The PIIGS and one-sided equations

The good Dr North has been pointing out for some time that things in Europe are not all sweetness and light (for recent examples, see here and here). He observes that mass demonstrations are taking place with a degree of regularity in Spain and Greece as the little people give vent to their frustration at the economic mismanagement of their political masters. None of us knows what the outcome will be, nor whether it will be the same in both countries or, indeed, in any of the other countries teetering on the brink of government bankruptcy.

What troubles me is not that people are finally waking up and complaining, it is that they are complaining about completely the wrong thing. Their target is undoubtedly correct, politicians have left the PIIGS (Portugal, Ireland, Italy, Greece and Spain) deep in the mire through reckless economic mismanagement. Their complaint, however, appears not to be that their governments borrowed and wasted too much but that they do not want their governments to stop borrowing and wasting now that existing debts cannot be repaid. We see exactly the same delusionary behaviour in this country whenever the trades unions wheel out their usual rent-a-mob to bemoan a tiny bit of trimming from departmental budgets to find cash to pay the interest charges incurred by Gordon Brown's feckless stewardship of the Treasury.

I am not in the least bit surprised. Governments all over Europe have been winning elections for years by presenting one-sided equations that sound nice but do not stand up to even the gentlest scrutiny. These one-sided equations are the tool of every headline-grabbing initiative and are not restricted to the field of economic policy, we see them all the time in the field of health policy.

Smoking / drinking / one food / another food / too much exercise / lack of exercise / salt / lack of salt, or whatever is the scare of the day, is calculated to cost the NHS so-many hundreds of millions of pounds and must therefore be banned. The figures are always wrong, always grossly exagerrated, but that is beside the point; even if they were correct they only look at one side of the equation. Treating medical conditions which might not have arisen had the patient not been a smoker can be seen as a cost caused by smoking, there is nothing unreasonable in that as a general proposition. The problem is that the NHS does not exist in a vacuum and it is not funded in a vacuum, it is funded out of taxes and smokers pay taxes that others do not pay; shops and wholesalers make profits on which taxes are paid, workers in those businesses and in every stage of the cigarette production and distribution network pay taxes on their wages. The taxes gathered from the ciggy network grossly exceed even the most dishonestly overstated costs attributed to adverse consequences of smoking.

The same is seen in the moronic argument that "green" production of electricity will be economically beneficial because it will create new jobs. Of course it will create new jobs because no one has been so stupid before to pay people to do anything so utterly pointless, but even so the benefit of these new jobs is only one side of the equation. On the other side lies the fact that employing more people to generate the same amount of electricity means it is more expensive and that cost must be passed on through higher prices. Higher prices for electricity means higher costs for businesses and individuals. Those businesses can be tipped into insolvency causing their employees to lose their jobs and individuals who must spend an extra £100 on electricity have £100 less to spend on other things thereby depriving Mr Patel's Merrymart and Madame Fifi's Sauna and Hanky-Panky Parlour of income, resulting in shed staff and less tax being paid. No one should be surprised that studies in both France and Scotland reveal each "green" job to cause the loss of more than two other jobs.

So it is also with the bubble of economic activity arising from an unsustainable expansion of credit. Of course it means people have more money and buy more stuff which means shops and manufacturers employ more staff, make more profit and pay more tax. The government takes credit for the miracle of an ever-expanding economy. Apparent riches for all means votes for incumbents. The other side of the equation in this situation contains what groovy hep cats might term a "double-whammy".

Credit cannot go on expanding for ever, eventually you reach a point where you cannot borrow any more because even the most foolhardy lender is not prepared to advance you another penny. At that point the economic expansion arising from credit necessarily stops and in due course it must be reversed as people realise they must repay their borrowings. It doesn't necessarily happen all of a sudden although it did two years ago because banks simply stopped lending. In addition to the reduction in economic activity resulting from the wind-down of credit-based spending we have the second whammy, namely a reduction in tax receipts for the government. The additional sums received in the boom years were used to strengthen their electoral position. Were we cruel people we could suggest they used tax receipts to bribe voters, but we aren't cruel so we will instead describe the spending of this windfall of unsustainable taxes as the result of nothing more sinister than stupidity. Unfortunately the stupidity knew few bounds so the PIIGS, the UK and many other countries find themselves with government spending commitments far in excess of tax receipts.

A sober and sensible approach to the problem would recognise that governments handed out treats that could not really be afforded even when times appeared good, so now that they are far from good those treats cannot be given any more. The governments of Spain and Greece are trying to cut back a fraction of the unaffordable treats and it is this that causes discontent on the streets. The people are complaining that something they should never have had in the first place (because it could not be afforded) should be maintained despite government income being substantially lower than it was in 2009, it is utter madness. A particular difficulty arises with government spending compared to individual spending, namely that the consequences of reducing it are highly visible. A million people each spending £50 less is equivalent to government spending £50million less - the former is just a normal incident of life whereas the latter is a headline in every newspaper.

I cannot help thinking that pushing one-sided equations at their people and arguing tooth and nail that the equations in question have only one side is the root of current public disquiet in Spain and Greece. There is every sign that the people demonstrating against plans to trim government spending really believe there is only one side to the equation. In a way this should not be surprising, both countries had long periods of socialist government in which the allure of the magic money tree was all pervading - no need to worry, the government will pay for it, the government has a bottomless pit of money because it just plucks some more from the magic money tree. We should be more worried about this reason for mass demonstration than we would have to be were demonstrators complaining about overspending in the past.