Liam Halligan

The revolution the West needs (and won’t get)

Without a smaller state, decline is inevitable

The revolution the West needs (and won't get)
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The western world is a mess. The ‘advanced’ economies are failing to generate higher living standards for the majority of citizens. Many of us believe, rightly, that our children and grandchildren will have less prosperous lives than we do. That not only runs counter to the tide of western history, but jars with natural human instincts, creating a deep sense of unease.

The public no longer trusts the political classes to deliver a brighter future, so lots of us don’t vote. In the European elections, only two fifths of voters bothered casting their ballot. Many of those who did, of course, abandoned mainstream parties for the extremes.

The common western problem isn’t a housing shortage, deteriorating infrastructure or immigration fears — although such issues are widespread and must clearly be addressed. The underlying problem in Britain, across Europe and in America, too, is more general yet somehow more arcane: we’re living in an age of bloated, deeply dysfunctional and often counter-productive government.

To argue that the western state has become excessively large and unwieldy is fact, not ideology. Many ‘leading economies’ are effectively bankrupt — or, at the very least, only avoiding bankruptcy by governments borrowing on an unsustainable, dishonest basis, propped up by printed money.

Having ludicrously claimed he’d ‘abolished boom and bust’, Gordon Brown expanded government spending from 36 per cent of national income to 44 per cent during the eight years to 2007, despite healthy growth. Our response to the credit crunch, though, made a bad fiscal situation far worse. While the UK economy struggled after 2008, public spending still raged, spiralling to over half of GDP by 2011 and barely falling since.

The result of repeated deficits is an ever-increasing debt burden — which must be serviced. Britain’s national debt, having ballooned from £570 billion in 2008 to £1,270 billion now, is set to breach £1,400 billion by 2016. ‘Austerity’ has been patchy and limited largely to rhetoric. Under the Tories, national debt is doubling. George Osborne is borrowing more during five years as Chancellor than Brown did in ten.

Keep in mind, too, that these burgeoning debt numbers don’t include bank bail-outs and vast public sector pension liabilities. Include those, and UK public debt is well over 200 per cent of GDP, on generous assumptions. Even at today’s artificially low interest rates, we’re spending more taxpayers’ money on debt service each year than on defence. Once rates start rising, state interest payments will outstrip spending on education.

Across almost the entire western world, state spending has spun out of control. As it has, dissatisfaction with public services has escalated, trust in government collapsed. Far from inspiring faith and loyalty, the West’s big-state political classes are seen as distant, incompetent and corrupt.

The public sector needs to do less but do it better. That’s the central message of The Fourth Revolution, a new book by John Micklethwait and Adrian Wooldridge, respectively editor-in-chief and management editor of The Economist. The most pressing issue facing the West, they argue, is the re-invention of government. While our dysfunctional state has become entrenched, it’s not impossible to change.

There have been three great revolutions in government in modern history, the authors argue, all led by the West. In the 17th century, an English royalist called Thomas Hobbes outlined a vision of government that turned fledgling nation states into trading empires. The methods were bloody, but western Europe surged ahead. After the American and French revolutions, liberal reformers rejected regal patronage, replacing it with more meritocratic, accountable government — the ‘night-watchman state’ of John Stuart Mill. The third revolution happened ‘when liberalism began to question its small government roots’, eventually leading to the Webbs, Beveridge and the founding of the welfare state. Since then, this model, while successful for a while, has gone way beyond its founders’ intentions.

‘Beveridge worried,’ the authors recall, ‘that the welfare state would collapse if it subsidised idleness or tolerated abuse.’ His blueprint ‘applied strict time-limits on the dole’ and was designed to make sure ‘the rich didn’t receive benefits intended for the poor’.

The key problem we face, as our disgraceful public debts attest, is that vote-chasing governments have ‘repeatedly shifted the cost of funding existing entitlement programmes on to future generations’. This might make sense when, as during the post-war years, ‘western populations are growing and everyone knew their children would be richer than they were’. But as our populations age and living standards stagnate, it looks a lot more risky — especially because borrowed money is being increasingly used to cosset the old and subsidise the idle, rather than spent on infrastructure and schools. ‘There’s nothing progressive about that,’ as Micklethwait and Wooldridge neatly conclude.

That’s why we need ‘A Fourth Revolution’ — to rein in the state, prevent it doing harm and restore western competitiveness. Thatcher and Reagan only managed a ‘half-revolution’, the authors conclude. Welfare spending was 22.9 per cent of GDP in 1979 but still 22.2 per cent when the Iron Lady left office in 1990.

This is a beautifully written book, as you’d expect. The descriptive analysis is superb. There’s a great explanation of Olson’s Law, named after the economist Mancur Olson, which so often sees a small, determined lobby feather its nest at the expense of the broader public interest.

Where the book falls down is prescription — and urgency. There are calls to ‘recapture the spirit of the great 18th- and 19th-century liberals’ and coherent suggestions to enhance local democracy and use more technology in government. But what’s lacking is a sense of discomfort and even outrage at the state we’re in — the same outrage that drove the previous revolutions in government, which punctured the ruling classes’ complacency and kicked the vested interests into touch.

It worries me that a new book about the abuse of state power barely mentions QE. There’s no analysis of the banking lobby’s role in our downfall or of the urgent need to tackle too-big-to-fail. This book, admirable in so many ways, is ultimately a polite clearing of the throat, rather than a fully blown polemic, the analytical punch in the chest required. As such, it’s worthwhile and worth reading, but it won’t help fix the mess.

Liam Halligan writes the weekly Economics Agenda column in The Sunday Telegraph.