Marc Robinson's Blog, page 5

No, Increasing Poverty and Precarity Won’t Force Spending Up

There are many who think that income support – welfare benefits such as unemployment benefits, income supplements and tax credits for the working poor, and child benefits – is a key area where governments will be compelled to spend much more over coming decades. They consider that changes in the way the economy works will produce rising poverty which will necessarily lead to higher welfare spending. Many take the view that the only effective solution will be a costly universal basic income.

I disagree. In my new book Bigger Government I argue that there is no compelling reason to believe that underlying poverty will trend upwards in coming decades. Setting age pensions aside, it will be policy changes – and not external forces such as changes in the economy – which determine whether income support spending increases or falls in particular countries over the long term.

Why?

Firstly, because the prospect of technologically-induced mass unemployment is nothing more than a bogeyman, the only practical function of which is to sell books on the frightening dystopian future which humanity supposedly faces.

Secondly, because the proposition that there is a growing army of “precarious” workers who need more income support from the state is a myth. Let me say a little more about that here.

There is a small army of pundits and sociologists – the “precarity theorists” – who allege that precarity is omnipresent and rapidly growing in advanced capitalist economies. Guy Standing, for example, is in print claiming (without citing any statistics or other evidence) that around one-quarter of the modern workforce fall into this category. In my book, I have carefully analyzed such claims and found them to be baseless. I do so by looking at the statistical evidence of actual levels of what I call “earnings precarity” – meaning the actual exposure to a high risk of involuntary loss, or drastic reduction, of labor income. There is no evidence that earnings precarity, thus defined, has grown over recent decades in advanced capitalist nations. This reality is hidden by the failure of the precarity theorists to either clearly define what they mean by “precarious work,” or to recognize one simple fact: that irregular work (which has certainly grown considerably over recent decades) is not necessarily precarious work.

The world economy is now moving into a savage recession. This will inevitably bring with it a substantial increase in underlying poverty and precarity. But it is crucial to distinguish between cyclical changes in the labor market and long-term trends. Things went bad in the wake of the global financial crisis a decade ago, but economies eventually recovered. The same will happen this time, even if the recovery might take as long as five years. This needs to be borne in mind when we listen to the loud voices which will undoubtedly be raised over the next couple of years claiming that there has been some permanent shift to labor market with much higher levels of structural unemployment and in-work poverty.

Let me emphasize that the point I’m making has nothing to do with the entirely separate moral question of whether particular countries should spend more on income support. If I were, for example, an American, I would certainly be arguing so. It is nothing short of a disgrace that the richest nation on the planet leaves so many of its citizens in desperate poverty. But the focus of my book is not on policy and philosophic choices, but rather on the underlying economic and social forces which will impact on government spending over the coming three decades.

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Health Care: The Biggest Growth Area

By far the most important reason why government expenditure can be expected to increase greatly over coming decades is growing health expenditure. There are strong grounds to expect that government health expenditure will grow by at least 4 percent of GDP in all advanced nations in the period up to 2050.

Although everyone is conscious of the need for additional spending to strengthen national health systems in the light of the weaknesses revealed by the coronavirus pandemic, this is not the reason why spending will increase so much. The really big driver of health expenditure will be the rapid expansion of the “capabilities of medicine.” The bioscience revolution which is currently underway is delivering an increasing flow of new and more effective treatments – many of them for conditions which are currently untreatable or only poorly treatable. Governments will not be able to avoid paying, in large measure, for these.

Advances in medical science have in fact always been the dominant factor behind the long-term growth of health expenditure. They are the main reason why government health expenditure has more than doubled as a percentage of GDP over the past half-century in almost all advanced countries. What is new today is the way in which the bioscience revolution is delivering increasingly-effective precision and customized treatments, which are generally expensive because of their scientific complexity and relatively small target patient groups.

The bioscience revolution centers on advances in molecular biology that are furnishing medical science with increasingly detailed knowledge of the molecular mechanisms of disease. It is supported by the growing field of bioinformatics, which applies advanced computing to the biosciences.

There are many who think that population aging has been the main force driving health spending up. If this were true, it would mean that health spending could be expected to stop increasing several decades from now – when, as is projected, population aging stops in most advanced countries. However, the fact is that population aging has played only a distinctly subordinate role in increasing health spending. It is notable that very few health economists assign a primary role to population aging in increasing spending – for reasons which are explained in my book.

There are two other theories about what drives health spending which are popular amongst economists. One is the “cost disease” theory, which holds that the problem is that supposedly there is little cost-saving technological innovation in the healthcare sector. This is wholly incorrect, as even a cursory look at the big changes which have occurred in many areas of medical treatment in the past. Consider the example of the treatment of heart attacks. In the 1960s, 95 percent of heart attack patients had hospital stays of twenty-one days or more. Today, the average stay is less than a week, even though post-discharge survival rates have increased enormously. Per-patient treatment costs have fallen dramatically as a result. Technological innovation is the reason for this huge productivity growth. There are many other similar examples. The problem is not a lack of cost-saving technological advances. It is that the expenditure reducing impact of these is swamped by the costs of the constant arrival of new and better medical treatments which are often costly.

The other notion to which many economists subscribe is that health care is a “superior good.” A superior good – also known as a luxury good – is one which we want to consume a lot more of when our income rises, so much so that we end up spending an increasing proportion of income on it. Champagne is an example: for many people, if their pay were to double, they might drink three or four times more of the bubbly prestige tipple. But to think of health treatments as luxury goods similar to champagne defies common sense. An individual whose pay doubles is highly unlikely to choose to splurge by tripling their dose of anti-hypertensive medication, or to have another coronary triple bypass or two because they enjoyed the first one so much.

Good health care is one of the most important human needs. It is completely rational for societies to pay an increasing part of their income on paying for the new and better treatments which medical science delivers. Because governments pay for such a large part of the costs of health care, this presents a problem for budgets. But from the overall point of view of society, it makes total sense to spend more on services which do so much to save and improve the quality of our lives.

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Why Government Will Get Bigger

Government spending has dramatically increased everywhere in response to the coronavirus pandemic and the savage recession which it has triggered. In the wake of this, the debate about the size of the state has gained new urgency. However, nearly all of the spending is – and should be – purely temporary. The much more important question concerns long-term trends in government spending.

My new book, Bigger Government: The Future of Government Expenditure in Advanced Countries shows the way in which government expenditure in all advanced countries will be forced upwards over coming decades by powerful external pressures and forces which are independent of the philosophical orientations of political leaders and parties. These pressures will be felt most strongly and universally with respect to spending on health care, climate change and long-term care for the very elderly. In the period up to 2050, government expenditure in a majority of countries by 7 percent or more of GDP.

Although everyone is conscious of the need for additional spending to strengthen national health systems – in the light of the weaknesses revealed by the response to the coronavirus pandemic – this is not the main reason why government health spending will increase enormously over the long term. The really big driver of spending will be the rapid expansion of the “capabilities of medicine.”

Technology-driven increases in health expenditure are accelerating because the bioscience revolution is generating an increasing flood of precision and customized treatments which offer patients huge benefits. While politicians and budget officials understandably worry about how to pay for increasing health expenditure, containing spending is not and should never be the primary focus of public policy. The main concern should be to ensure citizen access to the great benefits which medical advances offer. Doing so will cost governments more, and they will be unable to resist the pressure to spend.

Climate change is the second area where governments will not be able to avoid spending more. Achieving “net zero” and making necessary adaptation investments can be expected to cost governments up to 1 percent of GDP annually over the coming three decades. But governments are likely to spend considerably more than this – possibly up to 2 percent of GDP. This is because popular resistance to higher carbon taxes is leading to increasing reliance on subsidies to households and businesses. Bad policy, but with a clear political logic.

Every advanced nation can also expect to see a substantial long-term increase in government spending on the provision of long-term care for severely-disabled elderly and other citizens. The main reason for this is the intense political pressure on governments to support those who are unfortunate enough to face the catastrophic scenario of dementia or other severe disability. Governments have shirked their responsibilities in this area in many advanced countries, but will not be able to continue doing so for much longer.

In the many advanced countries where there are severe infrastructure deficits – e.g. crumbling roads and closed bridges – infrastructure spending will be another source of pressure.

With respect to age pensions, the story is a little different. This has been one of the biggest areas of spending pressure over past decades. This will continue to be true in most advanced countries for the next decade or two. But after that, the story will change. In quite a few countries, pension expenditure/GDP is actually projected to be lower in 2050 than it is today.

The key point made in my book is that long-term trends in government expenditure are not just the reflection of changes in the political ideologies of politicians and governments. External forces and pressures are also extremely important, and in many cases force governments to spend irrespective of their ideological inclinations. In the decades to come, the pressures forcing spending up will be so large that it will be politically impossible to offset them completely with compensatory spending cuts elsewhere. So one can forget about smaller government. The only question is how much bigger government will get.

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