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December 19, 2011 2:08 pm

Britain, Class Warfare and the Welfare State

avatar by Gabriel Martindale

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British Chancellor of the Exchequer George Osborne.

While one European country after another plunges into insolvency, you’ll be glad to know that British politics continues its plunge into idiocy. The latest missive from planet Zog, came courtesy of the union bosses who organized the recent public sector strikes and were somewhat disappointed with Chancellor Osborne’s response, accusing him of “class war“ on behalf of the rich against the poor.

This is the current favorite talking point of the Left who use it as a way of deflecting criticism when one of their bargain-rate demagogues gets on TV and starts rambling incoherently about the rich. Just as Israel bashers claim that “all legitimate criticism of Israel gets labelled anti-Semitic“ and use this to deflect attention when one of their number actually goes and says something anti-Semitic, so advocates of “soaking the rich” can say that it is really advocates of fiscal restraint that are really waging the class war and they are just responding in turn.

All this is, of course, perfectly ridiculous. Even if Osborne was mounting a radical attack on the public sector it would not amount to a class war against the poor, since many public sector workers are rich and many of the private sector workers who pay their salaries are poor. On average, state employees are better off and certainly have better benefits.

But, of course, by any sober standard Osborne is not making any serious attack on the public sector at all. If he did have such intentions he would proceed along the lines outlined here. It is pointless speculating about that since no principled supporter of the free market or moral conservatism would ever make it onto the Tory front bench any more than a principled socialist could scale the heights of the Labour party.

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We could perhaps speculate more usefully on what Osborne would do if he were a bog-standard fiscal conservative of the sort that pretty much every serious person was, including members of the Labour party, until the Keynesian revolution in economic thinking in the 1930s. He would have observed, upon coming to office, that the national deficit was about £170 billion and that since we weren’t embroiled in a world war, the end of which would bring down the deficit automatically, he had no choice but to raise income from taxation by about £85 billion and cut spending by about £85 billion preferably within a year and certainly by the end of the first parliament.

A simple observation of facts that would take you 20 seconds on google to discover would demonstrate he has done nothing of the sort. Instead, his plan is to keep spending, once adjusted for inflation, pretty much the same and talk a lot about ‘austerity’ and ‘fiscal discipline’. The purpose of this is to instil confidence in the bond markets in order to keep U.K. borrowing rates low enough to maintain New Labour’s level of public spending until the economy recovers, raising tax revenues enough to wipe out the deficit. Britain could then continue on as it had in the 1990s, just with a rather larger public debt than before.

So far the plan has worked extremely well. Despite the UK being in a worse fiscal position than most Mediterranean countries, the cost of borrowing  is the lowest in Europe. Osborne has effectively fooled the bond markets, helped by the fact that with other countries either in, or on the verge of, sovereign debt crises, they have limited choice as to where else to go. Recognizing that this is the best plan available to save the welfare state, one that former Labour Chancellor Alistair Darling would have followed as well if he had got his way, the Liberal Democrats have endorsed it and so would the public sector unions, if they had any sense. However, public sector mandarins are so blinded by their self-righteous avarice that they are intent on bringing down the government that constitutes their last hope and bringing Labour leader Edward Miliband to power on the promise of a spending splurge, which will bring about default in about six months and then real austerity in which nurses and teachers are not paid for months on end because the government literally can’t find the cash to send them. Paradoxically, though, the strikers play into Osborne’s hands; the more times some ninny gets on T.V. and complains about ‘savage cuts’ the cheaper the Treasury can sell its bonds.

There are, though, two big problems with the Osborne plan. First, his budgets are premised on inflation being about 2%. This is understandable: The Bank of England is, after all, legally obliged to aim for that target and continues to promise that they will fall to that level reasonably soon. It is, nevertheless, completely fanciful and real inflation will remain around 10% even if the BoE’s massaged figures do fall from the current 5%. Hence, though he is giving his departments more money each year they are going to find it increasingly hard to purchase what they need.

However, the second problem is much more important still. The whole Osborne plan is premised on economic growth solving the problem in the near future. He had originally banked on this kicking in after 2 years but now expects it to take much longer. Even this, though, is wildly over-optimistic. Osborne’s underlying premise is that the economy is in the toilet because of the loss of some ethereal quality called ‘confidence’ and a shortage of available credit. Both these problems are in principle more than solvable by the combination of bank bailouts, Quantitative Easing and interest rates of 0.5% (or effectively -4%), which together, it should be remembered, amount to the most radical experiment in monetary stimulus in UK, and arguably world, history. In reality, though, the economy is in trouble not because of a loss of ‘animal spirits’, but because we are at the end of a 30 year inflationary boom, which has produced misallocation of resources on a scale that far dwarfs those that preceded the Wall Street Crash. The mechanics of the business cycle are a bit complicated, but essentially all of the important mechanisms that make a market economy self correcting have been abolished since 1971 and there’s now only one left: systemic bank failure, followed by deflation and epic recession.

Central banks are increasingly aware of that, which is why the day before the strikes they announced yet more trillions of newly produced dollars to flood into the European banking system, but it won’t work and neither will anything else. Sooner or later they will realize that they only have two options: pull the plug and watch the global economy go down or keep inflating the major fiat currencies until they become completely worthless, reducing large swathes of the globe to barter until a new monetary system emerges. Neither option is pain free, but the former is obviously superior since it will lead to less suffering, place what suffering there is more heavily on the feckless and irresponsible, and most importantly provide the conditions for the swiftest possible return to prosperity. Political factors will almost certainly lead to the latter course.

That being the case, matters will take longer to sort themselves out, but the end result is basically the same. The fractional reserve banking system, propped up by central banks with the weapon of paper money is finished. It will take decades, at the minimum, before bankers can build up the degree of public trust necessary to inflate their way to the obscene profits they have earned since 1971. This will probably seem to you to be eminently good news, but the end of the fractional-reserve banking system of the last 40 years also means the end of the mammoth welfare state that has been nurtured and reared on its inflationary profits. It is only that immoral and fraudulent system that allows high-spending governments to borrow their way to constant liquidity cheaply, and it is only that system that allows them to monetize away the debt a few years later. They simply can’t do without it. No doubt some countries will give state-socialism proper another crack, but they will swiftly run into the impossible task of finding a viable alternative to the price system for allocating scarce resources. The rest of the world will just have to get used to having a free market with sound money and a state that lives within its means, because there’s nothing else it can do. Since the growth of the welfare state has been necessarily accompanied by the non-stop erosion of savings and a stagnation of real wages not seen in the western world since the Napoleonic wars, the general public will, if they can restrain the Pavlovian urge to loot, benefit enormously. People with few marketable skills and a solid conviction that they deserve to be provided with jobs that guarantee them an upper middle class standard of living will have to set about the long, slow slog of building up a public sector that can supply their needs. It took about 150 years the last time around, they can try and beat that.

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