Two ways to overspend

The sort of stuff we are hearing from some of the participants in The Times CEO summit about slashing taxes and government spending, or flat taxes is very plausible, not least because it would be more effective than the familar alternative. Business leaders cannot be blamed for having swallowed the same implicit doctrine as everyone else. Namely, the only alternative to a ‘New Right’ free market style agenda for the combined financial and economic crisis is an old style socialist programme of public investment and measures aimed at raising the spending power of the poorer groups in society (who usually spend most of any extra income they receive). Most of us have absorbed the lesson from history that the state is not a canny investor, and that it is important for the poor themselves that welfare systems do not prevent them from seeking work. Part of the lesson is that socialist governments have tended (with a limited group of exceptions, chiefly in Scandanavia) to come to grief quite quickly.

It is therefore only too easy to imagine that the ‘let the market rip’ alternative is safe and sound. No, it is not. True it is likely to take longer to fail than the socialist path, but fail it will. Naturally, business people trained to please – and never to argue with or criticise – the customer will find it hard to think in terms of private overspending and indebtedness even when we have already experienced that as well as the governmental version. From a psychological standpoint, this is a similar delusion to that of trade union activists or poverty campaigners who cannot come to terms with a society where only a minority struggle for the necessities of life. Yet experience from the 1950s to 1960s, and then more sharply from the 1980s onward shows that an expanding private sector and affluent populace will eventually shade over into overspending of resources. The impact of status competition and ‘keeping up with the Jones’ is very effective at casting aside any limits here. This means overspending in straightforward economic terms reflected by balance of trade and/or levels of personal (including family) debt, without worrying about the environment. For a time a policy of cutting government spending and taxes means a free ride for a majority of the public (which socialism cannot match, even temporarily) but free rides ultimately come to an end.

I would like to think that some speakers at the CEO summit, be they politicians or, better still, business leaders themselves will be wise enough to take note of this. Sadly, the signs are that the dogmas of both left and right are too ingrained in our culture for that to happen. The Liberal Democrats used to pride themselves on being neither right nor left. How about starting to define what that might mean by working out an economic strategy that would not lead to overspending in one form or other, or indeed both?

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