The more things change, the more they say the same?

By Gord Gekko
web posted July 1998

The politicians of the world never had it so good.

I'm not referring to their salary or benefits -- legal or otherwise -- which remain generous by most measures, but their newfound Teflon status.

A mere decade ago, if a company shutdown a major plant, politicians would have taken it on the chin from unions and the public at large if some sort of package or subsidy wasn't offered to either save the company or help the newly laid-off.

Today, all politicians have to do is shrug and mumble a mantra involving globalization and the free market, and everyone goes away believing that the cutting back of the government by right-wing extremists and mysterious economic forces have left the state powerless.

It is taken as an article of faith that since the 1980s, people like Ronald Reagan and those mysterious forces like globalization have severely reduced the power of governments to intervene in the economy. In the 1990s, say politicians, the world market is more powerful than any state.

Take Malaysia's Dr. Mahathir bin Mohammed who blamed speculators like George Soros for the collapse of his country's currency, or the common belief from economists to taxi drivers in South Korea that their economic problems are the result of a conspiracy to keep the Asian countries down. Governments, they say by inference, can't stand up to the influential funds and market forces when it comes to economic matters.


Both Mohammed and your local politician are being completely disingenuous when they claim that the power of the state has been eroded by global economic forces and by reformers.

If you wanted to begin your definition of a government's intervention in an economy by comparing its spending as a percentage of a nation's economy, something I think is a simple but potent measure of intervention, you would quickly learn that little has changed.

According to Clive Crook of the Economist, only three of seventeen rich and developed nations actually reduced government spending as a percentage of the economy between 1980 and 1996 -- the United Kingdom, Ireland and the Netherlands. Those three managed to "cut" spending, while the alleged birth of anti-government forces, the United States, only managed to barely slow its growth of spending.

When you look at International Monetary Fund data, you'll see that spending as a percentage of GDP through this century has only slowed recently, but it is still growing at a sharp rate.

From 1870 to 1913, spending as a percentage of GDP barely grew among those seventeen countries. Beginning in 1914, however, the spending hit the fan when it hit 10 per cent, jumping to 15 per cent in 1919. Spending continued to rise to about 28 per cent in the early 1960s, 43 per cent in the late 1970s, and 46 per cent in 1996.

Place these figures in context: The economies of these seventeen countries has grown constantly and enormously in the 126 years the figures cover -- outside of recessions and downturns -- so the amount being spent has exploded far more than these simple percentages actually indicate.

"On average, public spending in the advanced economies is bigger in relation to national income than it was in 1990. Even in the unusual case of Britain, after nearly twenty years of strenuous efforts to roll back the state, public spending accounts for about the same share of the national income as it did in 1980," said Crook.

And if you think the recent news of budget deficits being eliminated in some of these countries is indicative of spending being cut, you'd be wrong. In most cases increased taxes are responsible for reduced deficits.

It is clear that during the 1980s and 1990s, government spending continued to increase regardless of the efforts of government reformers.

So what about taxation? Proponents of globalization say that economic forces will punish a country whose taxes are too high by luring workers and business to cheaper climates.

In some respects, this has turned out to be true. Capital is easier to move around today thanks to the deregulation of financial services in many countries, but once that capital has been turned into hard assets like factories, governments can tax them easier. It is not surprising to find out that in many jurisdictions, taxation of property is becoming popular again because it cannot be moved easily or at all.

And while corporations may be able to shift assets to cheaper tax climates, the ordinary worker continues to suffer under the same problem that has always prevented the free market of labour. Language, family ties and culture keep a majority of workers tied to one country, making it easier for the government to tax income and property. This has translated into heavy rates of taxation for European countries, Canada, and the rest of the developed world.

Globalization has also had little effect when it comes to public borrowing. The prevailing wisdom is that countries that borrow heavily and unwisely will be punished by the markets with currency crashes and higher interest rates. Those who believe this point to the Asian economies as a real world example.

Perhaps, but the trouble in the Asian countries isn't due to just one variable or another. Each country helped create its own mess in different ways. Whether it was the government aided concentration of ownership among a few chaebol (huge companies with fingers in every conceivable type of pie) in South Korea, the poor banking system that aided in the creation of an inflated property price bubble in Japan, or crony capitalism in most of the Asian economies.

Huge flows of capital actually make it easier for countries to borrow irresponsibly, not harder. While countries are punished for policies deemed irrational or unwise by financial markets, that only translates into higher interest rates. Once a nation's economy is open to foreign capital, it is much easier to exceed your budget then when it was closed.

Globalization has not changed the basic rule that governments may regulate the domestic economy by use of its monetary policy. It may have made it harder, but it is still within the power of most governments.

And as for government intervention by means of socio-economic policy -- minimum wages, safety, and the like -- little has changed either. While minimum wages and safety regulations have impaired downward wage flexibility for employers and the economy as a whole, the same basic rules apply in economies under globalization as they did in more closed economies. The cost is lower incomes in that economy, but not much more so today then a decade ago.

So obviously the hands of politicians seem no less tied now then they were a decade ago. So why do they persist in blaming globalization and reformers for forcing them to make unpopular decisions?

If you had to make an unpopular decision, wouldn't you rather blame it on an unseen force? It's a politician's dream.


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