The strange non-death of public spending

Andrew Watt: In 2011 Colin Crouch wrote a noted book entitled The strange non-death of neoliberalism. In it he discussed why neoliberalism had managed to avoid being killed by what had appeared to be its nemesis: the global financial and economic crisis. 


The title came to mind on reading  some recent work on the political economy of modern capitalism in general, and the European Union in particular, by some other well-known commentators. It seems that, actually, we are witness to the strange non-death of public spending, at least in the EU.

Let me first give two examples of a view that many readers will likely believe to be self-evident.

In Le Monde Diplomatique the reknowned historian and political economist Perry Anderson has just published an analysis of the driving forces behind populism and protest. Under the sub-heading “Draconian austerity” he writes:

From monetary union (1990) to the Stability Pact (1997), then the Single Market Act (2011), the powers of national parliaments were voided in a supranational structure of bureaucratic authority shielded from popular will, just as the ultraliberal economist Friedrich Hayek had prophesied. With this machinery in place, draconian austerity could be imposed on helpless electorates, under the joint direction of the Commission and a reunified Germany…
 
The economic sociologist Wolfgang Streeck has also been much in the news with a series of pessimistic books and shorter publications on a similar theme. Democracy is being weakened and, particularly in the European Union, actively suppressed to pursue a neoliberal agenda of rolling back the state and reducing its ability to correct market outcomes in the interest of labour. More specifically, Wolfgang Streeck has written of The Rise of the European Consolidation State:
 
An established consolidation state is one that has managed to institutionalize a political commitment and build a political capacity never to default on its debt, projecting an uncompromising determination to place its obligations to its creditors above all other obligations. It features a general configuration of political forces that makes spending
increases difficult while making spending cuts, on everything except debt service, easy.
 
In an interview on the subject of the consolidation state he writes:
 
The truth is, of course, that it is not political autonomy that is the objective of consolidation but shrinkage of the public sector, accompanied by extensive privatization of social insurance and public services, including even the military. The smaller the public sector, the more confident financial investors can be that their capital will be repayable and profitable. Typically spending cuts tend to come together with tax cuts for corporations and the rich, restoring the deficit and necessitating further spending cuts.
 
Taking a similar line to Anderson, he argues that things are much worse in the EU (or the Euro Area) because:
 
This is the case in particular in Europe where consolidation coincides with an unprecedented increase in the scale of political rule under European Monetary Union and with the transformation of the latter into an asymmetric fiscal stabilization regime.
 

What do the numbers say?

Both authors possess enviable rhetorical skills and address a wide range of issues in an intellectually coherent way. This should not – I am sure both would agree – release them, however, from the duty to bring the theories and arguments to the facts. Now, neoliberalism is a broad (indeed arguably rather useless) concept that defies simple measurement. But the above quotes relate quite specifically to austerity and consolidation, both overall, and in terms of the interests allegedly served by public spending. They constitute testable hypotheses.
 
So what do the facts say? The AMECO database has a consistent and comparable series for government spending going back to 1995*. Expressed as a share of GDP, they give us a snapshot at almost a quarter century of spending trends under the regressive influence of monetary union, stability pact and the “voiding” of national parliamentary democracy in Europe.
 
Let us start with total government spending as a share of GDP (Fig. 1).

 

We see a lot of cyclicality: a decline in the size of the state in the economy in the late 1990s boom and a more or less full reversal in the Great Recession. It is now declining slowly (note the scale). Overall, government spending in the Euro Area is unchanged from the level of late 1990s. In the EU the share has risen very slightly since that series started in 2001. To a first approximation, then, the neoliberal onslaught and suspension of democracy has had more or less no effect on the overall size of government as a share of GDP in Europe over almost a quarter century. The strategy of shrinking the state has either failed or it was not there in the first place.
 

What about the bias away from market correction? AMECO has two series (social transfers except benefits in kind and benefits in kind) which I have summed as a proxy for social spending (Fig. 2):

 

We see that in the period between the mid-1990s and the start of the Great Recession social spending was, with slight cyclical variation, virtually constant at 27-8% of GDP in the Euro Area; it was about 1pp less in the EU as a whole. There was a marked jump upwards in response to the Great Recession. This sits at first sight oddly with the idea of draconian austerity, one focused on weakening labour or frustrating redistributional aims. Obviously, though, this reflects the operation of the so-called “automatic stabilisers”: higher unemployment induces higher spending. Note, however, that this upwards step-change seems, for the moment, rather persistent: since 2009 the share of social spending has not declined as a share of GDP but has oscillated around 30%, around 2 1/2 pp of GDP higher than before the crisis. The pattern in the EU is the same at a slightly lower level.
What then about the idea that, with democracy suppressed, financialised neoliberalism has forced governments to divert valuable resources into feeding the beast of the financial sector. One would need to look at a more disaggregated level to address this issue rigorously, but a simple calculation on AMECO data enables us to back out government interest payments as a share of GDP (Fig. 3).

We see that – despite a large build-up of government debt to which Wolfgang Streeck has drawn attention as a portent of disaster – the share of interest payments in GDP would appear throughout the neoliberal epoch to have been in secular decline: it is now less than half its value in the mid-1990s. This is because of the fall in interest rates. If financial capital is plundering the state it is not doing a very good job, at least not via interest payments.
 
Comparisons across countries outside the EU need to be treated with caution, but AMECO provides (in principle comparable) data for the US, Canada, Norway and Switzerland for government spending as a share of GDP. The hypothesis, it will be recalled, is that a particularly regressive and aggressive form of neoliberalism and the consolidation state applies in the EU, and especially the Euro Area, due to the Maastricht rules and other technocratic processes that have robbed national parliaments of their say. We would expect lower levels and/or a relatively worse trend in the Euro Area than these unencumbered countries.
Image
 
We have already seen that the share of government spending in the Euro Area has not eroded over time. The comparative data in Fig. 4 tell us that the Euro Area consistently has the highest government share of all the countries considered, even compared with oil-rich, social-democratic Norway (in all but a few years, minimally). We see no erosion of the gap to Canada (unfortunately the series is cut short) or Switzerland despite the allegedly specific pernicious impact of the Euro regime. The gap has narrowed a touch with the US, where government spending has tended to rise, but at the end of the period was still a whopping 
10pp of GDP.

The E(M)U: undemocratic and neoliberal?

I learnt a lot from both the authors I have cited earlier in my career and I still find parts of their story interesting and persuasive. A whole battery of other indicators could and should be analysed in order to address the issues more fully. There are plenty of reasons to be concerned about serious distributional and other related issues. (I have tried to reflect this in other work.)
 
Yet, I am struck that the bold claims, which I believe are rather widely held in parts of academia and have exerted a considerable hold over educated public debate, are in certain important respects at odds with the facts. Neoliberalism, whatever exactly one understands by the term, may well have had a pernicious influence. But it does not show up in European government spending indicators, despite this being an important and specific part of the argument that is made. Nor does such data support the claim that the allegedly undemocratic institutions characterising EU economic governance render neoliberalism a particularly potent force within the single currency area, over the period as a whole.
Let me be clear that this counter-critique should not be misunderstood as a blanket defence of EU or Euro Area policies. Particularly since the onset of the recession, there has been – after an initial attempt at fiscal stabilisation – austerity. In some countries, austerity – to be more accurate: pro-cyclical fiscal consolidation – has been very severe and very damaging. I and IMK colleagues have repeatedly drawn attention to this.
 
But this refers to a specific period, not the neoliberal era generally. More fundamentally, here, too, the arguments of commentators such as Anderson and Streeck need challenging, but regarding the process not the outcome. In truth many of the regrettable economic policy decisions have been taken by democratically elected national governments, alone or collectively: the very institution, then, that is supposedly our only protection against faceless and unelected bureau- and eurocrats imposing neoliberal policies on electorates that allegedly want the opposite.  I will not develop this argument in extenso: a few pointers must suffice here:
 
Austerity in the UK was at the discretion of the elected right-wing government. The fiscal rules do not force Germany to run a black zero or drive public investment below capital replacement rates; it is a democratically legitimate (bad) decision by the German government. That same government – rather than the technocracy in Brussels of Frankfurt – has consistently blocked steps towards Eurobonds, has weakened banking union. The fiscal compact was an intergovernmental treaty between national governments. It is above all the Eurogroup, i.e. the finance ministers of elected governments of EMU member states, led by finance minister Schäuble, that has driven such a hard (and counterproductive) bargain with Greece. Conversely, it is the European Commission that has (belatedly) called on Germany to pursue a more expansionary fiscal policy and criticised its outsized current account surplus.
 
All of these outcomes can be criticised in substantive terms. It is far from evident, however, that the problem is a excess of neoliberal technocracy over democratically accountable government as a widely accepted narrative claims. Indeed, a case could be made that greater supranational elements would in many areas have led to more favourable policies.
 
In conclusion, it would seem that a much more differentiated approach is needed, both at the “politics” and the “polity” level. Mistakes will be made, both in research and policy terms, if we are guided by imposing intellectual edifices, whose empirical basis is shaky.

Andrew Watt is Head of the Department Macroeconomic Policy Institute (IMK – Institut für Makroökonomie und Konjunkturforschung) in the Hans-Böckler Foundation. He was previously senior researcher at the European Trade Union Institute. This article was first published on his blog.