Wednesday, July 18, 2012

The case for... Evidence based policy in UK politics

Defenders of orthodox neoliberalism often try to defend their favoured socio-economic ideology by pretending that "there is no alternative".
In this series I'm going to explore what some of these alternative economic strategies could be.

After two years of blundering incompetence from the Tory-Liberal coalition government there has been much talk of evidence based policy. The topic has even reached the pages of the Daily Telegraph, which are usually filled with the kind of reactionary sentiments that do so much to undermine evidence based politics. The article by Jonathan Shepherd makes a very strong case for the introduction of evidence based politics, one of the key quotes comes from Jon Baron, president of the US coalition for evidence-based policy, who said: “Distributing social spending the old fashioned way – with maximum regard for political gain and minimum regard for evidence of effectiveness – is a luxury we can no longer afford.”

I'd suggest the first step towards introducing evidence based policy would be to begin by teaching a few economic fundamentals to all elected politicians:

Lesson 1. What is a fiscal multiplier?
Lesson 2. What is an externality?
Lesson 3. What are anti-competitive practices and how do we avoid them? (hint: monopolies, oligopolies, information assymetry, cartels, price fixing, dumping, subsidies are bad)

The next step would to be to introduce routine assessments of the fiscal multiplication effect of government policies (taking externalities such as environmental degredation, use of limited/non-renewable resources, systemic risk, social disorder, health consequences, anti-competitive practicies into account). This kind of analysis would provide useful data on which government services provide good overall (economic, social and environmental) returns and which need to be made more efficient, scaled back or completely abandoned.

An approach like this would also prevent ideologically driven fools like Caroline Spelman from slashing state spending on economically beneficial flood defence projects, against the scientific advice and incurring significantly more economic damage that she saved through her mindless adherence to the failing cut-now think-later ideology of Osbornomics. By slashing spending on worthwhile flood defence projects Spelman was clearly just serving her own political interests. She was simply trying to win brownie points and future promotions from the ideological neoliberals that run the Conservative party by demonstrating that she would gleefully inflict the largest proportional spending cuts on her own department, without any consideration for the obvious false economies she was creating.

The problem of course is that proper analysis of the fiscal multiplier values of government spending would throw up a lot of results that all three of the neoliberal riddled, corporatist Establishment parties would abhor.

Government spending on social housing, public infrastructure projects and welfare projects usually provide good fiscal multiplication values, whilst tax cuts for the extremely rich have provided some of the lowest fiscal multiplication values ever seen. The 2008 Bush tax cut for the super rich resulted in a fiscal multiplication value of just 0.29, meaning that for every Dollar spent (in lost tax revenue) the economic return was just 29 Cents. Compare this to Spelman's flood defence cuts, it has been estimated that for every Pound spent on flood defences the country saves £8, an astonishingly high fiscal multiplication effect of 8.00, or a 27 times more effective use of government funds than cash handouts to the richest people in society (a favoured Tory policy).

Evidence based policy based on the assessment of fiscal multiplication values would create a situation where government would find it almost impossible to give vast tax cuts to their wealthy mates and financial backers and instead find themselves compelled to increase funding for economically beneficial projects such as building flood defences and social housing, providing healthcare, education and welfare, increasing spending on tax enforcement and cutting taxes that disproportionately effect the poor and ordinary working people (such as VAT and council tax). These outcomes are precisely the reasons that evidence based policy is highly unlikely ever to happen in the UK.

See also

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