The madness of more of the same

The gravest global economic crisis since the 1930s was clearly a crisis of the private sector - yet it is the public sector which is getting the blame and must be cut.

Michael Burke blogs at Socialist Economic Bulletin

There is a strange feature of the current debate about the economic and fiscal crisis. The gravest global economic crisis since the 1930s was clearly a crisis of the private sector – yet it is the public sector which is getting the blame and must be ‘reformed’, that is, cut.

The latest to enter the fray is the Centre for Policy Studies (CPS) which correctly argues that the British economy has plummeted down international league tables of competitiveness. But the solution offered (pdf) for this malaise is lower taxes and deregulation, exactly the same policy mix that helped foster the conditions for the crisis.

Lest we forget, the locus of the crisis was initially the US, under the most tax-cutting, free market President since World War II. The proximate cause of the crisis emerged in the deregulated banking system based on the private sector’s activity in the housing market. That a similar policy was adopted here under New Labour meant that the British recession was one of the harsher in the G7, less severe only than Japan and Italy.

Crucially, the loss of output in the OECD as a whole is a function of a private sector investment strike. The fall in gross fixed capital formation (investment) accounts for 96 per cent of the entire decline in output from its peak in 2008.

The question is, why would lower taxes and deregulation reverse the long-term decline in British competitiveness, when this policy mix is exactly what has been tried previously – and failed?

Britain has halved the corporate tax rate since 1979 and has had lower corporate tax rates than the G7 average since 1983. The OECD countries with the lowest corporate tax rates and among the most deregulated too are Ireland and Iceland (12.5% and 15% respectively).

Neither economy is an advert for the CPS’s policy prescription.

Of course, the CPS was established to attack the ‘socialism’ of preceding Labour and Tory governments, so arguing for an assault on the state is in its DNA. But policy should be based on evidence.

So, for example the current drive to further marketise and privatise the NHS should be seen in light of the fact that the state-run NHS is actually the most efficient health provider among the developed economies, with the second-best health outcomes, behind The Netherlands (that is, it would be the best if a more reasonable amount of money were spent).

The same point is proven with a contrary example.

Successive governments, New Labour and Tory, have eschewed any role for the State in homebuilding. Where once local authorities were allocated large funds to provide housing, that has almost entirely stopped. And the result? Britain has a housing shortage that is both acute and chronic, with 1.8m households on council waiting lists and the lowest level of new home building since 1923.

There are also 300,000 unemployed construction workers.

This endemic inefficiency of the private sector, and government policies that have exacerbated it, is the underlying cause of Britain’s poor infrastructure and lack of competitiveness bemoaned by the CPS. When the World Economic Forum ranks Britain 33rd in the world for the quality of its physical infrastructure, there are 16 European countries ahead of it and every single one of them has a higher level of government spending as a proportion of GDP.

The inefficient private sector cannot be the main source of public goods such as infrastructure creation, health, education or housing. Government has to fill that role if it is to be done efficiently-or even at all. And that requires government spending.

Einstein said that repeating an experiment and expecting a different outcome was the definition of madness. In their anti-State drive the CPS is, well, a little bit crazy.

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18 Responses to “The madness of more of the same”

  1. Liz K

    The madness of more of the same: http://bit.ly/koyGrW by Michael Burke

  2. Fleur Young

    The madness of more of the same: http://bit.ly/koyGrW by Michael Burke

  3. Michael

    The madness of more of the same I Left Foot Forward – Michael Burke – http://j.mp/lpqS3C – Interesting.

  4. Ed's Talking Balls

    If The Netherlands has the best health outcomes, and that country uses a model based on health insurance and has substantial private sector involvement, that comprehensively destroys this nonsensical view that ‘public = good, private = bad’. This is good use of evidence-based blogging, and I commend you for it.

    Also, you cite private sector activity in the housing market as a cause of the financial crisis. Perhaps it would paint a fuller picture if you mentioned that the US market was distorted by the involvement of the Clinton regime. Banks were strongly encouraged, cajoled even, into lending to those patently incapable of repaying. This was always going to cause problems: don’t mess around with the fundamental rules of lending.

  5. Michael Burke

    Dear ETB

    I’m not sure you’ve read the article carefully enough before rushing to blog.

    I argued, “….the state-run NHS is actually the most efficient health provider among the developed economies, with the second-best health outcomes behind the Netherlands”.

    To repeat, the NHS is more efficient. Why are there slightly worse health outcomes in Britain (1 year lower avge life expectancy)? Because the Dutch spend far more on health, 60% more; €4,294 per person per annum compared to €2,686 in Britain.

    Source: OECD Health At A Glance, 2010, Table 4.1.1

    We should spend more on health to achieve the best outcomes, not less. And would get more for our money than anywhere else, because the NHS is so much more efficient than private or insurance-based systems.

  6. michael burke

    My piece on leftfootfwd: Why Tory thinktank calls for lower taxes & deregulation meet Einstein's definition of madness http://bit.ly/isCc7T

  7. Ed's Talking Balls

    Nope, I read the blog alright. And I read it carefully.

    I read with surprise that the NHS is efficient. But I also read that The Netherlands produces the best health outcomes. That we could outperform the Dutch if we spent more does not rebut my point that the example from The Netherlands comprehensively destroys the Left’s argument that privatisation/insurance models in healthcare lead to poor results.

    Moving away from healthcare (an area of interest but certainly not of expertise, so I won’t pretend), you utterly failed to address my point about the financial crisis. Markets will obviously be distorted if politicians force them to conform to their ideals. The Clinton regime shouldn’t have forced banks to lend to NINJAs. There’s no point criticising banks for behaving irresponsibly if their irresponsible actions were brought about by politicians.

  8. Michael Burke

    ETB

    not sure if this ignorance is wilful, or not. The Dutch private sector spends 60% more on health than Britain and achieves marginally better results, meaning the NHS is vastly more efficient. Under a private system in Britain vastly greater resources would have to be deployed to achieve even the same health outocomes as now.

    The canard about the poor causing the sub-prime crisis is barely worthy of response. Bush was declared the winner the 2000 election. He had 7 years to turn the tide on this outrageous pinko/black/hispanic fraud perpetrated on decent upstanding mortgage brokers, loan sharks and credit rating agents. Yet he inherited $160bn worth of sub-prime mortgages from Clinton……..and increased it to €1.3trn. Smart cookie that Clinton, forcing the reluctant banks to lend 7 years after he left office.

  9. Ryan Bourne

    In our piece we address the decline in our competitiveness since 1997 by examining the reports from the World Economic Forum, the IMD and the Heritage Foundation. All three show us to be much less competitive than 14 years ago.

    These organisations helpfully produce a range of sub-indices to allow you to track why the UK is, or is at least perceived to be, uncompetitive in the global economy. The conclusions of the three show that relative UK government efficiency has fallen, and we are one of the worst ranked countries for the ‘extent and effect of taxation on work and incentives,’ as well as the burden of government regulation. So I fail to see how not attempting to reverse these downward trends would, in fact, make us more competitive, as you imply.

    Our conclusions are that we need enterprise (small businesses especially) to be deregulated, the burden of tax reduced and the need to open up public services to competitive tendering. The fourth component – restoring fiscal balance – is already being attempted by the government, and should remain the priority. But reducing the tax burden doesn’t imply just reducing corporation tax – we are talking about incentivising work and ingenuity more broadly. And introducing competition to public services isn’t just about the NHS.

    As for the ridiculous claims about public and private sector efficiency, I shall simply refer you the ONS to see which the most efficient component of the economy is. They show that our health service has become less efficient in terms of outputs for every input, exacerbated when you use spending rather than input values. In fact, if you examine spending against outputs and strip out the massive increase in prescriptions, productivity has fallen by 33% since 1997.

  10. Michael Burke

    5. Ryan

    I have seen the studies you mention and their sub-sets. I actually refered to some from the WEF in the piece.

    The studies themselves though offer a confusion as analysis, which your contribution only compounds. So, you say, “relative UK government efficiency has fallen….” but this is relative to other countries which persistently invest much more than Britain, including government investment. It would be astounding under those circmstances if British relative competiveness didn’t decline and the solution to it is evidently to increase investment, including government investment.

    Instead, the CPS proposes “enterprises be deregulated, the burden of tax reduced and the need to open up public services to competitive tendering”, which is more of the same.

    The difficulties of measuring relative sectoral productivity or efficiency are well-known. Cross-country comparisons of healthcare provision demonstrate the innately greater efficiency of the NHS.

  11. Broken OfBritain

    The madness of more of the same I Left Foot Forward – Michael Burke – http://j.mp/lpqS3C – Interesting.

  12. Richard

    “that comprehensively destroys this nonsensical view that ‘public = good, private = bad’.

    One successful example among many substantially less successful examples of healthcare provision using the same model comprehensively the polar opposite of your conclusion. Less of the hyperbole, more of the accuracy, bollox meister.

  13. Richard

    *comprehensively proves the polar opposite*

  14. Clive Burgess

    RT @leftfootfwd: The madness of more of the same http://t.co/sigHFgt

  15. Ryan

    Michael

    So let me understand your line of reasoning. The logical conclusion to your argument is that the government “invest” more into services like health in order to make them more efficient. Leaving aside the fact that the party this blog champions were offering less protection to health budgets than the coalition, this extra spending will have to be paid for. This will require raising more in tax revenue, thus further damaging the incentive effects mentioned above. Furthermore your article assumes that the private sector wouldn’t invest if the state didn’t. But the whole point of introducing quality competition is that companies and hospitals invest to create better quality care and, as a result, increase their customer base as more GPs commission operations to the best hospitals.

    As I said above, the arguments with regards to business regulation as highlighted by the IMD are clear. I’d you want businesses to locate here and create jobs then you need to make them easy to set up. You need to provide a flexible, well skilled labour force and you need to provide a strong enough profit incentive that they will
    choose to locate here instead of the low wage economies. Our language, market size and use of innovation are world class, but these can still be hugely undermined by overbearing regulation. Your argument seems to be that because a deregulated financial sector resulted in a crisis, lower regulation to any time of business is bad.

    That’s why your argument is flawed. It’s implication is that governments are the only ones placed to invest more, but you fail to recognise the damaging consequences of an even higher tax burden and crowding out effects.

  16. Ed's Talking Balls

    ‘bollox meister’

    You really are a cretin.

  17. Michael Burke

    Ryan

    More government investment is not merely the logical conclusion to my argument, I explicitly state it.

  18. Socialist Action

    Tory right calling for deepening of policies (lower taxes & deregulation) responsible for undermining British economy http://bit.ly/kvn7yz

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