Friday, December 10, 2010

The Expediency of Cutting Public Spending

One of the interesting aspects of the current problems with Sovereign Debt is that-for the first time ever-it is now politically expedient to talk about reducing Government expenditure as a share of GDP. I am aware that Margaret Thatcher achieved this, but I would question if her popularity stemmed from this or whether it was as a consequence of the economic growth plus populist policies on housing. Perhaps the reality is that Thatcher could not have achieved this without the growth in the private sector and/or selling off state industries. The latter produces a one time benefit to revenues.

No matter. The point here is that there does appear to be a wind of change on the issue. Such sentiment shifts are hard to achieve. If humans were rational, we could all sit down and see the benefit in curtailing excessive Government expenditure. However, abstract arguments are hard for people realise in practice. In reality, ideas have no resonance unless they are accompanied by emotional involvement.

It was the emotional involvement of Germans with hyper-inflation during the inter-War period that has largely shaped their consensual awareness of its dangers today. Similarly, there is no doubt that the UK (an invaded during the Second World War) views the political project of the EU with less stringency. For war bedevilled continental Europe (almost continually at war for at least 200 years) the EU project is about ensuring solidarity and harmony. Another example, can be seen in the reticence of Asian countries to depeg their currencies from the US Dollar. They remember, all too well, the aftermath of the Asian Financial Crisis in the late 90's.

Returning to the subject of this post, it is worth recalling how problematic it has proved to intellectuals to get across the idea that Government Spending should be curtailed. James Buchanan gave the greatest insight with his applications of game theory to public choice decision making. Milton Friedman talked of constitutional adjustments to enforce balanced budgets. Friedrich Hayek warned us over taking the 'Road to Serfdom'. Alan Greenspan endlessly promulgated the necessity to rein in Federal Spending. Nothing worked.

Prosperity begets power and no power exerts itself more forcibly or effectively than that of the control of the welfare state by the middle classes. The transmission mechanism of this power is, inevitably, the willingness, nay necessity, for politicians to have a beauty parade based on who can spend the most money. It takes a shock, similar to current events, for people to finally realise that the public spending that they demand is actually paid for by them. We can only hope that in the UK ,for example, the public realises the wastefulness and inefficiency of the previous regime, and in fact, of many of them before them.

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