Saturday, October 23, 2010

Sorry, We Have No Money

Tyler has been reading a splendid new book by ex-Treasury advisor Warwick Lightfoot (he advised Lawson, Major and Lamont). It's called Sorry, We Have No Money, and it's right up Tyler's street.

Lightfoot picks up and amplifies all the themes we cover on BOM - that public spending has grown far too much, it's extremely wasteful, and it constitutes a serious drag on our prosperity. He documents all of this in detail, with many references to the supporting research studies.

He argues that we should cut public spending back to around 35% of GDP, roughly the level in the mid-60s. As BOM readers may recall, this chimes with the findings of previous research, showing how there is little further improvement even in so-called social policy objectives once spending increases beyond about 30% (eg see this blog, and this).

Now, 35% is a long way from where we are now (47.3%), and even after all George's cuts we'll only reach 39.8% (see this blog). What Lightfoot shows is that, despite all the pain, by 2015-16 George will only have done half the job.

The book has many interesting chapters, including one devoted to our old friend the Swedish model (and why she's not the paragon of virtue asserted by the Grun).

Tyler's favourite chapter is on the problem with our high dependency regions, something else we've blogged many times. And let's quote Lightfoot's conclusion in full:

"The heart of the UK’s regional economic problem is that individuals and communities have progressively become de-marketised over the last thirty years. If anything, public policy measures intended to mitigate social and economic deprivation have aggravated the problem. The combination of large and expanding public sector employers paying nationally agreed salaries, a national social security benefits system that destroys work incentives in generally high performing labour markets such as London, and expensive national regulatory and tax burdens makes the regions uncompetitive internally and externally. The UK public sector has ignored the role of relative prices and pursued polices that assume that simply spending public money can overcome the handicap of local labour markets where wages are not able to adjust to the productivity in the local economy. It has been plain for many years that the British economy needs greater regional pay differentials and the critical thing is to change public sector pay settlement arrangements to so that public sector pay reflects conditions in regional labour markets."

De-marketisation - spot on. We must abolish national pay rates and welfare scales pdq. And we should also note that shipping all those heavily unionised public sector jobs into the depressed regions hasn't done the local work culture any good at all. Consider Lightfoot's very striking chart on strikes:

So, the very areas where jobs are most difficult to find - Scotland, Wales, the North East - are the very areas where those lucky enough to be in work are most likely to strike. A strike record like that can only exist where the biggest employer is the public sector. And if you were a private employer looking for a new base, would you want to enter a maelstrom like that?

If you want a thorough analysis of how our obese state is crushing Britain, then this book is for you.

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