False economy

Even senior politicians don’t understand how public spending works - it’s wrong and harmful

26th November 2019

Imagine that you’re trying to build a house, and the local council has rejected your plans. “We’re worried that the foundations of this house are just too strong and secure,” the planning committee says. “Your walls are too well insulated, and your roof too impervious to leaks.”

Naturally, you would think that the council was playing some kind of joke on you. These criticisms don’t make any sense. But this is what many of our economic debates sound like. Politicians are hauled up on the TV and asked, in effect, “how can we afford a well-paid and educated society?” “How can we afford to have good public health and low homelessness?” “How can we afford to have secure housing and reasonable rents?” Just as the hypothetical planning committee worrying about a foundation being too sturdy reveals a confusion about the purpose and nature of a building, so these questions reveal a deep confusion about how the economy works and what it is for.

Vince Cable, having apparently learned nothing from his time in government, has called for a “serious debate” in The Independent, “about how a country with a stagnant economy… can best reconcile the yearning for better services… with a reluctance to pay more out of incomes that have barely risen, if at all, for a decade.” Absent from Cable’s analysis is any awareness that these things may be related: that it is cutting back on investment and downward pressure on wages and services which itself drives the stagnation of incomes and the lowering of living standards.

Workers at McDonald’s have been striking over pay. Their pay demand for £15 an hour has been met with outrage by many online, who point out that nurses and firefighters and care workers don’t make that much. But should we infer, therefore, that low public sector wages should act as a ceiling on everyone else’s pay? Or perhaps would a more sensible conclusion be that everyone in the country is low-paid and that pay needs to be higher across the board?

Money which is paid to employees or invested in public services does not just vanish

Consider the flip side of “can we afford to invest in good services?” Should we be targeting a healthy increase in homelessness to show we’re not wasting money on social housing? Perhaps we should argue that Britain should have the lowest wages and the highest rents, the most expensive and poorly run services, just to guarantee that “the economy” is healthy? At that stage you have to start wondering what this “economy” thing even is and why we’re so bothered about improving it.

At the heart of this surreal conversation is a set of myths and errors which are as common as they are implausible. The dominant mythology says that a small group of “wealth creators” spend 60 hours a week down the money mines, and after they emerge blinking in the evening, faces caked in a thick layer of money dust, everyone else from governments to waged employees are waiting idly with their grasping hands outstretched, snatching away this wealth and then immediately throwing it into a pit and setting it on fire.

But this is simply not how an economy works. Money which is paid to employees or invested in public services does not just vanish. As people make income they spend it, and one person’s spending then becomes another person’s income.

More work does not mean more reward in Tory Britain. Everyone is running to stand still

Low wages, high rents, and expensive basic services means there’s less money in the bank account to spend on other things – meaning less income for the people who wanted to sell them those things. This reduced economic participation in turn reduces the total wealth generated by society.

This is what we have seen in the lost decade of Tory austerity. The Resolution Foundation released a report, pithily entitled “Feel Poor, Work More” which says that a typical earner today earns 27% less than they would have been had we returned to growth after the financial crisis. The poor performance of the economy has resulted in people taking on more hours, but wage growth has been non-existent. More work does not mean more reward in Tory Britain. Everyone is running to stand still.

When Labour announced that they would nationalise and expand the fibre infrastructure in the UK, again we were subjected to the endless drone of sensiblism asking “how can we afford this?” The answer is that Labour’s policy is two policies designed specifically to address different aspects of the current problem.

Lots of £35-a-month savings, delivered to lots of people, equate to a far bigger boost to the economy than giving one person £500m

The first, nationalisation and expansion of Openreach, is designed to improve and invest in a key part of infrastructure that is, in the 21st century, as important as the roads or the power grid. Just as good phone, water, power and road systems enable private companies to build on top of this basic infrastructural skeleton, Labour have recognised that a robust data infrastructure is necessary for a 21st century economy.

The second is both more radical and more mundane – a recognition that reducing people’s monthly bills is good. It is ambitious in recognising that everyone in a modern society has a need for some access to data as well as other utilities such as water and power, and proactive in saying “what if you could get it and also keep your £35 a month to spend on something else?” There’s also a recognition here that it’s not just the quantity of money that government spends which has the impact, but how you distribute it. Lots of £35-a-month savings, delivered to lots of people, equate to a far bigger boost to the economy than giving one person £500m.

If we were to travel to somewhere where one person owned everything and rode around in a gold-plated Rolls Royce while the vast majority of the people were destitute on the street, we would not see that as a “wealthy” society but as a vastly dysfunctional and impoverished one. The value of wealth creation counts for far more if it enables a broad increase in social welfare rather than the concentrated accumulation of vast riches by a super-wealthy minority.

We swallow more of the poison that’s killing us, thinking it’s medicine, and when it doesn’t work our answer is to increase the dose

We created the post-war middle class with a double-pronged strategy of investing heavily in public infrastructure and socialising access to things like healthcare, education, and the provision of basic services. Improvements in general welfare and economic growth were two sides of the same coin. Higher levels of education and health improved productivity, people having more disposable income meant that they had money to spend in the economy, and reduction in work hours meant they had more free time in which to spend it. We have stopped doing this because we believed we “could not afford it”, and it has proved to be a false economy. We swallow more of the poison that’s killing us, thinking it’s medicine, and when it doesn’t work our answer is to increase the dose.

A society where people have the capacity to do valuable work for decent wages which aren’t immediately swallowed up in monstrous rents and spiralling living costs is both a necessary precondition of a well-functioning economy and one of the desirable outcomes of it. 

What we can’t afford are low wages, homelessness and crumbling public services. We need to invest in the foundations of our society, or else the whole thing will fall apart on us.

26th November 2019