Wednesday, 30 November 2011

Socialism not Bankers to Blame for Public Sector Cuts

Today has seen tens of thousands of Britain's vast army of 6,000,000 public sector workers out on strike. The Prime Minister's own press secretary has been forced to man the immigration desk at Heathrow Airport. Millions of school children have lost a day of education, as well as elective surgeries cancelled and disruption across the country. Annoying for the UK, certainly, but for the rest of the world these are also worrying times, with more than a few echoes of the  economic situation of the inter-war years. In this article, we debunk the myth that it is 'the bankers' to blame for the mess we're in by making an assessment of why 'developed' economies (including our own) have come to owe so much money in the first instance.

In the 1930s the near collapse of capitalism was brought about by a series of defaults in an international debt triangle which ultimately forced the great depression and a second war in Europe. Indeed, right now in 2011 a an economic pyramid scheme which is at least superficially similar to that which was at fault in the '30s can be seen at play around the US/IMF/China triumvirate. Similar pillars of cyclical debt current underpins the EU experiment. In this article, we explore how modern socialist state economics are to blame for this unholy trinity and how such economic thinking has once again brought the international system to the brink of collapse.

For many on the left, the theoritical models of JM Keynes provide the genealogy of their present-day economic policies. 
Indeed, Keynesianism became the prevalent economic theory throughout much of the middle part of the last century. It is based on the essential pre-requisite that economic growth slows when the demand for production stagnates as a result of unemployment. Keynesianism suggests that the stagnation effects of unemployment can be overcome by creating the economic circumstances under which it is possible to increase the demand for products once more. The key concept to Keynsianism is that a short-term government funded stimulus which creates direct state employment, paid for with money borrowed from the markets or other nations, re-establishes the ability for the citizenry to purchase goods and services en-masse. This thus increases the need for products - ergo manufacturing - which in-term creates employment once more in the private sector. Keynsianism was not designed as a long term status-quo and was not designed to be a permanent life support system for economies, rather a short-term economic defibrillation. Indeed, the success of Keynesian investment depends on short-termism.

'Spent too much for too long and borrowed too much to pay for it'

Consequently, Keynesianism was employed with some success throughout the middle part of the 20th Century, including assisting the revival of most major economies before, during and after WW2. Therefore, it is not difficult to see why Keynesianism has attracted fans, particularly from the left where it seems to fit nicely with the ideological requirement for high public spending on generous public services. The UK Labour party’s economic policies are understandably based heavily in an interpretation of Keynesianism. Indeed, Gordon Brown's pledge as chancellor to bring about an “end to boom and bust” echoed strongly Keynes’ aims ‘to stabilize economic output during the cycle’. 

However, there are enormous problems with the modern centre-left's faith in Keynes' economic theories, as the ongoing failure of the so-called PIGS countries show us. Over the last 30 years, the governments of Portugal, Ireland, Greece and Spain have been dominated by the centre-left. Their economic policy has, like the UK's, been driven by bastardisations of Keynesian theory, borrowing heavily in order to spend on public services (read public sector workers). All have consequently spent too much for too long and borrowed too much to pay for it. 

How then has Keynesianism failed so catastrophically in the PIGS and brought Britain and the US to the maximum of their credit limits?

The first part of the answer lays partly as discussed in the fact that Keynes only ever meant high public borrowing/spending as a short term solution, not as the basis of long term economic policy.  Indeed, what the current Labour shadow chancellor Ed Balls, and his party leader Ed Miliband, both fail to understand is that it is not that the current coalition government is ‘cutting too far, too fast’ but that the previous Labour government was spending too much for too long. Labour's current  policy is entirely bi-polar; acknowledging the need to cut the deficit at the same time as advocating high levels of spending on public services. 

The second part of the answer is absolutely the key to understanding why the left can never be trusted with the economy again. It is more nuanced, but also more important. It concerns what public borrowing is actually spent on.  
In Keynes' time, an economic stimulous would buy short-term project specific blue collar workers; navvies, factory workers and builders. In the 21st century these manual trades have largely disappeared to be replaced by police officers, community outreach workers and NHS administrators who are employed on permanent contracts with pension schemes. Jobs for life. This is a change which partly reflects the evolving nature of our increasingly service based economy, but it also allows centre-left governments to claim increased public sector 'investment'. Employing one extra police officer for example, removes one person from the jobless total, adds one person to the number of police on the street, provides a basis for 'investment' in the police force. A very tempting proposition for any democratic government. In the 21st Century this is the fundamental problem with Keynesianism, and it is one that all ‘advanced’ economies (USA, PIGS, GB etc) suffer from. Here's why:

"The difference in the nature of public funded employment is the key to the mess we’re in, and it is also the key to the way out. The difference is the question of permanence"

In the middle-part of the 20th Century, working for the government meant building Autobahns in '30s Germany, manufacturing munitions in '40s America or NHS hospitals and social housing in '50s Britain. In the 21st Century, well educated citizens used to a higher standards of living simply do not wish to be employed in menial work. Instead, increasingly voter conscious centre-left parties throughout the West have sought to apply Keynesianism to jobs more conducive to electoral success, but less fitted to Keynesian stimulous.The difference in the nature of public funded employment is the key to the mess we’re in, and it is also the key to the way out. This difference is the question of permanencePut simply, it is possible to hire and fire blue collar workers much more flexibly; when a motorway is finished, a war won or a hospital built the dependant workers can be, and are, laid off. 

However, white collar workers are of a different nature and have different expectations. Historically, office jobs form part of a career structure which assumes a level of permanence and confers a much more secure tenure as well as other benefits such as generous pensions and access to union and or legal representation which means that they are very difficult to fire an they very rarely wish to leave of their own accord.
Consequently, the centre-left’s fondness for creating jobs out of thin air has brought electoral prosperity for the left by means of supplying the unions with many thousands of members as well as simultaneoulsy cutting the jobless statistics and increasing 'investment' in public services. But it is a policy which has saddled the country with literally millions of extra hungry mouths to feed, in many cases from 18 until the grave.

Whenever you hear Labour talking about 'creating jobs' or 'investing in public services' what they actually mean is 'investing in votes' and 'creating a legacy of debt'. Next time you feel sympathy with public sector workers on strike, remember that your children's children will be repaying the debt accrued to pay today's public sector pensions. Instead of blaming those attempting to reign in the deficit, it's time we blamed those who created it.

Follow me on Twitter: @HortonEddison

Here are some powerful facts:
  • Portugal: Years Socialists in power since 1981: 30 years (100 %)
  • Ireland: Years Socialists in power since 1981: 18 years (55 %)
  • Greece: Years Socialists in power since 1981: 22 years (73 %)
  • Spain: Years Socialists in power since 1981: 21 years (70 %)

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