I had just gathered a few graphics and was about to write this post when I was alerted to a post by Simon Wren-Lewis¹ which covered some of what I was going to say. However, I still have a few points of my own to make.

The economy is one of the main debates around the next election. However, I have extreme difficulty in discussing it since I have such a divergent view from that commonly held I cannot even start covering some points without a lot of preliminary discussion. Sadly most people prefer sound-bites rather than proper discussion.

In my last post (aimed at computer programmers) I did say that there is not point in optimising crap code. Similarly I feel that there is no point in tinkering with a crap system. It is not only a crap system but a system which will not work. We cannot keep on expanding the economy – there are set physical limits which most economists ignore. In a way we are building up a debt with the natural environment which we can never pay back and that debt bubble is about to burst (peak oil, global warming etc).

‘We’ Are Extremely Wealthy

The UK is unbelievably wealthy. We are often told that ‘we cannot afford…’- we can. We can afford to double the expenditure on the NHS. We can afford to renew the Trident nuclear weapon system (but just because you can afford something it does not mean it is a good idea to buy it – see my posts on nuclear deterrence). However the problem is the extremely uneven distribution of wealth:

For more information about inequality and its affects see the Equality Trust website³.

Debt

I could write several posts just about debt but I am not going to since I am not really into economics. If you are interested then there is David Graeber’s book, Debt: The First 5,000 Years⁴ For more information on the effects of debt in current economics then Steve Keen is well worth reading/hearing⁵.

Having said this there are a couple of points I would like to make. The first thing is that many view government debt similar to household debt. I think this is partly due to the Margaret Thatcher election campaign – the frugal housewife. However, this is a Saatchi & Saatchi PR campaign and has very little to do with economic reality. Government debt is very different from household debt.

Also many people have the impression that government debt is ‘skyrocketing to unprecedented levels’. In fact the level of debt to GDP has been much higher in the past:

This is not to say that ‘debt’ is not a problem. However, let us look at the bigger picture:

So if debt is a problem what debt do you think that the media/politicians should be talking about?

Different Types Of Debt

Money could be borrowed to do a variety of things. For example you could borrow money to put up solar cells or insulate your house. Hopefully it would be a good investment since you it will pay you back by decreased electricity and heating costs. Or a business could borrow money to invest in new machinery or employ new staff in the hope to increase productivity and production.

Alternatively money could be borrowed to buy the latest designer clothes or a new car. For an individual this may not be a good idea if you cannot pay the money back without accruing a large amount of interest. However, for the economy overall it means that the clothes/car needs to be made which helps the economy overall. Therefore increasing debt can increase demand and help the economy – sometimes!

What happens if there is a recession. Instead of increasing their debt people start to worry and pay it off. Debt therefore decreases demand increasing the recession.

Yet another type of debt is borrowing to buy assets that are expected to increase in price – for example houses. The increased demand increases the cost of the asset. People see the increase in price of the asset and think it is a good investment and therefore borrow money to buy the asset. The increased demand increases the cost of the asset…

This creates an asset bubble which eventually bursts whether asset be tulips⁷ or houses.

Private Expenditure vs Public Expenditure

Although slightly off topic I would like to make a point about public expenditure and private expenditure.

People often say thing such as ‘we cannot afford the NHS’. What they really mean is that they do not want to pay for the NHS through taxes. They are not saying that we should scrap health care and hospitals. The problem with this is that often it is much better to pay for something collectively than privately. For example, despite all of its faults the NHS is much better and cheaper than the US system of private healthcare⁸.

Another point is that when we do things such as pay nurses or carers that money does not disappear down a black hole. That money is spent on goods and services which helps the economy as a whole. Cutting back on public spending and putting civil servants on the dole can have a very negative affect on the economy.

I believe that reason for much of the push from publicly financed to privately financed is to help large business and in particular the financial sector. It is not to help the majority of the people in this country. However, I think this should be a topic of a separate post.

Money

We need a flow of goods and services, not money to have a fulfilling life. Money can just mediates this flow – although there are other ways of doing it. While many people will deride bankers for ‘creating money from nothing’ in fact money is always ‘created from nothing’ except good faith. Have a look at a bank note – ‘I Promise To Pay The Bearer On Demand The Sum Of..’ – it is a debt note. In a way money is created through debt.

The amount of money needed to keep this flow going depends on many things. If there is too little money then the flow can stall, if there is too much then the economy can get ‘over heated’ – lots of asset bubbles, inflation etc.

Government Deficit and Debt

Surprisingly I found a large number of people who do not know the difference between the deficit and the debt. This has not been helped by people such as David Cameron confusing the two.

The deficit is the difference between the expenditure and income. If there is a deficit the debt continues to increase. Only when you income exceeds the expenditure (i.e. a surplus) can the debt start being ‘paid off’.

Although there is some relationship between government deficit and the economy as a whole (see below) it is not directly related. You can have large government deficits with a healthy economy or large government surplus with the economy falling apart.

Government income increases mainly because the economy continues growing although they can make slight changes by increasing and decreasing taxes. It is theoretically true that if you cut taxes and this makes the economy grow faster then the cut will increase the government income. However, there is no evidence that cutting taxes – particularly for the rich – has this effect.

The government can increase or cut expenditure. However if the cut in expenditure has negative affect on the economy then government income can decrease. Government can also increase expenditure to stimulate the economy and hence increase government income. For example the Australian response to the recent recession was to send out $3.9 billion for low and middle income families ($1000 per child, pensioners $1400, pensioner couples $2100)¹⁰.

Looking at the graph above you can see the drop in government income when the recession hit in 2008. Government expenditure rose a bit – nothing out of the ordinary. The Labour government started a programme of austerity with various cuts. After the Conservatives took power these cuts were continued and increased.

The UK suffered the longest recession in recent history:

Despite the claims the UK economy has not done as well as many others in recovering from the recession:

In a recent survey two thirds of economist believe that the Conservatives’ policies have harmed the economy¹³. Whether Labour or any other party would have done better is a matter of debate.

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¹ How Can Labour Say It Did Not Crash The Economy, Simon Wren-Lewis, Mainly Macro Bog (http://mainlymacro.blogspot.co.uk/2015/04/how-can-labour-say-it-didnt-crash.html)

² Distribution of total household wealth and income, by percentile points: Great Britain, 2010-12, Office of National Statistics (http://www.ons.gov.uk/ons/rel/was/wealth-in-great-britain-wave-3/wealth-and-income–2010-12/stb–wealth-and-income–2010-12.html#tab-Results

³ Equality Trust (http://www.equalitytrust.org.uk/). For a quick overview see Richard Wilkinsons talk https://www.youtube.com/watch?v=cZ7LzE3u7Bw.

⁴ David Graeber’s book is available from good bookshops such as Freedom http://freedompress.org.uk/ – or view his talk https://www.youtube.com/watch?v=CZIINXhGDcs.

⁵ Steve Keen (http://www.debtdeflation.com/blogs/)

⁶ United Kingdom National Debt, Wikipedia, http://en.wikipedia.org/wiki/United_Kingdom_national_debt.

⁷ Tulip Mania, Wikipedia (http://en.wikipedia.org/wiki/Tulip_mania)

⁸ NHS means British healthcare rated top out of 11 western countries, with US coming last, The Independent, Tuesday 17 June 2014, (http://www.independent.co.uk/news/uk/uks-healthcare-ranked-the-best-out-of-11-western-countries-with-us-coming-last-9542833.html)

⁹ UK Central Government Finances, Economic Research Council – (http://www.ercouncil.org/chart-of-the-week/week-11-2015-uk-central-government-finances.html)

¹⁰ National fiscal policy response to the Great Recession, Wikipedia (http://en.wikipedia.org/wiki/National_fiscal_policy_response_to_the_Great_Recession#Australia)

¹¹ UK Recessions and Recoveries, Economic Research Council ( href=”http://www.ercouncil.org/chart-of-the-week/week-9-2014-uk-recessions-and-recoveries.html)

¹² International Post-Recession Recovery, Economic Research Council (http://www.ercouncil.org/chart-of-the-week/week-18-2014-international-post-recession-recovery.html)

Two thirds of economists say Coalition austerity harmed the economy, The Independent, (http://www.independent.co.uk/news/business/news/two-thirds-of-economists-say-coalition-austerity-harmed-the-economy-10149410.html)