Tuesday, April 28, 2009

It's not what you spend, It's the way that you spend it

Public Debt’s not the Devil and Balanced Budgets are no Cure-All

Going into debt is not necessarily a disaster for governments, nor will balancing the books automatically result in economic success and good public services. What’s important is what governments spend money on. The solutions to our economic problems are also much wider ranging and less separable from political, military, social and environmental problems than many economists and politicians seem to think.

What is vital in public spending is not whether governments go into debt but whether they spend money productively on things that will bring a mixture of increased revenue and collective benefits, or reduced financial costs and suffering, in the long run – in other words whether they waste money or spend it productively. A government which balances its books or reduces its debt in the short term can still be destroying its revenues or increasing its costs to an unsustainable level in the long run.

Private Finance Initiatives or ‘Public Private Partnerships’ are a good example of debt that isn’t formally counted as debt at all but in fact results in massively and costs on the public sector in annual payments over decades, resulting in increased taxes along with cuts in the number of full-time, fully-trained staff and beds in hospitals. Both main parties in the UK have expanded these massively from the 1990s on.

The US federal government has repeatedly gone into massive debt under Republican administrations from 1970 to the present, but their economy has never collapsed as a result, despite mis-spending massively on military contracts such as a fleet of submarines commissioned in the Cold War and re-marketed as ‘special ops’ submarines which would supposedly fire special forces in capsules onto beaches from their torpedo tubes. It’s Iraq ‘reconstruction’ and army supply contracts running to tens of billions have similarly been grossly over-priced and provided a tiny fraction of what they were supposed to in services and reconstruction.

The only governments to collapse due to over-spending in the modern period were the Soviet Union and it’s satellites. That was the result of mis-spending. Under Leonid Brehznev and Yuri Andropov in the 1970s the Soviet government increased their military budget massively to attempt to make their military as powerful as that of the rest of the world combined when their economy wasn’t as large as that even of their main rival’s, never mind it and all its allies. Over-spending on the military is indeed wasteful, as military spending never creates a fraction of the number of jobs or tax revenue that investment in civilian technologies and research does.

However going into debt in order to develop new technologies such as more efficient wave, tidal, solar and wind power would be the most sensible thing our governments could do. Obama has taken a step in this direction, even if a relatively modest one, but other governments seem slow to follow.

After World War Two Japanese and German industry had been destroyed by their defeat in the Second World War. Two decades later the Japanese and West German economies had overtaken most of the rest of the world in wealth because they had been forced to re-build their economies and so had been willing to pay for newer technology, while the rest of the world delayed making the investment and relied on its existing machinery.

The longer we delay now on investing in developing new, cheaper, more environmentally sustainable, energy and transport technologies the more we will suffer for it in the long run in terms of delayed economic recovery, unemployment (and the costs of paying unemployment benefit rather than getting tax revenue from the employed) and climate change related ‘natural’ disasters and illnesses (e.g lung cancer, other cancers and leukaemia caused by air pollution, mercury poisoning of seas, water and fish and nuclear waste).

Even John Browne, the former Chief Executive of British Petroleum, has said that private companies cannot be relied on to invest in these new technologies on the scale that’s required unless new government regulations and incentives ensure that they do (1). It should be added that the majority of people should not be gullible enough to allow their taxes to be used to pay to develop technologies which are then handed royalty-free for big multinational firms to reap all the profits when we’ve paid for the costs of the research and development. We need to demand that if we pay for the development of these technologies we also see a return on them in increased spending on public services and infrastructure and more apprenticeships and full-time skilled jobs.

That’s where a return to the 1970s British system of requiring all firms over a certain size to take on a certain number of apprentices relative to their number of employees or else pay an apprenticeship levy can come in. This eliminated the ‘free rider’ problem. Since it was abolished by the Thatcher government in 1979 there has been a massive shortage of apprenticeships and trained staff in Britain because every company has faced the problem that if it spends money to train apprentices other firms can simply coax them away with slightly increased pay without having to spend nearly as much on training itself. Unemployment has risen because of the resulting mis-match between the skills available among the potential work force and required by businesses. Only a reintroduction of a law making it compulsory for all medium sized and large businesses to take on apprentices or pay a fine to subsidise those who are will solve this problem.

Of course investment in green technologies and an apprenticeship law will not be enough to rebuild our economies and societies on a more sustainable model on their own. That will require a new mixed credit system, involving not just private credit from private banks but public and micro-credit, which i’ll give the outlines of in another post. It will also require fair trade with a balance between protectionism and free trade; a reform of farming towards organic mixed farming rather than chemical-using monoculture; a redistribution of wealth within and between countries; a move away from over-spending on military technology towards civilian technology ; a new system of international regulation to eliminate tax havens and allow and require firms to behave responsibly and take a long term view looking at returns over the next decade or two rather than the next quarter; and increased foreign aid replacing some military spending in order to take into account the primarily economic and social causes of many wars and genocides – and the primarily economic and social ways to end them and prevent them starting in the first place. We can always crush pirates and militias by military force in the short term, but in the long term that will not deal with the causes of piracy, civil war, sectarian violence and failed states – which are also often the product of our own governments’ wars, foreign polices, sanctions and economic policies. As with the credit system i’ll deal with all these issues in other posts here and/or articles on my website www.duncanmcfarlane.org in the future.

(1) = Guardian 25 Mar 2009 ‘State intervention vital if Britain is to meet its green energy targets, says former BP boss, http://www.guardian.co.uk/environment/2009/mar/25/clean-energy-uk-browne

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