Recent Posts

#136: The challenge for government

THE POLITICS OF DECLINING PROSPERITY

The underpinning assumption of continuous growth has framed the entirety of the economic debate in politics since long before current systems of Western governance came into being.

Now, with the economies of the West characterised by an ongoing deterioration in prosperity, wholly new rules apply. Whilst sharing out the benefits of growth has seldom been easy, allocating hardship is going to be a very much harder call. As things stand, the incumbent elites have no answer to a question that they do not even know they need to ask – how do we govern societies that are getting poorer?

This puts us in a strange situation in which the general public knows more than the political elites. The official line is that people are continuing to enjoy growing prosperity, but people themselves recognise increasingly that this isn’t the case. The elites believe that traditional parties, and established ideologies and methods of conducting government, remain valid, but the public is well advanced in the process of repudiating all of them. Where elections are conducted proportionately, insurgent parties are making huge inroads – but where, most obviously in America and Britain, the system is structured in ways which entrench established parties, those parties are becoming the target for capture from within

Two humdrum issues in fiscal policy illustrate quite how dramatic the economic change is going to be. For a start, there’s no point in anyone proposing to increase public spending, because this is ceasing to be affordable. Likewise, there’s no point in asking whether or not governments should “tax the rich” more than they do now, because doing so is becoming unavoidable.

This change invalidates much of the economic thinking of the respective ‘conservative’ and ‘Left’ political persuasions. Additionally, the conservative side is now about to discover the price of two disastrous mistakes made within the last decade, whilst the Left is losing the ability to present a viable alternative to “austerity”.

Politics and government – the children of growth   

Although the American Constitution dates from 1787, most forms of government operating around the world today are of much more recent origin – and, even in the United States, governance has undergone huge changes since the Founding Fathers put quill to paper.

What this means is that virtually all Western systems of government and politics are products of an age of growth, and this history frames the policy debate, in economics and in much else. The Industrial Revolution is generally dated from about 1760 and, though it took a long time to spread around what we now call ‘the West’, it’s fair to say that no system of government in the advanced economies pre-dates the start of growth.

This is not to assert that there has been an uninterrupted continuity of growth because, of course, there have been periodic downturns, some of them deep and protracted. However, even in the midst of the best-known slump – the Great Depression of the 1930s – the assumption of expansion remained, stated in a consensus faith in the eventual restoration of growth.

The dominance of distribution

If, for now, we ignore the purely ideological dimension, economic management in an era of expansion becomes fundamentally a question of distribution. This poses one basic question: ‘if economic output is going to grow by X over the coming Y number of years, how are we going to share out this growth?’

Generally speaking, those on what we might term the ‘conservative’ side have tended to favour letting the fruits of growth fall where they may, which is to say in an unequal and somewhat haphazard fashion, not unrelated to the ‘lottery of life’. Those on the ‘Left’, on the other hand, have favoured skewing the distribution to favour those at the lower end of the prosperity spectrum. For the Left, this then poses a subsidiary question. Should redistribution mean taking from the better off and handing it to the less prosperous, much as Robin Hood is said to have done? Or are the resources to be redistributed better bestowed in kind (in the form of public services) rather than as a simple financial transfer?

It’s in the nature of popular discourse that both sides have endeavoured to construct a moral case buttressing their persuasions. For the Left, allowing extreme wealth for some in the midst of grinding poverty for others is morally unacceptable. For conservatives, taking money from the energetic, successful or simply lucky and handing it to those who may lack ability, or may be feckless, or are just plain unfortunate, encroaches unacceptably into private preference.

The aim here is to avoid this moral stand-off, not because it doesn’t matter, but because it’s largely insoluble. If someone feels that it’s morally wrong for the state to take his money and give it to others – or, conversely, if he finds it offensive that some people own multiple palatial dwellings whilst home for others is a cardboard box under a railway bridge – it is unlikely that he or she is persuadable to the other point of view.

Moreover, it’s of diminishing relevance if, as is argued here, ‘sharing out growth’ has ceased to be the decisive political issue in politics.

With growth come choices – but de-growth replaces them with imperatives.

The game-changer

As you’ll know if you’re a regular visitor to this site, a central finding of Surplus Energy Economics is that two centuries and more of increasing prosperity are in the process of going into reverse. The main reason why this is happening is that the energy-based economy is being undercut by an upwards trend in ECoE (the Energy Cost of Energy). To observe how this is taking place, it’s necessary to see past financial gimmicks which are designed, if not to affect, then at least to disguise what is going on.

This, it must be stressed, is an interpretation, not a prediction, at least as far as almost all Western economies are concerned. According to SEEDS, prosperity has already declined markedly in most advanced economies, having peaked at various points between 2000 and 2007. Italian prosperity, for example, has declined by 13% since 2001, British people are typically 11% poorer now than they were in 2003, and Americans have become 7.5% less prosperous since 2005.

America, the United Kingdom and Italy are used as exemplars here because of circumstances specific to each. In Britain, where prosperity is deteriorating particularly rapidly, voters have decided to defy the establishment and pull their country out of the European Union. Nationalism has certainly come to the fore in the United States, where it’s plausible that the Trump administration is the first government to understand that prosperity is becoming a zero-sum game. Italy’s new insurgent coalition clearly plans to challenge EU strictures on spending and deficits.

Trends in prosperity and GDP per capita for these economies are illustrated in the first set of charts. In each case, the official line is that GDP is growing, but, in each instance, this perception has been sustained only by the spending of huge amounts of borrowed money. People in all three countries are getting poorer, and, politically, this is exerting mounting pressure for change.

Critically, this downturn isn’t temporary, so there’s no point in waiting for prosperity growth to resume.

#136 prosperity & governmentjpg_Page1

The authorities in these and other countries have tried to circumvent the deterioration in prosperity using credit and monetary adventurism. But all that this has done has been to create a first global financial crisis in 2008 (GFC I) and, now, to set in motion a process that will bring about a second and much larger crash (GFC II) in the near future.

Where politics is concerned, the ending and reversal of the upwards trend in prosperity is a game-changer – instead of debating the sharing out of growth, politics is now becoming the much tougher matter of allocating hardship.

The establishment’s existential errors

The ending of prosperity growth is something that the existing structure of politics will struggle to address, even when the reality of shrinking prosperity becomes so obvious that it can no longer be denied or ignored. The problem for incumbent regimes is exacerbated because, during and after GFC I, the establishment managed to shoot itself in both feet.

First, the powers-that-be underestimated the popular anger that would be triggered when they combined the necessary rescue of the banks with the arguably unnecessary rescue of the bankers. Second, they introduced monetary policies which handed huge gains to those who already owned assets in 2008, and made asset accumulation very much harder for those – a majority – not in that fortunate position.

Both problems were compounded by supplementary errors. Where inflating asset values was concerned, no measures were introduced to even try to capture at least some of the winners’ upside in order to compensate the losers. Since the winners tended to come from an older demographic than the losers, this gaffe set in motion a process of change that is corroding away popular support for the established system.

The compounding problem with rescuing the bankers was that this was done by governments whose default position is opposition to intervention, which is why they find reasons not to act whenever the idea of rescuing, say, steel-workers or retail employees is proposed. Bankers, apparently, are worthier of rescue than manual or clerical workers. This is a view for which there is little or no popular support.

Put simply, then, the authorities made two existentially bad calls in 2008. If these mistakes are added to a deterioration in prosperity – denied by the authorities, but experienced by ‘ordinary’ voters – it becomes very easy indeed to see why insurgent or “populist” parties are enjoying steadily growing support. Part, at least, of the explanation for this shift lies in the establishment’s spectacular failure to recognise the consequences of making itself unpopulist.

How bad?

As we’ve seen, prosperity is declining markedly in Britain, America, Italy and most other Western economies. By 2025, people are likely to be a further 6.0% poorer than they are now in Britain, 5.4% poorer in America and 3.1% poorer in Italy.

This necessarily impinges on the ability to pay tax. Though taxes tend to be levied on incomes, consumption and returns on investment, the only thing that can really be taxed is prosperity.

To understand why, picture somebody whose income is £30,000, but whose prosperity is only £22,000. (In SEEDS terms, two components explain the difference between these numbers. One is the proportion of income financed by financial adventurism, and the other is the trend cost of ECoE, experienced by the individual primarily through the cost of household essentials).

If the state imposes taxes totalling 40% of this person’s income, the resulting £12,000 tax represents 55% of his or her prosperity. Now, move this on to a point where income has increased to £35,000, but prosperity has deteriorated to £20,000. If tax is still being levied at 40% of income, the proportion of prosperity now going in tax has climbed to 70%.

The starting figures are not dissimilar to the actual situation in Britain. In 2017, government primary expenditures (which exclude interest on debt) totalled 37% of GDP, but this was already more than half (52%) of aggregate prosperity. If the government is, in 2025, still spending 37% of GDP, it will need to tax 60% of prosperity to finance it. The numbers for Italy are similar, and, whilst America has rather more fiscal elbow-room, the trend towards the government seeking an ever-growing share of national prosperity is just as firmly in place there.

Another way to look at this is that, taking the UK as an example, tax equated to 51.8% of national aggregate prosperity in 2017. If that ratio is maintained, the tax take (at constant values) in 2025 is likely to be about £736bn, rather less than the £760bn likely to be raised this year.

These points are illustrated by the next charts, which illustrate government primary expenditures as percentages both of GDP and of prosperity.

#136 prosperity & government 2jpg_Page1

Less room for choice

A clear implication of SEEDS analysis is that no government, irrespective of its political colour, is going to be able to increase public spending to any material extent – and, in the longer term, is going to have to push expenditures down, not up – unless it wants to appropriate an unacceptably large proportion of national prosperity. Yet both the Left and much of the insurgent sides of politics predicate their policies on higher state spending, whilst the only parties favouring restraint seem already to be heading towards political irrelevance.

Before conservatives draw any comfort from the conclusion that public spending cannot realistically be pushed upwards as prosperity falls, they need to recognise that their own resistance to higher taxes on “the rich” is becoming equally untenable.

The reason for this is that, whilst the deterioration in prosperity is a generalised phenomenon, its effects are felt from the bottom up. This observation is already writ large in the visible widening of hardship, not so much amongst those in absolute poverty but amongst the large and growing numbers variously described as “just about managing” and “struggling to keep their heads above water”. As the number struggling increases, the ability to collect taxes from these people declines. Before very long, only those described in varying degrees as “rich” will be able to pay much in the way of tax.

Lastly, there is a nasty budgetary sting in the tail contained within the ECoE process and the consequent deterioration in prosperity. Ultimately, these processes mean that each pound, dollar or euro delivers a declining quantity of discretionary spending capability over time, as the cost of essentials absorbs a growing proportion of income.

But this doesn’t just affect households – it affects government as well. Accordingly, the amount of activity that public services can deliver from any given budget is on a decreasing trend.

Conclusions

If SEEDS is correct in identifying diminishing prosperity, the implication is a total game-changer in politics and government. Increasing government spending is ceasing to be a viable option, whilst “the rich” are going to have to pay much more in tax, however just, or unjust, one happens to think this is.

No existing party is equipped to handle this new reality, and neither, for that matter, are the insurgent movements sometimes dubbed “populist”. Political conservatives cannot hope to preserve the economic status quo, whilst the Left’s dreams of bigger state spending are becoming ever less realistic.

If “populism” means anything, it means giving the voters what they want – but this, too, in hard economic terms, is ceasing to be plausible. The spread of insurgent politics is likely to put a growing emphasis on “taxing the rich”, which, apart from being something that government can do, is going to become inevitable in the future. Conversely, though, insurgent promises to counter “austerity” by increases in public spending are rapidly ceasing to dwell in the realms of the possible.

This in turn suggests that insurgent, “populist” politicians are likely to put greater emphasis, not just on “taxing the rich”, but on non-fiscal issues including nationalism and immigration. As both the ‘Left’ and the ‘conservative’ persuasions struggle to come to terms with new realities, the insurgents can be expected to move in new and more radical directions.

 

  1. #135: Still not (wholly) about “Brexit” 392 Replies
  2. #134: An extremity of risk 221 Replies
  3. #133: An American hypothesis 320 Replies
  4. #132: The revenge of the spider 321 Replies
  5. #131: Not about “Brexit” 495 Replies
  6. #130: Grand Bargains, dangerous choices? 264 Replies
  7. #129: Why, what, how? 174 Replies
  8. #128: GFC II 480 Replies
  9. #127: Quantum of risk, part three 183 Replies