Chris Dillow – No magic money trees

“There’s no magic money tree” is usually used as an argument against extra state spending. But it can just as often – and sometimes with more justification – be an argument against privatization.

Chris Dillow is an economics writer at Investors Chronicle. He blogs at Stumbling and Mumbling, and is the author of New Labour and the End of Politics.

Cross-posted from Chris’s website Stumbling and Mumbling

John Rentoul has been mocked for claiming that “the Twitter consensus is that the magic money tree should pay to upgrade our sewage system”. Such mockery is right; people think that water company owners should foot the bill. But John is dead right to alert us to the fact that, often, there are indeed no magic money trees.

His argument applies to privatizations. There is often no magic money tree that makes things more affordable in the private than public sector – as we see in water companies plans to make customers pay the costs of investing in the sewage system. 

But that’s just one example of a general pattern. The public-private partnerships and private finance initiatives, which New Labour greatly expanded, kept public debt off the books by promising companies who built schools and hospitals big cashflows for many years. But these proved more expensive for tax-payers than ordinary government borrowing would have been, which was why Philip Hammond scrapped them in 2018.

The idea that there was a magic money tree the state could shake to finance schools and hospitals has been refuted. And there was, at bottom, a simple reason for this. Governments can borrow more cheaply than the private sector. Shifting debt from the public to the private sector thus increases borrowing costs. And given that companies are less able to bear high debt than governments – because they can’t print their own money or raise tax – it also increases financial fragility, as we saw with the collapse of Carillion.

Another example of what I mean are pensions. It’s sometimes said that the pensions triple lock is unaffordable. It’s not. If it stays in place, state spending on pensioner benefits will rise from 5.9% of GDP now to just under 8% in 2057-8. This is much less than many European governments – such as in Germany, France Austria or Italy – spend on pensions today.

What’s more to my point, though, is that if we don’t provide for an income in our old age via the state will we have to do so privately. And it’s here that there’s no magic money tree. Private pension fund managers charge big fees which compound hugely over time, and they entail big investment risk and longevity risk – risks which the state is better able to carry.

Health care is another example of what I mean. Long NHS waiting lists are forcing people to go private. What people save in taxes by not funding the NHS is thus, for many, offset by paying for private care. Austerity – back door privatization – therefore does not always save money; it merely shifts the cost from the healthy to the ill. Again, there’s no magic money tree.

The same applies to talk of reforming the NHS. Of course, the NHS is inefficient, but that’s just another way of saying it is a large organization. But the same things that cause it to be inefficient – lack of management skill, vested interests, whatever – also make reform so damned hard. The last major efforts at reforming the system – the introduction of internal markets and Lansley’s reforms – were so ineffective they were subsequently reversed. The idea that reform is a magic money tree which can substitute for increased spending is optimistic.

“There’s no magic money tree” is usually used as an argument against extra state spending. But it can just as often – and sometimes with more justification – be an argument against privatization.

Now, there are two objections to this. One is that the Treasury’s short-termism and failure to see that balance sheets have two sides puts a block upon public sector investment. Privatization gets round this and so is in effect a money tree, a way of releasing investment. This is why Blair and Brown greatly increased private finance initiatives. It’s also why privatization began in earnest in 1984: Thatcher sold off BT to prevent big investment in the phone network from showing up in the government borrowing data.

We must not, however, mistake bureaucratic convention and groupthink for economic reality. The reality is that governments can borrow more cheaply than the private sector, and so escaping the maw of the Treasury adds to borrowing costs.

A second objection is that privatization might increase efficiency and so cut costs. But this only works if monopoly is replaced by competition. Which often hasn’t been the case. Water charges are 4.3 times as high as they were when the industry was privatized, whilst electricity prices are 5.7 times as high: consumer prices generally are 2.3 times as high. There’s little sign here of competition driving down prices.

My point here is simple. What stops us doing good things are lacks of real resources – of capital, labour, technology, materials and managerial skill. It is only if we can create or mobilize these that we can have more or better schools, hospitals, utilities or whatever. If you have a plan for doing this – and maybe some of Labour’s proposals to reform the NHS do – then you have an intelligent policy. Otherwise, you are just wibbling about magic money trees. And this is as true of some rightists as of leftists.

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