The Withering of the Private, and the Growth of the State

In the 1990s, Simon Upton and Michael Cullen had consecutive essays in NZ Books. Simon’s piece was called the Withering of the State, if memory serves, and was a classical liberal defence of private over public. Michael’s was a moderate and sensible 90s social democratic response, which avoided the flummery and triangulations of “Third Way” rhetoric and practice to an admirable extent.

Those two essays, more than ten years old, came to mind as I was recalling an argument with a mate in Sydney about the state government’s attempts to privatise the electricity generation system. The argument was that massive new investment would be needed in generation assets, and that the state’s budget could not cope with the demands. Far better to privatise that problem and leave it to the market. 

I am not an instinctive privatiser, and didn’t really buy the argument that privatising the assets would save anyone anything much. The investment would still need to be found, and the citizens of New South Wales would still need to pay the cost. The question was which would be cheaper in the long run, and government credit often is so long as the companies involved are not badly run.

The reason, in turn, that I was recalling that conversation was an essay by John Quiggin about the social democratic response to the financial crisis. He makes the case, very briefly, that the collapse of financial liberalism as a governing project means a new opportunity for social democracy as the most rational way of managing the risks created for people, families and communities by capitalism. 

In particular, he sees a permanent, larger role for government in both managing a more restricted financial sector, and in providing more human services to drive employment and to meet the demands of the public for higher quality public services.

The relationship between these rather disparate points of interest is simply this. The global financial crisis has kicked the stuffing out of the idea that the market is always right and that government is always the problem. 

That argument was never true and never reasonable, but it was the orthodoxy. Now though the fact that it wasn’t true is too hard for the public to ignore. The prophets of the past have been seen for what they are, and their influence over the shape of things to come is at an end.

Now that we can sustain a healthier and more nuanced debate about the relative strengths and weaknesses of the public and private sector, we should be able to build a global economy – and one in New Zealand – that is less susceptible to a repeat performance. Additionally, it should be an economy that is more in line with social democratic aspirations about a more equal and fairer society.

In those nuanced debates, one of the interesting ones is: how do you finance infrastructure through private involvement (telecoms, electricity, sometimes roading, sometimes water, sometimes ports, sometimes airports) when the massive flows of private sector investment capital that have provided so many of them are starting to dry up?

I recall attending a conference organised by NZCID in Auckland last year, where there were several bank economists (of all people!) who were arguing in a sense that the financial crisis had shifted the relative costs in favour of public investment, and against private investment in such goods. Governments’ cost of capital advantage had increased as the risk-aversion spread further through the system.

Now I beg to suggest that that risk aversion is going to be a long term change, and that we are not going to again see such a ready supply of global capital to finance investment. The state is going to have to play a greater role, whether it is in the New South Wales energy market, or whether it is in New Zealand (and Australia’s) new broadband networks, or in other areas of infrastructure.

So far from the withering of the state that Don Brash, Ruth Richardson, Roger Douglas and co wanted to see, and which Simon Upton wrote of so eloquently, we will instead see a withering of the private. The state is on the move, its relevance more clear and more vital in a day to day sense than in the quiet and easy years of recent times.

A final thought. The New Zealand Labour Party needs to take serious looks at these issues as it develops its programme for the 2011 election. The liberal straight-jacket that was part of Labour’s economic agenda in the 2000s has broken up, and times have changed. 

Will Labour change with the times? If so, how? (I suggest yes, and carefully.) National has clearly changed. It is too early to know what into: what is clear though is that the worst excesses of the liberal fundamentalism of the 90s are being carefully painted out. We will not know really until next year’s Budget whether that is an act or whether it is the real thing, but either way Labour will still need to change. An interesting project for the next three years.

Comments

[Alan]

The real problem we have in NSW is the withering of the brain in the NSW Right, the dominant faction in the state ALP. Even before the GFC, privatisation made little sense, especially in light of the disasters with power privatisation in Victoria and South Australia. While everyone else is spitting it out the NSW ALP continues guzzling that free market koolaid right down.