Saturday, 28 April 2018

The power of ideas

There's a paper,  'Modelling public expenditure growth in New Zealand, 1972–2015', coming out shortly in New Zealand Economic Papers - it's online already here if you've got access - which has a go at explaining the long-term trends in New Zealand government spending as a share of GDP.

Here's what the data look like.

The paper - by Norman Gemmell (Victoria), Derek Gill (NZIER) and Loc Nguyen (Victoria) - tests out three theories. One (they call it a "public finance" view) says, there is a demand function for publicly provided services like health and education, and expenditure responds to demand changes. A second ("public choice") says expenditure reflects political pressures (eg voters' demand for greater redistribution). And a third ("public administration") says spending follows changes in how the state sector is run. And they find some support for the first two views, but rather less for the third.

I was struck by something rather different when I saw the chart. I thought it demonstrated the immense power of ideas. 

At the start of the period, we're in the heyday of programmes like Lyndon Johnson's 'Great Society' and other attempts to radically improve the scope and the effectiveness of the welfare state. We're in the era of aggressive Keynesian demand management. We're in a world with an expansive view of the commercial activities a government should or could undertake ('Think Big'). 

But by the end of it we've passed through the stagflation that discredited the theory behind the old Keynesian policies. We have new ideas on how cycles develop and what if anything we can or should do about them, with some seeing government as part of the problem rather than the solution. We're more into 'austerity' and leaving ourselves 'fiscal leeway'; privatisation and funder/provider models reflect less ambitious ideas of the scope of government.

The authors, by the way, note (p23) that "past levels of spending strongly constrain future levels – changes in spending demonstrate inertia", and you can see it for yourself just by eyeballing the chart: when it's going up, it keeps going up, and likewise when it's going down (the hump at the end is the GFC and the Canterbury earthquakes, and chances are the otherwise downward trend is still intact). That, in my view, is entirely consistent with keeping on working from the same policy playbook. And I don't think it's any coincidence that the series peaks in the late '80s as the ideas underpinning ever greater state activism got displaced, here and overseas. Our paradigms and models shifted, the policy playbook got reprinted, and the size of government fell into line.

I found myself reminded of Keynes' wording (pp383-4 of the General Theory):
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back...soon or late, it is ideas, not vested interests, which are dangerous for good or evil.
It's also left me wondering - again ('Those who don't know history...') - why economics courses both here and overseas spend so little time on the history of economic thought and on economic history in general.

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