Saturday, 21 July 2012

How can the argument for increased state spending be won?

Do Labour really want to claim that their alternative to malicious and incompetent
"austerity" is basically just  borrowing cash to pay people to dig holes?
I recently came across an interesting article on a left-leaning, Labour supporting website which called on the government to take advantage of all-time low government borrowing rates in order to invest in a number of projects such as a "national restoration scheme", to massively boost the number of apprentice schemes and to stimulate the house building sector. In general I agree with the argument but the author badly let herself down with the statement that "It doesn’t matter too much what we build, but it matters very much that we start to build something. And soon".

In the comments section I presented the case that it really does matter what is built. That what is needed is investment in the kinds of projects that can create proven social and economic returns (strong fiscal multipliers). I tried to explain that "building for the sake of building" is no good and that you might as well pay people to dig holes and fill them back in again if that is your argument.

The author responded to my point by saying that "the great irony is that paying people to dig holes then fill them back in again would work too". Whilst I admit that employing people to essentially do nothing can boost aggregate demand in the short term (via wages and increased consumer spending, lowered welfare costs), it would be foolish to create the impression that your policy is to just chuck money around willy-nilly. Indiscriminate spending would be just as irrational as the Tory policy of mindlessly cutting spending for the sake of cutting spending, even when the cuts being made are obvious false economies.

It is wrong to fund economic activity that generates fewer long term economic, social and environmental benefits than it actually costs. Firstly because there is already plenty of evidence to show that sustained investment in the construction of social housing (for example) reliably creates significantly more economic (and social) benefits than initial investment costs. And secondly because "paying people to dig holes" or funding activities with low fiscal multiplication values (such as tax give-aways for the super-rich or funding absurd vanity projects) is just creating a debt for future generations to cover, that is larger than the short-term boost in aggregate demand.

No politician in their right mind should be arguing in favour of wasteful spending at the expense of future generations, it just provides ammunition to the opposition and more than that, it is morally wrong to expect future generations to foot the bill for our short-term economic gains. The moral bankruptcy of shafting future generations for short term political gains is a lesson that should already have been well and truly learnt from the reckless creation of hundreds of billions of pounds worth of toxic PFI debt legacies.

Don't get me wrong, I'm wholly in favour of fiscal stimulus but there really should be more research into the most effective multipliers, so that proponents of state investment can adopt an evidence based approach to stimulating the economy. Allowing them to create strong factual arguments in favour of funding projects that have been proven to be more likely to provide long-term economic, social and environmental benefits.

If a more reasoned, scientific approach is taken, increases in spending on projects such as social housing, public transport infrastructure, research and development, education and high-tech industries can be presented as a short-term stimulus to boost the economy now, that will also improve economic prosperity for future generations, with an evidence base to support the assertions.

It would be far from easy to define an acceptable methodology, with a great deal of work needed to properly define how net benefit is calculated. The economic returns on investment must be considered but not at the expense of externalities such as social cohesion or the destruction of non-renewable resources.

To give a very brief (and over-simplified) example of what I mean: If a scenic rural railway line is re-opened, the combined boost in short term aggregate demand during the redevelopment process and the long-term revenues on the line may never cover the investment cost, but if the economic benefit to the local economy (increased viability of small local businesses, increased tourist appeal, etc) and the environmental benefits (a few hundred people using the train to commute instead of making long individual car journeys) are considered, the benefits may begin to outweigh the negative economic returns than the functioning of the line is considered in isolation.

I'm pretty sure the adoption of a carefully considered evidence based policy when it comes to allocation of state funds and the sourcing of articulate and economically literate spokespersons to argue the case could be a big vote winner, especially given the rising public anger at the Tories brand of  mindless, self-defeating, ideologically driven, seemingly incompetent, "cut-now, think-later" austerian pseudo-economics.

See also