Peter Mandelson claims that we have a choice between Labour’s “progressive reform” and the Tories “ideologically-driven retrenchment and deep cuts”. Which raises the question: what impact do different governments really have upon public spending?
The answer might be: less than you think. A new paper by Allen Drazen and Ari Brender has looked at changes in the composition of government spending across 12 different categories in 68 democracies between 1972 and 2003. And they’ve found something remarkable:
The answer might be: less than you think. A new paper by Allen Drazen and Ari Brender has looked at changes in the composition of government spending across 12 different categories in 68 democracies between 1972 and 2003. And they’ve found something remarkable:
We find no evidence that a change in government leader results in a larger change in the composition of government expenditure in the first two years after the change relative to no change in leaders. If anything, a change in leaders is associated with less change.
Changes in leaders do affect the composition of spending over longer periods, such as four years. But even here their impact is slight: leaders explain only around one-eighth of the changes in the composition of spending that occurs anyway.
So, why might governments have so little impact on spending? Here are some possibilities:
1. Any party has to appeal to the median voter. If the median voter’s preferences don’t change, nor will the composition of spending.
2. Spending is very hard to change. Governments have to fend off special interests and vested bureaucracies, and the brute power of the status quo.
3. Spending is more sensitive to events than leaders’ ideology. Many Labourites would like to have cut military spending, for example, but this preference has been mitigated by the number of wars the government has felt compelled to fight.
4. “Nixon goes to China” syndrome. It’s widely thought that only a man with Nixon’s strong anti-communist credentials could have improved the US’s relations with China so much in the 1970s; had any more left-wing president attempted to do so, he would have been decried as “soft on Reds.” In this sense, ideology can be a counter-predictor of policy.
This might generalize. Maybe Labour is better equipped than Tories to cut welfare spending, as they are (wrongly?) less vulnerable to charges of being hard on the poor. Similarly, Tories might be better able to cut military spending, as they are (again, maybe wrongly) less vulnerable to charges of lacking patriotism.
5. Maybe macroeconomic aggregates are just to big to detect policy changes. Here’s a challenge for you: show me some time-series data in which we might be able to clearly identify when Thatcher became Prime Minister, and when she left.
If all this is right - or even nearly so - the search for dividing lines between the political parties is, for practical purposes, fruitless. What matters is not politicians’ preferences, but their opportunities. And these are often tightly constrained.
So, why might governments have so little impact on spending? Here are some possibilities:
1. Any party has to appeal to the median voter. If the median voter’s preferences don’t change, nor will the composition of spending.
2. Spending is very hard to change. Governments have to fend off special interests and vested bureaucracies, and the brute power of the status quo.
3. Spending is more sensitive to events than leaders’ ideology. Many Labourites would like to have cut military spending, for example, but this preference has been mitigated by the number of wars the government has felt compelled to fight.
4. “Nixon goes to China” syndrome. It’s widely thought that only a man with Nixon’s strong anti-communist credentials could have improved the US’s relations with China so much in the 1970s; had any more left-wing president attempted to do so, he would have been decried as “soft on Reds.” In this sense, ideology can be a counter-predictor of policy.
This might generalize. Maybe Labour is better equipped than Tories to cut welfare spending, as they are (wrongly?) less vulnerable to charges of being hard on the poor. Similarly, Tories might be better able to cut military spending, as they are (again, maybe wrongly) less vulnerable to charges of lacking patriotism.
5. Maybe macroeconomic aggregates are just to big to detect policy changes. Here’s a challenge for you: show me some time-series data in which we might be able to clearly identify when Thatcher became Prime Minister, and when she left.
If all this is right - or even nearly so - the search for dividing lines between the political parties is, for practical purposes, fruitless. What matters is not politicians’ preferences, but their opportunities. And these are often tightly constrained.
"Here’s a challenge for you: show me some time-series data in which we might be able to clearly identify when Thatcher became Prime Minister, and when she left."
The claimant count? It started rising from about 3.7% about six months after she took office, peaking at about 10.5% in late 1986, and then falling to a low of 5.3% (I'm reading these off a chart) about six months before she left office, when it then quickly shot back to nearly 10%.
Posted by: Matthew | September 22, 2009 at 05:05 PM
All may be true and politicians are no doubt hubristic but if 1 is true it is because voters seek parties who match their preferences
Posted by: Neal | September 22, 2009 at 08:23 PM
A similar effect can be observed in the ups and downs of the Israeli-Palestinian 'peace' process. Generally, it is the hardliners who have the political capital to have 'talks' without being 'soft', while the doves end up sending in the tanks and planes (sweeping generalization but unfortunately close to the reality of politics in that part of the world).
Posted by: Bruce Davis | September 22, 2009 at 10:08 PM
Significant drivers of spending are exogenous; automatic stabilisers are one example, but another would be the bank crisis. Didn't matter who was in office or what they wanted - when the bed fell on them they had to do it if they wanted BACS to keep working. Quite a lot of infrastructure stuff is probably like this as well; if you need a new Thames barrier in year x, you need one (and you don't need it in year y), and it is surpassingly irrelevant which party is in charge.
Posted by: Alex | September 23, 2009 at 11:46 AM
Is it not because governments plan budgets and expenditure 2 years ahead, so an incoming leader will largely follow the existing budget of his predecessor, whilst planning to implement his own budget two years down the line? So governments do influence public spending, its just that there's a time-lag?
Also, is this the first time that a party will go into a UK election bragging about how savagely they will cut spending? They will win with a massive mandate to cut - has that ever happened before?
Posted by: pablopatito | September 23, 2009 at 03:39 PM