Posts Tagged governance
The Labour Party was congratulating itself yesterday on having joined with Tory rebels to defeat the Tory-led government by voting to cut the EU budget. In truth, this was sheer opportunism. While the two Eds (Miliband and Balls) may believe that supporting belt-tightening in Europe is good populist politics, in truth, Labour has shot itself in the foot.
Why? Because the vote was not about whether the British hate Europe—doubtless many do and will continue to rally round the Daily Mail. Rather, it’s a vote about the principle of adopting further deflationary policies.
By voting to cut the EU budget, Labour is aligning itself with budget cutters throughout the EU—in the main, centre-right parties. With euro-zone unemployment now above 11% (in some member-states above 25%!) and Europe headed for even deeper recession, any sensible progressive politician should be shouting out for co-ordinated fiscal expansion. What’s needed is the opposite of budget cutting—a far larger EU budget which could be used to reflate the economy and transfer resources towards the neediest regions.
Granted, under current arrangements, the EU budget is nearly useless as a vehicle for driving reflation. Bright economics-trained shadow ministers like Rachel Reeves and Chuka Umunna—even the Pro-EU Shadow Minister for Europe Emma Reynolds—understand this and know what needs to be done, but sadly are forced to toe the party line.
But whether it’s about Britain or about Europe as a whole, it’s time to repeat the message loud and clear—balls to deflationary policies in the midst of recession!
The late Tony Judt once remarked that today’s young people have little sense of social collective public goods and services. The economist’s notion of a public good has lost currency in this age of commodities, not just in the EU but particularly in the Anglo-Saxon world.
Two generations ago, economics undergraduates were taught that such goods were different from soap flakes and hamburgers. Public goods and services are things which need to be supplied—or at least regulated– by the public sector because they are by their very nature collective. Clean water, unpolluted air, education and law and order are obvious examples; there is no doubt that everybody should have such goods, not merely those who can afford to buy them privately.
Public Goods today
These days, because the distinction between ‘public’ and ‘private’ has become blurred, and because amongst mainstream economists the consensus appears to be that the private sector is more efficient than the state, it is commonly thought we should limit the public role almost entirely to that of supervision. In Britain, for example, in the 1990s the railways were privatised and an ‘internal market’ was created within the National Health Service on the grounds that this improved the efficiency of service delivery for ‘customers’. In the USA, it has become common for everything from mass transport to prison services run for private profit. Indeed, there are some politicians who—as followers of the economist Friedrich Hayek— would abolish all forms of state supervision or control, and a few who would abolish all taxation.
Anti-state ideology has its roots in 18th and 19th century romantic libertarianism, but its major driver in the past century was doubtless the Reagan-Thatcher revolution and, at a global level, what became known as the ‘Washington consensus’; ie, the right-wing orthodoxy associated with the IMF and the World Bank. Amongst others, economists such as Anne Krueger and Jagdish Bhagwati helped popularise the notion that civil servants are really ‘rent-seeking’ bureaucrats whose contribution to society is nil.
Market fundamentalism, the best-known US apostle of which was Milton Friedman, was developed inter alia by Thomas Sargent into ‘rational expectations theory’ which argued that markets contain all available information and are populated exclusively by fully informed consumers and producers for whom all future risks are calculable. Such notions provided the intellectual foundation of the anti-Keynesian, anti-state views which came to dominate the profession.
The brief return of Keynes
For a short time after the financial collapse of 2008, it appeared that the Thatcher-era ideology of market fundamentalism—or ‘neoliberalism’ as it is known today—was in terminal decline, but this view proved to be an illusion. While Keynesianism was briefly rolled out to save the advanced countries from total economic meltdown, once disaster was seen to have been averted most politicians returned to the dreary game of peddling austerity to the poor while helping the rich to prosper.
Nowhere was there more enthusiasm for this dismal sport than in Europe in general—where a ‘transfer union’ was unthinkable and the welfare state was soon deemed ‘unaffordable’—-and Britain in particular. In Britain under David Cameron and his Chancellor, George Osborne, privatisation is set to reach new heights as private companies bid for fat contracts to build and manage hospitals, schools, roads and whatever else can be hived off to the private sector in the name of reducing public debt.
The privatisation of everything
Although there are some circumstances in which it is sensible to privatise, there are many good reasons why wholesale privatisation should be shunned. The first and most important reason is that abolishing universal free access to public services will make us less equal. For example, the notion of being ‘equal before the law’ is a hallowed principle which goes back to ancient Greece. Few would deny that where legal aid is denied to the poor while the rich can evade it with the help of clever (and very expensive) lawyers, not only does this make a travesty of justice, but it also threatens social cohesion.
By analogy, a major reason for providing universal health care as a public service is that decent medical treatment should not be a privilege reserved for the few. Equally, because capitalist business cycles result in economic downturns, all tax-payers contribute towards funding unemployment benefit for those unlucky enough to lose their job during such times. When there are ten job-seekers for every vacancy, ‘getting on your bike’ to find a job simply doesn’t work.
The same public logic holds for education. Universal literacy may be instrumental to developing a skilled work force—a notion much loved by Tories—but the real reason we value education is because it is a necessary (though insufficient) component of a well-functioning democratic society. Education is not a commodity to be purchased according to individual preference; it’s central to the meaning of civilised society.
The superior efficiency of the private?
What of the argument that the private sector is more efficient at running things because of competition? Although this may hold true for the production of many commodities (as we know from the sad experience of Soviet-style central planning), it is by no means a universal principle.
It used to be argued that publically-owned industries are necessary in the case of ‘natural monopolies’; ie, where long-term economies of scale in production make for ‘monopoly profits’. It is only fair that government—through ownership or regulation—captures such revenues for the public benefit. Also, because natural monopolies (eg, water, energy, transport) typically require very large initial capital outlays, often the state alone is in a position to finance them. What has happened in recent decades to many public utilities is that, having been established and run by the state often with a strong element of public subsidy, they have been sold to private interests at knockdown prices on the grounds of fiscal rectitude (and with the blessing of the IMF).
Another reason for preferring public provision is where ‘external’ costs or benefits exist. A contemporary example of such an externality is where an industry damages the environment. A private company might want to cut down swathes of forest to grow crops for biofuel, disregarding the long term environmental impact. Such companies typically have short time horizons—they must make profits for shareholders next year, not next century. Government needs to step in to take the long-tern environmental effect—or any other form of market failure—into account.
The notion that competition always makes the private sector more efficient than the public sector is therefore quite unjustified. Markets are not perfect, the future is uncertain, externalities are important and some goods and services by their very nature must be publically provided. What politicians typically mean when they speak of ‘greater efficiency’ is lower costs, typically achieved by employing cheap, non-unionised labour. This is the real reason so many public services are outsourced.
In short, arguments favouring private over public provision are not just theoretically flawed, but typically favour the few at the expense of the many. We may choose commodities at the supermarket, but public goods require collective choices; ie, choices made as citizens at the ballot box. Abolish well-informed collective choice and one abolishes democracy—little wonder Margaret Thatcher argued there was ‘no such thing as society’.
In an earlier piece, I argued that the ‘Club Med crisis’ reflects Eurozone trade imbalances similar in nature to the more serious trade imbalance which exists between the US and China. By definition, the solution to this problem cannot be for all countries to become net exporters like Germany. Rather, what is needed is a rebalancing of trade.
This can best be accomplished though two broad measures. First, like China, Germany must stimulate domestic demand so that domestic consumption and investment rise faster than exports. Secondly, the Eurozone must recognise the need for better economic governance.
The latter should not be about enforcing ‘more fiscal discipline’ on the periphery at the cost of peripheral wages, but rather about giving the ECB a broader remit (growth and employment rather than inflation targeting) and establishing a Federal Budget large enough to redistribute surpluses—just as happens in the United States.
Eurozone Current Account Balances as %GDP
Source: IMF (in Lapavitsas et al, 2009)
Two-thirds of German trade is within the Eurozone, while the Eurozone’s trade with the rest of the world is roughly in balance. The accompanying graph clearly shows Germany’s surplus to be mirrored by the ‘Club Med’ deficit. No devious plot is implied; this situation arises because somebody’s surplus is by definition somebody else’s deficit.
Obviously, small surpluses and deficits are not the problem. Rather, it is when the surpluses and deficits become large and entrenched over many years that action must be taken. Clearly, reform of economic governance is required if the Eurozone is to prosper in the long term. Just as the China-US trade imbalance is best resolved by increasing aggregate demand in China and recycling surpluses rather than by means of expenditure contraction in the US (the cost of which would be further recession), the Eurozone trade imbalance cannot be resolved by inducing recession in the Mediterranean.