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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