Why I’m against big government

As an economist I grew up in the shadow of Keynes -- literally every morning walking from my hall of residence to the London School of Economics I would walk in front of J.M. Keynes London home (the homes of famous residents are remembered with a blue circulate plate on the façade), where I was trying to become an economist.  Yes, LSE had a large number of professors (and students) where were very much in view of the western system was raping the world, and were into a balanced growth model, but LSE was one of the premier Austrian schools (Robins & Hayek both taught there), and a surprisingly large number of its professors were (mid 1980s) in monetarist think tanks.  BTW the reason LSE got a left wing image was simply that the BBC headquarters were literally down the street (about 50 yards) – so reporting from the front line of the “revolution” was easier at LSE than Oxbridge (50 km away) [So I got that chip of my shoulder].

Experience teaches that massive shifts in the social contract take effort, a crisis, a will and outsized personalities!  When these changes become necessary you hope the politicians in charge will make the right call, but more often than not you are disappointed.  You assume that the disappointment arise from the immediacy of decision making or simply because of expediency, but at time it become evident that politicians have deep character flaws that were hidden by the glamour of the media embrace (or laziness as the case may be). 

Over the past three days I have been reading Thinking the unthinkable a deeply depressing document written by Tim Morgan, Tullet Prebon’s chief strategist.  His analysis of what is happening to Britain is dispiriting and leads me to a simple conclusion.  The only way governments can help an economy is if they remain an insignificant part of the game.  Because in the end, governments are pro-cyclical.  In a nutshell, Prebon’s analysis is that the excess of the past are not the only bad news facing the UK, because the future of the UK is now also in serious jeopardy, the British government decided that its 10% deficit (reminds you of anyone) had to be addressed by a combination of increase in revenues and cuts in services.  Part of the UK’s problem is that the government is now a very important player in the economy and those cuts will now affect GDP growth, and the British government is now counting on the private sector for growth (and a rise in tax revenues!!!) the news is bad because nearly 60% of the historical source of GDP growth are now “out of the game” (real estate, finance and construction and Government), suddenly all the economic growth has to be generated by the 40% of the economy.  So if you assume a 3% GDP growth rate this 40% of the economy has to be growing at 5.5% just to achieve this overall goal of 3% -- in Prebon’s opinion this is unrealistic, and therefore despite an initial success in correcting the current imbalance, the UK economy will soon slip back into a low growth model, where the deficit begins to grow again.

This makes me sound like one of the loons of the Republican Party!  That is not my intention, but what is clearly emerging is that the government which could be countercyclical at the time of Keynes now is a pro-cyclical element of the economy.  Several G7 governments tried to stimulate their economy in the face of the deep 2008 recession (one notable success was China), but in reality few have the will or the resources to carry real stimulus – in America the amount the Federal government spent to stimulated the economy was more than matched by the reduction in expenses by state and local governments

It gets worse, the strategy of “shovel ready project” are hardly suitable to a post industrial G7 world to generate economic growth, this is not the 1930s.  I am now firmly of the belief that governments, by the nature of the G7 world, are unable to stimulate demand in a post industrial society; they simply don’t have the tools. Actually, one of North America’s great successes in mitigating the recession was the province of Quebec; the province embarked on a massive (and really overdue) program of infrastructure upgrades.  The success of this program in mitigating the recession must be set against its time frame:  this project was first developed in 2005/6, 36 months before the 2008 crisis.  It was fortuitous for Quebec that it had a pre-approved (where the design and engineering was already in the works) program in place.  But as investors know, luck cannot play a part in everyday affaires – otherwise you would pay for your 45 feet yacht with your future lottery winnings!

Pimco’s Bill Gross continually reminds America that beyond the $1.5 trillion operating deficit, America has $66 trillion in unfunded commitment that cannot possibly be honored.  America’s problems are as intractable as those of Britain, moreover since Americans have such dismal financial literacy, the same people who support a balanced budget amendment would never consider a reduction in their “earned” benefits and yet the reality is that is exactly what needs to happen.  Aside from raising taxes (a necessity if the problem is to be resolved) G7/G20 countries need to realize the limit of their government’s abilities to fix their world.  

Aside from income redistribution – the issue becomes one of understanding what needs to be done and what is realistic.  What are the services that only government can provide, and everything else should be turned over to the private sector.

Defense, regulations and support of the weakest members of society should remain in the hands of government, the first two because there really is no other option.  The third because how we treat our weakest members defines who we are as a nation.  Healthcare is trickier, clearly the U.S. model is deeply flawed, but as a Canadian the absolute single payer system also has problems that are intractable.  Moreover, all health care systems in the G7 world share a common affliction, costs are rising more quickly than GDP – in the medium term it is unsustainable.

The rest can be shipped off to the private sector (or some form of non-governmental system).  Education doesn’t not need to be in the hands of governments, equally the  private sector (in the U.S,) how shown what a mess they can make – the for profit education system there has proven one thing, while medical costs are rising quickly the cost of education is rising even faster.

This could lead to a 50% reduction in the size of governments across the G7.  Because I am not here talking about only central government, but also local governments.  This doesn’t solve the problem of recession (in my opinion cycles are part of our economic growth model) but it removes an important pro-cyclical element to the process.

That’s my two cents!

[Ed Note:  The province of Quebec spent $10 billion dollars over five years -- this is equivalent to the US spending $1 trillion dollars, some would say that the $900 billion of US stimulus is relatively close to what Quebec did, but most of the money was not actually spent on stimulus, something like $200 billion was allocated to "shovel ready projects]