Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

Aware that the argument clearly gave ammunition to advocates of the smaller state, the authors hastened to reassure their readers that they had no skin in the game: that their argument had no ideological foundation, but was based purely on empirical data. They even went so far as to stress that their research had no underlying theory of government: ‘our approach here’, they emphasized, ‘is decidedly empirical’. 5

Predictably enough, politicians and technocrats eager to ‘balance’ public spending seized on Reinhart and Rogoff’s research, which proved highly influential in the post-2008 crisis debate about austerity measures. In his Federal Budget Plan for 2013, passed by the US House of Representatives, the Republican Congressman Paul Ryan cited the study as evidence for the negative impact of high government debt on economic growth. It also informed austerity policies proposed by then UK Chancellor George Osborne and the EU Economy Commissioner, Olli Rehn.

Also in 2013, as part of his PhD studies, Thomas Herndon, a twenty-eight-year-old student at the University of Massachusetts Amherst, tested Reinhart and Rogoff’s data. 6He couldn’t replicate their results: his calculations showed no steep drop in growth rates when debt was high. Examining the professors’ data sheet, Herndon found a simple spreadsheet error. He also discovered inconsistencies in the countries and data cited. 7In two articles in the New York Times , 8the professors defended their general results, but accepted the spreadsheet error. Magic numbers were not so magic after all.

Now on to the other magic number held so dear by EU economists: the number 3. The ‘periphery’ countries of the Eurozone have been urged to restore their competitiveness by downsizing the state. In line with the Maastricht criteria, bailouts for countries like Cyprus, Greece, Ireland and Portugal have been conditional on their cutting spending. If that spending goes above 3 per cent of GDP then bailouts are jeopardized. Between 2010 and 2017, Greece received €260 billion in bailout aid, in exchange for cutting state expenditure. However, since its problems were too structural to be solved by a simple ‘austerity’ measure, the cuts pitched it into a deep recession, turning into full-blown depression. And, rather than decreasing Greece’s debt, the lack of growth has caused the debt/GDP ratio to rise to 179 per cent. The cure is killing the patient.

This obsessive focus on countries’ deficits ignores a stark reality. Some of the weakest Eurozone countries have had lower deficits than the stronger countries – Germany, for instance. What matters is not the deficit but what government is doing with its funds. As long as these funds are invested productively in sectors like healthcare, education, research and others that increase productivity, then the debt/GDP denominator will rise, keeping the ratio in check.

Italy is another glaring example of how magic numbers don’t work. For the last two decades Italy’s budget deficit has been lower than Germany’s, rarely exceeding the 3 per cent limit specified for euro membership. Indeed, Italy has been running a primary budget surplus since 1991, the only exception being 2009. And yet Italy has a high and rising debt/GDP ratio: 133 per cent in 2015, 9way above the 60 per cent ceiling. The ratio is less affected by the numerator (the budget deficit) than by the lack of public and private investment determining the denominator (growth of GDP). After three successive years of austerity, GDP grew by just 1 per cent in 2015 (0.1 per cent in 2014, 0.9 per cent in 2016). (In fact, the austerity years were responsible for an outstanding fall in real GDP: −2.8 per cent in 2012, −1.7 per cent in 2013.) So why has the economy stagnated? The answer is complicated, but in part it is the result of inadequate investment in areas that raise GDP, such as vocational training, new technology and R&D. To make matters worse, a prolonged squeeze on government spending has weakened demand in the Italian economy and lowered the incentive to invest.

Yet Eurozone policy blindly persists in the conventional view that austerity is the solution, and that inadequate growth indicates insufficient austerity. Back in 2014, in a stinging attack on Eurozone political economy, 10Joseph Stiglitz wrote: ‘Austerity has failed. But its defenders are willing to claim victory on the basis of the weakest possible evidence: the economy is no longer collapsing, so austerity must be working! But if that is the benchmark, we could say that jumping off a cliff is the best way to get down from a mountain; after all, the descent has been stopped.’ The austerity policy of cutting taxes and government spending does not revive investment and economic growth, when the real problem is weak demand. And in countries like Greece and Spain, where 50 per cent of young people cannot find work, pursuing policies that don’t actually affect investment – and hence jobs – means that an entire generation can lose its right to a prosperous future.

Questions of government debt and budget deficits are often also confused with ones about the size of government, usually measured as the ratio of government spending to the size of the economy. And yet there are no magic numbers for what is too big or too small. France, frequently touted as an example of ‘big government’, has a government expenditure/GDP ratio of 58 per cent. The UK government’s spending is also often regarded as quite big, but at about 40 per cent its ratio is not much different to that of the US at 36 per cent – although the US is often cited as an example of ‘small government’. Surprisingly, China, often perceived as a state-run economy, has a ratio of only 30 per cent.

However, recent research into the impact of government size on economic growth has found almost unanimously that small government is ‘bad’ if, for example, it cannot even maintain basic infrastructure, rule of law (e.g. funding of police) and the educational needs of the population. Conversely, the same research concludes that bigger government might be ‘bad’ if it is a result of activity that ‘crowds out’ (reduces) the private sector 11or unduly restricts private-sector activity and interferes too much in people’s lives. 12But within these rather obvious limits, the ideal size of government is hard to quantify – not least because it depends heavily on what you want government to do and how you value government activity. And here we have a problem: there has been a dearth of thinking by economists – both historically and in recent decades – about the value created by government.

GOVERNMENT VALUE IN THE HISTORY OF ECONOMIC THOUGHT

Economics emerged as a discipline in large part to assert the productive primacy of the private sector.

Starting with the French physiocrats, economists found that government was required for the orderly functioning of society and thus for setting conditions for the production of value. But in itself, government was not inherently productive; rather, it was a stabilizing background force. The physiocrats pleaded with King Louis XV to laissez-faire – not to micro-manage the economy by siphoning off as much gold as possible, and thereby upset the intricate mechanism by which value was really created 13– through productivity of the land, not by accumulating precious metal. We saw in Chapter 1 how, according to Quesnay’s Tableau Économique , value produced in agriculture flowed through the economy. But government was absent, ‘unproductive’. As part of the ruling class, members of the government got a share of the value apportioned simply because they were in power. 14

Nevertheless, Quesnay knew, the Tableau did not work by itself. There was something to be ‘governed’. Quesnay argued that the wealth of the nation could only be upheld through ‘proper management by the general administration’ – what we would call government regulation. 15He thought that free competition would best benefit the economy – but to achieve this, far from excluding government, he favoured an activist state that would break monopolies and establish the institutional conditions necessary for competition and free trade to flourish and value creation to thrive. 16