We starve the state and public infrastructure development at our peril

Australia is at the end of a long federal election campaign (albeit not as long as the US) and the vote is on Saturday (July 2). Both major parties – the conservatives (who call themselves liberal but oppose many freedoms) and the Labor Party (who are conservatives in drag these days) – have gone to pains to convince the voters that they will get the fiscal balance back into surplus by 2021. The Labor Party, which was meant to be the political voice of the workers has proposed something like $A71 billion in spending cuts and tax hikes (or scrapping tax cuts promised by the conservatives). But both are content to leave more than 15 per cent of the labour force lying idle and to oversee rising inequality, rising poverty and social alienation, in a nation that is arguable in the top three wealthy nations of the world. Moreover, the obsession with pursuing fiscal surpluses is taking a heavy toll on public infrastructure and social and community assets in Australia. The latest data shows that there is a massive shortfall in expenditure on these assets and that more than 11 per cent of these essential assets are in a poor to very poor condition, which means that the assets are incapable of serving their function including supporting economic growth. As well there is increasing evidence that shows the transformative nature of public investment in innovation and education. We starve the state and public infrastructure development at our peril. That should inform a progressive agenda if nothing else does.

The only differentiating feature of the macroeconomic policies proposed by our two major parties is that the Labor Party has indicated it will increase the deficit over the next four years by a modest $A16.5 which will mean the deficit will be $A101 billion instead of the projected $A84.5 billion from the conservatives.

But then both say the deficit will be back to surplus at the same time. And the party of workers has been trying to attract voters with a “my surplus will be bigger than yours” when it claims by 2015-26 it will have a surplus of $A15.5 billion compared to the conservative’s estimated surplus of $A6 billion.

The Shadow Treasurer has been relentlessly claiming that Labor will see the “budget balance improving” as if running down a deficit is an improvement when there are more than 15 per cent of the labour force lying idle – either in unemployment or underemployment or hidden outside the official count (given the participation rate is still depressed).

As a prediction, I don’t see then achieving these goals because in trying they will undermine the tax revenue growth that would be required to record fiscal surpluses.

Their public statements presume that the fiscal balance is something they can control and is disconnected from the rest of the economy in some way – so that it can become a legitimate policy target.

The fact is that the fiscal balance is not something the federal government can control – it can influence its outcome via its discretionary spending and taxation decisions but ultimately, the final outcome is the result of the non-government sector’s spending and saving decisions.

The best way to reduce a fiscal deficit, if that should be a legitimate policy goal tied in with creating advances in well-being for all the population, is to engender growth in employment with wages growth.

The policy strategy pursued by governments these days, in the main, are the opposite. They preach about how they are committed to ‘Jobs and Growth’ but oversee labour market developments which yield pathetic employment growth, increased casualisation and precarious work, and low wages growth (even real wage cuts).

And then they wonder why the cyclical component of the fiscal balance goes against their goal of reducing the deficit.

The election economic debate is so asinine in Australia that I barely follow it these days. The goings on in Britain and America are much more interesting.

In Australia, the press wheel out one bank economist after another in the media to proclaim how our AAA rating is in danger from the on-going fiscal deficits and the rating is altered then interest rates will rise. They are not asked to explain why they are lying about the consequences of a ratings downgrade.

In reality, nothing much would happen at all. The central bank controls the interest rate and government bond yields wouldn’t move at all. These economists lie when they say otherwise. But they get their few minutes in the national media spotlight and probably feel important.

They also claim there is no fiscal space – no “ammunition” left – for governments to do anything much and the surplus plans are essential.

I dealt with those lies in this blog on Tuesday – When journalists allow dangerous economic myths to pervade.

What is absent from the entire debate is a coherent vision for the role of the state and the problems that years of trying to run surpluses (that is, deliberately restricting government net spending) have created.

Two things are worth noting here.

First, I have been reading the latest – 2015 National State of the Assets: Roads and Community Infrastructure Report – published recently by the Australian Local Government Association (ALGA).

The Australian Constitution was designed to place a major responsibility for infrastructure development and upkeep on local governments despite them not having sufficient financial resources to adequately do that job.

Hence, they are reliant on the Federal government which has all the currency capacity but less spending responsibilities.

In this era where governments have eulogised the pursuit of fiscal surpluses (even though they find it hard to achieve them – killing growth is not the way!), one of the major casualties of the cut backs has been spending on capital formation.

The most stark example is the water situation in Flint, Michigan which has been created by idiots trying to save a buck without realising that

I have written a bit about this topic in these blogs:

1. The urban impact of the failure of austerity.

2. British floods demonstrate the myopia of fiscal austerity.

3. The myopia of fiscal austerity.

4. Australia’s crawling Internet speed signifies wider fiscal failure.

5. Public infrastructure does not have to earn commercial returns.

Governments find it easier cutting capital expenditure than current expenditure. The reason is simple. It takes some time before the impacts of the former are noticed and felt by citizens, usually beyond the current political cycle.

But cuts to welfare entitlements, pensions, public sector employment and the like – recurrent expenditure – is felt immediately and causes immediate political damage.

So while austerity mavens have cut recurrent spending they have also been quietly starving public infrastructure of funding and the results are now starting to become obvious.

The ALGA report on the “National State of the Assets: Roads and Community Infrastructure” is alarming and when juxtaposed with the political statements both the major parties are making about the need to cut public deficits and to get back into surplus as soon as possible leaves one wondering how our political system could become so disconnected from its responsibilities and the realities.

The report is about one component of the public infrastructure only – the assets that Local Governments are responsible for maintaining. They thus exclude the public infrastructure that is the responsibility of State Governments (airports, bridges, hospitals, universities, schools etc) and the Federal Government (many roads, some education etc).

Public infrastructure not only serve an economic function (allowing private business to leverage lower costs etc) but it is also an essential component of our social well-being.

The ALGA report says that:

Infrastructure assets (transport, recreation, housing and water) are national networks that deliver services and support local quality of life and international competitiveness.

The services that flow from public infrastructure are to the benefit of virtually every citizen in the nation on a daily basis.

The summary results of the ALGA Report are stark:

1. “The gross replacement value of local government infrastructure for all Australian councils is estimated at
$438 billion” and “11% or $47 billion of assets are in poor or very poor condition”.

Poor to very poor condition means that the assets are incapable of serving their function including supporting economic growth.

There is “some geographic concentration risk”, which means that some areas (for example, the “steep, high rainfall areas”) have more impaired infrastructure than other areas.

The degraded assets include Roads (11 per cent are in a poor to very poor state, which means they are dangerous); Buildings and Facilities (10 per cent in poor/very poor state), Parks and Recreation (9 per cent in poor/very poor state), Stormwater (9 per cent in poor/very poor state), Water and Wastewater (12 per cent in poor/very poor state) and Airports and Aerodromes (12 per cent in poor/very poor state).

The sum overall is $A47 billion.

2. “Seven per cent or $31 billion of the asset stock has poor function requiring upgrading to meet current or emerging local and regional service level targets for safety, compliance, social, environmental and economic performance.” Meaning they cannot perform their function adequately.

3. “Seven per cent or $31 billion of assets have poor capacity and require augmenting to support growth trends.”

4. “There is an overlap between assets in poor condition, function and capacity that provides an opportunity to better target investment of community wealth guided by a national asset management plan involving the three levels of Australian Government.”

The problem is that neo-liberal emphasis of both major parties has meant they think the ‘market’ (whatever that is) will sort this out.

The reality is that the non-government sector will never provide economic and social infrastructure at levels and quality that are essential to maintain a vibrant and inclusive society.

I would suspect that the same type of probles are replicated in many nations at present as a result of the neo-liberal obsession with fiscal rectitude.

The neo-liberals go on about ‘international competitiveness’ and ‘high productivity’ all the time and the need for so-called structural reforms to ensure these goals are achieved but then undermine those very goals by:

1. Demoralising the workforce with cuts to wages, pensions, working conditions etc

2. Running down public education and training schemes. There was a report this week – Election 2016: Apprentice numbers slump in key marginal seats, government figures reveal – that showed that Apprenticeships under the current conservative have fallen dramatically.

3. Deprive essential public infrastructure of appropriate maintenance and replacement funds – trying to hide the austerity where it will be less politically damaging in the short-term.

The result is that nations so deprived see productivity growth slump and real wages growth come to a halt. And then fiscal deficits creep up via the contraction in tax revenue because growth is suppressed.

The neo-liberals then claim that the pace of structural reform is not fast enough and propose cutting wages even further.

Greece is the dystopia that this sort of reasoning has created but the rest of the world is not that far behind.

Indeed, one could hypothesise that the Brexit outcome is tied in with this. Britain’s public infrastructure is in an appalling state as a result of years of neglect by successive government crippled by their surplus mania. Its productivity levels are low and the state of its education system has degenerated.

The current British government is planning to privatise its university system. Stay tuned for a further decline in educational standards in that nation.

So the politicians bidding for votes this Saturday should be made to cost in this $A47 billion which is just one part of the infrastructure funding shortfall in Australia.

The neglect of public capital formation as nation’s pursue their mindless surplus objective not only undermines economic prosperity now but has longer-term negative implications that reduce a nation’s productive potential and undermine productivity growth, which in turn, undermines the capacity of the society to support higher material standards of living.

And within the neo-liberal context of rising inequality, the losses are and will be disproportionately borne by those with the least voice – the disadvantaged and less educated.

The Brexit referendum has, in my view, been a siren song of what that voice deprivation might lead to. The social instability we are already witnessing will get worse.

How the state promotes innovation

This links with a growing literature that traces how the role of the state has been essential for promoting economic development and innovation.

I have been following an interesting research effort from an American academic (Daron Acemoglu, MIT) who with others has been examining the debate about whether the slowdown in growth in the current era is due to the lack of transformative inventions (which is the Robert Gordon hypothesis entertained in his book – The Rise and Fall of American Growth) or whether it has something to do with the changing role of the state in promoting innovation.

The latest offering in this literature is the article (June 27, 2016) – tate capacity and American technology: Evidence from the 19th century by Acemoglu and two co-authors.

The results discussed builds on Acemoglu’s 2009 book – Introduction to Modern Economic Growth (Princeton University Press).

The proposition is simple:
The ‘great inventions’ view of productivity growth ascribes the excellent growth from 1920 to 1970 in the US to a handful of advances, and suggests that today poor productivity performance is driven by a lack of breakthrough discoveries. This column argues instead that the development of an effective governmental infrastructure in the 19th century accounted for a major part of US technological progress and prominence in this period. Infrastructure design thus appears to have the power to reinvigorate technological progress.

Their proposition resonates with the work of Mariana Mazzucato who has convincingly demonstrated that the state is responsible for most of the large and important breakthroughs (inventions etc) that neo-liberals like to claim is the sole outcome of private sector impetus.

She shows that in many of the key areas of innovation, it was the high risk investments of governments that led to the breakthroughs and came well before any private sector involvement. The private sector then leverages off the public developments and innovations.

Acemoglu’s work is supportive of these insights.

He challenges Robert Gordon’s conclusion that “Present day economic growth is slower because inventions that have the transformative power of electricity and the internal combustion engine are no longer emerging.”

He suggests that Gordon’s ideas run counter to research that demonstrates “how the pace and direction of technological change respond to incentives and opportunities, often shaped by the institutional environment and policy decisions”.

That is, that excludes an analysis of the role of the state.

The article lists three ways in which the state is crucial in advancing innovation:

– Patents, property rights and functioning judicial institutions, for instance, allow individuals to reap the rewards of their investments and new ideas;

– Educational institutions and policies and a legal environment ensuring lack of discrimination against specific groups are also key for opportunities in business as well as in innovation to be open to most individuals in society; and

– Subsidies for research and development or tax credits are important for innovation incentives as well.

Their case study is the “critical role” the state (through these means) played “in 19th century American innovation”.

Their latest research “empirically tests the hypothesis that the US government’s infrastructural capacity helped drive innovation during the 19th century”.

They find that:

1. “a major part of the explanation for US technological progress and prominence is the way in which the US developed an effective state.”

2. “the infrastructural capacity of the US state played an important role in sustaining 19th century innovation and technological change.”

3. “In the current economic climate in which pessimism about US economic growth prospects is common, we present a more optimistic historical narrative in which government policy and institutional design have the power to support technological progress.”

The details of their empirical design and methodology is interesting but I will leave it to you to read up on it if you are interested.

Their techniques are standard and uncontroversial and I don’t believe they skewed the outcomes of the empirical exercise towards any particular outcome.

Conclusion

Productivity growth has been lagging in most nations and the sort of research I have referred to here leads one to a simple conclusion.

The slowdown in productivity growth (and growth in general) began more or less as national policy makers adopted neo-liberal mindsets.

The neo-liberal Groupthink has led governments to starve public infrastructure development, squeeze public education including research in higher education, force public research bodies (such as CSIRO in Australia, which invented the wifi protocal) and the like to only pursue ‘commercial’ rather than pure research, and maintain elevated levels of unemployment so that generations are now missing out of work skill development and essential training.

Imagine what Greece and Spain will be like in 20 years when their youth – 50 odd percent of them unemployed and have been for years now – become the adults that the nations will rely on for productivity growth.

In relation to adjusting to the Brexit decision, British Labour should immediately announce an intention to implement a large-scale public investment program as well as a Job Guarantee.

They will be howled down by the neo-liberals which includes the class traitors masquerading as Labour MPs (The Blairites!).

But time will tell and before long it will become obvious that as public infrastructure collapses (and according to the ALGA report many bridges that link communities in Australia are becoming unusable given their condition) that this neo-liberal obsession that starves the forces of innovation are to blame.

Then politicial parties that announce progressive policies will be seen as the voices of wisdom.

LEXIT

Forget the so-called Left campaigns that aim for a united democratic Europe. They will go nowhere.

There is a new campaign that is gathering pace – LEXIT – or Left Exit.

The LEXIT Network has now launched an Appeal for “Democracy and Popular Sovereignty
instead of Neoliberal Integration and a failed Euro-System” and is soliciting support.

I rarely sign up to these sorts of movements (including petitions, letters etc). But I have given this (ad)venture my unconditional support because I think it is the only way ahead for a progressive Left future.

The LEXIT-Network is seeking members and you can sign up to indicate your support – HERE. But please read the general statement to make sure you are okay with it before you sign.

The Network is about EXIT – which means out of the Eurozone, out of the EU, out of so-called free trade agreements etc. It will re-establish national sovereignty and provide progressive forces with a focus on how to push their polities in the desirable direction.

I hope it becomes a massive movement.

Textbook Update

The manuscript for the advanced MMT Textbook (intermediate macro version) to complement the introductory text we published earlier this year is due to be finished in August 2016.

We are well advanced in meeting this goal. It will have at least 10 extra chapters and will add more detailed material to the existing chapters that appeared in the Introductory version.

At this stage it is likely to be published by a leading commercial publisher which means the manuscript delivery will then set in place a production and editorial process that will take a few months before it hits the shops.

We are still debating whether we will go with that publishing route or use the instant Amazon route which we used for the Introductory version.

So it will either be published sometime late 2016 or early 2017 (if we go with Palgrave or similar) or late August 2016 if we go the Amazon route. The price will be similar irrespective of the publishing choice.

I will keep you updated on the progress of all that. But the manuscript is well developed now and we are editing the extra chapters.

Thanks for the interest that many have expressed via E-mail, Twitter or through the Comments on my blog.

Paperback version of my Eurozone book now available

My current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – carries an on-line price of £99.00.

It is now available in much cheaper paperback form for £32.00.

Also the eBook is available 36.27 US dollars from Google Play or 61.45 Australian dollars from eBooks.com.

That is enough for today!

(c) Copyright 2016 William Mitchell. All Rights Reserved.