Themes > Current Issues
01.03.2010
What Small Government Means
C.P. Chandrasekhar
The
mess in Europe epitomised by the debt ‘crisis' in Greece is instructive.
The issue is being presented as a dilemma facing the more developed
countries of the European Union, on whether they should condone fiscal
"profligacy" among their partners by bailing out Greece, which
is overburdened by a large fiscal deficit and massive government debt.
If Germany bails out Greece, it is argued, it would only encourage the
latter (and other countries in the European Union) to spend even more
and present the bill to German and French tax payers in the future.
Hence, Germany and other EU partners should insist that Greece adjusts
by curtailing its expenditures to generate the surpluses to pay its
creditors. If in the process the economy collapses, unemployment rises
and standards of living deteriorate, the government in Greece should
pay the price – even though it is not the current social democratic
government but its conservative predecessor that is responsible for
the state of the country.
The presumption here is that Greece has only one option: that of cutting expenditure. Anybody acquainted with rudimentary arithmetic would know that the deficit on the government's account, which is the difference between revenues and expenditures, can be reduced either by cutting expenditures or raising revenues, or with some combination of the two. When financial markets insist on austerity to stave off default, the presumption is that taxes cannot (read should not) be increased, making reduced expenditure the only option. If that were true, the EU is indeed faced with a dilemma, since if pushed to adopt austerity measures Greece could walk out of and jeopardize the future of the Union. Fortunately, the argument is false. In fact, governments are thinking of a range of measures from taxes on bonuses and incomes of the rich to taxes on financial transactions or bank balance sheets, to find the money to finance their debt repayment commitments and additional expenditures.
It must be noted that those, like the Republicans and conservatives in the US and elsewhere, demanding austerity of governments that have built up large fiscal deficits and accumulated debt, are not ideologically committed to minimal government. We only need to look back a couple of years to 2008 to realize that when the financial crisis generated by private institutions threatened the financial system (and collaterally damaged the real economy), almost everyone turned Keynesian and demanded of governments that they substantially step up spending. We know from hindsight that much of that spending, euphemistically termed as fiscal stimulus, went to support the private financial sector rather than revive the real economy. However, most analysts sidestep the fact that it is the combination of this increased spending and the reduced revenues resulting from the recession that increased fiscal deficits across the world and substantially increased government indebtedness. As a result, deficits that were till recently seen as a fiscal imperative are now being attributed to fiscal "profligacy". Since finance has got its fix, and the system has been saved from collapse even if not revived, the attempt is to divert attention to reducing deficits and curtailing debt, rather than towards raising additional revenues to finance debt repayment.
The move to big government was not just a post-crisis phenomenon. In fact, right through the years since the 1980s, when the ideology of small government gained much support, governments from the Left, Right and Centre had been expanding the state. As The Economist (January 21, 2010) put it recently: "Long before AIG and Northern Rock ended up in state custody, government had been growing rapidly. That was especially true in Britain and America, the two countries in which "the end of big government" had been declared in the 1990s. George Bush pushed up spending more than any president since Lyndon Johnson. Britain's initially frugal Labour government went on a splurge: the state's share of GDP has risen from 37% in 2000 to 48% in 2008 to 52% now. In swathes of northern Britain the state now accounts for a bigger share of the economy than it did in communist countries in the old eastern bloc. The change has been less dramatic in continental Europe, but in most of those countries the state already made up around half of the economy." These trends are likely to continue as developed-country populations age and a higher proportion draw on their pensions.
In sum, while politicians, policy makers, economists and the financial media were railing against big government, governments kept expanding relative to the size of most economies. Why then the panic of recent months reflected in the anxious discourse on the need to "exit" from the fiscal stimulus and the widespread concern over the crisis in Greece and the European Union? These arguments stem from three sources. First, financial firms that are no more able to leverage their bets have turned cautious about who they lend to and how much, making it difficult for over-indebted governments to borrow more to meet commitments on past debt, besides financing new expenditures. They must, therefore, raise additional resources to meet these commitments. Second, experiences in Dubai and elsewhere seemed to suggest that governments that borrow through many arms may not always offer guarantees against default, increasing default risk even on what is considered sovereign debt. And, third, all of this has raised the interest rates at which creditors are willing to lend to over-indebted governments, increasing the interest and amortization payments on their debt and worsening the problems they face.
The consequent need to turn to new taxes to finance debt repayment commitments comes at a time when there are new demands for additional social spending by the state. As noted above, it is now clear that for some time now, and especially during the recent crisis governments were borrowing heavily. During the Golden Age of capitalism stretching from the Second World War to the late 1960s, debt-financed state spending was significantly directed towards constructing a welfare state, which had as its corollary a higher social wage and improved income distribution. As opposed to that, the increases in government deficits in recent years have financed expenditures and concessions that benefited those at the top of the income pyramid, worsening income inequalities. The sharp increase in expenditures after the 2008 crisis, to bail out financial firms and clean up the mess they created, and the return to business as usual and big bonuses on Wall Street and in the City of London, has brought this to public attention. The fallout has been a backlash against finance and a demand that the government should do more to help those who have been adversely affected by circumstances that were not of their creation. This implicitly wins social sanction for a proactive state and delegitimizes the private sector and the ideology of "market forces" on which it thrives. It also requires the state to find the resources to redress the imbalances that have been generated during this period.
Confronted with this situation, governments that realize they cannot push for austerity without threatening their own survival are likely, sooner than later, to turn to the other option they have to deal with their fiscal difficulties: that of raising taxes. Those taxes will have to be substantially, even if not solely, on the more well-to-do and would also take the form of direct taxes on incomes, bonuses and wealth. This of course is anathema to the well-to-do, who don't want to lose through taxes a share of the additional benefits they garnered as a result of state spending. What they would prefer is for the pattern of government spending to change, with salaries, pensions and social expenditures being pruned, while spending on areas from which they benefit is sustained. Hence, the cry for austerity when public debt reaches levels where taxes on the rich rather than "austerity" for everyone else is the better option.
If the reliance on taxes option is indeed exercised, we would see an actual return to a new state, with more spending on welfare and less inequality in income distribution. That would be a reversal of the gains made by private capital in the years when finance capital rose to dominance, and Thatcher and Reagan changed the terms of the debate and paved the way for state policies that shifted the terms of exchange and the distribution of income in favour of capital and the rich. The so-called "backlash" against the state is nothing more than the effort of private capital to stall that reversal and recreate a world where the state predominates, but functions not in the interests of all, but remains an instrument of, by and for the rich and the powerful. It is not a demand for small government, but for governance of a particular kind, that favours the already well endowed at the expense of those who have not shared in the benefits of development.
The presumption here is that Greece has only one option: that of cutting expenditure. Anybody acquainted with rudimentary arithmetic would know that the deficit on the government's account, which is the difference between revenues and expenditures, can be reduced either by cutting expenditures or raising revenues, or with some combination of the two. When financial markets insist on austerity to stave off default, the presumption is that taxes cannot (read should not) be increased, making reduced expenditure the only option. If that were true, the EU is indeed faced with a dilemma, since if pushed to adopt austerity measures Greece could walk out of and jeopardize the future of the Union. Fortunately, the argument is false. In fact, governments are thinking of a range of measures from taxes on bonuses and incomes of the rich to taxes on financial transactions or bank balance sheets, to find the money to finance their debt repayment commitments and additional expenditures.
It must be noted that those, like the Republicans and conservatives in the US and elsewhere, demanding austerity of governments that have built up large fiscal deficits and accumulated debt, are not ideologically committed to minimal government. We only need to look back a couple of years to 2008 to realize that when the financial crisis generated by private institutions threatened the financial system (and collaterally damaged the real economy), almost everyone turned Keynesian and demanded of governments that they substantially step up spending. We know from hindsight that much of that spending, euphemistically termed as fiscal stimulus, went to support the private financial sector rather than revive the real economy. However, most analysts sidestep the fact that it is the combination of this increased spending and the reduced revenues resulting from the recession that increased fiscal deficits across the world and substantially increased government indebtedness. As a result, deficits that were till recently seen as a fiscal imperative are now being attributed to fiscal "profligacy". Since finance has got its fix, and the system has been saved from collapse even if not revived, the attempt is to divert attention to reducing deficits and curtailing debt, rather than towards raising additional revenues to finance debt repayment.
The move to big government was not just a post-crisis phenomenon. In fact, right through the years since the 1980s, when the ideology of small government gained much support, governments from the Left, Right and Centre had been expanding the state. As The Economist (January 21, 2010) put it recently: "Long before AIG and Northern Rock ended up in state custody, government had been growing rapidly. That was especially true in Britain and America, the two countries in which "the end of big government" had been declared in the 1990s. George Bush pushed up spending more than any president since Lyndon Johnson. Britain's initially frugal Labour government went on a splurge: the state's share of GDP has risen from 37% in 2000 to 48% in 2008 to 52% now. In swathes of northern Britain the state now accounts for a bigger share of the economy than it did in communist countries in the old eastern bloc. The change has been less dramatic in continental Europe, but in most of those countries the state already made up around half of the economy." These trends are likely to continue as developed-country populations age and a higher proportion draw on their pensions.
In sum, while politicians, policy makers, economists and the financial media were railing against big government, governments kept expanding relative to the size of most economies. Why then the panic of recent months reflected in the anxious discourse on the need to "exit" from the fiscal stimulus and the widespread concern over the crisis in Greece and the European Union? These arguments stem from three sources. First, financial firms that are no more able to leverage their bets have turned cautious about who they lend to and how much, making it difficult for over-indebted governments to borrow more to meet commitments on past debt, besides financing new expenditures. They must, therefore, raise additional resources to meet these commitments. Second, experiences in Dubai and elsewhere seemed to suggest that governments that borrow through many arms may not always offer guarantees against default, increasing default risk even on what is considered sovereign debt. And, third, all of this has raised the interest rates at which creditors are willing to lend to over-indebted governments, increasing the interest and amortization payments on their debt and worsening the problems they face.
The consequent need to turn to new taxes to finance debt repayment commitments comes at a time when there are new demands for additional social spending by the state. As noted above, it is now clear that for some time now, and especially during the recent crisis governments were borrowing heavily. During the Golden Age of capitalism stretching from the Second World War to the late 1960s, debt-financed state spending was significantly directed towards constructing a welfare state, which had as its corollary a higher social wage and improved income distribution. As opposed to that, the increases in government deficits in recent years have financed expenditures and concessions that benefited those at the top of the income pyramid, worsening income inequalities. The sharp increase in expenditures after the 2008 crisis, to bail out financial firms and clean up the mess they created, and the return to business as usual and big bonuses on Wall Street and in the City of London, has brought this to public attention. The fallout has been a backlash against finance and a demand that the government should do more to help those who have been adversely affected by circumstances that were not of their creation. This implicitly wins social sanction for a proactive state and delegitimizes the private sector and the ideology of "market forces" on which it thrives. It also requires the state to find the resources to redress the imbalances that have been generated during this period.
Confronted with this situation, governments that realize they cannot push for austerity without threatening their own survival are likely, sooner than later, to turn to the other option they have to deal with their fiscal difficulties: that of raising taxes. Those taxes will have to be substantially, even if not solely, on the more well-to-do and would also take the form of direct taxes on incomes, bonuses and wealth. This of course is anathema to the well-to-do, who don't want to lose through taxes a share of the additional benefits they garnered as a result of state spending. What they would prefer is for the pattern of government spending to change, with salaries, pensions and social expenditures being pruned, while spending on areas from which they benefit is sustained. Hence, the cry for austerity when public debt reaches levels where taxes on the rich rather than "austerity" for everyone else is the better option.
If the reliance on taxes option is indeed exercised, we would see an actual return to a new state, with more spending on welfare and less inequality in income distribution. That would be a reversal of the gains made by private capital in the years when finance capital rose to dominance, and Thatcher and Reagan changed the terms of the debate and paved the way for state policies that shifted the terms of exchange and the distribution of income in favour of capital and the rich. The so-called "backlash" against the state is nothing more than the effort of private capital to stall that reversal and recreate a world where the state predominates, but functions not in the interests of all, but remains an instrument of, by and for the rich and the powerful. It is not a demand for small government, but for governance of a particular kind, that favours the already well endowed at the expense of those who have not shared in the benefits of development.
© MACROSCAN 2010