The Economist nails it:
How to slim the state will become the great political issue of our time.
“IF SOMETHING cannot go on for ever, it will stop,” Herb Stein once observed caustically. The American economist’s aphorism has proved apt of late—as applicable to Hosni Mubarak’s regime as it was to America’s rising property prices. Could it apply to the growth of the state?
Government comes in many shapes and sizes. In some parts of the world, the state is too small. In Guatemala, where the tax take is around a tenth of GDP, private security guards are five times more numerous than the police and army combined. But most of the world has the opposite problem. The state has kept on grabbing an ever larger share of the economy in the rich world for a century (see chart), and the state’s regulatory sweep has increased as well.
As our special report this week concludes, the forces driving this growth are powerful—but so are the reasons why it needs to be halted. As a liberal paper, The Economist has long favoured a smaller state; but there are pragmatic grounds now for politicians of all sorts to make the state more productive. With ageing populations to care for, many rich-world governments are on course for bankruptcy—unless they raise taxes to levels that would wreck their economies. And emerging markets are watching, keen to cater to the demands of their ever richer citizens—and also to avoid the mistakes of the West.
Behold, the beast changes shape
Attitudes to the big state have swung to and fro, from the liberal attack on patronage in the 19th century to the embrace of the social-democratic consensus after the second world war to Thatcherite privatisation in the 1980s. There are some signs that another rethink is imminent: witness the budget cuts in the euro zone, the battle between Wisconsin’s governor and the public-sector unions and David Cameron’s “Big Society” rhetoric. There is even the probability that the state’s share of GDP may slip back in the short term, as the recovery lifts the overall economy. But many efforts at reform are timid—witness the mendacious budgets produced in Washington by both Barack Obama and the Republicans and their refusal to touch entitlements. If nothing is done other than slimming a few departments, Leviathan will be on the march again.
Why? Because, despite all that rhetoric from the tea-partiers, big government is not just the fault of self-interested bureaucrats and leftist politicians. Conservative voters, even if they don’t like taxes, have kept on demanding that the state does more. Just as the left has built hospitals, announced endless programmes to help the poor and indulged the teachers’ unions, the right has built prisons, announced wars on drugs and terror, and indulged generals, farmers and policemen. And there are also two structural causes of big government. First, productivity in the state sector, especially in fields like education and health, has lagged behind the private sector. And second, there has been a huge increase in “social transfers”, especially benefits for the middle classes and the elderly.
To lose weight, governments have to do two things: learn how to do more with less, which means modernising the state, and cut back on what they offer, which among other things means tackling the social transfers. Both are inevitable, but the first offers the best chance of immediate gains.
Most attempts to “re-engineer” government thus far have fared poorly. But the failures of the current system are getting ever more obvious, especially given the jaw-droppingly large variances in performance. Why should one British health area have eight times more “unscheduled admissions” (the costly sort) than its very similar neighbour? Why should Americans spend twice as much on health as Swedes yet die younger? Each new international education ranking makes it clearer that American schools and continental European universities do not lack money, as unions claim, but need to hire better staff—and be able to sack lousy teachers. Merely bringing the useless bits of the public sector up to something close to average would save a fortune and improve services dramatically. And there are also common themes that emerge time and again: pay good staff well; make performance transparent; simplify taxes (see article); and move towards a small core civil service with a lot of competing suppliers for services.
Public-sector reform is gritty work. Do it well, and a state could provide the same services and benefits for less money. Yet politicians also need to tackle the question of whether the state should be handing out so much to so many. Here politics matters much more, both because voters are more protective of their perks and because there are genuine ideological choices to be made. This paper, for instance, would take an axe to industrial subsidies and to tax breaks (the latter are worth $1 trillion a year in America alone); it would also push up pensionable ages much more quickly than most Western governments are currently doing—and index them to longevity.
The hardest issue of all to tackle will be the perks that currently flow to the middle classes and the elderly. Benefits that were originally designed for the poor have become sops for the middle class; others are going to the elderly for longer than anyone expected. The “all you can eat” buffet nature of European welfare states not only prompts overconsumption; it also means that even those who do well out of the state have little idea how much it is costing overall. Again, the more transparent and modern the state is, the easier it will be to talk about means-testing currently universal benefits.
One fine day
Ideally, the next round of Western elections—especially the presidential one in America—will focus on that. Slimming the state is not an easy conversation. But consider the alternative: an ever fatter state, ever less freedom and ever higher taxes. In the 1990s much was made of the idea that capitalism had got so footloose that states were bound to get slimmer to compete for corporate favours. In fact companies proved more loyal than expected—and the state went on one last splurge. But talent and capital are getting more mobile; and the demographic pressure of those ageing populations is mounting. The ever larger state cannot go on for ever. It will stop.