Even after correcting for living costs the other regions are substantially poorer than the Greater South East. After adjusting for prices London is still 42% richer than the North East.
Using regional spending figures from the Public Expenditure Spending Analyses Smith works out the degree of socialisation of each region, the share of its economy that is made up of state spending. With this analysis it emerges that the South East, if independent, would have the second lowest level of government spending in the OECD, after South Korea, at 31.3%. By contrast, in the North the level is 58%. That is uncomfortably close to the 75% of the Soviet economy that the state was thought to actually control thanks to the black market.
Smith points out the questions this raises about how we need to understand the Northern economy:
"Many academic economists spend a lot of time analysing the consequences of ‘market failure’ in the private sector. However, no more than the remnants of a market economy now survive in many parts of the British Isles. Irrespective of whether one regards this as a good or bad thing, it is difficult to avoid the conclusion that ‘government failure’ could now be a more important source of the problems facing certain UK regions than any failure in the private market sector."
Smith presents three key harms that emerge from an economy dominated by the state, even if that state is paid for by someone else:
First, it encourages people to seek an income through political activism or state dependency instead of through earning a living in the marketplace. This is similar to the Bauer analysis of the harms of foreign aid to developing countries. Effort is redirected away from the productive economy.
Smith also describes this in terms reminiscent of Baumol's argument that a free-market economy is successful because it directs entrepreneurs towards productive activity. Smith describes the rise in Northern political entrepreneurship in place of market entrepreneurship since the North's industrial heyday:
There is also the interesting phenomenon that high government spending regions, such as Scotland, Wales and the North-East, seem to produce large numbers of political entrepreneurs, who live off and lobby for a large state, but few of the traditional wealth creating kind these days – compare and contrast the careers of James Watt and Gordon Brown, or George Stephenson and Alan Milburn, for example."
Smith also links this to the finding, in psychology, that welfare dependency can encourage the pursuit of instant gratification. This can explain the huge levels of drug and alcohol abuse of those on benefits. There are serious social harms to depedency on the scale seen in the North.
Second, regional income inequalities mean that other state policies such as the minimum wage do far more damage to employment in the North than the South as they translate into far higher levels of income. Benefits set on a single level throughout the UK are also a far better alternative to work in the North. This kind of affect has been seen in the poor regions of other countries with severe income inequalities such as East Germany or the Italian Mezzorgiorno.
Finally, public sector employment is an attractive alternative to work in the private sector. With the massive piles of cash provided by the Southern subsidy to play with the state can attract the best people away from cash-strapped Northern employers. This is a very direct crowding out effect.
The costs to the South of paying 8% of its GDP to the rest of the country are obvious. That money, if given back to its people, could make the South a remarkably wealthy place. The South East of England, with levels of taxation at the low end of Eastern European levels, would be a fearsomely competitive economy. To pay this opportunity cost and do serious harm to the North is pretty tragic. David B Smith's paper, by breaking down the effects of the state in different parts of the country, makes an invaluable contribution to understanding the harm that the British state does to our country as a whole.