A country is not a company

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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?

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