Monday, 30 March 2009

A welcome call for austerity

It's always nice to read something in a national newspaper supporting what one has written for months. Today Libby Purvis, writing in The Times, emitted a call for a bit of common sense to be applied to the public sector. Her main theme was that the public sector must pare-back on all non-essential expenditure and must apply a real-world view to what is essential.

Hundreds of commentators far more knowledgeable and lucid than my mere self have made the same point over and over for years because the public sector has been sucking life from the productive sector through the dead weight of pointless and very expensive interference. What I find so pleasurable about Miss Purvis's contribution is that she had the guts to use the noun "austerity" to define the proper approach.

Both my regular readers will know I have been arguing for public and private sector austerity for some time. Not out of any sense of wanting people to suffer, because austerity is not a recipe for suffering. Austerity is a recipe for being able to cope with whatever the world throws at you. Austerity is about cutting out the frills and living firmly within your means. It is about sitting back while your neighbours acquire endless gadgets on the never-never. It is about eschewing credit that does nothing other than advance the acquisition of ephemeral pleasures in return for a higher price than if you waited until you had the cash in the bank. It is about putting aside something for a rainy day because rainy days happen whether or not they are expected or deserved.

It never occurred to most of those of my parents' generation to borrow money for treats because they knew borrowed money is expensive money. Both their day-to-day lives and their long term financial wellbeing was based on spending only what you can afford, and part of what had to be afforded was a little protection by way of a lump sum in the bank or building society. That attitude did not generate unsustainable demand and it did not create precarious employment based on such demand, but it did give stability. It gave stability because it limited the number of outside events that could rock the family financial boat. Of course unemployment could do so, but changes in interest rates, fluctuations in the fortunes of the stock market and the calling-in of credit could not.

Contrary to the desires of our current government, one consequence of the recession is that little people have been saving more according to a report in last Saturday's Times. Orders that they must spend so the country could return to the prosperous pomp of yesteryear appear to have met with the response: "bugger that, old chap, I'm protecting myself". When put in a difficult position common sense comes to the fore. Fancy economic theories are nothing compared to real life and real life requires people to find a way to pay bills and prepare for an uncertain future. The only way they can do so is by marshalling the limited resources at their disposal. That which is obvious is being practised, namely that credit is a luxury and security lies in living within your means.

There is, as far as I know, nothing magical about public sector spending (apart from the ability of that sector to deliver a staggeringly small return for the amount it spends). The argument that recent increases in public sector spending have to be maintained in order to prevent a bigger slowdown in the economy than would otherwise be suffered seems to me to miss the point. One might as well argue that businesses must stay afloat to keep their employees in wages so that they can spend to keep the economy going. That argument is a non-starter, however, because loss making businesses have to lay people off or fold when they have insufficient income to keep going.

We are in a time of significant restructuring. The loony left argues that capitalism has failed and must be scrapped. When all they can offer is the economic miracle of the Soviet Union I feel comfortable rejecting their suggestion. The failure was not of capitalism but of consumerism. In the private sector consumerism manifests itself in (i) people buying stuff on credit rather than waiting, saving and only buying when they have the money to do so and (ii) spending everything (with or without utilising credit) rather than setting something aside for the future. That is changing, people are now repaying credit card debt and putting money aside. It is a change in culture, a change in the way money is seen. Public sector spending on fripperies such as a dance development officer for Blackpool or a head of the NHS low carbon programme for Cornwall and the Isles of Scilly is consumerism on a different scale but the problem with it is the same. Yes, spending money on anything creates jobs. Spending it on crap you can't afford creates jobs now but it also creates a liability for the future. That liability carries a huge price both in lost hope for those rendered unemployed when the illusion is burst and for lost spending power for those who need to repay their debts.

Miss Purvis is right to call for austerity. It is already being practised by the little people. One day government might learn that what is good for the little people is good for the public sector too.


Alex Cull said...

Good article! This is something that I found increasingly weird over the last decade or so, the government simultaneously encouraging people to spend money on nonessentials just to keep the economy going, and on the other hand tutting over the amount of skyrocketing personal debt, with people maxing out their credit cards on the kind of nonessentials the government was urging people to buy. And also the talk of a failure of "consumer confidence", as if being careful with money and living within one's means signalled having a sort of rare and unnatural personality flaw. Madness, really.

delcatto said...

Not madness. Plain & simple stupidity and wishful thinking.

james c said...


Unfortunately it is not possible for public and private sectors to tighten their belts at the same time (unless the UK developed a trade surplus, which seems unlikely).

This is because by saving, both would be removing demand from the economy, at a time when demand is already weak,leading to increasing unemployment.

With no scope for interest rate cuts, there would be means of increasing demand and the UK would be stuck in a slump.

What happens next would be mass unemployment or severe deflation, depending on whether wages adjust downwards.