Tuesday, January 27, 2009

Time to get back to making stuff

A few days ago National Review's Mark Steyn highlighted a section from a Matthew Parris op-ed in the Times (UK) --

This recession is not a failure of market economics. It is a reassertion of market economics after a decade in which we paid ourselves more than we were producing, and funded it precariously and temporarily by complicated credit instruments that it took a while for the market to rumble.

Others also took note. The full Parris column is a good read and heaps deserving ridicule on Gordon Brown in particular. But Steyn is back today taking note of another Times (UK) article --

Across the UK as a whole, government spending now accounts for 49% of the economy. And look at these regional variations:

Southern England: a mere 36% of the economy is government spending;
Northeast England: 66.4%;
Wales: 71.6%;
Northern Ireland: 77.6%.

As The Times notes:

"The state now looms far larger in many parts of Britain than it did in former Soviet satellite states such as Hungary and Slovakia as they emerged from communism in the 1990s, when state spending accounted for about 60% of their economies."

Big government is where once successful nations go to die.

It's worthwhile considering the link between these observations. Where is the share of government spending in the UK economy smallest? In the part of the country which was devoted to most fiendishly creating that debt mountain that Parris was complaining about. And while Northern Ireland has a special factor i.e. The Troubles accounting for the high share of government, the other parts of the UK were not helped by being priced out of the things they used to do by the financial boom.

Priced out specifically by the exchange rate, jacked up to high levels in the early 1980s by Maggie Thatcher partly in the belief that export manufacturing was a unionised dinosaur, and then maintained there by the ability of London's financial services machine to pay the bills even as many of the industries that the UK used to have went into decline. Necessitating an increased role for government. Recall also that the "strong dollar" obsession, likewise detrimental to manufacturing, was a hallmark of the Reagan era adopted enthusiastically (although with less credibility) by his successors.

There's a broader point here. Many of the crisis response critiques, such as those from Parris, are interpreted as saying that the problem is that government got too big. But the clear reading of the last two years is that it was the financial sector that got too big. That's where some real crowding out was happening.

UPDATE: Martin Wolf sheds more light on how it was the US and UK financial sectors that got so large.

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