Wednesday, April 07, 2010

Money and the economy

Inspired by the excellent Fat Bigot and the squabbling on Question Time, I'd just like to add my two penneth worth to the argument on National Insurance.

In particular, I'd like to concentrate on the issue of "taking money out of the economy".

The Tories argue that increasing National Insurance will "take money out of the economy"

Labour argue that reducing the tax take for the government will "take money out of the economy"

They are both wrong. Before I go on, I'd just like to point out that of course I favour lower taxation and of course it promotes jobs and growth - but that isn't the point here. We're talking about what "takes money out of the economy" and the truth is that neither a NI increase or an NI reduction takes money out of the economy.

If you leave NI the same then the money stays in the economy in the form of money in the private sector (from where all money comes from) in the pockets of employers and their employees.

If you increase NI then the money still stays in the economy - it just goes to a different set of pockets. Either way, the money will remain in the British economy. You can argue that one use of the money is better than the other - but not that one way takes money out of the economy.

The only way money leaves the economy is if it leaves this nation and every year we "take money out of the economy"- billions of pounds - and hand it to the EU who graciously allow us to have a little bit of it back - but not much.

The biggest way to "take money out of the economy" is to run a trade deficit - and we've been doing this for decades. Every year 5% of our GDP is taken out of our economy in the form of the trade deficit. Even in years when our economy is growing at a decent rate this is usually over and above the level of growth by 2-3%.

In other words, even if you grow your GDP by 3% per year, you are still losing 2% of the money out of your economy. It's not like the money is lying dormant somewhere or just not being put to the best use - it has gone. For good.

When money is leaving your economy faster than wealth is being created then you have two choices. First of all, you can resort to debt - which is what we have been doing for the last 20 years to support the fallacy that was our "economic miracle". Well - we all know where that ended up.

The second choice is to print more money - which is what we've been doing for the last year or so - but that is just storing up inflation which is yet to hit us, but inevitably will.

There is a third option. You can reduce your trade deficit or, even better, run a trade surplus. However, that requires some sort of commitment to protect and preserve your national industries - particularly manufacturing.

But no one wants to do that.


They will - eventually.


TheFatBigot said...

Couldn't agree more Mr Stan.

We've both written before about the way the balance of payments has dropped off the political radar. It must return one day and the sooner the better.

Antisthenes said...

You are quite right in observing that the increasing or lowering of taxes has no effect on the supply of money in the economy. Either our politicians are totally ignorant of economics or they think the general public are. In which case if the former what are they doing running or aspiring to run the country and if the latter they are being patronising and totally misleading the general public .

The actual argument should be who are best placed to use the money the public sector or the private sector. Also will it or will it not mean less money to pay for public services.

The private sector always uses money more wisely and more efficiently than the government so that part of the argument is easily winnable by the Conservatives. The second part of the argument is harder to define, in theory taxing less is self-financing as it promotes wealth creation. However will it create enough wealth to cover itself, probably not in the short term but because it will in the long term it is desirable. The alternative is forever to starve the private sector of funds to pay for the public sector, which means eventually wealth creation will cease to be the means of paying for public sector. So the protection of the public sector at all costs at the expense of the private sector will be self defeating and services will be eroded anyway. Better to rebalanced the economy in favour of the private sector now or permanently destroy both the private and public sector later. It does not need to be done in such a way that is that painful, front line services need not suffer that much or at all. The government needs to grasp the nettle and make radical changes to how the public sector provides services and are payed for and cut away all the excess fat that is the proliferation of non and unnecessary jobs. The down side of course is that unemployment will rise as these public sector workers are thrown onto the labour market. Better the fat cats suffer than the country as a whole and it would only be for a relatively short time because as the private sector becomes revitalised job opportunities will emerge.

Stan said...

It's a very curious thing, FB - almost like there has been some sort of conscious effort to ignore the balance of trade in recent years. I remember listening to my dad's conversations with his work mates back in the sixties at the local British Legion. They talked about inflation, the value of the pound and the balance of trade - they never mentioned GDP growth or the FTSE100. I mean - those of us who were around then all remember the high rates of inflation in the 1970's, but who remembers that GDP grew by more than 7% in 1973 or that the years immediately preceding Thatcher's win in 1979 were markd by consistent growth above 2%?

Antisthenes - we certainly need to rebalance our economy between the public and private sector. With the public sector now accounting for more than 50% of our GDP we are in a death spiral!

We also need to rebalance our economy between manufacturing and services - with the greatest emphasis on manufacturing. People forget that most of the "services" industry is retail - selling stuff - and most of that stuff isn't produced in Britain.

TheFatBigot said...

I'm with you both.

The one thing that astonishes me at the moment is the short-termism displayed by all three major parties. They should be addressing the structural economic problem caused by government spending around 25% more than can be afforded rather than quibbling about how £6billon can be accounted for in the next year.

Under the economically illiterate tenure of Gordon Brown we have reached the position of the government borrowing around £170billion in a single year and hoping to reduce that to something like £85billion in four years time. Those four years will involve accumulating debt of around £750,000billion and at the end of it we'll still be adding debt at the rate of £85billion a year.

None of them has the guts to say this but they all know it.

We need a new Thatcher to do what she did in the late 70s. She said "it isn't working and we all know why it isn't working". It only needed her to say it openly for the silent majority to reply with "that's what I've been saying for years, but the consensus said I was wrong".

The consensus now is that government needs to micro-manage countless areas of life at a cost we cannot pay. Almost everyone I know recognises this to be an absurd waste of money yet no major party is challenging it.

If I had any to spare I'd be pulling my hair out.