Friday, 30 December 2011

Growth, Choice and Optimism

Back during my first degree course I was studying for a unit on South Africa, and I remember reading for the first time an article on ‘good growth’. What the author meant of course was green growth, sustainable growth, which is undeniably an excellent and important topic. What I want to talk about today however is a different kind of good / bad growth.

Opponents to Keynesian economics often mock the example of a man being paid to dig a hole, only to fill it up again. The idea that you should pay someone to do something unproductive, simply to get money into the economy. This sets up the possibility that there are some types of economic activity which are productive, and some which are unproductive (whether unproductive is the same as bad is another argument).

In which case, I think a case study should prove enlightening. Let’s take a few areas of policy and economic activity for which there are ready international benchmarks and comparisons, using the US as an example. I only intend to do this superficially so as to make a point, but it isn’t difficult to go further.

The US health care system spends around three times as much, per capita, as the UK system, and produces somewhat inferior outcomes, taken as a whole. Now, of course there is no single reason for this, be it lack of preventative care, poorly structured care, over-prescription of expensive diagnostic methods, or the way money flows in the system. Certainly lifestyle is a factor and cannot be blamed squarely on ‘the system’ (save in its preventative and information role). Even so, we might conclude that somewhere in there is a lot of ‘bad’ economic activity.

The US justice system, in the meantime, imprisons something like five times as many people as the UK system, taken as a percentage of population. The costs of keeping these people in this state is great enough, as is the cost of the wardens, administrators and the operation of the criminal law. The US is very different to the UK of course, but if you look at the statistics on black male youths in prison, and how their economic and parental absence affects their children and wives, you’ll see a cross-sectional slice of how justice policy can perpetuate intergenerational problems just as easily as poverty and discrimination can. This is not an attack on prisons, but most people will I think agree that prison is not the answer to everything. In the American example, it must surely be a drain on society.

The financial services sector, which had swollen from 4 to 12% of GDP before the crisis, is perhaps more debatable. How much of what is done in Wall Street, or the city of London is economically virtuous, and how much is destructive? That is nearly impossible to tease out, and at best we can make estimates and assumptions to the effect that a great part of it has proven to be speculative and unproductive. That is my assumption, that is my estimate. You may agree or disagree.

Finally there is inequality. If we assume-- as I do, and will go into in far more detail soon in a separate post-- that the poor are not uniformly less talented from the outset than the well off, then we must assume that there is great economic inefficiency in allowing them, because of their environment and history, to squander their gifts. Yet it is clear that if they find it harder to get loans, harder to study and do well, harder to feel confident and to aspire, harder to imagine themselves succeeding and commanding respect, then their gifts are likely being squandered in some degree. Of course many gifted young people succeed in spite of the statistics, the odds and the deterministic framework they face, but exceptions too often prove the rule, even as they shed new light on the real complexities which underlie it.


If we take the huge percentage difference in GDP that the US spends on these things, for comparable or worse results in many cases, we can calculate a roughshod aproximation of the slice of this wealthy nation’s GDP that it can afford to sacrifice on what we may deem wasteful activities. The arguments over defence spending are in this sense illusory. At least defence is a legitimate policy consideration.

Now, to return to the beginning of this post, this is not an argument that we can survive with less economic activity, with fewer people working, with less money being spent. This is an argument that GDP growth, while important, is very much something government has to consider not just as a number, but as a targeted set of priorities for the gradual reconfiguration of overall economic activity. This is true no matter how you plan to get there or where you want to go. Not very contentious, I know.

A lot of Austrian economists would tend to argue that market distortions caused by government actions lead to malinvestment. Others would argue that we must direct investment into the industries ‘of the future’, though opponents would say governments don't do well at picking winners. Still others would say our first duty is to invest in infrastructure, to allow the rest to happen. Things like railways and roads and terminals for Heathrow. Or of course, we might feel inclined to invest in ourselves, in our human capital, especially given our prowess at things like chemistry in this country.

These are a lot of competing claims for a government to balance, and are made harder by the realities of path-dependency in fiscal policy. For example, we might decide we want more manufacturing and less finance, but we're already reliant on tax from the city, so we can't exactly axe it. Once you strip away one sector, or become reliant on another, it isn't easily remedied without some pain.

There is however, potentially, one surprising piece of good news for the idea of social choice. In the present crisis money has poured into treasuries, collapsing yields to historic lows and simultaneously making it hard for SMEs to get loans. Cash-rich companies are hoarding and those who are Keynesian in character would say that this is a time when government can and must invest. If so, the optimism that Ed Balls speaks of is best translated into a confidence and boldness in our thinking and how we envision the state of our economy in the future.

And there’s no harm in considering the cold hard economic logic of progressive policies.

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