The period between now and Easter should be an interesting one. As the Eurozone settles down and no immediate crisis looms, attention is likely to turn to the United States. Just to recap, the US has public finances that are, in many respects, worse than those of the Eurozone. It also doesn't really have a credible deficit reduction plan. By virtue of its global reserve currency, America has been spared the need to resort to the types of austerity programme that are now common elsewhere in the OECD. That may start to change soon.

At the beginning of 2013, a compromise of sorts about the US Federal deficit was reached. Modest tax rises were agreed, accompanied by a postponement of spending cuts to the end of February. In addition to this, the debt ceiling - an overdraft limit, if you like, managed by Congress - is likely to be reached in February as well. Far from reaching a consensus about the shape of American public finances, the matter was simply kicked into the long grass. We will be in the long grass in a week or two, and no real progress seems to have been made in finding a solution to the longer term problem of American deficits.

Is there a problem? There is the question of how long a government can run a perpetual deficit before it encounters a major problem. Most public debt is simply rolled forward from one generation to another. The example of France in the Sixteenth and Seventeenth Centuries suggests that public debt could be rolled forward for over 150 years. But then, it did end rather unfortunately for the French monarchy during the French Revolution. In modern times, the ability to roll forward a perpetual deficit is rather questionable because the bond markets may test this ability somewhat sooner. This is what the Eurozone found to its cost in 2012.

On the assumption that the government wishes to address the issue of US Federal debt, what are its options? There are only really two - increase taxes or reduce spending - or a combination of both. There are a number of possible areas where taxes could be raised. For example, the US is one of the few developed nations that does not have a national sales tax. Other governments find it convenient to use the tax system to nudge behaviour away from goods they disapprove of, such as tobacco and alcohol. From an outsiders perspective, this might seem like a useful way to enforce gun control. Americans have the right to bear arms, but that right does not extend to making ammunition affordable. If each round were to carry a $100 sales tax, then firing off a clip of ammunition would become a very expensive hobby! The problem is that there is a very deep resistance to tax increases amongst a significant part of US society.

The other option would be to reduce spending. But spending on what? Once again, there are a number of alternatives that could be possible. One such possibility would be to reap a peace dividend. As US troops are withdrawn from the parts of the world in which they serve, the current force establishments could be reviewed. Are so many ships, tanks, and aeroplanes absolutely necessary? If so, to do what? Alternatively, as other OECD nations are doing, there could be a review of welfare spending. Could it be possible to increase the state retirement age to, say, 70? Such a move would lessen the fiscal impact of an ageing society. However, entitlement reduction is very unpopular with another part of American society.

And so we reach the impasse that we have today. American society, from the perspective of an outsider, seems very fragmented and divided. These divisions handicap the public debate about effective deficit reduction programmes. In those economies where the questions of austerity are being successfully handled, such as the UK, the issue is not one of austerity or not austerity, but of how much austerity. One side of the political divide (Labour) argues for a slower path, whilst the other side (the Coalition) argues for a quicker path. One side (Labour) argues for a mix of 66% spending cuts and 34% tax rises, whilst the other (the Coalition) argues for 80% spending cuts and 20% tax rises. The consensus is that there must be deficit reduction and it must be a blend of spending cuts and tax rises. In the US, that broad political consensus does not exist.

This is a shame because America faces a number of long term difficulties that will need some form of cross-party consensus to address. Two problems stand out above the others. The first is an ageing population. If things continue as they are, then the long term commitments to healthcare and retirement benefits are likely to bankrupt the public finances. A resolution to this problem will need a strong political consensus to find the right blend of reductions in entitlements and increases in taxes just to keep the system afloat. Equally, the US infrastructure is in desperate need of renewal. The US stands out as one of the few nations within the OECD to have a national high speed rail network on the drawing board. This will have an impact on the long term competitiveness of the US economy. To address this issue will take a long term perspective of public infrastructure that will not work without a strong political consensus.

And there we reach, in our view, the most significant problem facing American society - an inability to conduct grown up politics. This child like nature of US politics has given rise to the problem of the US Federal deficit in the first place, and its resolution is a pre-condition to the solution of that problem. This places the responsibility squarely back at the feet of the American public. You get the politicians you vote for. Why don't Americans vote for adults for a change?


Stephen Aguilar-Millan
© The European Futures Observatory 2013

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How should we view Big Brother? As a response to a previous post, one of our correspondents asked: 'Stephen would you see the Big Brother as more benevolent or more one that watches us intently?' This is both an interesting and an important question. If we are to see greater state intervention in the economy and in social affairs, is that necessarily a good thing?

Let us lay on one side the dogmatic language of the extremists. There are those for whom all state intervention is bad. To these people, no amount of discussion will persuade them differently. They are fixed in their views. Equally, there are those who take a dogmatic view that there should be greater state intervention. Once again, there is no talking to these people, so fixed are they in their views. Our comments below are directed to the vast majority who take a more nuanced view of how things should be - at some times, state intervention is the best course of action; at others, the state should draw back.

In our model, we have two poles for the delivery of public services - the state as commissioner and deliverer, and the state as commissioner but with the private sector as deliverer. In our current iteration of the model, we have the state as commissioner (i.e. government decides which services are to be provided, how much money will go into these services, and the parameters for their delivery). The private sector acts as the deliverer of public services (i.e. private companies take responsibility for delivering the services, within a given set of parameters). This model has worked well for some time and has been the main device by which public sector spending has been controlled in recent decades.

It is our contention that this equilibrium is changing. The commissioning model has its uses, but it also has its limitations. The way in which services are outsourced is through a process of competitive tendering where, normally, the lowest bid wins the contract. We have now reached a position where companies are placing competitive bids that are costed too low to do the job effectively. They have what is known as the 'winners curse'. In the face of the winners curse the whole system lacks resilience and is very insecure.

The 2012 Olympics gave a really good example of this. The security of the event was outsourced to G4S, the largest private sector security firm in the world. The contract was awarded under the competitive tendering regime. However, G4S suffered from the winners curse - they had not sufficiently allowed for the complexity of securing the games in their original tender, which may have been low-balled to gain the contract. The result was that, just before the games, G4S had to admit that their security was beyond the company. The government responded by cancelling leave for the armed services and using service personnel in the roles that the civilian contractors should have fulfilled (see story). This had an immediate impact upon G4S, whose shares were downgraded (see story), and a longer term impact in that there is now a question mark over its ability to handle large scale public sector contracts (see story).

What is now called into question is not the ability of one company to deliver a complex public contract, but the ability of the system to avoid a market failure. It should be noted that the contract to run Wolds Prison not only has been taken away from G4S, but also is to return into the public sector. This is how the worm turns, and provides a data point to suggest that the worm has turned.

The delivery of public services by the private sector only has resonance if there is no extensive market failure. If market failure does occur, then the lack of accountability in private sector delivery leads to calls for those services to return to the public sector. And that is one half of the answer to the question posed about how we should view Big Brother. In the face of a delivery failure - caused by a market failure - and an inherent lack of public accountability for that failure, the return of Big Brother is to be welcomed.

Of course, the worm will turn again. As service delivery returns to the public sector, so will the inefficiencies and feather bedding for which the public sector is well known. We are likely to return to the land of Sir Humphrey, where the man from the Ministry knows best, and is best served by an army of civil servants. However, that is an argument for another day. Our model suggests that we may have to wait another generation or two for another Thatcher Revolution.

At this point in the cycle, Big Brother is something of a benevolent force. It is correcting a failure in modern life - the failure of private corporations to act for the public good. That will change over time, but, for now, many people will welcome the re-nationalisation of parts of our life.

Stephen Aguilar-Millan
© The European Futures Observatory 2012

At the beginning of this decade, we were concerned with the trends that would dominate the decade - the decade in which we are currently living. At the time, it seemed to us that, given the high levels of state intervention in the economy, one trend that would dominate would be a more interventionist public sector. We wrote about this in both 2008 (see article) and 2009 (see article), before including the trend in our 2010-11 project 'A History Of The Next Ten Years' (click here for more details).

We are now 20% into the decade, and we are now collecting evidence that supports our view of the trend. In progressing from the identification of the trend to determining an underlying model that gave resonance to the trend, we took the view that politics, certainly from a European perspective, contained a tension between the mode of delivery (corporate -vs- atomistic) and the intended beneficiaries of the collective action (the individual -vs- the community). The model suggested that we were turning away from a period in which the individual would be the intended beneficiary of an atomistic (i.e. market based) collective action, and towards one in which the community would be the intended beneficiary of an atomistic (i.e. market based) collective action.

What does this mean in simple terms? The bottom line is that it implies a return to state owned corporations. Ones that are not within the public sector, but ones that do come under state control. In the UK, we have calls for a more interventionist industrial policy (see article), which Germany and France are leading the drive to greater state control of key industrial companies (see article). To a certain extent, this development was entirely foreseen.

If our model is correct, then in the decade after this one, we can expect to see a move from one in which the community would be the intended beneficiary of an atomistic (i.e. market based) collective action to one in which the community would be the intended beneficiary of an corporate (i.e. state directed) collective action. If we are right, then we may see the drive towards Big Brother increasing in the years to come. These are the data points for which we are now looking.

Stephen Aguilar-Millan

© The European Futures Observatory 2012