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

Of course, government would have to borrow to finance this spending, which means bigger government debt in a recessionary economy. But higher debt is a result of a crisis, not its cause. Keynes argued that this increased debt should not overly worry the government. Once the recovery was under way, the need for big deficits would pass and the debt could be paid off.

Keynes’s concept of a deficit-led recovery quickly won over governments. It was applied most intensively at the end of the 1930s to stimulate post-depression growth, and at the beginning of the 1940s as wartime spending. Spreading rapidly after the Second World War, Keynes’s ideas were widely credited with generating the unprecedented prosperity of the three post-war decades – the trente glorieuses . Towards the end of the twentieth century, Keynes’s ideas earned him a place in Time magazine’s list of the 100 most important people of the century: ‘His radical idea that governments should spend money they don’t have may have saved capitalism.’ 29As it turned out, these words were prophetic. Some eighty years after the publication of the General Theory , in the wake of the financial crisis governments around the world introduced stimulus packages: a move that owed much to Keynes.

In the end, however, Keynes only went part of the way. He changed our thinking about how government can create value in the bad times, through counter-cyclical policies; but he, and his followers, had much less to say about how it can do so in good times as well. Even as Keynesianism and the post-war boom were at their height, dissenting voices could be heard. With great ingenuity, the American Paul Samuelson (1915–2009) – one of the most influential economists of the second half of the twentieth century, a professor at the Massachusetts Institute of Technology and the first American to win the Nobel Prize in Economics – attempted to prove that neoclassical theory could explain how the economy behaved in normal times, except when recessionary periods made monetary policy have little effect: i.e. when increasing the money supply does not lower interest rates and only adds to idle balances rather than spurring growth (what is known as the ‘liquidity trap’). In essence, Samuelson argued that in normal economic times there was little need for governments to try to manage the economy along Keynesian lines and that government intervention (e.g. aimed at increasing employment) in these cases would only lead to higher inflation.

In the 1970s, inflation began to increase, opening the way for the monetarists, led by Milton Friedman. A libertarian, Friedman rejected the idea that government spending is beneficial, arguing that it most likely leads to inflation, ignoring that this assumes that the economy is already operating at full capacity so that any extra demand (stimulated by government) would result in higher prices. But Keynes’s whole point was that the economy would often be working at under-utilized capacity. For Friedman, what mattered was controlling the quantity of money in the economy. The new classicals also challenged Keynes by arguing that government spending was useless and only crowded out private investment. According to them, an increase in the public deficit raises the rate of interest (due to the effect of issuing bonds on interest rates) which, in turn, decreases the amount of private investment. For these reasons, government’s role should be restricted to incentivizing individual producers and workers to supply more output and labour – for example by cutting taxes.

The new classicals, however, misunderstood how interest rates affect investment. First, interest rates are not a market phenomenon determined by supply and demand. Rather, they are set and controlled by the central bank through monetary policy, 30and an increase in government expenditure financed by the deficit does not raise the interest rate. Second, lower interest rates do not necessarily lead to more investment, since firms tend to be less sensitive to interest rates and more sensitive to expectations of where future growth opportunities lie. And it is precisely these opportunities that are shaped by active government investment, as we saw in Chapter 7.

GOVERNMENT IN THE NATIONAL ACCOUNTS

As we saw in Chapter 3, national accounts were highly influenced by Keynes’s thinking. GDP can be calculated in three ways: production, income and expenditure. Despite its size and importance in the economy, however, the word ‘government’ rarely appears in discussions of production and income. Instead, it is usually examined simply in terms of expenditure – how the value produced and earned is spent.

For Keynes, additional public spending was needed to make sure economies were not constantly prone to recessions and depressions; by purchasing goods, government added to GDP on the expenditure side to make up for what was often too low business investment. The accounting method adopted was simply to add up the costs of government production, subtract intermediate material inputs and equate the difference – basically, government employees’ salaries – with the output of government. Although government played an active part in national accounting, its image was still as a big spender rather than a producer.

This is all extremely important. The accounts seem to say that government is just spending what it taxes away from value-adding companies. But can that be true?

The national accounts fail to capture the full amount of this government value added and have several major flawed assumptions. First of all, national accounts regard most of government value added only as costs, mainly pay to government employees; government activity lacks an operating surplus, which would increase its value added. Let’s compare it with the private sector. The share of pay in private-sector value added is rarely above 70 per cent. On that basis, you could say that government value added is on average only 70 per cent of what it should be.

Second, the return on investment by government is assumed to be zero; by this logic it does not earn a surplus. If it were more than zero it would show up as operating surplus. The US did not officially separate public current expenditures (e.g. costs to run the everyday business of government, such as civil servants’ salaries) and capital expenditure (e.g. to fund new infrastructure) until the 1990s, which strengthened accountants’ impression that the government only spent money. But of course vital government investments abound: obvious examples include infrastructure projects like the Federal interstate highway system in the US or motorways in the UK. It makes no sense simply to assume that the return on enormous government investments is zero, when similar investments by the private sector do produce a return. Moreover, it is perfectly possible to estimate a return. One way of doing this is to assume a market rate of return such as the yield on municipal bonds – the overall return on bonds issued by cities. 31The crucial point here is that zero government return on investment is a political choice, not a scientific inevitability.

Third, to assume that the value of government output equals the value of input means that government activities cannot increase the economy’s productivity in any meaningful way: an increase in productivity, after all, is obtained by growth of output outpacing the growth of inputs. But if the output of government is defined simply as what it costs to do something, then an increase in output will always require the same increase in inputs. In 1998, the UK’s Office for National Statistics began to measure public-sector output by deploying different physical indicators, for example the number of people benefiting from public services (in areas such as health, education and social security) for every pound spent. In 2005 the British economist Sir Anthony Atkinson (1944–2017) improved on this by introducing important changes to the quantity measures of each public service, along with elaborating some quality measures for health and education. 32Intriguingly, when these changes were applied, it was found that productivity fell on average by 0.3 per cent per year between 1998 and 2008. 33Productivity increased significantly only after the financial crisis. But the increase was the result of fewer inputs, not improved outputs. Austerity aimed to cut back the inputs (government spending) while producing the ‘same’ outputs. 34It is hardly surprising that this kind of productivity ‘improvement’ does not result in better services – we only have to look at the long NHS waiting times to see this.