Austerity versus rot: Government capacity

The austerity neoliberal policy introduced into the US by Ronald Reagan took a long while to show serious repercussions.  I argued that impact of reducing government workers and capacity didn't show so much because the US had overinvested in capacity previously.

The failure of FEMA in dealing with the post-Katrina aftermath in New Orleans under George W. Bush was to me, the first glaring example of the impact of austerity.  Although this was accentuated by the agency having poor leadership as well.  (Since then FEMA has performed badly under Republican administrations, specifically Trump, "A Post-Katrina Law Guards FEMA Resources. Why Hasn’t It Stopped Noem?," New York Times.)

Writing in The Atlantic, "U.S. Capabilities Are Showing Signs of Rot," military historian Phillips O'Brien makes the point that firing capable officials, and installing ideologically acceptable but less skilled people in their place creates "Rot."  And that Rot is now very apparent in the US military, as shown by the performance in the current War against Iran.

Also in DHS under Noem, ICE ("Leaked Documents Show a Border Patrol Remade in the Image of Gregory Bovino," American Prospect), and the FBI, "How Kash Patel Wrecked FBI’s Ability to Stop an Espionage Attack," New Republic, among others. Tulsi Gabbard as Director of National Intelligence during war time is another example of rot.  Richard Grenell at the Kennedy Center, most of the Secretaries in the Cabinet, etc.

The first Trump Administration's response to covid is another example of rot.  This rot has been deepened by appointing anti-medicine people in high positions at the FDA and CDC, and with RFK Jr.--who believes his voice dysphonia was caused by the flu vaccine--the Secretary of HHS!

WRT to war, sure the US and Israel can pummel Iran at will, but expending million dollar missiles to shoot down $50,000 drones is a cost-benefit ratio that is unsustainable.  Trump, who treats Ukraine like s***, has reached out to them for technical advice on dealing with drones.  In effect, Ukraine has provided more aid in dollar value to the US than Trump's Administration has provided to Ukraine as it fights Russia's invasion of the country.  (Fortunately, the US still shares intelligence with Iran.  But in general it does everything in its power to promote Russia.)

From the article:

On multiple occasions after President Trump launched a massive air campaign against Iran this past weekend, retaliatory attacks by simply constructed Iranian drones have penetrated American defenses with serious results. For example, at least six U.S. soldiers died, and others were wounded, in an Iranian strike Sunday on a command facility in Kuwait. CNN reported that the Americans received no warning of the incoming drone. According to CBS News, the fortifications around the facility protected it from car bombs but not from a direct overhead strike. “We basically had no drone defeat capability,” an unnamed military official told the network.

... When a complex system starts to decay, the first signs are usually subtle. In the third century, after the Roman empire had reached its geographic maximum, literacy began to decline across Roman society. Education levels fell not only among soldiers, but among officers, aristocrats, and even emperors. The Roman army still looked formidable for years afterward. It had good equipment and could march well. Yet it was no longer as advanced relative to Rome’s enemies as it had once been. It fought as hard as ever, but less effectively.

... The U.S. military’s supremacy over foreign rivals is built on intensive training and the manipulation of advanced technology. By contrast, Hegseth has been stressing lethality and a warrior ethos instead of learning and reflection, to the point of blocking U.S. military personnel from taking courses at the most elite American universities. Yet the events of the past week underscore how shows of force alone may not defeat even militarily inferior enemies.

In Bahrain, a lone Iranian drone penetrated the headquarters of the U.S. Fifth Fleet, which oversees 2.5 million square miles of the world’s oceans. The incoming weapon destroyed an AN/TPS-59 radar unit intended to provide 360-degree air surveillance for U.S. forces. In a moment, Iranian equipment that cost perhaps $30,000 devastated a piece of U.S. military hardware estimated to be worth tens of millions of dollars.

Another term for this is "capital shallowing" or disinvestment.  It's the opposite of "capital deepening" or investing ("Capital shallowing: the effect of disinvestment on government functioning").

Capital shallowing: the effect of disinvestment on government functioning

Is a term that I am sad to say that I haven't come across.  (Although I have seen the term "capital deepening" applied to the increased income of neighborhoods as demographics change and the neighborhood becomes more attractive at the scale of the metropolitan residential landscape.)

It has so much explanatory power.

It's used in a Financial Times article about the National Health Service in Britain, how with decreased funding and investment, the amount of capital to support each worker, and each facility, declines in systematic ways that often reduce the ability to provide proper care ("NHS capital investment cuts leave England’s hospitals crumbling").

The article argues that while the facilities are declining and the waitlists lengthening, care is still okay.

In the basement pharmacy at St Mary’s Hospital in London, part of the world-renowned Imperial College Healthcare NHS Trust, senior pharmacist Michele Garwood has placed plastic trays beneath the ceiling in an attempt to protect her stock of medicines from regular flooding. 

Elsewhere, on Albert ward, one of five lavatories has been out of use for three months after a hole opened up in the floor, exposing it to the car park below, and rotted floor joists in patient bays, temporarily taped over, represent a constant trip hazard. 

We “still provide the best care we can” but some patients are so horrified by their surroundings that they discharge themselves, said matron Marta Calvo Hernandez. St Mary’s is one example of how a longstanding lack of capital spending is being felt across the NHS. The service is struggling with an accumulated maintenance backlog estimated to be worth more than £10bn, the highest since records began. 

Stephen Rocks, an economist with the Health Foundation, a research organisation, said there had been “a very sustained under-investment in capital” over the austerity years of the 2010s, which had “left the NHS with insufficient capital investment to deliver the care patients need”.  

Rocks suggested this was part of the reason that a growth in staffing levels in the health service did not seem to have translated into a corresponding increase in activity. “We’ve seen a ‘capital shallowing’, with less capital per worker, and that does have a very direct read across to productivity,” he said. 

As a term, apparently it was coined in development economics, making the point that as countries grow in population, there is less money invested in per capita ("Population Pressures, Saving, and Investment in the Third World: Some Puzzles," Economic Development and Cultural Change, 1988).

I wish I had known this concept earlier, because it explains points I've made in various areas.

First, the impact of neoliberal induced disinvestment in government--the US could "slide" for a long time with denigration and disinvestment in government because in the decades before it overinvested. 

But the failures with FEMA and disaster response after Hurricane Katrina and under Trump with Puerto Rico and Houston are a good example.  But I don't know if the failure of the Army Corps of Engineers and levees was about capital shallowing or just politics, failure to adequately address risk, budget shortfalls, etc.

And the failure of the Trump Administration to properly respond to covid.  And the serious problems of the US public health infrastructure to respond to covid after decades of declining budgets ("COVID-19 and Underinvestment in the Public Health Infrastructure of the United States," Milbank Quarterly, 2020).

Of course, the Conservative Party austerity agenda in the UK for the last ten years has had the same kind of debilitating effect ("Austerity urbanism in England: the 'regressive redistribution' of local government services and the impact on the poor and marginalised," Environment and Planning A, 2017).  With covid, policing, transit, health care as mentioned above, care for the aging, defunding of local government, parks, libraries, etc.

Second, with the tax cutting fervor in growing places like Utah--"let's share the benefits of growth"--when growth imposes more costs, not fewer, and by cutting taxes you have less revenue to invest, or a capital shallowing ("A Robust Economy, State of Utah press release).

A third example would be the impact on local governments of declining budgets.  This has been particularly pronounced in Toronto, where the previous mayor refused to raise taxes beyond the inflation rate, even though costs increased at a greater percentage than inflation, with serious negative impact on the quality of municipal services ("Brutal performance art criticism of Toronto's Mayor, John Tory, and his "austerity" agenda").

It can be difficult to separate the effects of neoliberalism, say with the water quality failures in the UK ("Water companies are playing dirty over sewage. That’s why 20 million of us are taking them to court" Guardian) from capital shallowing--the budget of the UK Department of Environment is only £11.47 million FOR THE ENTIRE COUNTRY--and capital shallowing.  

I think they are mutually reinforcing, especially when it comes to "advanced economies" as opposed to developing economies for which the concept was coined.

Taxes as an investment concept: funding public goods versus tax reduction

I've been meaning to write about tax policy because there has been a fair amount of writing about the 2017 tax cuts, and the benefits mostly being directed to corporations and the extremely wealthy, and the purported big rise in economic growth that proponents said would come about because the changes hasn't happened.

-- "A New Congressional Study Finds Little Economic Benefit From 2017 Tax Cuts," Tax Policy Center

A big thread in neoliberal policy is reducing the size of government, privatizing government functions, and reducing taxes.

At the same time, the counter argument is that collective action and providing public goods requires a reasonable rate of taxation, and that lower taxation comes at the cost of investing in infrastructure and other public goods.

1. One example that comes to mind to me is how Norway and the UK took oppositional actions in response to the new revenues they received from oil production in the North Sea.

Norway didn't cut taxes, and retained ownership of the resource, directing royalty revenues to a state investment corporation, which has invested in various projects, increasing the return on investment in multiple ways.

The UK used the new revenues to justify tax cuts for the wealthy, did not retain ownership interests in the resource, and reduced corporate tax rates as well.  And while it isn't the only reason that the UK is seriously challenged financially and lacks the money to invest in revitalization and other government functions, it is a good example of how short term thinking has deleterious consequences in the long term.

-- "Did the U.K. Miss Out on £400 Billion Worth of Oil Revenue? ," Resource Extraction
-- "Why UK's oil and gas revenues are dwarfed by Norway's," Business for Scotland

2.  I have been thinking about the tax cuts issue in terms of positive return on investment.  There is a lot of discussion about how the US is running higher deficits, even though the economy is growing relatively well, because of the tax cuts, and how this is counter to general expectation, but also bad policy and bad practice.  That today's deficits are being financed by future generations.

-- "Robert J. Samuelson: Trump's fantasy budget worsens deficit"  (Washington Post syndicated columnist)
-- "Robert J. Samuelson: Shrink the budget deficit? Not a vote-getter"

There's no need to have a discussion here about Keynesian fiscal theory, recessions, counter-cyclical spending, etc.

A simpler way to think about might be, does your deficit financing "today" increase return on investment in the future or not?  If deficits don't or aren't intended to increase overall return on investment, it's bad policy and shouldn't be countenanced.

3.  Of course, what's happening with the federal deficit shows the hypocrisy of Republicans.  They "fight" deficits if the spending is for public good projects like infrastructure, or various federal programs generally as a matter of course, but not if it is for tax cuts for the wealthy.

-- "The Republicans Are Deficit Hypocrites. The Democrats Should Be Too," New Republic
-- "Charles Lane: A country at war with itself over debt" (Washington Post syndicated columnist)

4. Alaska proposes to cut university budgets 40%.  In the vein of whether or not tax cuts add or subtract value, the proposal by Alaska's Governor to fund an increase in payments to Alaska citizens by cutting university budgets is a good example.

Similarly to how the UK has let the benefits of oil production flow away from the National Treasury, instead of enacting state income and sales taxes, Alaska uses oil revenues to pay for the cost of state government as well as an annual payment to citizens. Theoretically, the Alaska Permanent Fund is not unlike what Norway did. But Norway doesn't pay out annual payments to every Norway citizen, instead it invests the revenues.

The Governor ran on a campaign plank of increasing the payment. In the face of declining oil revenues ("No longer rich on oil, Alaska may ax money to universities. Lawmakers are 800 miles apart," USA Today), the only way to do that is to cut the budget, and universities offer an opportunity to provide a significant portion of the cuts to state government necessary to fund an increase in the payments from the Alaska Permanent Fund.

But the question is whether or not that's the best possible way to "spend" such revenues. Likely the long term investment benefit from such an action is nil.

Therefore, it's bad policy and shouldn't be countenanced.