Saturday, 21 March 2009

The aggregate demand for wasting money

One of the great joys of blogging is receiving comments that put a different point of view. It's mildly irritating to find a view you have taken time to express might be based on foundations of slush, although the irritation is not with the commenter but with oneself for not taking into account a relevant point (or, indeed, being completely fundament over mammary papilla). The result of the exercise is increased understanding of the topic you have discussed which, to some of us, is always a joy. What is not much of a joy is receiving short snide comments which provide no explanation of the alleged error in our reasoning and are nothing more than insults. I don't receive many of those but a few arrive from time to time. It would be wrong to delete them, however tempting it might be. The only comments I delete are true "spam" such as automatic links to commercial sites which have been left here because some wording I have used triggered a reaction in a computer somewhere else.

An occasional insulter has returned recently after some weeks doing other things. Whenever I throw out one of my half-baked pieces on matters economic there is a chance that he will pop in to tell me I don't know what I'm talking about. There is no debate, just assertion of a different view without explanation of why that view is so obviously superior to my own that I should spare the world any further ignorant offerings. I should make one thing clear. I don't claim to "know" about economics. All I do is put forward my views and attempt to justify them with reasoning. If they are completely misconceived then they are completely misconceived, but neither I nor anyone who finds them a little persuasive is likely to change his mind by someone chipping in with "that's nonsense" or words to that effect. One reason I write essays rather than single paragraphs containing nothing but conclusions is so that my reasoning (such as it is) is available for all to demolish if they think they can. From time to time comments are left attempting to do exactly that, and it's huge fun. They believe they have proved me wrong and are happy, I believe I have proved them wrong and am ecstatic.

A couple of days ago I had the temerity to suggest that the government should cut its expenditure because it is borrowing vast sums of money and the less it spends on unnecessary fripperies the more it can devote to repaying that borrowing. I don't find that a difficult concept. Apparently I was completely wrong. My lurking insulter crept out from under a cheese to tell me I had ignored the effect public-sector redundancies would have on what he called "aggregate demand". No doubt he will be surprised to learn that I am familiar with the term "aggregate demand" and have at least a passing knowledge of what it means. To see whether I can elicit a second insult in a few days, I want to discuss why dispensing with pointless paper-pushers is likely to be of overall benefit to the economy. I will keep my "reasoning" as short as I can because my point is essentially simple.

Let's start with a simple observation, an observation with which everyone might be able to agree. If public sector employment is, of itself, a net benefit to the economy it follows that every government should seek to employ as many people as possible. As a factory closes the government should take on those who lose their jobs and give them something to do, or even give them nothing to do but just maintain their incomes at the previous level. Yet governments do not do this, for the very obvious reason that it would be a loss-making exercise. Much of the public sector does not produce anything and merely adds to the costs of the productive sector of the economy.

That is not to say that the public sector does not confer benefits. As things are currently arranged, defence of the Realm, the emergency services, the NHS, State education and social security benefits (any many other things as well) are paid for out of taxes. They add costs to business but they also deliver a benefit which would otherwise have to be paid for through other means. This piece of waffle is not an appropriate time to deal with issues concerning those "beneficial" tax-funded services.

However, far too much of the public sector delivers no discernible benefit and is pure dead-weight cost. It does things that no sane person would ever think of paying for with his own money. That is the structural problem I referred to in my last epistle. To argue that it should not be challenged because of the effect on "aggregate demand" is, in my opinion, misguided. Of course if taxpayers pay salaries totalling hundreds of millions of pounds to hundreds of thousands of government employees who do nothing but shuffle paper for no purpose, the dismissal of those people will remove an awful lot of spending power from the economy. But it will do so only because that spending power was handed to people with non-jobs in the first place. Keep them in place until the trump of doom and they will be a dead-weight cost until the trump of doom. If you think they should be kept in place, why not add another 100,000 to the number so that "aggregate demand" (paid for by unaffordable government borrowing) can be boosted and the path from recession can be eased? If those in place at the moment were not there, who would suggest they should be added to the public payroll to boost "aggregate demand"?

It goes without saying that matters should be approached according to current circumstances, but that does not necessarily mean that cutting out the dead-weight should be delayed until we are out of recession for fear of making matters worse by exacerbating falling demand. There is just as sound an argument for saying that this is exactly the time to cut out the wholly unproductive parts of the public sector. Do it now and the recession might go on a little longer or be a little deeper. Frankly there is every sign of it being horrendously long and deep in any event. I can see an argument for starting with as clean a slate as possible once we are in a position to recover. Surely it is better to build from a position in which dead-weight does not continue to hamper the productive economy.


Dan said...

Hello. You seem to treat as axiomatic the idea that there are lots of public sector non-jobs that can be dispensed with. Can you give specific examples?

Many thanks for your consistently interesting blog.

Anonymous said...

well dan,how about all the fake charities for a start.

Dan said...

Well, charities aren't part of the public sector, are they? They're not funded by the taxpayer.

I'm not saying there's no such thing as a public sector "non-job", I'm just asking to be directed to specific examples (libel laws allowing!).

The Filthy Engineer said...

Have a look here Dan and see what you think.

james c said...

Dear FB,

Perhaps I can take this slowly.

If, at a time of recession and high unemployment, we sack lots of civil servants the aggregate demand in the economy will fall.

This is because the civil servants will go on the dole and stop spending their salaries.

It is true, that this will allow lower taxes, but some of this money will be saved.

The net result will be lower demand.

In previous recessions, the government could counteract this by cutting interest rates-1981 and 1992, for example.

This unfortunately is not possible now, as rates are virtually zero.

Thus, slashing public spending in the current recession would be misguided.

james c said...

Dear FB,

At the risk of offending you further, you might like to consider your view that the concentration of C02 (380 pp million or 0.38%) is too low to have any effect.

The earth is continually receiving heat and radiating it back. The amounts are almost equal.

The effect of the extra CO2 is to reduce the amount of heat radiated out and so the earth will gradually heat up.

Each day, a tiny fraction of the heat received by the earth will not be radiated back. This will be of the order of the increase in CO2 (100 pp million or 0.1%).

The effect over one day will be imperceptible, but over 100 years (36,500 days) it will not.

These are only approximations, but it is easy to see that the small fraction of retained heat will become meaningful over that timescale.

Pogo said...

"James C".

380ppm is not 0.38%, it is 0.038%. All your ensuing speculation is therefore out by a factor of 10.

Stick to "economics".

james c said...

Well spotted pogo.

I don't think that it changes my point, which is that the cumulative effect over 100 years would be material.

Have a nice day.

Pogo said...

Sorry James... Firstly, you appear to have neglected the fact that the effect of increasing CO2 is a logarithmic not arithmetical function (ie as an approximation, doubling to 760ppm will give a temperature increase of about 1C, the next "doubling" to 1520ppm will give an increase of 0.5C etc..)and secondly have not taken into account that the system always reaches a state of equilibrium - albeit at a slightly different temperature, be that warmer or colder. It's not just a simple addative process.

james c said...


Yes-I agree-what I was trying to illustrate in a simple way was that the cumulative effect from a 'small increase' in C02 would be meaningful over a hundred years.

(The post I was alluding too assumed that the amount of CO2 was too small to have any effect).

Pogo said...

James, I know what you're trying to illustrate, but the simple fact is that you're wrong if you are referring to a steady level of 380ppm causing a continuing increase in warming. The effect is not "cumulative" in the classically-understood meaning. If the CO2 level remains constant, so does the energy balance, so in 100 years time, if the CO2 level remains at 380ppm the temperature will be the same as today (excluding other forcings).

An increase in CO2 will cause the planet to warm a certain, reducingly-small, amount until equilibrium between energy-in and energy-out is reached, at which point the temperature remains, all other things being equal (which of course they're not), stable. So, if the CO2 level remains static, so does the temperature, it doesn't continue to warm.

TheFatBigot said...

Mr James, thank you for your comment at 20.43 on the 22nd. I agree that sacking lots of civil servants will reduce aggregate demand. But that is only one side of the equation.

If they are doing jobs that add nothing (an issue on which opinions will differ quite legitimately) then the positions they hold are a net drain on the economy. Your argument is that sacking them will do more harm than good in the short term.

That may very well be so, but maybe it would be better to take a heavier blow now by culling the unaffordable. The alternative is to keep them in place to act as a drag on recovery once we hit the bottom.

Either they will then be a slow drag on recovery by being dead weight cost, or they will be a more acute drag by being culled then and reducing aggregate demand just as the economy is trying to crawl upwards.

I don't know what the best answer is but I can see an argument for getting all the pain out of the way quickly. After all if you are to break a leg and an ankle the total damage is the same, but the total pain is less if you break them both together rather than suffer separate injuries.