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Cutting Back: The Benefits of Reduced Economic Statism

March 20, 2015

by J. Andrew Zalucky


An interesting article recently came out in the UK magazine, The Spectator, about an apparent “jobs miracle” taking place in Britain. Though its source obviously aims to proclaim the virtues of Britain’s Tory-led coalition government, I think the situation still bears out the benefits of curtailing the role of the state in managing the economy- yes, even during an economic recovery.

When the coalition government took power in 2010, it came in with a mission to fix the countries horrendous finances, left over from the previous Labour government. Part of this wasn’t actually the fault of Tony Blair or Gordon Brown, as the British economy had fallen plague to the same contagion much of the rest of the world did in 2008. As the cliche goes, “when America coughs, the world catches a cold.” In this case, America had essentially vomited a spew of toxic assets, layoffs and foreclosures onto the world economy, like macro-economic version of Linda Blair in The Exorcist.

Still, to the extent they are involved in managing the economy, governments need to keep tabs on how much they spend during good times. Otherwise, this could leave them in a terrible position of implementing painful austerity policies when the downturn comes. Despite whatever Labour says however, some budget cutting would have been unavoidable if they had won in 2010. Unless the British government wanted to accumulate higher and higher interest payments forever, eventually crushing the rest of the economy beneath it, they had to cut back until productivity rose fast enough so that businesses, consumers and investors could feel confident enough to take some risks again.

And it seems that at the end of this government’s term, they’ve reached that point:

There are 30.9 million of us in work, the most ever. That’s an employment ratio of 73.3 per cent, the highest in history. Employment is up by 1.7 million since Cameron took power and 1.5 million of these jobs are full-time. The number on Jobseekers Allowance fell by 30 per cent last year alone and the youth claimant count stands at its lowest since the 1970s. Birmingham added more jobs to its economy last year than the whole of France; Britain is adding more than the rest of Europe. David Cameron can take credit for creating more jobs than any first-term prime minister in postwar history.

The article chalks much of this up to the government’s change of tax policy. But unlike the high-end tax cuts often championed by American conservatives, the coalition government instead instituted a policy headed by the centre-left-but-still-market-oriented Liberal Democrats, one which looked to help low-wage earners instead:

Much of the jobs boom is to do with income tax cuts, or raising the starting rate of tax — from £6,475 to £10,600 over the past five years — a Liberal Democrat policy that ended up meaning that work pays more. Crucially, these tax cuts have made low-paid work much more attractive. The take-home pay of a minimum-wage worker has risen by about 20 per cent over the past five years, twice as fast as the average salary.

Perhaps this all started out, like so much government policy, as a gimmick to elicit applause during speeches or to appease the Liberal Democrats. But when work pays better, more people are persuaded to move from welfare into work. A study published last week shows that Britain is now the best country in Europe in which to move from welfare to work.

The idea of The United Kingdom presiding over an explosion of jobs (even a labor shortage!) would have sounded absurd only a few years ago. But again, let’s return to the reality of the debt and business cycle. Governments, barring dictatorships or ones that go way off-the-rails in terms of spending and regulation (e.g. Britain in the late 1970s), can only alter the course of an economy so much. Remember, “the economy” is simply the aggregate of individuals exchanging goods and services within a given place and time. The fluctuations of activity (i.e. growth, recession, recovery) depend on the rate of productivity growth, the ratio of debt vs. income and a variety of other factors.

Still, changing the policy so that people who make between £6,475 to £10,600 helps quite a bit. And its especially helpful since people at those income levels lack the levers of power and cushions of privilege afforded to people who pay at a higher rate (and can sometimes find a way out of it anyway). Imagine if the United States did this for people who make between $17,500 and $25,000. The working poor might pay the least in income taxes, if any at all, but pay a higher share of their income to FICA payroll taxes (Medicare and Social Security) than anyone else. Of course, we would be better off scrapping most of what we have in favor of a guaranteed minimum income that everyone pays into and benefits from. But that’s a discussion for another time and place. And the British economy is very highly-regulated, another item to address if they wish to maintain the same levels of growth.

And though you wouldn’t think it from the endless anti-austerity pieces written in the British press, the leaning down of the state has actually been surprisingly popular with the public and has created incentives for local governments to pick up the slack:

After one of the biggest fiscal squeezes in post-war Britain, which has seen a million public-sector jobs cut, Britons tell pollsters they have never been happier with public services.

To dull the blow of austerity, moreover, the coalition government has given them new responsibilities, for example over public health, for which they get extra money. It has also allowed them to retain more locally raised revenue, including from business taxes. In cash terms, local government expenditure has increased: it will be £79 billion ($117 billion) this year, up from £76 billion in 2010-11.

But one element still holds David Cameron and George Osbourne back from embracing this phenomenon completely: immigration. With the populist UKIP digging into its poll numbers, the Conservative Party is leery of upsetting voters concerned about immigration. The only problem is, more immigration not less will be needed to fill many of the job vacancies now cropping up in British manufacturing and other sectors. Britain should be happy to take on workers from the rest of Europe (and potentially elsewhere…like The United States, why not?). This would ease the pain of those governments struggling to balance their own budgets (Greece, Italy, Spain) and provide an extra boost to the British economy.

The contention often raised is that this will dilute the sense of “Britishness” and “Englishness” by bringing in other people’s and cultures. But if Britain can find a way to make a positive argument for instilling its core values (secular, Western enlightenment ones) in a way that isn’t jingoistic, there’s every chance that this concern can be alleviated. Again, another fight for another time.

Overall, the news reflects the benefits of reducing the role of the state in the economy, in this case that of extracting resources from it ostensibly to use for the “public good.” But it also shows it can be done in a way that’s directly beneficial for working class people. Perhaps American policy makers should keep this in mind next time they think about gutting food stamps, rather than by eliminating farm subsidies.

2 Comments leave one →
  1. mywholehearisinjoy permalink
    August 18, 2015 4:35 pm

    There has been a huge rise in the number of self employed people over the last few years (13% of the workforce in 2008, 15% in 2014). At the same time, the average income of self employed people went down by 22% over the same period.

    Courier companies use self-employed drivers. Hairdressing salons will now hire out chairs rather than take on employees. This saves the business owner having to pay Employers Insurance. It means no holiday or maternity pay. It’ll likely to mean less money going to the Treasury in the long term.

    Why didn’t we get the call for high-end tax cuts a la America? Quite probably because we have an awful lot of non-domiciled persons in this country chucking money into the system compared to the US. Tax cuts wouldn’t assist these folk much because they’re already using systems that lower their taxes. What is fairly evident is that the middle earners have been squashed down massively over the last few years.

    I’m enjoying the blog. Excellent reading.

    • August 18, 2015 5:06 pm

      Glad you’re enjoying it! And glad to get informative, insightful comments like this from a reader in the UK!

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