“Or are they instead motivated by silly fears about the national debt and by a hatred of public sector workers and benefit claimants?”

And the expert on Rhetorical Questions returns…

I have never quite understood why we measure the size of the state by the amount it spends. Surely the point about people who believe in a smaller state is not necessarily that they should simply want spending cut by X%, it is that they think the state has decided to undertake too many tasks that could be better done elsewhere.

So therefore the task to reduce the size of the state isn’t so much about arguing for spending reductions. It is about arguing which tasks the state should no longer be doing/funding.

But the logical counter to this is that when we do agree on a function the state should perform (to pick an uncontroversial one – enforce law and order) then we have to also agree the state should spend whatever it takes to ensure the fucntion is carried out correctly, and thus to raise the amount necessary to pay for this through taxation.

And the current state of the economy is largely irrelevant to this kind of debate.

There are a few problems with your arguments:

1. Just because cuts are made quickly does not mean they are the wrong ones. However the argument you use in relation to bottom up information is more market mechanism, than cerntral planning. That is precisly what a market provides and by each person pursuing their seperate interests they benefit society as a whole by producing a good or service that someone needs. By abandoning this we have landed in the trouble.

In any event, what you are saying is not correct about the cuts being too quick because there have only been a tiny amount of cuts so far. In fact, government spending has increase by 0.7% in the last year. That suggests that the cuts that are planned have not been done quickly as you claim, but actually quite slowly.

2. But our entire economic spending has been wrong on Keynesian grounds for the last 15 years, and you very much misunderstand Keynes if you think that his contribution was just through lobbying for stimulus. Cuts when the private sector is in a bad way however is not damaging. In most cases it is because of the govt presence in a sector that the private companies struggle. What we need is the govt to exit these sectors and allow the private sector to expand into them. We also need a lessening of regualtion and taxation to enable private enterprise to become more productive, employ more people and enable those people to buy more products using money that isn’t being taken away anymore by tax.

As for the last sentence of point 2, I have no idea what you are saying, and I dont think it actually says anything.

3. You confuse the current crash with previous…We are not talking about 5 year cycles in this instance, and what you graph does not show is government expenditure as a percentage of GDP, and the GDP itself. The graph really shows very little, and certainly not what you contend it does. So you claim that prudence has not been a habit in the past, but then we have rarely been forced in the past have we?

I think this fails to appreciate what has actually caused and happened during this economic crisis.

@2

Would be good to hear what you think is the cause of the current crisis.

”What we need is the govt to exit these sectors and allow the private sector to expand into them. We also need a lessening of regualtion and taxation to enable private enterprise to become more productive, employ more people and enable those people to buy more products using money that isn’t being taken away anymore by tax.”

On the point of Tax, I though this was spent by the Government so the notion that somehow Tax is taken out the economy is disturbing.Maybe you could explain?

The evidence is that companies are not expanding into areas where Government maybe attempting to retract except for industries where the Government is underwriting the endevour for example in Health care provision.

Moreover, these companies are looking to make a profit and are unlikely ever to match employment levels caused through the retraction of the Government.Also wages inevitably drop whilst the profit motive will tend to reduce spending in the wider economy.

Further the Government sector tends to be more labour intensive as opposed to capital intensive so the idea that companies will ever make up the shortfall is questionable; Sadly another inhibitor on the economy.

@2

Cuts when the private sector is in a bad way however is not damaging.

The empirical evidence of the last 3 quarters and the GDP contraction we’ve seen proves you’re wrong.

What we need is the govt to exit these sectors and allow the private sector to expand into them.

No we do not.

In many cases public goods are most efficiently and effectively delivered by the public sector.

what you graph does not show is government expenditure as a percentage of GDP, and the GDP itself.

Precisely because they’re irrelevant.

Sweden does very well spending 50pc of its GDP through government.

Nothing suggests the UK could not achieve similar outcomes.

Without wanting to spend 20 pages saying what I think caused the crises I would sum it up as follows:
(i) Artificially low interest rates fueling a house price explosion, and lending to parties unable to pay for mortgages because credit was so cheap. (ii) The subsidisation of mortgage lending (ie, Fannie and Freddie), pumping trillions of toxic debt onto the markets to be sold around the world as CDO’s. (iii) Banks buying said CDO’s not understanding what they were actually buying and dealing in products they didn’t understand. (iv) Govt bail-outs of institutions when they should have been allowed to sink. In the case of banks, stripping out savings and mortgages to be sold off, letting the rest of the ship sink. No more rewards for failure.

“On the point of Tax, I though this was spent by the Government so the notion that somehow Tax is taken out the economy is disturbing.Maybe you could explain?”

You are right, tax is not ‘removed’ from the economy. The question however is not whether it is removed, but how it is spent. Governments spend money very inefficiently. Take quangos for instance, 60bn a year is spent on these, most of which we would not suffer without. The problem with tax however, is that you are taking money out of the productive part of the economy, and given it to unproductive part. This stifles development and growth, it doesn’t help it.

“The evidence is that companies are not expanding into areas where Government maybe attempting to retract except for industries where the Government is underwriting the endeavour for example in Health care provision.”

I would agree with your underwriting point. Govts shouldn’t underwrite industries though. If an industry cannot survive on its own, there is a reason…it is unviable. But again, we are taking the money from a productive part of the economy through taxation and we are handing it to a less productive part, causing higher rates of unemployment and lower productivity.

“Moreover, these companies are looking to make a profit and are unlikely ever to match employment levels caused through the retraction of the Government.”

That simply proves the point that govts are not employing efficiently. Too many cooks in the kitchen, by simply hiring more and more people. The profits pursued by the private enterprise are the reason the company is incentivised to do the job in the first place. Profits are not bad. Profits provide a means of increasing employment through expansion, increasing innovation through investment, increasing savings pushing up investable capital. All the while providing the incentive to continue to grow and develop. It is also important to remember that companies don’t pay tax. People pay tax, and the tax burden of corporation tax falls in one (or combination) of three ways. (i) Lower wages for workers because there is less to pay the worker, (ii) lower rates of employment and there is less capital to expend on growth and development, (iii) higher prices for consumers as the cost of the tax is passed on.

“Also wages inevitably drop whilst the profit motive will tend to reduce spending in the wider economy.”

But they havn’t. Consider Hong Kong, perhaps one of the most free economies. They have seen an increase in wages (they are now well ahead of England), and their growth continues at a far quicker rate than the UK. Also, profits will not reduce spending in the economy. Profits don’t simply sit in big heaps on tables, they are either reinvested to grow the company, or spent in the economy providing revenue to other businesses.

“Further the Government sector tends to be more labour intensive as opposed to capital intensive so the idea that companies will ever make up the shortfall is questionable; Sadly another inhibitor on the economy”

The government sectors are only really more labour intensive because they want them to be. It is easy to use public sector industries to manipulate employment figures, without having to make any really structural changes to the economy to promote private sector employment. However, I would disagree with the statement that govt is more labour than capital. Just over 6m people are employed in the public sector, versus 23m in the private. Yet government collect taxes that account for 50% of GDP. Certainly seems capital heavy to me, but also points out the shocking inefficiency with which the government uses resources.

@4

“The empirical evidence of the last 3 quarters and the GDP contraction we’ve seen proves you’re wrong.”

But cuts havn’t taken place yet…govt spending is 0.7% higher than last year, and in fact at no point has government spending gone down yet since the new govt. So the suggestion that it is the cuts that have caused the drop in GDP is simply misconceived.

“In many cases public goods are most efficiently and effectively delivered by the public sector.”

Yet, in all of those cases there is no private sector to compare it to. So you are extrapolating an answer where there is no evidence.

“Sweden does very well spending 50pc of its GDP through government.”

You have to put things into perspective. Firstly, Sweden has done better as it has started to drop its govt expenditure. Secondly, Sweden is far less socialist than the UK. I commented on here a little while back that the idea that Sweden is a socialist utopia is a fallacy. They have no minimum wage, they have a private transport network, private power supply (mostly from German companies), they stopped using agricultural subsidies in the early 1990′s, they have a large private health system (the biggest hospital in Stockholm is private), they broke up state monopolies and outlawed them, the telecoms industry was privatised, corp tax is a comparitively low 28%, and they have school vouchers promoting competition in the education system and enabling people to send their children to any school they want, not the one the govt dictates to you based on where you live.

@5

All good stuff I think I can learn a lot from you.

Ok I understand the issue regarding Credit Default Swaps.
Personally I wasnt impressed by Hank Paulson’s role in Macand May either without which a lot of American debt would not have been accrued by the American Public,but thats by the by.

That aside, do you have a view about the continuance of CDS’s and for that matter rehypothecation in undermining the monetary position of the UK. My understanding is that hypothecation is limitless in this country. Is that sustainable in your view and what if any long term impact do you see this will have in terms of stability.

I get the Bacon Etlis reference but are we in that territory at the moment. Yes the Government might be inefficient but they do put money into the economy. Surely the assumption that human resource will be taken up by private enterprise is not at all evident. I dont necessarily find that surprising. Skill set mismatches are going to be an obvious economic impediment I would have thought.

In that environment isn’t the idea of downsizing ultimately deflationary.

I dont know anything about Hong Kong but I am aware that many private take overs (private equity companies for example) make their money out of stripping assets and lowering employment terms. I cant see how that will aid the economy since it must have a knock on effect on demand.

@7

Profits don’t simply sit in big heaps on tables, they are either reinvested to grow the company, spent in the economy providing revenue to other businesses.

Surely that could read spent in AN economy providing revenue to other businesses. Consider the case of Kraft and Cadburys,Boots, Holland and Barratt etc etc.

Moreover the marginal propensity to spent decreases with affluence so to really get the economy going shouldn’t more go in wages AT THE MOMENT .

Wow, a lot going on. A few things, as I notice my comments are getting longer and longer.

I wouldn’t mix the CDO and CDS, except where there are synthetic CDO’s. The CDS’s were a time bomb in my opinion. The problem is I think that swaps are tools that a lot of people play in, but very few understand (I don’t profess to know everything about CDS’s). The problem with the CDS market as I see it was the size. Some believe that it grew to as much as $60tn, yes that trillion, not billion. The slightest move in the wrong direction was going to hurt a lot of people. But while a shift would have hurt investors, some pensions, and other silly bu**ers, the harm would have I think been more limited than what happened in this instance. The CDO (where backed by loans and bonds, instead of CDS’s) presented a more structural problem. The losses of CDS’s could in essence be contained, but the losses presented by CDO’s represented real people, real peoples houses, and real peoples livelihoods. This had moved out of the realm of a complex financial product, and started repossessing homes that were now worth nothing.

I think it stems to the view pushed in the early 90′s in the States that everyone should own their own home, and while Clinton is credited with giving everyone a home the impact of flooding the market with cheap credit pushed the prices of homes up, but the rise was unsustainable. I saw an astonishing fact the other day which was that by the year 2000, the US government through the Dream down payment act, and the loosening of mortgage deposit requirements that had been pushed onto Fannie and Freddie meant that 3tn in below median loans had been made. This was political tinkering at its worst. Before this, it is hard to believe, Fannie and Freddie were actually quite profitable. But as you say, whats done is done.

Rehypothecation is worrying I think. The problem is that it behaves like a ponzi scheme (not suggesting it is, but is similar in behaviour) in that so long as markets are settled there isn’t going to be a problem as movements of obligations (in a debt sense) are relatively small, but as we saw in 2008, it can fall on its face. I think it can continue as a practice so long as something like living wills for banks was introduced, and where that living will ultimately protected the mortgagor as a primary creditor so to speak, but the rates for the rehypothecation would have to be allowed to rise to represent the unsecured risk. Whether you cap % like the states or let the rates represent the risk will, I think, achieve pretty much the same result, but I would not be in favour of regulating where the market can adjust to represent the risk. I would of course regulate against manipulation however.

The lack of producers is a problem. I think it is one thing that has assisted a country like Switzerland. They were very careful to insure they kept their economy (in terms of # of people employed) at 1/3, 1/3, 1/3. In other words, a third in agriculture, a third in manufacturing, and a third in tertiary. I think they may have created some more problems for themselves in the methods they used, but overall it has been quite effective. My argument though stems from incentive. If we want an efficient private sector to take up the task (and they will if there is a profit to be made), then we have to allow them to compete. Take away govt grants and subsidies which prefer one company over another and restrict markets and have an economic landscape where if you produce a good product for less than your competitor you grow. Hong Kong, as I mentioned has this system, they currently have 3% unemployment.

I would agree that the labour market is mismatched, but having the govt provide jobs is not going to fix that where those workers still have the wrong skills. All we are going to do is cost the public more to implement a system which can’t pay for itself because you can’t extract sufficient taxes out of an unproductive work force.

There will always be asset strippers, but my argument is that where you are in an economy that promotes investment and saving the capital need not leave. Added to this, where there is lots of entrants into a market, labour forces are not so tied to one company and actually this has the effect of increasing employment standards because a worker can so easily leave for another position.

“Moreover the marginal propensity to spent decreases with affluence”

But the marginal propensity to invest increases. The supply side of the coin.

@9 Freeman

Double wow! Thanks for such a comprehensive reply.

It occurs to me that the British economy is currently a bit like steering a motor boat without the engine on.

I can see that what you say makes sense; to restructure the economy ,even if not on the Swiss model then certainly away from the reliance on the financial sector and towards,if not metal bashing,innovation.

What I don’t understand is how losing people to the dole queue can be regarded as anything other than totally inefficient.

I suppose the question is how do we restructure ,or indeed can we restructure when UK investment is low,existing capacity is high and under utilised and domestic demand low. Not to mention the continuing drag of the Euro saga.

Maybe you are a man with a plan but frankly I cant see structuring ahead, just a slump. Ultimately, this turnaround will need many years and a ton of investment. Despite sizable aggregate surpluses UK investment still is in the doldrums.

That only leaves Government in my mind.

@10

“What I don’t understand is how losing people to the dole queue can be regarded as anything other than totally inefficient.”

It is awful. What we have to do though is get the private sector to create jobs by actually coming here. Cases like GSK and Bombardier are key examples. Companies like this provide huge numbers of jobs, but they have to want to be here. That means that the govt can’t swipe half their profits, and they can’t regulate to the point where innovation is squashed. The Swiss created their whole IT industry in about 10 years by offering tax holidays, and minimal set up cost. Nearly 200,000 people now work in the industry and all have jobs and income which is spent in the economy.

I think the point I am making is that we need to move away from relying on the govt to produce jobs or income, whilst constantly reducing the available capital and incentive in the private sector. That just leads down a very slippery slope.

There are sizable surpluses, but the question is why would anyone use it now? instability, high taxation and regulation, uncertainty, lack of direction or plan from the government. Much easier to simply sit on the money and ride out the storm.

But I whole heartedly agree that the govt has no plan, but no party has a plan. They are all too busy playing the political game to worry about what is actually happening or do anything about it. The same situation has arisen in the USA. It makes sod all different whether its Romney or Obama, and while sites like this like to shout for their ‘team’, the reality is that it simply plays into the hands of the political game.

I also see years of slump, but I don’t see govt intervention as providing any answers. Only selective ‘schemes’ to try and win the next election.

Freeman @ 9

Thus spake the good old Libertarian, completely bat shit crazy and as equally as clueless.

Governments spend money very inefficiently. Take quangos for instance, 60bn a year is spent on these, most of which we would not suffer without.

Have you an ounce of evidence for that statement?

The problem with tax however, is that you are taking money out of the productive part of the economy, and given it to unproductive part.

How’s that? Surely every part of the economy is productive? How can a government spend billions of quid a year without creating a single private sector job?

Anyway, your whole fucking premise is flawed because if the council pick up rubbish that is supposed to be ‘non productive’ but if they farm the job out to the private sector and hey presto! Emptying bins has now became productive! Bullshit, it is the same rubbish, the same lorry and the same people, all that has changed is the relative proportions of where the revenue goes.

You know how many ‘private’ firms in this Country that exist entirely to suck public money out of the tax payer? Are A4E and G4S ‘productive’ parts of the economy?

What we need is the govt to exit these sectors and allow the private sector to expand into them.

Do you fuckwits live in the real world? How can that possibibly make sense? How does the Govt crowd out anyone from the market? Can you think of any real world examples of what you mean?

No, not would like it to mean, but actual real examples of real things that are happening today that the free market would have been willing to provide, but cannot because the government are so fucking good that the free market cannot compete with it?

Anyone can build a hospital for example, but you cannot create a market for people who are too poor to afford health care to fill that hospital.

Try and grasp this concept for once in your worthless life.

WE INVENTED THE NHS TO PROVIDE HEALHCARE FOR PEOPLE WHO WERE NOT ABLE TO AFFORD IT. THE ‘FREE MARKET HAD HUNDREDS OF YEARS TO PROVIDE THE POOR WITH DECENT HEALTH CARE AND IT DID NOT DO IT. EVERYONE TAKES HEALTHCARE FOR GRANTED NOW BECAUSE THE GOVERNMENT STEPPED IN TO FILL A VACUUM THAT THE FREE MARKET LEFT< NOT THE OTHER WAY ROUND. SAME WITH EDUCATION, SOCIAL HOUSING ETC. THE PRIVATE SECTOR WOULD NEVER HAVE CREATED THESE THINGS FOR PEOPLE TOO POOR TO BUY THEM THEMSELVES.

Fucking grow up and read a book, son, you are making a twat of yourself.

@12

Firstly, your unnecessary use of expletives suggests an inability to readily express yourself. Lets consider a few of the points you raise however, although I do feel like I am trying to have a discussion with a petulant child.

It is really unnecessary to have to ‘prove’ something every time you make a statement, otherwise every comment would be filled with links, of which I see none ‘proving’ your assertions. Lets pacify you however.

http://news.bbc.co.uk/1/hi/uk/8135460.stm

There is the link for the amount.

https://docs.google.com/spreadsheet/ccc?key=0AonYZs4MzlZbdG00RHhvbzBRdERyRU9FQzFGQUp1VWc#gid=0

There is the link for the list.

“How’s that? Surely every part of the economy is productive? How can a government spend billions of quid a year without creating a single private sector job?…it is the same rubbish, the same lorry and the same people, all that has changed is the relative proportions of where the revenue goes”

What you are looking at is the provision of the job, and not the cost. The cost of providing that job is the relevant factor. You are correct to say that all spending is productive to some extent, but we have to look at which is more productive. As I said above:

“Just over 6m people are employed in the public sector, versus 23m in the private. Yet government collect taxes that account for 50% of GDP.”

Now I appreciate that the government may have higher capital expenditure and therefore expenditure would be higher. However, not 4 times the cost per job created.

A few real world examples though as you seem unable to appreciate what has been said above. The healthcare system in Switzerland is 95% private. Do you see people dying on the streets of Switzerland? no, you don’t. Why is this? A great deal of the reason is that people are taxed less, and therefore have more disposable income. There is also regulation in Switzerland requiring individuals to hold health insurance. So using this extra money they pay for health insurance. There is also a public system of care, but it is tiny because it is means tested for those that really have fallen between the cracks.

You see healthcare in this country is not free. You pay for it through NI (and income tax as NI is not ring fenced). The correct question to be asking is which would you prefer as a choice? Have the govt take your money away and then dictate to you where you will receive treatment. Or, keep the money, purchase health insurance and then choose where you are to be treated. So again, your accusations of stupidity really don’t go very far as Switzerland has the system you berate and they have a higher standard of healthcare.

You also jump to the conclusion that I would have ‘no’ public funded health system. This is nonsense. There is an argument for an NHS system, but I am suggesting that it is 10% of the size it is. It is also curious that according to your version of the NHS, life didn’t exist before 1948 in the UK, and the NHS was only widely available in the early 60′s. So again, expletives aside, your statements don’t add up.

Finally, I am not your son. You don’t have the eloquence, character, or charisma of my father. Should you pursue the “read a book” line, you will embarrass yourself more than you will me.

Freeman ‘ 13

It is really unnecessary to have to ‘prove’ something every time you make a statement, otherwise every comment would be filled with links, of which I see none ‘proving’ your assertions.

Yeah, a link to a Tory making the same assertion as you and a list of Quangos proves nothing. You have asserted that that you could remove all of these Quangos and most of us would not suffer. That is a very bold statement indeed, you now have to prove that removing most of those quangos would have no effect on most of our lives.

So, I ask again, can you prove that removing most of thoseQuangos could be closed down without making a dent in most our lives?

Now I appreciate that the government may have higher capital expenditure and therefore expenditure would be higher. However, not 4 times the cost per job created.

Oh, for fucks sake, why do we have to through this EVERY fucking time? How many of those private sector jobs are created by public sector spending? How many houses, cars and clothes are bought by public sector employees? How many shops are kept afloat by pensioners and benefit claimants? You want to cut benefits? Fine but remember to sell your shares in Tesco’s first. People like you complain about gold plated public sector pensions, but those gold plated pensions don’t get flushed down toilet, they are spent in the economy.

How many private sector jobs are created by the provision of roads? How many jobs are created by the existence of an educated workforce? How many employers require minimum qualifications for given jobs? How many jobs are created through the need to adhere to legislation? The effects (positive and negative)are endless. Simply looking at two figures is stupid.

You see this is the type of simplistic nonsense you people come up with. You assume that if you cut everything, everything else would stay the same. If someone who earned twenty grand didn’t have to pay income tax then he would still earn twenty grand. Fucking nonsense, of course, but there you are.

As I said, read a book. Start of with the beginning of the National debt. What was the money used for, what effect did that demand have on the Country iron foundries and ship builders. What happened to the wages these men were paid etc? See if you think it had a positive effect on the wider economy.

Freeman:

Like every other person of your ilk, you dodge the fundamental question.

You can always get an audience by saying “we should cut government spending” but this can only, I repeat only, be done by cutting government functions (absent minor tinkering and efficiency savings). What do you think the government is doing now that it should not be doing, and have you any evidence that it can be done better or cheaper by the private sector other than blind prejudice.

You failed to answer the question posed by Jim as to why the private sector failed in the past to provide universal health care (on this issue the only universal (at least within an organisation) were the communal schemes such as the Great Western Railway’s medical funds (used as a model for the NHS) and differing from the HNS model only by being contribution rather than tax funded) and housing etc.