Austerity & equality

“We can deliver fairness even when there’s less money around“ said Ed Miliband yesterday.

This is not a theoretical claim. It’s a historical fact. The 1945-51 government inherited a debt-GDP ratio three times today’s level and yet built the modern welfare state, created the NHS and increased income equality* whilst running a budget surplus. 

Poor public finances, therefore, are no obstacle at all to egalitarian policies. So what are? There are,

I suspect, five differences between now and then:

1. Social solidarity. After 1945, the recipients of redistribution were regarded as deserving - people who had risked all in the war. Today, they are more commonly regarded as scroungers - a largely erroneous idea which Labour, to its shame, doesn‘t challenge. This weakens support for redistribution.

2. Mobility. After 1945, the rich were to large extent captive and could thus be taxed heavily. Today, though, there is perceived to be a danger that high taxes will cause an emigration of talent. Whether this perception is correct or not is, however, another question.

3. Statism. In 1945, people had faith in the state - Hayek’s The Road to Serfdom was popular precisely because it was a counterblast to the dominant ideology - not least because it had defeated the greatest-ever threat to civilization. Today, the state’s CV looks shabbier, so confidence in its ability to achieve “fairness“, or anything else, is much diminished.

4. Full employment. The need for post-war reconstruction  generated a high demand for even unskilled labour; a lot of what equality was achieved in the post-war period was due to full employment rather than tax and welfare policy. Today, there’s no hope of this.

5. Rising costs. Baumol’s cost disease means that the relative cost of state services such as health and education has risen. Combined with points (1), (2) and (3), this threatens to crowd out other redistributive policies.

The question is: what to do about these problems? Adam Lent, acknowledging (5), says:

If Labour is serious about a major shift in spending priorities to promote jobs, growth and inherent fairness in the economy, then the party will almost certainly have to face up to the need to save money in the big spending areas of welfare, health, and pensions.

But this raises the question of where such savings will come from, given that the notion that top-down government can find efficiency savings is just a managerialist fiction.

I’d suggest two other things - which Miliband did not sufficiently address.

One is to look to expand the tax base - for example through land value taxation; people can emigrate, but land cannot. This implies having an open mind about the top income tax rate; let’s just find out what rate causes people to flee.

Another would be to empower labour against capital. Naturally, this’ll be tricky when there’s an excess supply of the former. But support for stronger trades unions - an efficient alternative to laws - and more worker power on boards would be a start.

* The 1979 Royal Commission on the distribution of income and wealth estimated that the share of after-tax income going to the richest 10% fell from 34.4% in 1938 to 27.1% in 1949.

Comments

[Thomas Neumark]

I'm very sceptical that people had more faith in the state in 1945.

I might be convinced that there was more deference but faith seems quite a push.

I agree that Labour politicians had more faith in the state, but that's quite different to people.

[Liam Murray]

The fact that in 1945 welfare recipients were "regarded as deserving" wasn't a function of advocacy for them on the part of the Labour government; it was just the sense people had about social need and probably also explains the electorates readiness to eject Churchill so soon.

I'd suggest the current perception is similarly broad (and vague) in origin; in other words it's not people being taken in by nonsense from Murdoch/Dacre or Labour's reluctance to challenge it but just their personal experience & observation.

[Jim]

There was the little matter of Marshall Aid - $3.3bn in cash shovelled the way of Attlee's government from 1948-51, 85% of which was pure gift, not lending. There was another $4.6bn lent by the States to the UK.

The country was bankrupt by 47/48. Marshall aid saved Attlee's government from total disaster. Shame we didn't go bust then. Would have killed socialism stone dead in the UK, and saved us from 65 years and counting of idiots telling us that we can increase our wealth by spending other peoples money.

[UnlearningEcon]

Don't forget the extent to which the BW system and Keynesian monetary policy precipitated growth, allowing for high growth and full employment.

[SimonFa]

That full employment was caused, in part, by sending the women who had been working in the mills and other areas back home so that the returning men could have their jobs.

[BenP]

Marshall Aid was paid back - with interest - in 2006 :- http://news.bbc.co.uk/1/hi/6215847.stm

Interesting that you wish for economic collapse to validate your political ideology.

[TACJ]

"Rising costs. Baumol’s cost disease means that the relative cost of state services such as health and education has risen."

Chris: you often refer to the Baumol effect as a "disease". I'm not sure this is an accurate label.

The Baumol effect is just the inevitable consequence of efficiency gains in manufacturing and agriculture meaning that, as a society, we can spend more on healthcare and education. Yes, productivity grows more slowly in these areas, but so what? You can't have everything.

I suspect the "disease" label has arisen because healthcare and education are largely paid for through the public sector. Therefore higher healthcare spending and education spending means that state spending will rise as a proportion of GDP. Some people don't like this, but I'm pretty ambivalent about it.

But this rise in the proportion of our income we spend on health'n'education isn't a "disease."

[Philip Walker]

"support for stronger trades unions - an efficient alternative to laws - and more worker power on boards would be a start."

Just don't combine the two! If putting Bob Crow on a corporate board is the answer, you have to be asking the wrong question.

TACJ: Everyone calls it Baumol's cost disease; it's its name, in the same way as Say's Law is so called even though many dispute that it is any sort of law at all.

[john b]

Hmm. I wonder, was there some kind of event which happened in the 1940s and cost a vast amount of money? Nah, can't think of anything - it must just be that the country was bankrupted by socialism.

[dirigible]

"But support for stronger trades unions - an efficient alternative to laws - and more worker power on boards would be a start."

This is absolutely vital. And it's the one thing that Thatcherite parties won't do.

[nb]

You forgot demographics. Perhaps the most important difference?

[Luis Enrique]

some egalitarian policies (redistribution) put a strain on public finances - so are harder in times of austerity - and others don't (strengthening workers' bargaining power?).

The big question imho is what determines the pre-tax distribution of income - it may be that income was more evenly distributed in 1940s because these mysterious forces were favourably aligned (your point 4. being one of them, perhaps) rather than having anything to do with your other points.

I can't say I understand how you they did things that involved large public expenditures (like establish NHS, start paying out unemployment benefits etc.) and run a budget surplus (and service a big stock of debt) if the public finances are "poor" - how does that add up? How did they finance the welfare state, NHS etc. and still run a surplus if not with booming tax revenues? If they used seigniorage, isn't that accounted for as a deficit? If tax revenues were booming, how was (government) money scarce?

you mention that redistribution via benefits in kind (education, health) is an example of an egalitarian policy (which might be getting harder to do because of changes in relative prices) but I think it's worth noting that when people complain about growing income inequality they are not adjusting for benefits in kind. I wonder, if you do account for benefits in kind, whether the degree to which society redistributes might be greater today than it was in 1940? If so, status of your points 1 2 3 is questionable.

[Luis Enrique]

[if they could afford to do it all because tax revenues were high, previously funding military, and they were able to cut that and spend the money instead on NHS etc., I'm not sure you can claim that was a time when public finances were under pressure (austerity) - if we had some massive item of expenditure we could just stop, we'd have plenty of lolly left over too.]

[Frank H Little]

There *was* a consensus. I would point Thomas Neumark at the actions of Conservative politicians in the 1950s. They accepted much of the welfare state, while admittedly dismantling most of the industrial nationalisation.

Earlier, of course, it was a Conservative who saw the 1944 Education Act onto the statute book.

[asics shoes]

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