Wednesday, 1 April 2009

Pain now, gain later

In the comments to my last piece Mr James observed that substantial reductions in public sector employment would make things worse by taking a fat chunk out of aggregate demand (I hope that is a fair summary of his position). I would suggest that his observation is (i) correct in part, (ii) incorrect in part and (iii) neither here nor there, all at the same time.

He is correct in that sacking a civil servant from his job and giving benefits instead will reduce his spending power. Sack a thousand and collective spending power is reduced even further, sack the half million or so who need to go and shops will be hit. The songwriters Kander and Ebb knew about this sort of thing when they wrote the song Money,Money, including the line "money makes the world go around". Spending power from private sector employment falls as jobs are lost and this impacts directly on shops and thence on wholesalers and manufacturers. Whether a job is lost in the private or public sector, the direct loss of spending power is the same at the same salary.

He is incorrect in that the saving does not just disappear. Rather than being spent by the sacked civil servant it is now available to be spent on something else, be it repaying debt to reduce future expenses or reducing taxes to increase the spending power of others. No doubt there will always be a time-lag in which the additional fall in spending power can have a damaging impact, but it is not a one-way street. Private business doesn't shed staff in difficult times just for the fun of it, it does so because it has to in order to stay alive. No one would argue that the private sector should just rack-up vast amounts of debt in order to keep people employed and thereby maintain aggregate demand, this would just increase costs in the long run and add to the risk of businesses folding completely. The fall in aggregate demand is an unpleasant consequence of planning practically for the future. I see no reason in principle why the public sector should be different.

The reason why I say his observation is neither here nor there follows on from my last point. There will come a time, sooner or later, when the recession bottoms-out. Any real growth in the economy from then on will be a consequence of all the factors that apply generally, including having as low a burden of costs as possible. Maintaining public sector spending on fripperies rather than reducing government debt or taxes will necessarily add to costs in the longer term (subject to being inflated away, which gives rise to different problems). Growth can only occur out of profits; the higher the costs the lower the profits at the same selling price. Much of current government expenditure on pet projects (such as regional government, fussing about food and doing a King Canute on the climate) was only entered into because they felt it could be afforded out of the tax proceeds from poor Gordon's boom of doom. Those proceeds aren't there any more and these projects (along with many others) are now plainly unaffordable. Retaining the unaffordable out of stubbornness or a misplaced desire not to add to current problems merely bottles up the problem for a later date.

In the same way that I consider it sensible for individuals to live within their means rather on credit because they will find their money goes further, so the enormous sums raised in taxes will go further if they are not having to be spent paying interest on accumulated debt, a pretty large chunk of which will go overseas, and on non-essential matters.

What I am suggesting is a wholesale change in the way the public sector views itself. In a narrow way maintaining public sector employment in the short term can be beneficial in that it can help ease the effects of recession, but it cannot do so free of charge. The charge bites in the future, and will inevitably slow recovery. In the long term I suspect the detriment will outweigh the short-term benefit by quite some margin. Just as taking your golf clubs out of the car benefits fuel consumption, so taking unnecessary weight off the back of the private sector (the only sector of the economy that can create wealth) increases its ability to perform efficiently and profitably.


james c said...


You have set out your position clearly, but there are a few points in your argument with which I disagree.

The main one is that recessions somehow end of their own accord. They do not, as they are caused by central banks raising interest rates and end by them lowering them.

There are other forces at work,but interest rates are the main one.

This recession is quite different and, with rates close to zero,there is no scope for conventional measures.

None of this is to diminish the mistakes of the debt binge, which have been dumped on the taxpayer.

TheFatBigot said...

Mr James, I didn't say recessions end of their own accord. In the same way that various underlying problems can cause recessions, so the way out is different every time.

As for your assertion that recessions are "caused by central banks raising interest rates and end by them lowering them", you disabuse that theory yourself in your next paragraph.

Paulus said...

Does it piss you off that you don't have a column in the Daily Mail and Richard Littlejohn does? It pisses me off.

james c said...


Perhaps you misread my post.

I don't see how I am contradicting myself, as my point plainly is that this recession is completely different from the norm.

It is not true that 'the way out is different every time'. The way out usually involves interest rate cuts and sometimes a fiscal stimulus.

james c said...


The following article is reasonably clear.