Is public spending good for you?

 by michael roberts

Of course, it's the wrong question.  Public spending is good for all, almost by definition.  The question is really whether public spending is good for capitalism i.e. the private profit mode of production.  The answer is yes and no and depending on who you listen to.  Take the US budget for 2012.  The White House has just announced its proposals.  As mainstream economist (going radical) Jeffery Sachs commented, it is "a budget for the rich and powerful" (FT, 13 February).  President Obama wants to cut non-interest federal government spending from 22.6% of GDP to 19.3% by the end of the decade, while revenues would rise from 15.4% to 19.7%, turning a budget deficit into a surplus through a programme of austerity rather than economic growth.   The Republicans under Mitt Romney would cut spending even more, to 17% of GDP, while keeping tax revenues from rising to no more than 18%.

Both Obama and his likely Republican rival Matt Romney are agreed that government spending is not good for you right now and we should cut it back. This means swingeing cuts in so-called discretionary programmes like education, environmental protection, children's services, jobs training and infrastructure.  Even though federal tax revenues as a share of GDP are at a low not seen since 1950, both the Democrats and the Republicans plan to keep that share below the average of the 1980s and 1990s throughout this decade.  While Obama would tax those earning over $250,000 a year a bit more, so that they paid about 36% of income in tax on average (although many - like Romney himself - pay much less because their income is not from work but from dividends and profits), Romney would tax the top 1% even less than now, at just 26% of income, while so-called middle-class earners would see an increase in their tax burden.

Cutting spending would be less necessary even within the confines of an economic belief in the need to do so, if taxes were raised.  But this, of course, is anathema to the ruling elite if it means higher taxes on rich individuals and on large corporations.  On the contrary, both Obama and Romney want to lower corporate taxes.   What a stupid idea says, Albert Edwards, the strategist for the French bank, Societe Generale, when referring to the same proposal for the upcoming UK budget coming from various Conservative party sources (SG Global Strategy weekly, 23 February 2012).  "I can still recognize a bloody stupid idea when I see one. The right wing of the UK’s ruling Conservative Party is calling for a reduction in company taxation. This could be dismissed as a laughably stupid idea given the ruinous state of public finances if this government hadn’t already got a track record of cutting corporation tax as one of their very first fiscal acts.

Edwards went blisteringly on: "Why do I regard the idea of cutting UK company taxes as laughably stupid at this time? It is simply the fact that UK corporations, like their US counterparts, are sitting on piles of “excess”cash with very little evidence that they want to either spend or distribute these surpluses.  Indeed UK corporations have been running HUGE financial surpluses for some years (i.e. the excess of profits over investment spending and dividend distributions).   And to the extent that sectoral balances MUST sum to zero, if the government wants to reduce its deficit, another sector must reduce its surplus, most probably the corporate sector. This can either be done by reducing profits or boosting their spending. At a time when it is estimated that UK (and US) companies are sitting on huge cash piles, it seems totally senseless to boost profits still further by lowering taxes in the hope that they will spend this on hiring and investing. If they had wanted to do this, there is most certainly no shortage of funds. Indeed if the government really does want to reduce its bloated budget deficit, and if as appears to be the case, the UK (and US) corporate sector can’t find useful things to do with its cash mountain they should be relieved of this troublesome burden via HIGHER not lower corporate taxes. Alternatively a one-off levy on excess cash corporate piles should be applied.  After all, deficit reduction is this UK government’s number 1 priority."

But both Obama and Romney are opposed to raising taxes, so government spending must be cut.  Indeed, both parties in Congress are agreed that discretionary spending must be reduced by $1trn up to 2022, from 8.7% of GDP now to 5%.  Under Obama's proposals, for every $1 in extra revenues gleaned from the top 1%, $2.50 will be cut from government spending.   And these cuts in discretionary spending are centred on civil spending not on the military sector.  So their impact on economic growth and jobs is that much worse.  According to a study by PERI (The US employment effects of military and domestic spending priorities, December 2011, http://www.peri.umass.edu/), $1 spend on civil sector spending creates substantially more jobs than $1 spent on the military.  The US government spends nearly $700bn annually on its military, or $2,200 per person.  This figure has risen massively since 2001 to cover wars in Iraq and Afghanistan and for 'homeland security'.    The military budget is up from 3% of GDP in 2001 to 4.7% now.  Military spending provides jobs directly and indirectly for 6m Americans, but the same spending in the civil sector could provide for 30-100% more jobs (or over 2m more).  But such spending on infrastructure, education, healthcare and the environment are the very sectors that are going to be cut.

Of course, the reason for this 'stupidity' is that vested interests of capital are behind the call for a cut in corporate tax, even though it is already low and counterproductive even to reducing the public sector deficit.  It is what Marx called 'vulgar economics', based on crude class interests, not on a scientific analysis.  Many right wingers rail against public spending under virtually any circumstances.  Government is just bad.  We are continually informed that we are spending "beyond our means", that public sector debt has reached uncontrollable heights and budget deficits must be turned into surpluses (but not by tax rises for the rich and corporations).

As Robert Skidelsky put it in a recent review of a book by H Wood Brock, The American Gridlock, on US public finances (see www.project-syndicate.org), "there are many that are convinced that all state-sponsored capital spending is just so many roads, bridges and railway lines to nowhere that soak up their money in corruption and inefficiency.  Those who believe this are unfazed by the corruption and waste that characterises much of private sector spending.  They prefer the total waste of letting millions of people sit idle to the possible partial waste of programs that put then to work, nurture their skills and equip the country with assets".

The Great Recession was fundamentally caused by falling profitability for capitalist investment, but it was eventually triggered by the bursting of a huge credit bubble and excessive debt in the private sector not the public sector.  Public sector debt is now huge by historic peacetime standards because governments had to bail out the banks and other wasteful private sector corporations.  But apparently, a build-up in private sector debt can be okay but any build-up of public sector debt is bad.

The classical economist of capitalism and the so-called guru of free markets, Adam Smith recognised the need for public spending in his Wealth of Nations.  Smith explained: "The first and last duty of the sovereign is that of erecting and maintaining those public institutions and those public works, which though they may be in the highest degree advantageous to a great society are, however, of such a nature that the profit could never repay the expense to any individual. " And Smith meant by this "good roads, navigable canals, harbours and education".  In contrast to Smith, there is outright opposition to public spending and government.  Vulgar economics rules.

In a recent study, the US investment bank Goldman Sachs tried to analyse scientifically the good and bad aspects of public spending for a capitalist economy (Restructuring the public sector in Europe, 9 December 2011).  It looked at GDP growth in 27 advanced capitalist economies against government expenditure.  Goldman Sachs concluded that greater government spending would initially raise overall economic growth in a newly emerging capitalist economy where government is necessary, as Adam Smith pointed out, to provide 'public goods' required to sustain and train the labour force, infrastructure, and even to generate new technology.  But according the GS,"there comes a point where more government spending starts to hinder economic performance ".  What's the reason?  Government spending starts to "crowd out" private sector investment, "decreasing its returns".  In other words, if public spending and the public sector grow too much, it starts to destroy profit in the capitalist sector.  And that cannot be allowed,  even though GS admits that public spending "reduces the volatility of business cycles" under capitalism.

Way back in 1943, Michel Kalecki, the Oxford left Keynesian economist pointed out (The political aspects of full employment) that "the economic principles of government intervention require that public investment should be confined to objects which do not compete with the equipment of private business.  Otherwise the profitability of private investment might be impaired and the positive effect of public investment upon employment offset by the negative effect of a decline in private investment.  This conception suits businessmen very well... as there is a danger that the government in pursuing this policy may eventually be tempted to nationalise transport or public utilities so as to gain a new sphere for investment."  And we can't have that as " the social position of the boss would be undermined".

So the capitalist solution to the economic crisis is not growth through public investment in jobs and civil sectors but a decade or more of austerity.  Indeed, Alan Milburn, former Trotsykist and subsequently Blairite minister for health in the UK's New Labour government of the last decade and now adviser to private equity groups in Europe, echoed the conclusions of Goldman Sachs when he wrote in an article for the UK's New Statesman journal of the 'moderate' left, that: "The truth is this: the era of big public spending is over ... The implications for public spending of a more constrained fiscal environment are threefold.  First, governments will be forced to choose between spending programmes as well as within them.  Second, they will have to think in a new way about how to get better value from existing programmes.  And third, Europe's largely tentative efforts to reform welfare and public-service provision will have to move up a gear" .  And what Milburn means about reform is privatising health and education so that private profits can benefit at the expense of investment in labour, the only force for creating new value.

The UK's satirical journal, Private Eye this week:

"There was widespread shock today after the leading economist think-tank the IBO (the Institute for the Bleeding Obvious) claimed that the government's austerity measures would lead to an era of austerity in Britain.  "We've calculated that the result of slashing government spending and sacking loads of people" said a boring man in spectacles,"is that government spending reduces significantly and the number of unemployed rises rapidly.  From these findings we've drawn the conclusion that austerity measures will lead to austerity.  The chancellor was quick to reject these findings saying everyone he knows has just been awarded a six-figure bonus by the bank they were working for, so happy days are here again".