It’s been another weekend of mad economic news from our government. We now low that some government departments are going to be asked to cut 40% from their budgets.
The logic of this manic cutting is almost impossible to fathom: there is none in any sane economic theory. In that case we have to assume that the coalition believes its own justifications.
The Coalition’s belief that that this process of cutting public sector jobs — with massive private sector knock on consequences — during a time of high and already rising unemployment will reduce the deficit makes no sense: I have shown that. But again, despite the absurdity of doing so, let’s assume that will happen.
And let’s also assume that, as the coalition predicts the size of government will shrink steadily but the size of the overall economy will increase despite that over coming years (even though, again, there is no reason to think that true). So from having the state represent in various ways around 45% of the current economy now let’s assume as the Coalition does that the state sector will shrink to below 40% of GDP and that when this happens GDP growth will pick up and a new equilibrium will be created.
I want to ask a really important question having made these assumptions, and it is this. What is it that the private sector is going to provide us with in the future which will make us so much better off than the public sector services we enjoy now do?
Try a few of these statements for size:
I want 20,000 fewer police because I want xxxxxxx
I want to get rid of all class room assistants because I want xxxxxxx
I want to get rid of home helps for the elderly because I want xxxxxxx
I want the poorest in our community to be unable to feed their children because I want xxxxxxx
Now what is xxxxxxx?
No one has ever told me. I’ve never even seen the question asked. And I genuinely don’t know what it is because I foresee no technology out there bar green energy that we really need. I see no massive technical advance likely to transform well-being that is crowded out by government activity now. But I quite candidly, know we can live with fewer mobile phones, fewer large cars, fewer plasma televisions and much else besides and be absolutely no worse off.
Put simply: I can see some in society need more of what society has to enjoy but I see no pressing need in society as a whole for more of the “stuff” that the private sector creates, having spent a fortune on advertising to tell us we want it. As a result I just cannot see the private sector now leaping forward to fill this gap in the economy that the government is planning to create. That’s why I am so sure that for every job it cuts there will be two people joining the unemployment register, the second being from the private sector.
Of course if someone could tell me what xxxxxx was I’d be happier with the Coalition’s claims. But I really don’t think anyone can, or will.
In which case the hole in the middle of the Coalition’s plan is revealed. And that hole is simply this: that they have no industrial strategy at all. And that’s a massive problem when you’re setting out to destroy employment with all the energy you can muster because the absence of that bit of the equation says that this is the road to ruin. And that, I fear, is the way we’re headed right now.
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“Now what is xxxxxxx?”
“I don’t want the country to go bankrupt and blight the futures of people for decades.”
@John Scrivens
@John Scrivens
Please try to keep to reality
a) the UK can’t go bankrupt
b) people want to buy our debt
c) it’s the basis for all private sector pensions
d) it’s a great asset to pass on to the next generation
So stop talking absolute nonsense
“a) the UK can’t go bankrupt”
Yes it can. It can be unable to meet debts as they fall due. It’s called “a default”. In practice, because we print our own currency, politicians probably will have chosen the soft default of printing money to redeem gilts. Obviously this has severe consequences also.
“b) people want to buy our debt”
At the moment. And they wouldn’t if there was no credible plan for repaying them. Why on Earth would someone buy UK Government debt if they suspected it wouldn’t be repaid or paid only in money worth less than the money loaned? I wouldn’t. You wouldn’t.
“c) it’s the basis for all private sector pensions”
Sorry? Gilts are indeed at the moment the bedrock of private pensions, which is why if the Government defaults (hard by debt restructuring or soft by inflation/money printing) then the value of these pension funds will fall. In a severe crisis (Argentina-style) then Government debt becomes worthless and all assets in a pension fund are confiscated (Google “Argentina private pensions”).
I thought you said somewhere else that a pension fund that didn’t decline in value was one of the key features of a fair society. Are you now saying that falling gilt values and declining pension values are a good thing?
“d) it’s a great asset to pass on to the next generation”
I don’t understand your point. Are you saying a gilt is a great asset to pass on? Or that the obligation to redeem gilts is a great thing to bequeath to our children?
“I want 20,000 fewer police because I want xxxxxxx
…
Now what is xxxxxxx?”
Possibly “less scope for people to be stopped and searched on the street for spurious reasons,” or “less scope for people to be harassed for taking photographs,” or “greater freedom to protest.”
You could come up with any number if you were to think about it.
So you are worried that the market might produce what you deem to be useless technology, but at the same time you’re saying that there is no technology you can forsee. Riiiight.
Apart from that logical hiccup, I don’t think there is anyone who can predict what the future holds. Mobile phones, TVs, cars were all once completely unknown to the generations which went before them. And of course it follows that at the same time they didn’t “need” them, but they were shielded by a veil of ignorance. And that is almost certainly true with the current generation.
Police, classroom/home helpers and alleviating suffering are highly desirable, add to society, help look after our fellow man, but still represents the consumption of wealth. Highly desirable, but consumption none the less.
In order to pay for these desirable things, society needs to create wealth. The only way to do this is to accumulate productive capital stock. This comes from innovation and efficiently mixing the factors of production and so on, but it must also mean that society must defer some current consumption, somewhere, in order to accumulate economic capital so that we can pay for more of the nice things in the future.
The sheer indebtedness of society in aggregate and the promises made to the current generation that will be paid for by future generations is nothing short of terrifying.
What keeps me awake at night is the fear that this means that we are, net/net, consuming not only income, but valuable (and scarce) economic capital as well.
This should make us worry, surely?
Hi Richard. Your four (example?) statements are interesting because they do not represent government policy, and nor are they particularly likely outomes of the coming public spending round. So where did you get them from?
@Richard: John Scrivens is clearly correct. The dangers of a soft default must be taken into consideration. At no point do you refer to the realities of the bond market, beyond the bland statement that “people want to buy our gilts”.
The issues of increasing yields, rising taxes to meet those yields and rising interest rates as a consequence of rising debt are all massively important.
Also, your argument that interest payments are some sort of public good because the money goes to pensioners manifestly contradicts your stated desire to help the poor (most of whom won’t have a private sector pension).
There is an interesting debate to be had about how much we can borrow and how spending needs to change, but it can’t be held without admitting that the dangers of yield rises and a soft or hard default are important considerations. Your statement “The Uk can’t go bankrupt” is historically wrong (we’ve defaulted twice before), incorrect in today’s context and seriously naive. It undermines everything you are saying about the crisis.
Point (D), I’m not sure what you mean. A great asset for who? The rich to pass on to their kids? Doesn’t seem very progressive.
@alastair
You’re wrong
Police are in the firing line
All local authority budgets are – hence home helps
It’s widely believed classroom assistants are in the same position as the police – especially as they are a last decade innovation of great importance
The last is inevitable if housing benefit is cut for those unemployed for more than a year
@Charles
Krugman, Martin Wolf, Ken Galbraith junior, the markets themselves – none of them give a hint of agreeing with you
This is a straw man with no evidence of any sort at all to support it
Let’s put it another way – it’s a possibility as remote as their being fairies at the bottom of my garden – and as utterly implausible a tale
This blog is dedicated to the real world – not your myths
Just go and check the facts – like US real rates being at very, very low real levels – and that’s despite their commitment to deficit spending
@James Tyler
You confuse financial capital and real capital
To maintain the real value of money you will consign the best capital we have – people – the scrapheap
I call that very very poor economics
And callous indifference to the potential of people and the real economy
Sorry, Mr Murphy, but ‘in the day’ 50 years ago when I became aware of the world, or even 40 years ago when I was at university, we didn’t have any of these things.
We didn’t have as many policemen per head of population as now and we had less crime.
There were no teaching assistants, indeed we didn’t have any except volunteers when my kids were at state school only 15 years ago. It didn’t harm my kids, two of whom went to uni and all four now have successful careers.
We didn’t have have an army of state- and local authority-employed home helps, and nobody was the worse for it. Relatives did what had to be done.
Nobody starved, in fact we probably ate better food and more food than now because we grew our own. Nobody will starve in the future either. If you want to see starving you should have come with on business to India in the last couple of years.
Overall I just simply can’t see where you are coming from. The UK state takes too much money and borrows too much money, and then spends it inefficiently on ‘nice to have’ stuff. It has to spend a lot less so we don’t need to borrow, except for cash flow, and so the private sector, which adds value – unlike the public sector, which destroys value – can move the economy forward again.
Finally, we can shrink the state without any loss of ‘frontline services’. Oh and home helps and teaching assistants are not ‘frontline services’ and we don’t need them because we didn’t have any of them until a few years ago. There are lots of other similar occupations that are simply not frontline and we don’t need those either. I think you’ll find that along with teaching assistants and home helps, if you add in the following you arrive at about 1,000,000 ‘nice to have’ public sector jobs: Conservation and environmental protection officers, youth and community workers, housing and welfare officers, social service managers, senior educational administrators and town planners.
@Chris
Apart from the promotion of an awful lot of prejudice what did you hope to achieve from posting you comment?
And what is your alternative employment or need that these people shoul;d be engaged on – which is the question I asked?
If you have none – if it that you wish them to be unemployed?
@Richard Murphy
Prejudice has nothing to do with it at all and frankly I’m insulted by your suggestion.
My point is simple – we clearly cannot afford jobs that are ‘nice’ but unnecessary, as history shows us. It would be a lot cheaper if these people were on the dole. Dole is far cheaper than the average salaries and pensions most public sector workers are paid.
In any case, I think you’ll find – in the event – that a smaller public sector will mean a bigger private sector that will create many, many more added-value jobs. They just need the right economic conditions and this means less ‘big state’ spending. I’ve lived and worked through five recessions in the private sector (I left school in 1966) and the recessions were not fixed by employing more public sector workers but less. The private sector pulled us out every time.
So they will not be unemployed long because the private sector will need (need now in many cases) people as things pick up, and they will not have to compete with the public sector to hire. On the latter, as an employer, I have found it very difficult to get good people and keep them when the public sector offers salaries, pensions and conditions impossible for any private sector employer to match.
@Chris
First your claim that the dole is cheaper is not true
http://www.taxresearch.org.uk/Blog/2009/07/08/govspend/
Second it is contemptuous of those who you would wish be unemployed – and I am considerably offended at your indifference to them
Third – there is no evidence to support your claim the private sector will pull us out of the inevitable recession. It is a simple myth – and you won’t be able to show otherwise because there is no evidence to support that case
Last – why didn’t you chose to pay decent salaries if you wanted decent people? I never had the problem you suggest – because I always sought to pay well. If you couldn’t make money paying decent wages don’t blame the state – it was you doing something wrong
I am talking about the actual productive capacity of the economy. Machines, raw factors, equipment, knowledge, skills, people and relationships. The detail of wealth generation, not a money number, manipulated and overlaid on to the top of it all.
We can invest in producing stuff that others value, thus ensuring our future. That requires the deferral of current consumption, something our short term driven society seems incapable of doing.
Or we can artificially set the general interest rate at a ludicrously low level, mortgage up every last bit of ourselves, binge on the proceeds, and consign ourselves to a repeat of the 1930s or Japan in the 90’s, and leave our children to repay all of our debts. I regard that as a callous indifference to the potential of future generations.
@James Tyler
See http://www.taxresearch.org.uk/Blog/2010/07/05/markets-are-not-calling-for-deficit-reduction-now-or-later/
Why are you putting forward a hypothesis which is not supported by markets
Why are you demanding mass unemployment that will wreck any chance of recovery and escalate the debt? http://www.taxresearch.org.uk/Blog/2009/07/08/govspend/
Why haven’t you answered my question? What is it that markets will do?
I think that you blog, Mr Murphy, touches upon a very fundamental point that may be missed if one’s concerns are directed to the defence of conventional wisdom; that is that over the last forty years or so the nature of industrial civilisation has changed. As one might expect, conventional wisdom has not caught up with this change yet — indeed it has barely noticed it.
What I refer to is this — for its first two hundred years the industrial revolution was concerned with the production of physical objects to meet physical needs — clothing, furnishing, processed food, then means of public and private transport, and then from the twenties and thirties, labour saving devices and means of home entertainment. It did this by using what would now look like fairly clunking machinery that required constant human intervention and supervision. The more capable its products were, the more complex they were and the more often they needed tuning or repair.
Technology created a demand for labour, and matching the continuously improving efficiency of production found in a scientific and industrial society, new technologies come through which themselves continued to use up the supply of labour (e.g. in the fifties, a whole new trade of television repair men was created).
In the last generation or so the new technologies coming through have been about the supply, organisation and communication of symbolic rather than physical goods. OK, we still need physical goods to access all the information, but with the progress of technology and the increasing importance of intellectual to material content, the effort required to produce such things continuously declines. I suspect that the marginal costs of Ipad or mobile phone production look more like those of book printing than car production in 1960s Detroit or Dagenham. The reproduction costs of the content that runs on these devices might be in effect zero.
The prime good these technologies provide – the content that we access – uses up a limited and un-increasable resource — time. There is a natural – only 24 hours in a day — constraint on our desire for content — but perhaps no effective constraint on supply – reversing traditional economic logic (I would have thought that most people who read and — even more so — comment on blogs would see the truth of this).
So, in developed economies, the old connection between demand for new technology and demand for full time employment may be broken. I suspect that some of our more profound politicians may realise this — but none would be bold enough to say it for it goes against the ‘common sense’ of two hundred years. It would also imply that a study of economics outside of history is impossible — and that would put a few noses out of joint!
As an escape from this problem I can two pieces of ‘stuff’ that we might want:
– more time — that is more years of physically and mentally healthy life — but I can’t see this being much of a source of employment in the near future unless we want to train thirty per cent of the population in medical research;
– or the production of multi tasking intelligent robots that would be able to respond to all forms of human communication. These could then be used in such roles as Police Community Support Officers, class room assistants, home helps, auxiliary nurses etc. On second thoughts, I might in hindsight sound like someone in the 1890s arguing the advantages of the horse over the motor car, but I cannot but wonder if we already have a better and more readily available alternative to such robots, if only we can think outside our traditions.
Given that there is no economic justification for these cuts, we must assume another agenda. Margaret Thatcher also saw wrecking the economy as justification for another agenda ie breaking the unions. In the present coalition, we must assume that it is about breaking the public sector – without regard for the misery and hardship that will ensue. When will the left of the LibDems realise that this is not what they are in politics for?
I’ve just been listening to Gove’s lies to parliament about the need to stop mending secondary schools… so much for Osbourne’s protection of capital projects!
@Richard Murphy
Sorry we have to differ on these, but there you go. In any case, I think you’ll find that the coalition is going the private sector route, although perhaps not to the extent that the headlines suggest. We’ll see if I’m right or you’re right in the next five years.
On competition between public and private employment, one personal example is trying to employ analysts competent in maths and statistics. We tried very hard to find people in the UK, but the government was offering such incredible deals to graduates to become maths teachers, it was impossible. You can’t pay analysts the same deal because clients will only pay a certain rate for their services. In the end we didn’t bother with the expansion we had in mind.
@Chris
Look I’m sorry to say this but this is just tosh
The shortage of decent maths graduates was because the City snapped them all up which is why the government had to respond
To claim this was a government created problem shows a remarkable lack of insight on your part on the reasons for short supply of maths graduates
You did not suffer this problem because the government crowded you out
The private sector did
Sorry – but if that is your power of analysis it dopes not say much for the rest of your diagnosis
Here’s my own list. I propose that we stop spending public money on Official Junk.
Junk Development: money wasted on silly stunts, bungs to trades unions and subsidising developing world corruption. (Note: I know several DFID consultants who are privately embarrassed at the wastefulness of it all). This extends also to EU assistance budgets, which can operate years behind schedule. Far better to run such things through national budgets and prpogrammes, flawed as they are.
Junk Training/Coaching: money wasted on ever-expanding training and senior civil servant psychotherapy, much of it driven by legal fears arising from bogus ‘health and safety’ norms (my doctor friend in the NHS tells me that this is reaching madness levels, and taking doctors away from looking after people).
Junk Consultancy: were the many billions spent by Labour on domestic and international ‘advice’ efficient? No
Junk Propaganda: huge banners draped over EU buildings in Brussels advertising some or other official EU project; EU posters advertising the EU in EU office loos in Brussels; Trot-style posters in Driving Licence offices calling for ‘Smashing Discrimination’; FCO travel advice advertised on the side of London buses; and so on
Junk Education: teachers paid to dumb down standards, so that thousands of children leave school unable even to read properly
Junk Administration: the thousands of people employed in local government offices who make no obvious difference to public services there (according to a Lib Dem local counsellor friend of mine), and who can not be sacked as the annual appraisal system has collapsed under the weight of political correctness
The sheer waste and decadence represented by such things are startling. It can be afforded only by borrowing money from the future.
Richard is right to point to the unhappiness and pain it will cause lots of people (NB not all in the state sector) whose lives have been built round the phoney security of public sector ‘work’ which has no real purpose. But why should these people benefit if the only way to pay for it all is to pass the bill to people not yet born? There is nothing ‘moral’ about this. On the contrary, it’s insane.
I nonetheless would step up the effort put into VAT carousel fraud, a stunning loss of public money running into billions of pounds a year which (as I know from talking to expert people involved) is so large here and across the EU that no government dares talk about it much. No ‘tax justice’ there, methinks.
@Richard Murphy
Richard – What your comment reveals is the mistake the same mistake you usually make – You miss out the Lost Opportunity Cost of public spending.
You ask why we would wish to put these particular people on the dole, and think it harsh that anyone would want this to happen. But you miss the concept that there is no such thing as a free lunch, and certainly no such thing as a free public sector job. Every penny spent on public sector salary must first be taken, on pain of violence, from the purse and wallet of a private sector worker, under the name of tax. Every penny cannot then be spent by that private sector worker on a purchase of her or his choice. That choice is removed. That stimulus that the worker would have given, in buying the most benefit that their own decision could choose, is gone.
If a worker can keep more of their own money, to spend on things that person actually wants to spend it on, then of course there will be a stimulus, and of course that will mop up some of the ex-public sector employees into private sector jobs.
You mistake the opinions of the libertarians (and those of the right wing) for a dislike of people, whereas actually it’s a faith in the people, and a trust in their own ability to choose the most cost effective use of their own money, that drives us.
Public sector money does not grow on trees. If it did – go on – use fivers to light bonfires, be my guest. But actually it has to be taken from someone else first.
@Martin Audley
I’m sorry – but you’re plain straightforwardly wrong
Your really need to learn about money
Start here http://www.taxresearch.org.uk/Blog/2010/07/05/markets-are-not-calling-for-deficit-reduction-now-or-later/
And you still don’t answer the question – what do people want instead of the things I list
And why will they be better?
Is it because you can’t?
@Charles Crawford
I gather you were a diplomat for almost thirty years
You took a good salary, a gong, a big pension and no risk at all and now you show contempt for the state you chose to work for
Is it regret on your part at the life you must have wasted by your own definition that makes you so bitter?
I have always been an entrepreneur in contrast
It’s why I so greatly value what the state does – precisely because I understand what business cannot do
[…] am bored, mightily bored, with the argument that goes along the lines of a commentator here this morning who said: Every penny spent on public sector salary must first be taken, on pain […]
[…] am bored, mightily bored, with the argument that goes along the lines of a commentator here this morning who said: Every penny spent on public sector salary must first be taken, on pain […]
xxxxxxx is a broken up britain, where public sector functions are sold off in a firesale to create a set of tollbooth monopolies based on the necessities of life.
You can see it in Greece and Italy already, and the RAC’s (its charitable subsidiary at least) helpful idea to privatise the roads yesterday must have been sweet music to George and Daniel’s ears.
It has the pleasing benefit of transforming drains on the private sector into sparkling value added activity at a stroke.
@Richard Murphy
You refer again to this “analysis” of yours which forgets to mention that the cost of the public sector employee’s salary is no longer paid when he is made redundant. That’s a £25k saving which you completely ignore.
The quality of the “reports” that you produce which somehow find their way into the media through lemmings willing to pay for them such as the TUC are, frankly, most of the time no better, and frequently worse, than 6th form essays.
I’m pleased to say the quality of your reports is now being increasingly questioned around the blogosphere and web generally as people wise up to this fact.
There is also a major arithmetical error in your Tax Gap report which I can refer you to should you wish.
@Richard Murphy
You have not responded to the point raised and have immediately made an ad-hominem attack.
I had already answered your question: “xxxxxx” is whatever each individual, now able to spend their own money, will choose it to be.
@Martin Audley
I did not make an ad hominem attack
I said you were wrong end evidenced why
And I repeat – you have not answered my question – you have simply avoided it
In other words – next time you try to comment at this level I’ll delete what you say as you are not contributing to debate – you are trying to point score (very badly) and that is very, very tedious
@Peter
I think it’s you who has the basic maths problem
I say each job cut saves only £2,000 or so because I take into account the £25,000 saved and take off the £23,000 cost
Hard to see how anyone could have missed that
But if that’s the analytical power the blogosphere is bringing to bear no wonder serious people are taking the reports so seriously – because they see they are so far ahead of the pack
Which may be why the Treasury just called me….
@Richard Murphy
Oh dear, here you go again. Assembling a few wisps of ill-informed rhetoric into a fake straw man.
Having worked for HM Government for nearly thirty years (including for your information at some personal risk to myself and my family in post-communist Russia and post-conflict Bosnia – details available on request) I am baffled by your assertion that I am ‘bitter’ and/or that I ‘show contempt for the state I chose to work for’.
It is precisely because I care about preserving the values of a modern democratic state that I am annoyed and revolted by wasteful state/EU spending (much of it in effect corruption-lite bungs to the government’s political allies), and above all by the theft from the taxpayer of literally billions of pounds through VAT carousel fraud.
You undermine your credibility by making trite ad hominem remarks at readers who disagree with you, especially when they have specific inside knowledge of issues you yourself are raising such as the merits of government spending.
One good answer to all your xxxxxxx questions is “… because I want my country and its institutions to live within their means and not run up unsustainable national debts. Some public goods are indeed good – but for now they may be unaffordable or need to be carried out in different, more flexible ways.”
@Charles Crawford
I’ll believe you
But you’re obsessed with an issue admittedly relating to crime that is small beer compared to the real issues in the tax gap representing less than 1% of that gap in the UK
And your economic understanding is profoundly flawed
As is your social analysis
Both of which as a result make what you have to say seem remarkably ill-informed
And you’ll just have to believe me when I say that