Tuesday, 6 February 2007

Our parents have mortgaged our future

It’s a good job my father doesn’t read my blog, because I’m about to point the finger of blame firmly at his and his parent’s generation.

Over Christmas I read Living with Leviathan: Public Spending, Taxes and Economic Performance, by David B. Smith, Visiting Professor in Business and Economic Forecasting at the University of Derby and a visiting lecturer at the Cardiff University Business School.

The book is a long and detailed investigation of the pernicious effects of high levels of taxation and public spending on the economy. There are many findings and quite a few prescriptions, some of which even the author recognises are not politically viable.

However, the one bit that sticks out is the results of a piece of econometric modelling in which he estimates that “If government spending, as a proportion of national income, had been held at the level experienced in 1960, econometric evidence suggests that output in the UK would, today, be nearly twice as high as current levels. Total public expenditure would then be higher, albeit as a lower proportion of a much bigger national output.”

This is a startling finding for two reasons. Firstly, the suggestion that the policies of successive UK governments have cost us £1 trillion of GDP per annum defies adjectives. Indeed, I struggle to imagine what this would mean for UK standards of living today. Suffice to say that we would be half as rich again as citizens of the United States, and somewhat higher than Dubai. David B. Smith notes that we could spend far more on public services and still have lower taxes as a result. I might go further and suggest that most, if not almost all, of us would be able to afford to buy private healthcare and education of higher quality than our present, tax-funded system can afford, and still have more left over for fun and frolics.

The second startling fact here is that this lafferesque story of counter-factual economic history does not require us to have foregone our welfare state. By 1960 the welfare state was over a decade old, public expenditure was a third of GDP and our hospitals and schools were in rude health. So the argument often deployed by people who oppose supply-side measures that those proposing them would condemn the poor to ignorance and disease simply does not hold up.

"What's the bleeding time?"
"Ten past ten, sir!"
Sadly, as is so often the way with bureaucracies, costs began to escalate. In the 1960s and 1970s welfare expenditure ballooned until by 1980 it reached nearly half of national output, and despite the “small state” rhetoric of the Thatcher/Major years, it stuck well over 40 per cent. Under Gordon Brown it has risen again to over 45 per cent and shows every sign of rising further.

This massively bloated welfare system has not created schools or hospitals significantly better than were enjoyed in the 1950s. Healthcare is of course better – it is not so clear that the same can be said of schools – but this is as a result of technological advancement and the increased wealth our nation has enjoyed. Indeed, this latter factor would have been far higher had our parents and grandparents show a little more restraint.

Voters since the 1960s have cost those leaving home today half the potential wealth they might have enjoyed, with the higher living standards that would have resulted. We would all be better off had they shown more prudence. It is not too late to learn that lesson and to adopt a growth plan for future generations.

3 comments:

Joe Otten said...

Tom,

I think there is something wrong with the argument that we a) don't have schools or hospitals much better than the 1950s, and b) if we were twice as rich, they would be much better.

I am inclined to wonder why being much richer would help if it hasn't helped us improve much on the 1950s.

My own view would be that public services have improved substantially, but by tending to be labour intensive their costs go up when the general prosperity and expectations of society go up and they have to compete for talent. Richer societies can afford better services, but not in exact proportion to their wealth.

The bulk of the benefits of greater prosperity would therefore be in the private sector and personal incomes rather than the quality of public services.

This doesn't really affect the conclusion, but does perhaps highlight an exaggeration used for polemic effect.

Tom Papworth said...

Well, I do have "Polemic" in the title :o)

I think you've missed a bit of the article, though. I did not say that "a) don't have schools or hospitals much better than the 1950s". Indeed, I quite clearly said that

"Healthcare is of course better... but this is as a result of technological advancement and the increased wealth our nation has enjoyed" rather than "massively bloated welfare system".

Healthcare has improved because of new techniques and better medicines, greater understanding and more knowledge. We also have more to spend on R&D, training and equipment than we did 50 years ago. My point is that this is despite, rather than because, we spend more of GDP on the public sector.

In fact, my point is that had we spent a lower proportion of GDP on the public sector, we would now be spending a smaller slice of a bigger cake, because our economy would have grown.

I agree that labour costs would have risen in line with GDP, so twice as much money would not yield twice as much healthcare, but other costs (equipment, medicine etc.) would not have risen in line with GDP so we would get more healthcare for our doubled GDP.

Edis said...

This book is of course part of an economic argument from within the IEA (Institute of Economics Affairs) worldview. The calculation of wealth might come out a bit different if you dont make the same assumptions (Laffrer curve worship for example...)