David B Smith on Regional Fiscal Inequalities

My previous post on the politics of regional fiscal imbalances didn't do enough to explain the harms that those imbalances cause. Vino challenged me to explain what was wrong with the North, which is poorer, getting more state money. Fortunately, David B Smith's paper "Does Britain have Regional Justice, or Injustice, in its Government Spending and Taxation" (PDF) for the Economic Research Council's Spring 2007 Britain and Overseas does an excellent job of explaining both the degree of fiscal transfers between regions and the, very real, harms they create. The paper is well worth reading for yourself but I'll give a quick summary.

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.

Does Patricia Hewitt actually know anything?

The following quote is from oral evidence to the House of Commons Health Committee. The report is a huge 373 page document so I think people might have missed it. Here is the person theoretically in charge of the National Health Service, Patricia "goldfish brain" Hewitt, without basic knowledge of hospital building in recent decades:

"Q353 Mr Campbell: Just a couple of questions on PFI. You said that the greater levels of local initiatives and autonomy should be brought into the health service. How does that square with the large increase in PFI programmes when you have got the hospitals being built by these private companies who are nearly running everything, of course?

Ms Hewitt: The PFI programme, of course, was our response to the fact that there had not been a new hospital built in England for longer than any of us, I think, can remember—there simply had not been any—and large parts of the NHS were working in pre NHS hospitals, rather too many of them nineteenth century never mind twentieth century, and PFI has enabled us to make an enormous difference in terms both of refurbishing and modernising or commissioning entirely new hospitals, and we are seeing those new hospitals opening around the country—University College Hospital in London being the nearest one—but that, I think, is really helping to improve the quality of care that the NHS can give patients. Of course, those PFI projects are not imposed by the Department on local health communities. They are generally led by local hospitals who are desperate to rebuild their premises and improve their services, sometimes re-organise services maybe across several sites. They are the ones champing at the bit, if you like, for PFI. We have to make sure, as we do in every case, that there is real value for money and that the health community as a whole locally can afford what the hospital itself wants to build.

[...]

No.Q364 Anne Milton: Can I correct you on the number of hospitals that have been built. There have been some built under the previous government. Chelsea & Westminster, Princess Royal, there are about 50; it was not none.

Ms Hewitt: Right. Thank you.”

Technical Difficulties

I'm afraid my home phone line has been down for the last couple of days and will remain down till Friday. It has taken my broadband connection with it. As such, this blog is unlikely to get any posts till then. Apologies.

More Monbiot Madness

Monbiot's latest brain rot avoids any of the interesting questions in the global warming debate: to what extent is the human contribution or natural cycles the dominant cause? This determines the extent to which emission curbs policy can be effective. What will be the scale of global warming and its economic impacts? This is important to the question of the costs we should be prepared to pay to avert global warming.

Instead he continues his campaign to smear those who disagree with him.

You can tell them that almost all climate scientists believe it is taking place. But climate scientists are part of the conspiracy. You can explain that almost all peer-reviewed scientific papers on the subject accept it. But how does that help if they believe the Daily Mail is the font of all wisdom? You can point out that the effort to dissuade people that climate change is real has been sponsored by fossil fuel companies. In response - and in marvellous contradiction of their professed suspicion of scientists - they then point to the handful of climatologists who have not been sponsored by the oil industry who say that it isn't happening. You can argue that they are cherry-picking their experts and their data, but unless they have an understanding of the scientific process, they don't see what's wrong with that.

You know what he hasn't done there? Made a single non-spurious argument.

He's argued from authority and majority. I.e. we've got more professors than you. That's a recipe for writing off all minority opinions and killing science.

He's made a clumsy ad hominem. Being funded by oil companies doesn't make a person wrong. It is just as easy to attack the motives of people of Monbiot-like opinions whose careers are dependent upon the fear of global warming to justify research grants and newspaper columns.

Only one actual argument gets cited in the entire piece:

"At my talk last night, a man in the audience informed me that a belief in climate change is a religion, and that I am its Billy Graham. He pointed out that temperatures on Mars have risen: could that be because of all the people driving their SUVs there? Well full marks for originality: I haven't heard that one more than 100 times since the Martian data was published. But instead of trying to argue with him, this time I asked a question: what would it take to convince you that manmade climate change is taking place?

"Nothing", he said. "The climate has always changed. This is just another natural cycle."

"So even if every scientist of every kind and every persuasion agreed that manmade climate change is happening, you would still place your own opinion above theirs?"

"Yes."

This, I suspect, must now be the position of most of those who still deny that man-made climate change is happening: that there is nothing - no evidence, however compelling, no scientific consensus, however robust - that could persuade them of the opposite case. Could there be a better definition of religion?"

Monbiot doesn't offer any evidence as to why it isn't another natural cycle or the Martian data isn't important. He asks his questioner whether "if every scientist of every kind and every persuasion agreed that manmade climate change is happening" that would change his mind but doesn't mention whether there has been any change in the quality of the evidence for global warming. Again instead of deploying evidence Monbiot returns to telling his global warning denier he is in a minority and posing the counterfactual of his being in a smaller minority.

Monbiot doesn't seem to understand the term religion, at best he's talking about faith. However, his argumentative style, relying upon majority support and personal authority instead of evidence is reminiscent of religion at its least rational.