Wednesday, May 06, 2009

Sure, cut public spending and reduce taxes ... then what?

I'm not going to claim that I'm an economic genius - half the time I either don't know the meaning of various economic terms or mistake them for something else - and I know I don't have the cute turn of phrase or eloquence of many conservative bloggers out there, but I really get fed up with reading some of them who insist that all we have to do is cut public spending and reduce taxation to restore guarantee our economic future.

The thing is, although both these things are desirable in my book, neither was responsible for the mess we now find ourselves in. It wasn't the rise in public sector spending that caused the credit bubble and it wasn't high taxation that resulted in the debt mountain - so how exactly are reductions in these things supposed to prevent the problem happening again?

As far as I can see, all you will do by reducing taxation and spending is redistribute the way the debt is managed - robbing Peter to pay Paul. It does nothing to solve the underlying causes of this recession or to address the possibility of it occurring again. On the contrary - without action elsewhere it merely reinflates the credit bubble again. Less taxation means more spending power which means more demand for credit.

The Tories talk glibly about learning to "live within our means" as if that means something to them. All they are really suggesting by that is a minor reduction in public spending relative to GDP - but the last time I looked public spending was considerably less than GDP anyway - it's an irrelevant comparison and GDP is a really poor benchmark to use.

The essential point for me is consumer spending and where, ultimately, that money ends up. Because the vast majority of it ends up going out of the country. You might buy a Sunderland built £15,000 Nissan from a local dealership - but where, ultimately, does that money go? A small portion goes to the dealership, some goes back to the factory, but most of it goes back to the parent company who is in Japan.

The real problem for the British economy is the trade deficit - this is really what it means when we talk about a country living beyond its means.

To give an idea of the scale of a trade deficit, the figure is typically compared to the country’s Gross Domestic Product (GDP) – the total value of goods and services produced in a country in a year. Britain’s trade deficit was £60bn in 2006, or 5% of GDP.

[A]ccording to investment guru John Mauldin, no country has “ever run a deficit of more than 5% without at least a 30% drop in the value of its currency”. This is simply due to the fact that the more that imports outweigh exports, the greater the demand for foreign currency over the domestic one. Recovering from a large trade deficit or collapsed currency is a painful experience for a country. The recession in Britain in the early 1990s was largely due to huge deficits built up in the 1980s.

Nothing I have seen proposed by the Tories or most conservative bloggers addresses this fundamental weakness of the British economy. If the Tories - or anybody else for that matter - really wants to start sorting out the problems of the British economy we need to get back to the point where we have a trade surplus - we have to start making things again.


North Northwester said...

Other measures are needed; British industry is burdened, as in days of yore up to 1979, with regulation: most of it European in origin but zealously enforced by federast bureaucrats here.

All that needs to be junked.

It won't because it's mandatory under our various treaties with the 'colleagues' and Mister Cameron isn't going to take us out of the EU. He's as bad as traitor Heath.

Then there's a Welfare State that finances and promotes idleness and takes capital out of wealth creation and puts it into wealth-consumption: booze; recreational electronics; tobacco; designer clothing and drugs. Almost all of these goods are foreign sourced and are the mainstay of the underclass's material existence.

Social conservatism to the rescue: workfare but not welfare. Stoop labour needs to be reintroduced - cheap and simple in preparing the ground [quite literally in the case of clearing brownfield sites] and in filling new or reclaimed factories. You want protectionism, so how about this for an idea - franchising out groups of unemployed to private companies charged with reclaiming old or building new pre-fabricated factories to then house and employ them in simple manufacturing of household goods or building materials and to be paid lower rates of pay than hitherto.

Undercut union rates and reintroduce lower wages and insist on them working - the workhouse with a 21st Century spin.
It'd teach the underclass the habits of work and punctuality - for the first time in generations - and produce goods here in Britain instead of sending the profits abroad.

We're already screwed, and if we're going to be saved from Labour's economic mess, then this is slightly more possible than the Tory party cutting out its rotten federast cancer.

And a vote-winner amongst the employed taxpayers, too.

Stan said...

I agree that other measures are needed - and withdrawing from the EU is the first of those.

I do want protectionism, but I want clear, transparent and simple protectionism. That's the trouble NNW - virtually every other country in the world HAS protectionism, but they do it in covert ways to disguise the fact it is protectionism.

All I want are simple trade barriers and tariffs. That then gives you leverage to negotiate trade agreements with other nations and make use of the comparative advantage which free market globalists seems to be some sort of God given right of Britain.

It ain't. Comparative advantage depends on you having something someone else wants. The globalists seem to think that is "services" - but why the hell should someone in China pay us for a service they can get for less and just as good in China? Nor does it come from our skills - those are declining while other developing nations are fast catching up and most likely overtaking us. We do not have a comparative advantage anymore.

The only way we can get one is by building up our manufacturing and production economomies - particularly things which the world needs such as coal and steel.

People have to understand that the credit bubble didn't just happen. It is the inevitable result of globalisation. This led to huge increases in cumulative foreign debt and trade deficits - particularly in the US, but the same here on a smaller scale - and that creates the credit boom. The banks were at fault for trying to cover up the extent of the credit bubble by finding new ways and customers to drive the flow of money, but they didn't create it themselves. It is a result of globalisation.

I can't explain all this very well - I'm aware of that - but I know what I mean.

I'm not opposed to public sector spending per se - just how it is spent and what on. Right now I think the government should be spending more - but spending it on things that will address the real issues we have to deal with in our economy - producing something.

The government talk about spending big on capital projects - OK, let's do it. Let's spend it on opening old coal mines and starting new ones. We have masses of coal and there is a demand for it. Let's renationalise our steel industry and start opening new steel plants. At the same time as that, let's order some new ships for the Navy and build them in British shipyards using British Steel made with the help of British coal. Let's buy Vauxhall Motors and pull production of all Vauxhall/Opel models into the UK.

All these things will produce something of value which we can sell or use - either internally or abroad. Knocking down one school/hospital and building another school/hospital will not.

Blognor Regis said...

Check the first para here:

David Vance said...

I am opposed to public sector spending but agree with the thrust of NNW's points.

North Northwester said...

The point of workfare/outdoor relief of this sort is that the money's being spent anyway - on Income Support or Jobseeker's Allowance, Housing Benefit and Council Tax Benefit, Child Tax Credit and Child Benefit - but why not at least get some clothes pegs or clothes horses or prefabricated factories thrown up at no further cost in return?

The meat people-carriers and dole lords need to be occupied as well as provided with subsistence and housing. They could learn other skills and attitudes of mind along the way, and the providing companies need not employ welfare-recipients one, say, the third child reached five.

All child-related benefits and the like are to end with the third child of each mother for reasons I've discussed elsewhere.