What cowboy put this fiscal deficit in?

9 06 2010

That Cameron and Osborne should blame the previous administration for the mess they have inherited is hardly a surprise. It should also not be a shock that Cameron is painting the future as black. He then has the dual advantage that if things turn out badly he can say he told us so and if they do not he can claim the credit for turning the economy round.

What is more interesting is that beneath the rhetoric there does seem to be a genuine belief that the state in Britain should be smaller and have less role to play in all aspects of life. In this respect Cameron has been aided by the addition to his ranks of a section of the Liberal Democrats who believe in the free market. Clegg, Cable, Huhne and the (now departed) Laws were the four LibDems appointed as ministers in the cabinet. All of them contributed to the ‘Orange Book’ in 2004 which espoused the free market as a solution to the problems of the economy and which provoked controversy within the LibDems.

Having come late to the free market philosophy, and at a time when most other politicians and economists were moving away from it, they have some of the fervour of  the convert. Cable in particular, whose formative experiences were in the 1970s when the UK government failed abysmally to prop up failing businesses such as British Leyland, is possessed of a fierce belief that the state has only a limited role to play in the economy. He has promised to overturn Mandelson’s nascent attempts at reviving an industrial policy for the UK.

So now the government has both pragmatic and quasi-ideological reasons for cutting public spending and reducing the size of the state. Pragmatic in order to avoid a collapse of the confidence in those lending money to the UK and quasi-ideological through the concept of the ‘big society’ rather than the ‘big state’.

The problem with this approach is that it flies in the face of the history of capitalism over the past 100 years. The role of the state, in every developed and developing country in the world, has come to play a bigger and bigger role as time has gone by. Outside of the aftermath of wartime no state of any consequence has succeed in cutting public spending absolutely. Certainly no state has managed to do so after a recession. Even under Thatcher, in the supposed brutal period of the 80s, public spending overall continued to rise.

Why is this? Essentially because the free market has proved incapable of fulfilling many different and essential functions of society. No modern state for example has ever had an education system which is run as a private business. No modern state has had an entirely private health system. Even in the US, which is most committed to the free market, state funding of Medicaid is an essential part of health provision. In addition, individual national insurance schemes have never been able to pay entirely for payments to the unemployed.

Private businesses depend  on the state to provide cheap education, health care and unemployment benefits. To some extent the role of the class struggle in earlier periods was important in establishing the levels of provision of benefits from the state, but the elite as a whole understood that the state needed to subsidise welfare in order for the economy to function effectively. It was not the post war Labour government, for example, which architected the welfare state in the UK but the National Government under the Conservative Churchill which did so through the production of the Beveridge report in 1942.

The state has also had a key role in the building and maintenance of transport and other key infrastructural projects, which are too big for any individual private company to develop but which all businesses benefit from. Roads are one good example of this, but virtually all communication systems and infrastructure projects require massive state involvement and investment in their production or maintenance.

It is also the case that the state is now so large and so intertwined with private business that many companies depend on government contracts. The IT business in the UK, for example, has benefited over the past twenty years from many large projects in the NHS and in other government departments.

There are those who argue that it is the increasing role of the state which has stifled private enterprise, but the reality is that without ever-increasing state involvement modern economies could not survive. Capitalism is too feeble and unproductive in most modern economies to operate on its own two feet without massive state assistance.

 So what does this mean for the present UK government’s plans to cut spending? Firstly they will struggle to make any impact on the overall scale of public spending without doing huge damage to the way our society works. Secondly, whatever their pretensions to the opposite, the axe will fall hardest on those least able to defend themselves.

A version of this article appeared on Spiked

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The UK needs an industrial policy, and fast

21 01 2010

‘Industrial policy’ means in essence an activist approach by the state towards support for and development of the economy. In the UK, state activism in this area was discredited in the 1970s because extensive state financial support for the defunct UK car industry failed at huge expense. In France and elsewhere state support for industry has persisted and is seen as key to economic success.

The future of the UK economy is in a state of chronic uncertainty. Having depended for so long on the success primarily of the financial sector there is now grave doubt about where economic dynamism in the UK can spring from. There is also a growing sentiment that even were the financial sector to recover, over dependence on this one area is very dangerous. This has led to calls to ‘rebalance’ the economy.

Today’s Financial Times carries an analysis of why technology businesses in the UK are not able to offer the necessary dynamism. One key reason given is lack of the necessary support and investment to turn promising small companies into large successful ones. The article points out that Business Secretary Peter Mandelson is now keen on developing an industrial policy for the UK.

So what should an industrial policy look like were we to go down this road? Firstly, what it should not be. Propping up failing businesses in order to save jobs is a waste of money. For that reason the government ‘scrappage’ scheme to enable the buying of new cars was a mistake. Were it not for the fact that the UK no longer has an indigenous car industry no doubt the government would have done what the US did through the nationalisation of General Motors in 2008. Government money should not be used to keep failing industries going.

Nor should an industrial policy be about trying to preserve UK industry in the hands of UK owners as Mandelson has argued in relation to the proposed takeover of Cadbury by Kraft. Generally speaking any foreign buyer will want to keep good businesses going. If there are loss making parts of the business they would  be closed down eventually anyway. The key issue is what new businesses are emerging and growing and that is where the problems of the UK lie.

An industrial policy would first and foremost require a change in the nature of political leadership. The UK government has adopted a managerial approach to the economy for the past 13 years. This worked only because the technology and financial services bubbles kept the economy growing. Now that these bubbles have burst a different approach is required. We need a political leadership which is both entrepreneurial and strategic.

Government needs to be entrepreneurial initially by changing the nature of public debate away from risk avoidance and caution, at every level, towards one of measured risk taking. There is a growing unease  in the UK that we have become stifled by regulation, both state and self regulation, in every area of life. Politicians need to give a lead away from this towards a more self-reliant and entrepreneurial approach to life in general and to the economy in particular. This should then be backed up by specific tax breaks and other incentives to encourage new business and more research and development in older businesses.

Government needs to be more strategic by taking a longer term view of the infrastructural requirements of the UK and investing more where necessary. This is a huge discussion in itself and needs to be looked at in depth. Government should also be encouraging and incentivizing those sectors of the economy which are already successful to be more successful.

I wrote recently of the NASTI approach, No Alternative STagnation is Inevitable,  which dominates current thinking around the economy in this country. For this to be transformed requires a sea change in political leadership away from cautious managerialism  and towards dynamic entrepreneurialism. The upcoming general election campaign offers an opportunity to argue for this radically different way forward.