The fiscal crisis of the state

Tim Worstall raises an interesting point. Counter-cyclical fiscal policy, he says, requires that governments run budget surpluses when growth is above trend, not just deficits when it’s below. But, he says:

Can anyone really believe that was going to happen? When you've Polly Toynbee screaming that we can and must abolish child poverty for only a few billion more? When every policy panhandler is pronouncing on how this or that evil of the world can be solved for just a little more taxpayers' cash and anyway, isn't this what a Labour government is for?…
If it's politically impossible to have fiscal contraction when the theory says that there must be fiscal contraction then it's not all that useful a theory, is it?

This raises a question : why is (or was) a fiscal contraction impossible? One trivial possibility is just that Labour was stupid. Another, coming from public choice economics, is that politicians win more votes for spending money than raising it.
But there’s a third Marxian possibility, which is overlooked. I’m reminded of James O’Connor’s The Fiscal Crisis of the State, written in 1973.
State spending in a capitalist society, he said, must fulfil two functions: to raise profits, for example by maintaining aggregate demand; and to legitimate the system by ameliorating inequalities. But, he said, these forces for higher spending increased faster than people’s willingness to pay tax. The upshot was a tendency to bigger budget deficits, even in decent economic times.
You could argue that New Labour has been trapped by just these forces.
First, growing market-generated inequality in the 80s and 90s meant that it perceived a greater need for “legitimating spending.” In promising to reduce child poverty, or spend more on the NHS, New Labour was trying to show that capitalism could work in everyone’s interests.
Second, there was also a greater need for “profit-enhancing” spending. A key theme of New Labour’s was the need to raise the skills of workers in order to compete in a global economy. That meant increased education spending. But at the same time, there’s been pressure on it to use public money to increase corporate profits directly, via public-private partnerships, big military projects and lavish IT spending.
Third, the tax base has been eroded not just by popular opposition to higher taxes - twas ever thus - but by the increased globalization which means corporate taxes must be held down to stop companies moving abroad.
Put these pressures together and we have, in new form, just what O’Connor predicted - a tendency for budget deficits to increase, whatever the state of the economic cycle.
Now, I’m not offering this as a definitive, or even correct, analysis. All I’m saying is that it might be too simplistic to attribute the fact that the government borrowed money even in good times to mere New Labour profligacy. It could be that the forces for budget deficits are simply much stronger than people realize.

Comments

[RobW]

The point about reducing inequality is probably a valid one. But the corporate profits aren't. You don't increase profits by redirecting money away from consumers and investors.

A better way of looking at PPP & PFI is to see what it really is. A way for government to keep debt and liabilities off balance sheet. Also there's probably quite a bit of corporate cronysim involved as well.

[Diversity]

I think RobW misses the point. The pressures towards deficits are for a Chancellor also pressures to hide the degree to which he is are borrowing from the future.While the original use of private finance in place of public had admirable aims for increased efficiency, in practice it has long become little more than a way of hiding deficits; often at a substantial eventual cost over simply using public borrowing. Those for whom that cost is profit are very happy to co-operate in the fiction.

The same pressure to find means of hiding deficits explains the extraordinary reluctance to account properly for public service pension liabilities. But the pressure goes much further. The IFS latest 'Observation' charts how Gordon Brown distorted hie prudential fiscal rules in more recent Labour years through not revising his over-optimistic assessment of the growth potential of the British economy in the first years of this government. That allowed him to hide from the need for fiscal surpluses in the boom years.

And, of course, you do increase profits in the short term by over-expanding the economy. Does anyone seriously imagines that Fred Goodwin, Dick Fuld and all their more savvy colleagues who sold up before the bust were in it for the long term?

[ad]

“One trivial possibility is just that Labour was stupid. Another, coming from public choice economics, is that politicians win more votes for spending money than raising it.”

I’d like to apply public choice theory to the Labour Party (and to a lesser extent the LibDems). Compared with the Tories, a much larger fraction of their activists, MPs etc come from the groups that are lobbying the government for more money. So they have much more reason to push for spending increases than Tory members would have.

So even if Blair recognised the need to restrain spending, it would be much harder to enforce that restraint on his government than for a Tory PM. Even if his ministers agreed with him (and they would be less likely to do so than Tory ministers) each minister would still have to maintain his own power base in the Party – and that always meant supporting spending increases.

You will recall all the stories from years gone by about Blair trying to enforce some reform on a government department against a backbench revolt. There were no revolts to keep spending under control, or push a reform faster.

This is why "in the end all Labour governments run out of money", as I belive someone recently said.

BTW – I like the Marxian attempt to imply that the endless pressure to spend would not occur in a socialist society.

[Planeshift]

"If it's politically impossible to have fiscal contraction when the theory says that there must be fiscal contraction then it's not all that useful a theory, is it?"

Haha. You can use this for almost any idea.

"If it's politically impossible to have Pigou taxes to cover externalties when the theory says that there must be Pigou taxes to cover externalities then it's not all that useful a theory, is it?"

"If it's politically impossible to withdraw from the EU when the theory says that there must be a withdrawal from the EU then it's not all that useful a theory, is it?"

etc etc

[dearieme]

I've read someone claiming that the Howard government in Australia managed to reduce federal debt during the great boom. Is it true?

[runescap power leveling]

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[Laban Tall]

"the tax base has been eroded not just by popular opposition to higher taxes - twas ever thus - but by the increased globalization which means corporate taxes must be held down to stop companies moving abroad."

But I thought the great glory of the Brown years was that tax takes continued to rise, and the tax base WASN'T eroded by Labour's "holding down of corporate taxes". The whole point of NuLab was that the City could do what it liked as long as the taxes kept coming in.

And isn't your third Marxian possibility just another way of restating your second public choice possibility ?

In Paul Kennedy's 'The Rise and Fall of the Great Powers' he discusses how Johnson and Nixon both had large social spending programmes and large military programmes, but didn't want to raise taxes to pay for them, with the result that the US had to drop the gold standard and devalue (the 'Nixon Shock'). Sounds familiar, except we just let the markets devalue for us.

[Bob B]

Tim worstall has a point.

Widely respected think-tanks and independent commentators - like the IFS and Item Club - were warning about fiscal holes in Gordon Brown's budgets for at least the last six years, long before the credit crunch was generally anticipated, as this news report from 2003 shows:
http://news.bbc.co.uk/2/hi/business/2706495.stm

However, the issues don't end there. Few go on to ask about what would have been the likely consequences for interest rate decisions by the Bank of England's monetary policy committee (MPC) had the fiscal stance in Gordon Brown's budgets been tougher.

Other things equal, presumably the MPC would have needed to apply easier monetary policy so as to stay within its inflation target of 2% by the CPI - as set in February 2004 and which takes no account of mortgage rates or house prices.

What then would have been the likely downstream consequences of easier monetary policy for consumer debt and the house-price bubble?

[Preved]

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[Art Slagter]

More attention must be paid to the average nonfinancial *Rate** of profit which for practical purpose does not exist within neoclassical [i.e. mainstream] economics other than through interest rates.

When doing this we also see longwaves in rate of profit which impact revenues so to transcyclic periods of deficit.

the post late 1960s phase is inextricably linked to a much weaker avg. rate of nonfinancial profit and the struggle to overcome such - a 'struggle' that has provoked and hardened rentierism, associated inequalities and real market distortion.

PS - O'Connor's 'The Fiscal Crisis of the State', 1973 and its 'social-industrial complex' was in line with the Nixon administration.

"White House Conference on the Industrial World Ahead -A Look at Business in 1990 -records accumulated by Department of Commerce personnel detailed to serve on the staff of Robert W. Miller, executive director of the conference. This White House Conference, called by President Richard M. Nixon, was announced in a White House press release dated April 12, 1971. Its stated purpose was to bring together key individuals from business, labor, the professions, education and Government" ...with an interest in our industrial society to take a long-range look and develop policies that will help shape (the)

*'Rate' should best be measured in relation to total capital, not GDP or national income.

[Art Slagter]

with an interest in our industrial society to take a long-range look and develop policies that will help shape (the) future."
115
...
2Meetings
were convened at the Sheraton-Park Hotel between
February 7 and 9, 1972, and jointly chaired by Secretary of
Commerce Maurice H. Stans and Secretary of Labor James D. Hodgson.
Four principal themes were addressed during the sessions:
o The Social Responsibility of Business
o Technology and Resources for Business
o The Human Side of Enterprise
o The Structure of the Private Enterprise System
Among the documents found in the files are briefing books,
correspondence, reports, research materials, speeches, tape-
recordings, and the like. The files are arranged by subject
matter. Inclusive dates range from April 1971 through December 1972."
http://www.archives.gov/records-mgmt/rcs/schedules/independent-agencies/rg-0220/nc1-220-82-02_sf115.pdf

If possible I would read the transcript of Dr Simon Ramos presentation.