Tag Archives: democracy

The magic money tree

On Question Time this weekend, Theresa May was confronted by a nurse whose pay has been squeezed under the Coalition and Conservative governments. Her response to the nurse’s complaints was that “there isn’t a magic money tree that we can shake that suddenly provides for everything that people want”. Theresa May is of course right. There is, as far as we know, not a magic money tree. However, I fear that as an explanation for why nurses can’t have a pay rise, her statement is lacking.

That is not to say that there is no link between magic money trees and nurses’ pay. If there were indeed a magic money tree, then its harvest could surely be used to pay nurses more[1]. The absence of such a tree is a necessary condition for it being impossible to pay nurses more – but it is not sufficient. The reason for this is that there are types of money that are not magical and do not grow on trees. In failing to address the availability of this more mundane form of money, Theresa May has, not for the first time, not really answered the question.

A more charitable interpretation of Theresa May’s statement is that she is trying to argue that we can’t afford to increase government spending above current levels. Government spending is financed by taxes or debt, which must be repaid from future taxes, so the ability of a government to afford a given level of spending is dependent on its ability to raise taxes. One reason that some developing countries struggle to fund public services such as health care is that they have weak public institutions and so can’t raise taxes very effectively. The UK and most other rich countries are much better at collecting taxes and have larger public sectors. But their scope for public spending is not unlimited, for two reasons: high taxes and a large public sector might have a distortionary effect on the economy, discouraging economic activity and squeezing out the private sector; or democratic processes might limit the size of the state by voting out governments that raise taxes.

This is all very complicated and hotly disputed, but one way to understand whether the UK could conceivable have higher public spending is to look at how we compare to other countries. The chart below (based on OECD data) compares public spending as a share of GDP with GDP per capita, for all OECD countries where data is available[2].

On both measures, we are roughly in the middle. GDP per capita in the UK is about the same as Japan, France and Finland, higher than Spain and Italy, and a fair bit lower than most other Western European countries. Public spending (as a share of GDP) is lower than in most Western European Countries, but higher than Japan, Australia or the US.

It is also fairly clear that, as far as this dataset goes, there is no relationship between the two variables. Sweden, Austria and Denmark have much higher public spending than the UK, but this doesn’t stop them having much higher economic output. On the other hand, Australia and the US manage higher economic output with lower public spending. It seems that (within the range of this chart) pretty much any combination is possible. Of course, this doesn’t prove that higher taxes wouldn’t be bad for the UK economy. Perhaps our economy is so fragile that it would be crippled by any tax rises. But if you are going to argue this you are going to have to convince me that it is impossible for us to achieve what much of the rest of Western Europe can.

The political question is more difficult to analyse. Yes, other countries have larger public sectors, but they also have different political cultures. Perhaps the British are fundamentally different to our European neighbours and would simply not stand for the tax rises that are required to finance better health care and pay rises for nurses. Perhaps we are and will always remain a low tax country.

I don’t have a strong opinion on the optimal size of government, but I do wish we could have an honest debate about it. When someone says “we can’t afford it”, we need to be clear that this is nonsense. What they are really saying is that they do not think that we should raise the taxes required to pay for it. This is a debate that we need to have, but saying “we can’t afford it” is not the way to go about it.

The phrase “magic money tree” is even worse: it is designed to ridicule the suggestion that public spending should be increased. A nurse asking for a pay rise is as stupid as someone who believes that money grows on magical trees. Repeating this phrase whenever anyone suggests spending public money on something is not only nonsensical but frankly offensive.

 


[1] This statement is not the main point of this post and I don’t want to hear from any macro-economists about the inflationary effects of magic money trees.

[2] Excluding Ireland and Luxembourg, whose results are heavily distorted by their role as tax havens.

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The problem with professional politicians

Isabel Hardman asks what’s so bad about professional politicians. She concludes that it’s basically a euphemism for “selfish politicians who are out for themselves and will mow down anyone in their way”. I’d offer a different (and perhaps slightly more contrived) answer: the problem with professional politicians is the same as the problem with professional footballers and professional bankers – they have become too good at their jobs.

This is a problem because all three groups are employed to do something that is not quite the same as the purpose that they serve in society. They operate within a set of rules and structures that are supposed to ensure that by striving to do one thing (the direct aim of their job) they also achieve another.

Take footballers for starters. A footballer, or a football manager, is paid to win matches. If they’re good at it, riches and fame are theirs, if not, they end up on the losing side away at Exeter on a rainy Saturday in February. But the purpose of professional footballers is to provide people with entertainment. Usually, the spectacle of two highly-skilled teams putting everything on the line to win is entertaining. But footballers have worked out at least two ways to improve their chances of winning that aren’t.

The first is diving. It is in the interest of footballers to fall over whenever they are touched by an opposition player, especially in the penalty area. It’s very difficult for referees to know whether a person fell over too easily or not, and winning a penalty or getting an opposing player sent off can win you the game. But diving detracts from our entertainment when, rather than try to win by playing good football, Diego Costa or Ashley Young simply flings himself to the ground to try to con the referee. We see a similar thing when Jose Mourinho, a man who knows more than most about winning football matches, parks the bus when playing away against strong opposition. This clearly works, but it is not great to watch.

Investment bankers are employed to make as much money as possible. But their social purpose – and the reason that they are allowed to occupy such privileged positions within our economic system, with such huge potential for rent extraction – is to distribute financial investment efficiently throughout the economy. In principle, the joint disciplines of market forces and financial regulation should ensure that in trying to maximise profit they achieve this aim. But in recent years, bankers have come up with a range of ways to make stacks of money that avoid or even undermine this aim, such as packaging up mortgage debt in securities so complicated that the buyer fails to see the inherent risks. The results of this are plain to see: a massive global financial crisis that is still being felt more than half a decade later.

So what about politicians? The job of a politician is to win elections, but the purpose of politicians as a whole is to effectively manage the public affairs of a country in such a way as to improve the welfare of its citizens. Our democratic system, political institutions and free press are supposed to ensure that in order to win (or at least retain) power, politicians have to run the country fairly competently. But the last two decades have seen this diminish in importance relative to spin and soundbites.

This has reached its zenith with George Osborne, a chancellor whose primary occupation seems to be not running the economy, but trying to make the Labour Party look stupid. This doesn’t make much of a contribution to the welfare of British citizens, but it does seem to work. The Chancellor has managed to convince most voters that he is the one with the reliable economic plan, despite presiding over an economic disaster. George Osborne appears to be very good as his job, but very bad at fulfilling his purpose.

The public is at least loosely aware of this problem and this is part of the reason for Jeremy Corbyn’s popularity among Labour Party members. Here is a politician who seems to be focusing on fulfilling what he sees as the purpose of politics: to deliver his vision of better country. But this is no use if – as many in the Labour Party fear – in doing so he will fail to do his job, which is likely soon to be getting elected as Prime Minister.

If you’re a footballer and someone else wins more penalties than you, you could be stuck on the bench and unable to do anything to make the game more entertaining. If you’re an investment banker who refuses to make a profit at the expense of the rest of society, you might lose your job and become powerless to improve the morality of investment banking. And if Corbyn can’t compromise his ideals to win popularity with the press and the public, he may never be able to act on those ideals as Prime Minister.

In short, it’s not possible for one footballer, banker or politician to unilaterally reject this type of behaviour while the system rewards it. If we want to see changes, we need to fix the systems and incentives under which they operate. It is tempting to say that the answer is better rules and better enforcement, but there are reasons to be pessimistic that this will happen.

Video technology and retrospective bans for diving could make a huge difference in football. But unfortunately world football is run by a bunch of crooks and Mafioso who do little to improve the game and much to enrich themselves.

Breaking up the big banks so that they can be allowed to fail and the risk is not borne by the rest of society could change the behaviour of bankers, or at least ensure that they feel (to some degree) its consequences. But if a massive global financial crisis isn’t sufficient incentive for governments to do this, then what is?

The issue of politicians is perhaps more difficult, as there is no regulator that has power above that of Parliament. The role of keeping politicians in check and ensuring that they can’t get away with flimsy or misleading statements falls mostly to the press. But, either through partisan cheerleading or a preference for scare stories and embarrassing photos over policy and substance, it does not always do a good job of this.

Political parties are a crucial part of British democracy. Are they accountable enough?

With the Labour leadership contest almost upon us, it is looking ever more likely that Jeremy Corbyn will win. As the odds on a Corbyn leadership shorten, so the howls of anguish from centre-left commentators increase. My Twitter feed is almost unanimous on this: a Corbyn victory would make Labour unelectable and guarantee at least another decade of Tory government.

But why should this be the case? Jeremy Corbyn is, of course, tremendously popular. The latest polls show that 53% of Labour party members are planning to vote for him as their first preference, and that he would easily win a run-off against either Andy Burnham or Yvette Cooper.

The problem may be that Corbyn is too popular with party members. That is, he is giving them what they want – a kind of intra-party populism – rather than trying to sell to them a platform that he thinks can win an election. A successful modern politician, it seems, must make tough choices and compromises, between her ideals (and those of her party members) and what she think the rest of the voting public wants. Populism only works if applied to a sufficiently large number of voters.

In a democracy, compromise is essential. Different sections of the population have different preferences and one group can rarely have everything it wants. But the way in which a democracy is administered determines how and where these compromises are made.

In countries with proportional voting systems, people can (in principle) vote for the party that best represents their beliefs. The parties win seats in parliament according to the number of votes they receive, and will then begin the process of thrashing out a compromise and forming a government. Compromises are reached within the democratic institution of a parliament, through negotiations between elected members who represent the various viewpoints of the population.

In the UK, with our first-past-the-post voting system, it doesn’t usually make sense to vote for the party that is best aligned with your beliefs. Just ask the millions of people who voted for the Greens and UKIP earlier this year, for a return of two seats. Instead, the rational approach is generally to vote for whichever of the two main parties has come up with the best-looking compromise.

However, the compromises that we get to choose between are not formed within our public institutions, but within the political parties. The wider electorate doesn’t get a say in these compromises, except insofar as party members try to second guess their preferences in developing an electable platform. As a result, the major parties are themselves crucial parts of the UK’s democratic machinery – yet they carry out their role outside of the institutions that are supposed to govern our democracy.

Now, I don’t mean to argue that a proportional voting system is necessarily a better way of reaching a compromise. In the UK, voters can choose between manifestos that represent complete programmes for government with ready-made compromises, while under PR voters might have to choose their representatives without knowing what compromises they will ultimately make. But in the UK, the messy compromises that are crucial to a democracy are worked out within the two main political parties, whose memberships comprise less than one percent of eligible voters. It seems reasonable to ask whether that is a sufficient level of engagement and accountability for such a central part of our democratic system.