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May 08th 2018 print

Peter Murphy

Low-Growth Big-Statism

As Treasurer Scott Morrison unveils what has not already been leaked of his 2018 budget, a reminder that, while high growth makes a big-spending state sustainable, the converse is also true: a big-spending state is the primary drag on economic growth

Crisis Without End? The Unravelling of Western Prosperity
by Andrew Gamble
Palgrave Macmillan, 2014, 240 pages, $47.25

tax burdenProsperity is the single most important factor in modern political life. To lose it is devastating. To regain it is redemptive. Not to have it in the first place encourages all manner of delusions and feints about how to get it. Then there is the remarkable but small cohort of countries—or more precisely, regions within those countries—that decide, for whatever reason, to patiently climb up the slippery ladder of prosperity. Prosperity is hard work. Its benefits are reaped in the long run, not the short term. To achieve it requires the social virtues of sacrifice, prudence, personal responsibility, enterprise, creativity and above all an enveloping sense of providence. Modern politics offers endless ruses, gimmicks, gambits, shams and dodges promising good times. Like the carnival huckster, these intimate unbelievable delights. None of them work, but that doesn’t stop voters being seduced by them.

The last century is littered with cruel illusions about what makes and unmakes prosperity. A constant theme through most of these social fantasies is that “the state will fix things”. An incredible array of political ideologies have claimed the same. From fascism, corporatism, communism and socialism through labourism, Keynesian Left-liberalism and social democracy to populism and national conservatism, the assumption abides that the state can deliver prosperity. But if anything the opposite is true. The great delusion of the past century is that the state can create prosperity by intervening, planning, regulating, taxing, allocating and redistributing. It can’t.

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The root of this view is theological. One of the great dividing lines of modern theology was between the idea that the world is governed by providence and the notion that it is governed by free will. The first stream had its roots in Augustinian theology and its modern expression in Calvinism, Lutheranism, Anglicanism and Presbyterianism. This strand of thinking underpinned the secular belief in the hidden hand of markets, cities and industries. Their operation was viewed as providential. This led to a scepticism about the state and about agency in general. In sharp contrast, the second theological stream thought of the world as principally shaped by that very agency. Evangelical, Methodist and Baptist religious currents gravitated to this view, as did many strands of secular liberalism and socialism. Whether it happened to be the individual or the state that did the deciding, or whether the agency was a person or an organisation, ultimately didn’t matter. The planner, despot, dictator, regulator, calculator and egoist, all, equally, thought that the world could be shaped by human will.

The last century was an era of intense secularisation. The churches emptied. But the theological foundations of political economy did not disappear. This was captured most beautifully in Max Weber’s 1905 work on The Protestant Ethic and the Spirit of Capitalism. Even as religious belief ebbed, old debates between Augustine and Pelagius, Luther and Erasmus, Calvin and Arminius, the Jansenists and the Jesuits resurfaced in secular forms. The tug-of-war between grace and control, fate and free-will continued.[1] A tipping-point occurred early in the twentieth century. Advocates of economic voluntarism began to dominate. As their cultural influence expanded, so did the size and scope of the state.

The genius of the modern age crystallised in the late eighteenth century. At that point, the remarkable productive power of markets, industries and cities began to be realised. Nothing like it had come before. This potent combination started to create an unprecedented level of human wealth and prosperity. But it was not constant or linear. It ebbed and flowed. It was cyclical. Things improved remarkably yet also unwittingly. Markets, industries and cities were secular systems of providence. They were governed by the “hidden hand” (Adam Smith) or by “patterns of nature” (Edmund Burke). Human beings could adapt to cyclical ups and downs and make the best of them. But they couldn’t control them.

As long as providential outlooks dominated, this was fine. But as voluntarism replaced the sense of providential fate, anxiety grew. Rather than the down-cycles of markets, industries and cities being inevitable, individuals began to think of them as preventable. Capitalism, technology and the big city became bugaboos. The state along with other kinds of managerial organisation promised to “fix things”. Socialism and radical-liberalism flourished.

So began the era of the will. The democratic will, the people’s will, the parliament’s will, the president’s will, the national will, the regional will, the despot’s will, the leader’s will, the manager’s will—all competed for attention. Law-making, rule-making, policy-making multiplied. Yet the politics of will in the things that matter most is an illusion. This is because, as Richard Weaver once observed, there is a structure of reality independent of our will and desire.[2] Creation comes before us. It exists separate from our volition. It goes on long after us. This is true of the physical world and the social world. This reality is double-edged. It’s independent of individuals but not hostile to them. It’s amenable to human actions yet can’t be replaced by those actions.

In fact deliberate human acts most often do not achieve what they set out to do. That was the view of the sceptical tradition of social thought that ran from Vilfredo Pareto to James Burnham and onwards to the first generation of neo-conservatives.[3] Many of the best-laid plans end in futility or else produce perverse outcomes. This is especially true of the state. A lot of its actions are wasteful, counter-productive and ineffective—not least when it chases prosperity.

Democratic procedure, the rule of law, charisma, honesty, authenticity—all at various times have been crucial elements of modern political legitimacy. But if we look back over the past century, we see that nothing contributes to the success or authority of governments as much the visceral felt reality of prosperity. No government can stay in power very long without some plausible claim that it is devising, guaranteeing, overseeing or stimulating prosperity. That is equally true of democracies and authoritarian states. Only despotisms can escape the demands of legitimacy secured by economic growth because they rule by fear, not acceptability.

Andrew Gamble’s Crisis without End? has an interesting take on the question of the present and future of prosperity in the major economies. Gamble is a social democrat, perhaps one of a dying breed. He is a serious thinker who for a long time has engaged not only with the ideas of the Centre-Left but also with those of the Centre-Right. He’s a sympathiser of big government. Yet he also understands that, at its heart, there is something deeply wrong with it. The state’s share of GDP has grown dramatically over the past century. This was fuelled by spending on education, health, and retirement income. These goods tend to be politically untouchable. They are surrounded by a halo of sanctimony. Gamble is unusual. He empathises with Centre-Left politics but dissents from its common spending-is-genius assumption. He admires public goods. He thinks they are valuable. But he is also aware that big government is beset by two fatal conundrums: a fiscal conundrum and a growth conundrum.

As to the first, governments routinely spend more than they receive in income. The US Social Security system for decades has paid out significantly more in retirement benefits than recipients have contributed in payroll taxes. Because they fail to control, cap and balance spending, governments end up with what resembles a Ponzi scheme. They excuse this by saying that, in time, economic growth will pay for the chronic over-spending. But Gamble’s second conundrum belies this. Economic growth rises and falls cyclically. Yet what if, over a longer time-frame through multiple cycles, the rate of economic growth is declining? What if, as we emerge from the long stagnation of the 2010s, economies pick up but still fall short of the long-run prosperity super-engine of 3 per cent annual growth? Underlying contemporary prosperity, Gamble suggests, is an incremental tendency across multiple decades for growth in many countries to decline. If that’s so then many nations may exit the cyclical-low-ebb of 2010s but find that subsequent economic high-points are less than auspicious.

Gamble understands that without high growth a big-spending state is unsustainable. That’s his key interest. Yet the converse is just as relevant. For, arguably, it is the big-spending state that is the primary drag on economic growth. As Table 1 indicates, in almost all high-growth states with medium or high GDP per capita, total government spending is modest or low. The optimal size of government is 17 to 23 per cent of GDP, which covers all the genuine state essentials of infrastructure, law, order and safety-nets. Every 10 per cent of GDP spent by government above the optimum slices about 0.75 per cent off growth rates.[4] The irony is that spending growth relies on economic growth yet undermines it. The dead-end of this today is visible in high-spending low-growth Europe.

murphy table1



This leads to a further conundrum, which Gamble alludes to, but does not quite spell out. This is a political conundrum. As a general rule, virtually all parties on both sides of politics deify spending. There are exceptions to that rule. But the exceptions only prove the rule. The rule is that voters want things that are incompatible. They demand more spending on health, education and income-support. These have become the sacred cows of most democracies. Yet the more that governments spend, the lower the underlying growth rate. This points to a further conundrum. Parties and voters on the whole have convinced themselves that raw spending is the primary outcome of politics. Almost no one pays attention to the question of whether such spending generates anything like good value. Much of it does not.


The fiscal conundrum

It is also not unusual to find voters expecting more spending and lower taxes. The only way cynical governments can bridge the vertiginous gap between the two is with debt. The effect of this is two-fold. Governments channel short-term spending into long-term debt repayment. They shift the fiscal burden from the current generation of voters to future generations (their children and grandchildren). Second, they force on societies preternaturally-low interest rates to finance the debt. This discourages savings and encourages private debt including corporate and consumer debt. Gamble wryly calls the latter private Keynesianism, an artificial technique to stimulate demand in low-growth periods. Private, like public Keynesianism, does not work.

Total corporate debt in the US doubled between 2007 and 2015. The prime lending rate fell from 7.75 per cent to 3.5 per cent. Complementing private Keynesianism was the Obama administration’s public Keynesianism. It began with the 2009 stimulus package of $800 billion. Gamble estimates that the Obama administration spent $3.1 trillion across a variety of programs. The result, he observes dryly, was that unemployment increased from 8 to 9 per cent. The administration’s measures, he adds, were primarily directed to aiding public employees at the expense of private sector employees. The habitual response of Keynesians is that if this spending hadn’t occurred “it would have been worse”. This is the kind of reasoning that excuses almost anything. In fact US employment did not dip below 8 per cent till 2012 and did not return to pre-2007 levels until 2017.

The decade-long stagnation was for all intents and purposes identical to the long downturns that have occurred periodically in the major modern economies since the end of the eighteenth century. No government steering makes anything more than a marginal difference to that recurring reality. Fiscal stimulus is a mirage. But isn’t China an exception to that? Didn’t it “save” the global economy by spending big on ghost cities? From a very low base China reached a growth peak of over 15 per cent in the early 1990s, falling to 6 per cent in 2000, rising to 15 per cent in 2007, falling to 7 per cent in 2015. Even in economic take-off mode, China is no more immune to cyclical waves than any other major economy.

As Gamble puts it, the claim is that economies can be managed. The state can steer things so that downturns are flattened and minimised. That’s the promise. The touted techniques vary: central bank setting of interest rates below the natural market level, deficit spending, fiscal stimulus, increased taxes on savings and imports, and so on. The rationale for these can be equally Keynesian, populist, national-conservative or crypto-socialist. It matters little. In the end all the arsenal of national monetary, budget and tax policy makes only a mild difference to the wave-like motion of modern economies. This undulating motion is often at odds with the linear expectations of voters, governments and experts. What goes up they think will continue to rise; what goes down will continue to fall. Ecstasy prevails till doom arrives. The reality though is that the cyclical pattern of modern economies established in the late eighteenth century and developed in the nineteenth century has continued unabated ever since.

In the 1930s and 1940s, Friedrich Hayek and Joseph Schumpeter argued that government intervention in economies had close to no effect except to inflate bubbles and prolong downturns. Their peer, John Maynard Keynes, argued that by managing demand, the business cycle could be mitigated and downturns curtailed. Yet nowhere was this achieved. Keynesianism was a complete failure. Technology, industry, market and business cycles carry on virtually indifferent to government action. All the cheap money, low-interest-rate policies and government fiscal stimulus of the past decade in the major economies had zero net effect on the big-picture pattern of these economies. A major decade-long period of low growth occurred irrespective of all the vainglory of public policy.

Sometimes electorates see that less is more. Leadership makes a big difference. Australia illustrates the matter. It has a high-performing economy by world standards. Its record in the past two decades of avoiding recessions is stellar. In no small part this is because it has a moderate level of public spending. In general the lower the level of public spending the better a country’s net economic performance. This is by no means the only reason for growth. But it helps a lot. China, the contemporary “miracle” economy, is restrained in its public spending. In spite of the towering presence of the state in China, public spending between 1995 and 2011 averaged a fiscally-optimal 18 per cent of GDP. The overall best economy in the world, Singapore, has held spending for decades at 17 per cent of GDP. Britain’s strong exit from the sluggish 2010s is due to the heroic winding-back of spending by the Cameron–Osborne government.[5] Total UK public spending reduced from the super-sized 53 per cent of GDP under the Brown Labour government to 40.6 per cent in 2016. Australia’s long recession-free era was crucially dependent on a similar wind-back of the fiscal indiscipline of the Hawke–Keating years. During the Howard–Costello era, total public spending dropped from 40 per cent of GDP to 35 per cent. The Abbott government in 2014 and 2015 returned to the Howard-era norm. But otherwise the rest of 2010s was dominated by an ineffectual political class, uncomfortable with constraint.

Gamble cites the Council of Economic Advisors in 1965 telling the US President that “no law of nature compels a free market economy to suffer from recessions or periodic inflations”. That is simply untrue. A look back at the last two centuries of economic behaviour clearly shows that there is an economic law of nature that delivers growth and prosperity through waves of expansion and contraction. The period from 1929 to 1950 in the United States for example included the Great Depression but also one of the greatest periods of increase in GDP and productivity per capita. The classical political economists—the liberal-conservatives—said leave things alone, or as Gamble puts it, allow crises to run their course.

Downturns are the means by which modern industrial-capitalist economies renew themselves. This is because downturns are never just downturns. They are simultaneously upturns. For example the 1930s saw the replacement of the horse with the automobile and a rapid decline of employment in the large horse-livery industry. Today, in a similar vein, our own taxi-livery industry (and the associated transport industry) will be stripped of labour in the next decade or two as vehicle driving is automated. However, as one industry declines, another rises. New technology, the car, generated a vast new industry. As it grew, employment grew. But so did automation. In the case of the car industry this eventually caused swelling employment to shrink. In short, every upturn contains a downturn.

When the classical political economists advised governments to let things be, they did not mean that society should adopt a masochistic attitude towards downturns, but rather that labour and capital should seek the upturn that is always buried in the downturn. Between 1916 and 1970, as agriculture in the American South mechanised, six million African-Americans migrated to new industrial plants in Detroit and Los Angeles. But what goes up, comes down. So by 1970 manufacturing employment was on the decline. This though was a cause of prosperity, not debility. For manufacturing output did not decline, but rather labour input declined. In other words, economic productivity increased as labour was replaced by machines.

Sometimes there is a deep reluctance on the part of societies to accept this waxing-and-waning pattern. Much nostalgia attaches itself to industries that are shedding labour, even if those industries maintain or increase their output. This nostalgia runs up against the grain of modern industrial societies. These grow wealth and prosperity by replacing labour with machines. That frees capital to invest in new labour-generating industries that then go through the same labour-hiring, labour-shedding cycle as their predecessors.

Nostalgic politics promises to stop this economic law of nature. Yet it can only do so by slowing the increase in industry productivity. The recent example of the US administration introducing tariffs on steel imports is illustrative. Has US steel output changed much over the years? No. Has employment in steel production declined dramatically? Yes. Now, consider this thought experiment. Imagine if the US banned all steel imports. Would that stop the employment decline? In the short term, yes; in the long term, no. Domestic steel makers compete with each other and compete with foreign producers in the world market. How do they compete? They automate. The most advanced steel mills today employ only a handful of workers.[6] As King Canute told his courtiers, you cannot hold back nature’s tide.

murphy table 2



The growth conundrum

If you combine industrial automation with the market’s capacity to efficiently allocate resources and the propensity of big cities to concentrate and amplify talent, energy and ideas, you have the basic recipe for prosperity. When economies grow rapidly, the wealth of a nation expands. However since 1914 almost all governments, irrespective of nominal political ideology, have sought to tax growing wealth in order to expand government. At the beginning of the twentieth century, the state accounted for less than 10 per cent of GDP, and often as low as 3 or 4 per cent. Today it is 30 or 40 per cent or more.

As Gamble observes, the big-tax state has a fatal weakness: prosperity. If growth and prosperity decline so does the real capacity to fund state programs. So what do states do? Some borrow money and go into debt. Yet that only delays the day of reckoning. Others spend more in the hope that a big surge in growth will eventually occur, eliminating the gap between income and expenditure. This assumes that dips in prosperity are cyclical. That’s astute. Modern economies cycle in and out of good times and bad times. That’s what Gamble calls their “existential” condition. But what if, underneath these existential ups and downs, there is another deeper “structural” condition slowly, imperceptibly asphyxiating prosperity over the long term?

Gamble’s distinction between the existential and structural state of major economies is telling and important. The last decade illustrates the point very well. The 2010s was a period of major cyclical downturn, like the 1830s and 1840s, the 1880s and 1890s, and the 1930s. We now appear to have entered a period of recovery like the 1850s, the 1910s, and the 1940s and 1950s. But how good will that recovery be? If we step back from the present and look at the long term, what we see since the 1970s, through all the cyclical ups and downs, has been a declining long-term rate of growth compared with the first two-thirds of the twentieth century. Some assume that weaker growth since 1970 can be explained by weaker technology.[7] That is, information technology contributes a smaller productivity dividend than the automobile.

Citing Robert Gordon’s long-term growth analysis, Gamble asks: is the 200-year productivity spree over? Are we returning to a world in which growth is more steady-state than progressive? In many major economies since 1970 productivity has clearly declined (see Table 2). Why? Has IT failed to match the productivity-driving force of steam, electricity, running water, the railways and the automobile? This speculation is interesting. Yet another explanation for the slowing rate of growth in major economies seems more plausible. It’s not technology innovation that’s changed since 1970 but the growth of the post-industrial human-capital industries: education, health and retirement. Unlike other industries, the productivity of these has proved to be wilfully low. This is true across both the public and private sectors.

In the past half-century, nations have devoted more and more of their labour and capital to industries that are aggressively disinterested in productivity. Under these conditions, no matter how productive agriculture, manufacturing or service industries managed to be, the net structural result has been economic growth at a lower rate over the long term. To his great credit Gamble senses this. His social-democratic theory is tempered by realism in attractive ways. He notes two problems. First, the spending on retirement, health and education has been huge. Second, the biggest gains from this spending were the first gains. Later returns have diminished radically. As time has passed, Gamble observes, it has proved increasingly difficult to improve human capital. In the early days political promises to fund more university places or more training might have been a plus for growth. But no longer. Now these are just an added expense.

There are multiple implications of this. Take the case of low-income earners. Over the past forty years in the major economies the number of working-age males on low incomes has grown sharply. The real value of those incomes has stagnated or slightly declined over time. In a world of rapid automation and high productivity, though, low incomes are viable as long as the real cost of goods declines over time and every dollar buys more. That’s been true of most industries in the past four decades with the exception of (a) education, child-care and health, (b) housing and energy, and (c) retirement income. Governments subsidise the first group heavily, tax the second group aggressively, and fund the third group from unproductive taxes rather than productive accumulation. Subsidies and taxes invariably push up costs while social insurance struggles to keep up with longer life-spans and ageing populations. Who provides these goods varies. The state, the wider public sector and the private sector each play a part. The entire human capital sector though is dominated by the same managerial class. This class has a woeful sense of productivity masked by a love of excruciating jargon. It covers legions of inadequacies with a torrent of waffle.

The effect of this has been to wipe out the benefit of the declining real cost of agricultural, manufactured and service-sector goods. The greatest single burden on low-income earners is the ever-inflating cost of goods produced by post-industrial organisations that see resistance to productivity as a badge of honour.[8] The secret of high-growth economies is the anchoring of markets, industries and cities in productive cultures. High productivity requires a mix of social and cognitive virtues. These include a readiness to save and invest, adapt quickly to changing circumstances, organise and work resourcefully, and interact effectively with strangers in large-scale markets, industries and cities. Productive societies place a premium on the ability to read, write and calculate. Mental concentration, problem-solving, creative endeavour, and a dogged persistence in completing tasks are essential.

Low-growth, low-productivity nations cannot escape their structural condition just by nationalising currency, savings or debt denomination, pushing interest rates below their natural market level, taxing foreign goods, or engineering super-sized public infrastructure projects.[9] None of these can fix the structural ailment of long-term declining productivity evident in many major economies, especially in Europe (Table 2). Nor can the state provision of jobs (such as work-for-welfare) or tax cuts that boost wages without corresponding cuts in government spending and increases in the productivity of labour.

The 2010s saw a rise of political boisterousness—just like its cyclical precursors in the 1840s, the 1880s and 1890s, and the 1930s. From the 1848 revolutions to the agrarian populism and progressivism of the 1890s to the totalitarian and authoritarian-populist movements of the 1930s, these channelled a well-spring of social seething that focused on redemptive statist politics and social insulation. In the 2010s, the political gauge moved degrees from social-liberalism to left-liberalism, technocratic social democracy to populist labourism, and from liberal conservativism to national conservativism. Conventional institutional political parties faced internal and external challenges from movement-style party politicking. This politicking displayed strong charismatic, plebiscitary and Bonapartist-style characteristics. Rhetoric on all sides heated up. Fulmination, excitation, outrage, grandiosity, pomposity, nervous anxiety, brittle psychologies and political pieties became more common.

Gamble notes this shift and asks the interesting question: Does this make any difference to the underlying reality? He concludes, rightly I think, that it doesn’t. The rhetoric of the party movements, what Gamble dubs the anti-system parties, is startling. It feels disruptive. The 2010s looks like a splatter painting. Drips, smears and sprays of national-conservative, Bonapartist, neo-socialist, and bully-pulpitarian movement-parties have muscled in on the tidy brushstrokes of normal politics. The upstarts tend to be characterised by syncretic populist catch-all ideologies. They stress leader-movement interactions rather than caucus-party dynamics. Yet their policies are less heterodox than their rhetoric suggests. For ultimately they dip into a familiar twentieth-century bucket of fiscal and monetary policies.[10] Everything, it turns out, is recycled.[11]

Varieties of crony nationalism, state capitalism, neo-Keynesian fiscocracy, Eurogarchy, separatism, super-statism, defensive nationalism, sovereigntism as well as socialisms of the Right, reactionary antiphonies from the Left and aggressive identity moralising are just some of the kaleidoscope of postmodern fragments that the 2010s have recycled from the recent and distant past and mixed liberally with irritation, indignation and vexation. In spite of this, as Gamble observes, democracy has proved resilient. True, as John O’Sullivan points out, democracy has become more illiberal and liberalism more undemocratic.[12] Yet totalitarianism has not returned. Much else did though. For all its rhetorical swagger, the 2010s was a case of déjà vu—a rummage sale of venerable ideas, many of them spliced together in odd, sometimes bizarre, combinations, mostly offering a reconditioned redemptive statism.

An asset-based state

If we wish to avoid statism, what do we do? Andrew Gamble has written sympathetically about one of the most appealing alternative approaches, that of asset-based welfare.[13] Understandably his version is couched in left-wing redistributive terms (targeting “asset-exclusion” with capital grants). Yet the idea underlying it has universal applicability. It points to a way out of a lot of current political dead-ends. The idea is to move from tax-based to savings-based welfare. That is, from a defined-benefit society to an asset-owning democracy.

Australia was a major pioneer of this approach during the Hawke–Keating and Howard–Costello years with its national superannuation scheme.[14] One of the most retrograde developments since has been moves by the Gillard Labor and Turnbull Liberal governments and the Shorten Labor opposition to increase the tax that retirees pay on earnings from superannuation assets.[15] While a lot of this has been playing with symbols, symbols matter. The effect has been to shift the focus of public policy away from savings-based welfare back to tax-based welfare.

The imperative of the post-industrial managerial class is to control other people’s money because it doesn’t have its own money. Tax achieves this end, as do the tax-like fees and charges of private-sector health and retirement funds. The welfare state has spawned multiple third-party payers. The state naturally has an enormous vested interest in tax-based policies, and not just to grow revenue. If you move the emphasis of policy from state taxation to self-managed savings, what talking-points are left for parties when they come to election time? Contemporary politicians are obsessed with telling voters what “good works” have been done—or could be done—with taxpayer money.

A much more interesting question is whether the public gets good value for the money that’s spent on its behalf. An asset-based state is much more likely to achieve this than a tax-based state. Sound public finances and robust markets require good-value spending—that is, low-cost inputs and high-quality outcomes. In short, productivity. During the past century governments for the most part have left productivity to markets. Their own contribution to it with a few exceptions has been poor. The mechanisation of defence forces has been one exception. In contrast, health and education, in both the public and private sectors, are productivity disaster zones. Their record of labour efficiency, organisational nous and technology use is terrible. Yet their long-term share of employment and GDP has continued to expand relentlessly.

Take the case of education. In 2015 Australian public spending on classroom education in real terms was 135 per cent what it had been in 2000. Yet the combined PISA student scores in reading, mathematics and science were 95 per cent of their 2000 level. This is unsurprising given that since the 1970s escalating spending on education has been accompanied by a collapse in high-school-age high-literate book reading. This is the kind of reading crucial to society’s elite, its 15 per cent of professionals and managers. Among this class today the lucidity born of high literacy has been replaced with a gibberish language composed of weasel words and cant.[16] This language, which manages to mix moral badgering and thoughtless banalities in equal measure, has invaded even the universities. It is paralleled in politics by electoral talking-points that avoid hard truths.

Political actors frequently think they can outwit the fiscal laws of nature. Human self-deception is infinite. So it has to be checked. How? A classic social-democratic solution is to institute a pricing authority. This is a variant of central planning. Does it work? Take the case of the Independent Hospital Pricing Authority that Australia established in 2011. Its role is to set an “efficient” national price for hospital services. In 2010-11 the average cost of a hospital admission varied by $1500 between the least-costly state, Victoria, and the highest-cost jurisdiction, the ACT. In Victoria the average cost per admission differed by $1000 between the costliest and least-costly hospital. [17] Did the subsequent price-setting work? Only modestly. It reduced the rate of increase of real hospital costs from 5.3 per cent to 3.2 per cent per annum.[18] The only really effective method of reducing health costs (as opposed to the rate of increase in costs) over the long run is relatively high levels of out-of-pocket spending.[19] All national systems that have lower-cost high-performance health systems, including Australia, have above-average levels of out-of-pocket health spending.[20] In short, the greater the individual share of health costs the lower overall are those costs.[21]

This is one of the key reasons why a structural shift from a taxation state to a savings state would be very helpful. There is no compelling need for education, health or retirement to be tax-funded. Just as there is no good reason why the taxes individual taxpayers currently fork out for these goods could not be diverted to mandated savings accounts, much like compulsory superannuation accounts. For very-low-income earners, negative taxation can be applied to such accounts. Singapore does this for health spending. The result is exceptionally high levels of good-value spending on health—that is, relatively low costs for very high health outcomes. A savings-based state improves value-for-money markedly because it expands the amount of social self-organisation—specifically the number of active decision-makers across markets, industries and cities who positively influence the price and quality of goods and services. Tax-based states immunise the human capital sector from this kind of beneficial pressure. Asset-based states magnify this pressure to good effect.

Doing more with less is the essence of prosperity. The post-industrial managerial class routinely achieves less with more. The greatest impact of this is felt by the least well-off. “Reduce taxes and cut spending” is a typical, not unreasonable, response of liberal-conservatives. But, as Gamble rightly notes, decades of this rhetoric for the most part has had little effect. One of the reasons for this, Gamble points out, is that Centre-Right governments are routinely captured by the state agencies they administer and by the large lobbies that have grown up around the tax-based state.[22] Often these lobbies are financed directly or indirectly by the state. In short, the bigger the state, the larger are the internal and external pressure groups agitating to expand it.

Arguably the only effective way of dealing with this is to partially replace the tax-based state with an assets-based state. There is an expanding constituency for this. The self-employed, self-organising sector is growing.[23] It runs its own superannuation funds, does independent contracting, engages in DIY property investing, and works solo or through partnerships. It mobilises assets for independence. It prefers contracts to hierarchies and is good at disintermediation. When required it can tighten its belt. It has a healthy scepticism of third-party payers and tax-like institutional charges and it represents an increasing share of total business receipts. At the same time the lobbies in Australia pushing hard against superannuation during the 2010s illustrate just how deeply ingrained the tax-state ethos is. It doesn’t matter whether political protagonists want to cut tariffs and corporate taxes or raise them, or whether they want to reduce spending or increase it, or whether they advocate all of the above at the same time, most public policies on the Left and Right today assume the tax-state paradigm.

Irrespective of political will or intention, the upshot of the tax-state model over the long term has been the incremental entrenchment of low-growth low-productivity behaviours. These behaviours are rationalised by saccharine semi-ideologies composed of moral bluster and mawkish sentiment. The 2010s was notable for this kind of slushy political romanticism. Over its course we saw a sharp swing away from realism and scepticism towards political piety and sanctimony. The cross-sector post-industrial managerial class mobilised its moralising. The post-industrial classes badgered on behalf of morally-smug low-productivity delivery. The old industrial classes in response demanded equally low-productivity social insulation. The real cost of post-industrial goods continued to rise. Their value-for-money continued to fall. Productivity and growth stagnated.

What public policy needs today is a renewed dose of realism. A book like Andrew Gamble’s is a good start. A bit of political backbone wouldn’t go astray either.

Peter Murphy’s latest book is Limited Government: The Public Sector in the Auto-Industrial Age, forthcoming this year from Routledge.


[1]              The great contemporary conservative argument for the significance of fate and the down-playing of free-will has been made by the Australian sociologist John Carroll. See for example his The Western Dreaming, Sydney, HarperCollins, 2001, 150-172.

[2]              Richard M. Weaver, “Conservatism and Liberalism: The Common Ground” [1961-62] in In Defence of Tradition: Collected Shorter Writings 1929-1963, Indianapolis, Liberty Fund, 2000, 476-482.

[3]              Vilfredo Pareto, Mind and Society: A Treatise on General Sociology, New York: Dover, 1965 [1917-1919, 1935]; James Burnham, The Machiavellians: Defenders of Freedom, London: Putnam, 1943; Burnham, Suicide of the West: An Essay on the Meaning and Destiny of Liberalism, Foreward, John O’Sullivan; Introduction, Roger Kimball, New York, Encounter Books, 2014 [1964]; Mark Gerson (ed.) The Essential Neoconservative Reader, New York, Basic Books, 1996; Irving Kristol, Neoconservatism: The Autobiography of an Idea, New York, Free Press, 1995.

[4]              Livio Di Matteo neatly summarizes the evidence for this in Measuring Government in the Twenty-First Century, Toronto, Fraser Institute, 2013.

[5]              This fiscal discipline also laid the foundation for a prospectively strong exit of the UK from the European Union, something that David Cameron and George Osborne vehemently opposed. Such are the ironies of politics.

[6]              US steel output has been fairly steady since 1980, between 6 and 8 million tonnes annually (data: World Steel Association). Industry employment has dropped from 521,000 employees in 1974 to 87,000 employees in 2016. The Austrian-headquartered company Voestalpine has a plant that makes 500,000 tons of steel wire a year with 14 employees compared with 1,000 in the 1960s. As its CEO observed: “We have to forget steel as a core employer. In the long run we will lose most of the classic blue-collar workers, people doing the hot and dirty jobs in coking plants or around the blast furnaces. This will all be automated.” (Bloomberg Businessweek, June 21, 2017).

[7]              Robert J. Gordon, The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War, Princeton, Princeton University Press, 2016; Tyler Cowen, The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, New York, Dutton, 2011.

[8]              The only meaningful enrolment in trade unions today is in the public sector. The function of these unions is to resolutely fight against productivity increases. In this they are joined by public sector management. The latter see their role simply as getting more money from government. They have little or no interest in improving the efficiency—reducing the cost and improving the outcomes—of their organizations.

[9]              All of these policies, well entrenched today in public policy, are traceable back to Alexander Hamilton’s Report on Manufactures (1791) and Johann Fichte’s Closed Commercial State (1800).

[10]             The growth of “howling at the moon” rhetoric on both the insurgent political left and right may have proved to be a successful attention-seeking device yet it failed to generate political programs of either philosophical substance or policy cogency. Shouting is not an argument nor is sneering an adult mode of political contention.

[11]             A prime example of the political recycling of the 2010s was the immigration debate, which became very animated during the decade. Yet, for all the intensity of the arguments, the positions adopted by its protagonists tended to be pretty shop-worn: prohibition versus permissiveness, closed versus open borders. Ingenious alternatives like Australia’s skill-based immigration policy were confined mostly to the periphery of the debate. The program of skills-based immigration arose out of Stephen Fitzgerald’s 1988 Immigration Policy Review. It was adopted by the Howard government in 1996, to great effect, tying immigration intake to prospective economic contribution. That said, even good policies need updating from time to time. Currently the Australian government defines “skill” principally in terms of education. That made sense in the late 80s or early 90s. It was then a decent easy-to-administer proxy. “Skill” defined by certification was also part of the ideology of the “knowledge society”, the prospectus of the growing human capital industries. Today, though, using the undergraduate degree as the basic measure of skill is much less effective, as low-level degrees have multiplied everywhere across the world. In contrast Australia’s business migration scheme criteria are much more nuanced and targeted to useful outcomes. A second blind-spot of skilled migration is the relation of skilled incomers to infrastructure provision. Lagging infrastructure creates social pressures in cities. This is not helped when spending on education, health and retirement is now so all-consuming that it tends to crowd-out infrastructure outlays. A formula (a ratio) for tying intake size to urban infrastructure spending in Australia’s principal destination cities would help alleviate this problem.

[12]             John O’Sullivan, “Conservatism, Populism and Conviction Politics”, Quadrant, November 2017.

[13]             Andrew Gamble and Rajiv Prabhakar, “Attitudes of young people towards capital grants” in W. Paxton and S. White (eds) The Citizen’s Stake: Exploring the Future of Universal Asset Policies, Bristol, Policy Press 2006, 107-120; G. Kelly, A. Gamble, W. Paxton, “Stakeholding and Individual Ownership Accounts” in K. Dowding, J.D. Wispelaere and S. White (eds) The Ethics of Stakeholding, London, Palgrave, 2003. In a similar vein see also Bruce Ackerman and Anne Alstott, The Stakeholder Society, New Haven, Yale University Press, 1999. While these discussions focus on state-delivered capital grants for the young, the concept of life-long asset-based savings accounts has much broader applications including as a replacement for personal taxation and a device to compensate for technological unemployment when it occurs. A lucid case for a savings-based system has been made by Roger Douglas and Robert MacCulloch in “Welfare: Savings Not Taxation”, Cato Journal, Winter 2018. In that article they mock-up an alternative to New Zealand’s 2015-2016 budget based on lowering personal income tax rates and a series of compulsory savings accounts for health care, retirement and risk cover. Roger Douglas was Minister of Finance in New Zealand in the Lange Labour Government from 1984 to 1988.

[14]             An outcome of the 1983 Hawke-era “Prices and Incomes Accord”, industrial award guidelines were established in 1986 for industry superannuation schemes with operating standards legislated by the Commonwealth the following year. In 1992 the Keating government introduced compulsory employer superannuation contributions. In 1999 the Howard government amended the law to facilitate “self-managed superannuation”. The subsequent huge growth in self-managed funds has become the bête noire of Australia’s union-dominated industry superannuation funds and a sign of a growing cleavage under the surface of Australian society between the decentralised self-managed sector and the highly centralised organizational sector.

[15]             Australia’s 1915 Income Tax Assessment Act exempted superannuation funds from taxation and allowed for tax deductibility of employer contributions. The Income Tax and Social Services Contribution Assessment Act of 1961 permitted tax exemption for funds that held specified amounts of Commonwealth bonds. The Hawke government introduced taxes on superannuation contributions and lump-sum benefits. Addressing the withdrawal side of superannuation, the Howard-Costello government in 2007 abolished taxes on lump-sum withdrawals and superannuation pensions derived from taxed sources for persons aged over 60 and liberalised the tax rates on income streams from untaxed sources. The Gillard government in 2009 reduced the amount of tax-light (“concessional”) contributions a person could pay into their superannuation. The Turnbull government in 2016 legislated an indexed $1.6 million superannuation “retirement phase” fund cap, with earnings on assets above $1.6 million taxed at 15 percent, over-turning the Costello-era abolition of taxes on superannuation retirement earnings. Populist animus against “the rich” played a conspicuous part in the parliamentary theatre that accompanied the measure. With the door opened by the Turnbull government, the Shorten Labor opposition in 2018 then upped the ante. It bolted in with a proposal to eliminate dividend imputation cash refunds. The function of dividend imputation is to prevent the double taxation of dividends on top of company tax. If a dividend holder’s marginal tax rate is higher than company tax, they pay the difference to the tax office. If it’s lower they get a tax credit or in the case of those like retirees who are not tax payers, a cash refund. It was notable in this raising-the-stakes moment how much the rhetoric of scorn, derision, disdain, sniggering, smirking and sneering had come to dominate the opposition’s persona, echoing the dismal spirit of the times.

[16]             This junk language has been assiduously recorded in Don Watson’s Weasel Words (2004) and Worst Words (2015), satires of the management class made up almost entirely of its own words.

[17]             Stephen Duckett and Peter Breadon, Controlling costly care: a billion dollar hospital opportunity, Melbourne, Grattan Institute, 2014, Figures 16 and 17.

[18]             Australian Institute of Health and Welfare, Health Expenditure in Australia 2015-2016, Canberra, 2017, Table 3.5.

[19]             I discuss this in detail in Limited Government, forthcoming.

[20]             In 2014, during his brief prime ministership, Tony Abbott attempted to increase out-of-pocket payments for visits to general practitioners. The opposition from the post-industrial and populist lobbies was vociferous. The measure was defeated. Abbott, though, was right. The only thing that effectively forces down medical costs and prices is first-party payments by consumers.

[21]             Paying zero price at the point of delivery is seductive to almost everyone. Yet it is a dangerous seduction. For nothing is really free—even for a person who has no money. At most the cost of a free good is hidden. If individuals don’t directly pay out of their own pocket then they pay for nominally “free” things via taxes or insurance payments or by queuing or being placed on waiting lists and the like.

[22]             Politicians succumb to this. If they are sceptical, they find it hard to sustain their scepticism. Not only that, the big-spending departments of state are hard to budge. One solution is to take fiscal restraint out of the hands of politicians and bureaucrats. This means something like the American system of budget sequestration, that is, the application of laws with formulae for the systemic reduction of spending. Managers see their function as increasing resources not reducing them. Parties, meanwhile, love to campaign on promises of more spending. The only real decline in US federal spending since the late 1960s occurred as a result of sequester. Most recently was the Obama-era US Congressional sequestration procedure arising out of Congress’ 2011 Budget Control Act. Sequester dates back to the Gramm–Rudman–Hollings Balanced Budget Act of 1985. This law was super-ceded by the 1990 Omnibus Budget Reconciliation Act which operated until 2002. As was the case in 2002, Congress in 2017 had had enough of self-restraint and ended the 2011 sequester rule. Legislators find it difficult not to spend taxpayer money. In the Trump administration era, that is the one thing—perhaps the only thing—Republicans and Democrats agree on.

[23]             See Peter Murphy, Auto-Industrialism: DIY Capitalism and the Rise of the Auto-Industrial Society, London, Sage, 2017.

Comments [8]

  1. Jacob Jonker says:

    The corporate globalisation juggernaut grinds on. The well-funded corporate think-tanks, paid for by those at the lower end of the food chain, keep up the narrative with which they help the corporate-owned minions in government to justify doing the globalising corporate’s bidding. Gamble is supposed to be a Leftie. Well, it is immaterial whether he is or isn’t. The broad- and centre-Left allowed itself to be coopted by the corporate juggernaut decades ago-early Seventies is my guess. The far-Left, insofar as it is genuinely Left, is irrelevant. So,…
    Small government is the way to go now, and managerialism is now the bugbear. We have been hearing and reading about small government since Thatcher at least. It is all rhetoric. It is yet another excuse to rob the state and its citizens and transfer yet more easy profits, income streams, state assets and natural monopolies into the hands of the global elite while loading the costs and the losses onto society at large. Oh, I forgot, there is no such thing as society. Only law-abiding individuals doing as they are told, while a collusion of smart political operators do as they please. What are we to make of this kind of analysis, diagnosis, prognostication and half-hidden, subliminally implied conclusion?

    Well, it’s a narrative, most of all. It is to build out and augment the basis for policy measures to be lobbied for en publique, while behind the scenes the small coterie of enforcers in government are justified to do the corporates’ bidding. It’s all a game. The remarks about managerialism means that middle management will come under more pressure. It means that middle management is open for more competition and that the strengthening of the globalisng transnational corporate structure allows for a down-grading of the influence of middle management. Lower level of management have already been reduced to donkeys and monkeys. The neo-feudalisation of western society has gone a fair way. So far, so easy. It will go further still, all the while building resistance as it goes on its merry way. Where, and how, will it all end? That is anybody’s guess, but it will end in tears for certain. It’s a cycle. From order to chaos and back to order, eventually.

    • PT says:

      For what it’s worth, I think Thatcher was committed to small government. But her policies also smacked of strong state power! Her Britain was still burdened by the war debt (a debt that gave something vital – victory in WW2, unlike Krudd’s flushing billions down the toilet for nothing more than people liking him for a few months). The key point is that Thatcher and Reagan show how difficult reining in this stuff really is.

      • Jacob Jonker says:

        Thatcher started the train wreck in the UK. She was strong when the Falklands needed to be recovered, but it is still a mystery why the Argentinian dictatorship was led into thinking the Falklands would not be defended, which was essentially correct, and, hence, encouraged to invade. Politics is a dirty business, especially geopolitics turned against parliamentary democracy in a nation-state of some standing. James Meek has plenty to say about that in Private Island-A good read. The Falklands debacle was at the minimum a failure of leadership and a failure or traitorous behaviour on the part of the people in charge of intelligence and defence.

  2. Jody says:

    Which part of ‘it’s what the people want’ is confusing? I’d hate to be a politician, being shouted down by every single vested interest and being paralyzed by this. It takes the extremely strong politician to be able to withstand that constant pressure. They are few and far between. Thanks to an exponentially growing movement of vested interests it’s a lottery on who will get what these days.

    • PT says:

      Indeed, and that’s what gives us appalling people like Shorten, Gillard, and Turncoat!

      • Jody says:

        I note Hilary Clinton will soon be coming here from NZ on a speaking tour. She’ll be meeting Julia Gillard and they can both commiserate with each other about the fact that neither of them was ever elected by the people!!

        • Jacob Jonker says:

          New Zealand will be the meat in the South Pacific China-USA sandwich. The public here is being softened up to play its role in the sell-out;That is, to acquiesce to the take-over and bend over as New Zealanders are being played for suckers.