A country is not a company
The poverty of comment on this blog on macro-economic issues always strikes me.
I blame a simple, but fundamental conceptual problem. Over the last twenty or so years he corporate model of thinking has become pervasive; so much so that we suffer that profoundly annoying phrase ‘UK plc’ far too often.
The UK is not a plc. It is a country. A plc is a company. They are not the same.
For example, a company can shed its labour force, pay the compensation due and they are gone – no longer its concern. The person made redundant then becomes and externality.
If a government makes someone redundant and there are no other jobs for them to go to (as now) there is no externality: unless they leave the country the person is still needing to be housed, fed, clothed, kept warm, be educated, protected, consume healthcare and so on. All you do is cut one budget and add it to another. And, as I showed recently, that might give no real saving at all – indeed - it can add to government cost in many cases.
It’s no good assuming we have full employment and so government can behave like a company – we do not have it right now. Those who do so make the same disastrous assumption that was made at the beginning of the 1930s – which created the great depression – which is that the unemployed simply go away. Even more now than then they do not.
This is why the right decisions for companies facing a cut in revenue do not work for a country in the same scenario. A company might cut cost to cut borrowing. But a country can cut borrowing by keeping people in work – by spending in fact to avoid the massive social risk of unemployment and by spending to keep up tax revenues – and the growth it creates does, what is more, actually pay for the borrowing – so spending cuts borrowing, not increases it.
A depression is a shortfall in aggregate demand. You don’t solve it by increasing the shortfall in aggregate demand by cutting government spending during a recession / depression. You increase demand for as long as is required – and then you cut.
This is macro thinking. Cutting spending now is micro thinking – small minded thinking – and it’s wrong. And will be disastrous.
Someone please tell the Treasury, and remind them they’re running a country, not a company, please?
I would argue that if the government spends less, the money stays in private hands where it can be spent privately instead. Why am I wrong?
On the subject of the 1930s you might like this quote from Keynes:
It is the conception of the Secretary of the Treasury as the chairman of a sort of joint stock company which has to be discarded.
http://www.mtholyoke.edu/acad/intrel/interwar/keynes.htm
And there is me thinking the government is running the NHS, the Police, Armed Forces, etc, etc, etc. What a mistake to make!
As it happens good Companies tend to have well articulated strategies which inform decision making and management.
You are quite correct but its an interesting analogy. If you define a Country in terms of its assets, its income, its output, its currency, and its net debt (for example) then you could produce a finite list of such things. And in such a context you might start to understand the consequences of running a large budget deficit. It would be a study worthy of your time.
Rob you are wrong, because you still see money as a thing in itself, whereas it’s actual value is variable, because it is only a claim on a share of the real goods and services. It is quite possible to leave all the money in private hands, but by doing so, the actual wealth of the country is reduced and all this extra money is worth that much less. Don’t confuse the means of exchange with actual wealth, by which I mean goods and services.
James from Durham, on the contrary, I don’t see money as wealth. By “leave it in private hands”, I mean allow private people to direct it and invest it create wealth with it. In other words - if the government employs one fewer civil servant and cuts taxes by one civil servant’s salary, the money to employ the civil servant is left in private hands; a private sector job is created.
I’m really just repeating what Bastiat said in his famous essay, in particular paragraph 1.41.
Or to put it another way: wealth is created when people do work, we are only arguing about who gets to decide what work is done.
There is one way a country can externalise a lot of its workers;ship them off to sea.I have never understood how the Flag of Convenience system is generally accepted despite the sterling work of the International Transport Workers’ Federation .These Convenience Flaggers are more directly dangerous,arguably,than tax havens.