Economic Perspectives – 112 (Part 2)

 

[EMILE WOOLF, FEBRUARY 2022]

 

In Lewis Carroll’s “Through the Looking-Glass” Humpty Dumpty tells Alice: “When I use a word it means just what I choose it to mean—neither more nor less.”

 

Humpty’s subjective approach to verbal meanings is of little relevance to economic writing – although you would be forgiven for concluding that the highly-qualified economics correspondents employed on BBC news programmes are alumni of the Humpty Dumpty University. Only this week a friend sent me a clip from BBC’s educational video on the subject of Inflation – which, as you know, I was at pains to define in January’s essay.

 

The BBC’s accompanying workbook defines it as follows: “Inflation is the rate at which prices are rising. If the price of a bottle of milk is £1 and it rises by 5p, then ‘milk inflation’ is 5%.”

 

The BBC is in standard macroeconomic territory here: it cites inflation’s effect, but identifies no cause. It’s as if it came about by magic – which is apt enough in the upside-down “Looking-Glass” world, where cause and effect are what Humpty chooses them to be, neither more nor less.

 

To inflate is, literally, to blow up, as we might do to a balloon or a tire. It can also be taken to mean “expand” – such as the number of people who are paid out of taxes, to take a currently relevant question.  In the UK, in the year to September 2021, their numbers swelled by a quarter of a million people, reaching a total of 5.7 million in central government, local government, the National Health Service and the civil service – while on that date, 30 September 2021, the number of workers in the private sector totalled 27 million.

 

 

How can we evaluate public sector activity?

 

 

Taxation provides the funds that pay for public services, and the private sector generates the wealth from which those taxes are levied. But how can taxpayers assess whether they are receiving good value for their money? Without a reliable measure it’s impossible to assess the reasonableness of public sector wages, for example, or claims that they should be raised. What we do know is that wages in the public sector rose over the pandemic, while wages in the private sector, where productivity can be measured, decreased.

 

The pandemic has certainly been good to people paid from the public purse. It’s not surprising that they (and their unions) have consistently favoured more and more restrictions in our behaviour. These restrictions may ruin children’s education and put hundreds of small firms out of business – but civil service jobs, pensions, retirement plans and privileges, immune from economic consequences faced by the population at large, remain secure and demand no external justification.

 

Several factors are at work in this paean to bureaucracy. Distributing power across regions, implicit in the levelling-up agenda, requires a raft of new regulations and associated red tape, as is the case in a regionally-governed country like France. Under its powerful local government machinery it has 35,000 mayors and 5.5 million functionnaires. Shrinking the size of the state is an uphill battle with so many on the public payroll.

 

 

Impossibility of economic calculation

 

 

To repeat what I have pointed out many times, expenditure by government is not susceptible to economic calculation. Senior public sector officials have no need to think about such prosaic matters as commerce, competition or productivity. The terms of public sector employment are wonderfully generous for one reason: there is no commercial reason for them not to be! There is no compulsion, no pressing need for 5.7 million people to recognise that nothing comes from nothing, and money needs to be made.

 

So twisted is official thinking that no one in government could see, for example, that energy price-cap legislation would cause energy prices to rise; and that all “do-good” property schemes like “help-to-buy”, “buy-to-let” and a stamp duty holiday, would cause house prices to rise. Simply put, the effect of well-intentioned, but blind, meddling is always the opposite of what’s intended.

 

To measure productivity, it helps to be able to identify a product. Productivity is simply the ratio between “output” and the resources used up in creating it – but in the state sector no economic measure for “output” is readily identified. We certainly value clean streets; we value having refuse bins collected; we value public amenities and buildings, like libraries and museums; we value our children’s education – but the only economic measure of the state’s outputs is what we, as private citizens, would be prepared to pay a commercial contractor for providing them – for that’s where competition, efficiency, choice and markets enter the picture. If they are absent, evaluation of expenditure on state provision is impossible because it has no objective yardstick.

 

 

 

Need to curtail state expenditure

 

 

Chancellor Sunak at last recognises that he cannot spend his way to economic prosperity with more and more debt in the form of money created out of thin air. Even infrastructure spending and spending on “levelling up” is difficult to evaluate. All we know is that it adds to the national debt. Our (“fiscally conservative”) chancellor now recognises the desperate need to slash state spending. So why do local government authorities squander money with little restraint? Do borough treasurers think their funds come from somewhere else?

 

The imperative that drives them is that if they don’t spend this year’s budget it will not be renewed next year. The result is not surprising: congestion on roads caused by temporary traffic lights, even when no road-work is evident; low-traffic neighbourhoods with blocked-off roads and secret cameras at every intersection; millions spent on expensive technical equipment not needed for another two or three years, but requiring storage while risking obsolescence. And why? Because if the Borough fails to spend its current allocation it will lose its future allocation.

 

Another classic: an entire building in Colindale, North London, is encased in scaffolding and plastic sheeting while every window is being carefully replaced. But here’s the thing: next year’s budget includes the cost of demolishing the whole building.

 

This local government malaise is clearly ubiquitous. After granting a concession for a weekend farmers’ market a council in Chicago sent in its contractors to carefully measure, number and paint lines on the road delineating each booth, carpark spaces, and a delivery area. The next day another city crew arrived and laid tarmac over the whole street.

 

None of this has been made up. Collectively it demonstrates the importance of this question: Would I sanction this item of expenditure if it was my money? [And what criteria would convince me – either way?]

 

The need for objective economic reckoning is both obvious and indispensable – if avoidance of wasting taxpayers’ money is the aim.

 

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EMILE WOOLF – ECONOMIC PERSPECTIVES 112 [PART 2]

February 2022