"15 years ago it seemed that the great debate about the proper size and role of the state had been resolved . In Britain and America alike ,Tony Blair and Bill Clinton pronounced the last rites of "the era of big government".
Privatising state-run companies was all the rage .The Washington consensus reigned supreme;persuade governments to put on "The golden straitjacket",in Tom Friedman's phrase,and prosperity will follow.
Today government is back with a vengeance:not just as a brute fact but as a vigorous ideology.Britain's public spending is set to exceed 50% of GDP.
America 's financial capital has shifted from New York to Washington DC and the government has been trying to extend its control over the health-care industry.Huge state-run companies such as Gazprom and PetroChina are on the march .Nicolas Sarkozy,having run for office as a french Margaret Thatcher,now argues that the main feature of the credit crisis is "the return of the state,the end of the ideo;ogy of public powerlessness".
"The Return Of The State" is stirring up fiery opposition aswell as praise.In America the Republican Party's anti-government base is more agitated than it has been at any time since the days of the Gingrich revolution in 1994.
"Tea Party"protesters have been marching across the country with an amusing assortment of banners and buttons :"Born free,taxed to death "and "God only requires 10%(?)".On january 19th Scott Brown ,a Republican ,captured the Massachsetts senate seat long held by the late Ted Kennedy ,America's most prominent supporter of big -government liberalism.
Many European countries have devoted a high proportion of their GDP to public spendin for years.
And many governments cannot wait to get out of their new-found business of running banks and car companies.But the past decade has clearly produced changes which ,taken cumulatively,have put the question of the state back at the centre of political debate.
The obvious reason for the change is the financial crisis .As global markets collapsed ,governmentsintervened on an unprecedented scale ,injecting liquidity into their econimiesand taking over ,or otherwise rescuing,banks and other companies that were judged "too big too fail".Afew months after Lehman Brothers had collapsed,the American government was in charge of General Motors and Chrysler,the British government was running high street banks and ,across the OCED,governments had pledged an amount equivalent to 2.5% of GDP.
The crisis upended conventional wisdom about the relative merits of governments and markets.Where government ,in Ronald Reagan's aphorism,was once the problem,today is the default villain is the market.Free-marketeers such as Alan Greenspan,the former head the Federal Reserve ,have apologised for their ideological zeal.A line from Rudyard Kipling sums it up best:"The gods of market tumbled,and their smooth-tongued,Brown,Britain's chancellor and later its prime minister ,began his ministerial career as "Mr Prudent".During Labour's first 3 years in office public spending fell from 40.6%of GDP to 36.6%.But then he embarked on an Old Labour sprnding binge.He increased spending on the National Health Service by 6%a year in real terms and boosted spending on education .During Labour'13 years in power two-thirds of all the new jobs created were driven by the public sector ,and pay has grown faster there than in the private sector .
In America ,George Bush did not even go through a prudent phase.He ran for office believing that "when somebody hurts ,has got to move".And he responded to the terrorist attacks with a broad-ranging war on terror .The result of his guns and butter strategy was the biggest expansion in the American state since Lyndon Johnson's in the mid-1960S. He added a huge new drug entitlement to medicine .He created the biggest new bureaucracy since WW II ,the Department 's control over education and over the states.The gap between American public spending and Canada 's has tumbled from 15 percentage points in 1992 to just 2 percentage points today.
The Public Demands
The expansion of the state in both Britain and America met with widerspread approval .The opposition Conservative party applauded Mr Brown's increase in NHS spending .Mr Bush met no significant opposition from his fellow Republicans to his spending binge .It was clear that ,when it came to their own benefits ,suburban Americans wanted government on their side .A banner at one of those tea-parties sums up the confused attitude of many of the so-called anti-government protesters :"Keep the government hands off my Medicare."
The demand for public services will soar in the coming decades ,thanks to the aging of the population .The UN points out that the proportion of the world's population that is over 60 will rise from 11% today to 22% in 2050.The situation is specially dire in the developed world :in 2050 one in three people in the rich world will be pensioners ,and one in ten will be over 80.In America more than 10.000 baby-boomers will become eligible for social security and Medicare every day for the next two decades.The Congressional Budget office CBO calculates that entitlement spending will grow from 9% of GDP today to 20% in 2025.
If America keeps the distaste for taxes ,it will face fiscal Armageddon.
The level of public spending is only one indication of the state's power .America's federal government employs a quarter of a million bureaucrats whose job it is to write and apply federal regulations.They have cousins in national and supranational capitals all around the world .These regulators act as force multipliers:a regulation promulgated by a few can change the behaviour of entire industries .Periodic attempts to build "bonfires of regulations" have got nowher .Under Mr Bush the number of pages of federal regulations increased by 7.000 and eight of Britain's ten biggest regulatory bodies were set up under the current government.
The power of these regulators is growing all the time .Policy makers are drawing up new rules on everything from the amount of capital that banks have to set aside to what to do about them when they fail.Britain is imposing additional taxes on bankers' bonuses,America is imposing extra taxes on banks' liabilities,and central bankers are pondering ingenious ways to intervene in overheated markets.
Worries about climate change have already led to swathe of new regulations ,for example on carbon emissions from factories and power plants and on the energy efficiency of cars and light-bulbs.But since emissions are continuing to grow ,such regulations are likely to proliferate and ,at the same time ,get tighter .The Kerry-Boxer bill on carbon emissions ,which is now in the Senate ,runs to 821 pages.
Fear of Terrorism and worries about rising crime have also inflated the state .Governments have expanded their ability to police and supervise their populations .Britain has more than 4m CCTV cameras,one for every 14 people.
Chinese state-controlled companies have been buying up private companies during the financial crisis ,Russia 's state-controlled companies have a long record of snapping up private companies on the cheap.Sovereign wealth funds are increasingly important in the world's markets.
This is partly product of the oil boom.
Three-quarters of the world's crude-oil reserves are owned by national oil companies.By contrast ,conventional multinationals control just 3% of the world's reserves and produce 10% of its oil and gas)But it is also the result of something more fundamental ;the shift in the balance of economic power to countries with a very different view of the state from the one celebrated in the Washington consensus.The world is seeing the rise of a new econimic hybrid-what might be termed"stste capitalism".
Under state capitalism ,governments do not so much reject the market as use it as an instrument of state power .They encourage companies to take advantage of global capital markets and venture abroad in search of opportunities.Malaysia's Petronas and China's National Petroleum Corporationrun business in some 30 countries .But they also use them to control the economy at home -to direct resources to favoured industries or reward political clients,Politicians in China and elsewhere not only make decisions about the production of cars and mobile phones;they are also the hidden hands behind companies that are scouring the worlsd for the raw materials that go into them.
The revival of the state is creating a series of fierce debates that will shape policymaking over the coming decaded.Governments are beginning to cut public spending in an attempt to deal with surging deficits .But the inevitable quarrels over cuts will be paltry compared with those about the growth of entitlements.America's deficit ,boosted by recession ,is already hovering at a post-war high of 12% of GDP ,and the American economy depends on the willingness of other countries to fund its debt.The CBO calculates that the deficit could rise to 23% of GDP in the next 40 years if it fails to tackle the yawning imbalance between revenue and expenditure.
Crises can be the midwives of serious thinking .The stagflation of the 1970s prepared the wa for the Reagan and Thatcher revolutions.More recently ,several countries have dealt with out of control spending by introducing dramatic cuts:New Zealan ,Canada and the Netherlands all reduced public spending by as much as 10% from 1992 onwards.
The rise of state capitalism is fraught with problems .It may be hard to argue with China's 30 years of hefty economic growth and $2.3 trillion in foreign-currency reserves.But subordinating econimic decisions to political ones can come with a price-tag in the long term:politicians are reluctant to let strategic companies fail,and companies become adjuncts of the state patronage machine.Giving the imprimatur of the state to global companies is also fraught with risks .America's Congress prevented Dubai from taking over American ports on grounds of national security.
Anatomising Failure
The most interesting arguments over the next few years will weigh government failure against market failure .The market-failure school had been gaining strength even before the credit crunch struck .The rise of cowboy capitalism in Russia under Boris Yeltsin persuaded many people -not least the chinese-of the importanceof strong government.And the threat of global warming is an obvious example of how government intervention is needed to deter people fromm overheating the world .
The public sector is subjected to all sorts of perverse incentives.Politicians use public money to buy votes .America is littered with white elephants such as John Murtha airport in Jonestown ,Pennsylvania ,which cost hundreds of millions of dollars but serves only a handful of passengers ,including Mr Murtha ,who happens to be chairman of a powerful congressional committee.Interest groups spend hugely to try to affect political decisions :there are 1.800registered lobbyists in the European Union ,5.000 in Canada and no fewer than 15.000 in America .Mr Bush 's energy bill was so influenced by lobbyists that John McCain dubbed it the "No Lobbyist Left Behind" act .
"The Question that we ask today ",said Barack Obama in his inaugural address ,"is not wether our government is too big or too small,but wether it works." This is clearly naive :with deficits soaring ,nobody can afford to ignore the size of government .Mr Obama 's appeal fpr pragmatism has some value :conservative attempts to roll back government regulations have led to disaster in the finance industry .But left-wing attempts to defend entitlements and public-sector privileges willy-nilly will condemn the state to collapse under its own weight .Policymakers will not be able to give a serious answer to Mr Obama's question of wether "government works"without first asking themselves some more fundamental questions about what the state should be doing and what it should be leaving well alone.
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