Re: How do cutbacks save economies? : Thu Oct 11, 2012 2:40 pm  

Richie wrote:

OK, so here's the idea, and my economics knowledge doesn't go as far as nation states

Gov expense is more than revenues and can't be sustained.

Why not? If growth is larger than the deficit we don't have a problem

Richie wrote:

If the gov wants to cut expense and fthere are a bunch of public employees (whether police, armed forces, civil servants, anyone paid by the gov) and they're paid e.g. £40K a year (of which £10K might come back in tax so making a £30K net cost) then if those roles are removed and each one is now only paid £6K a year in benefits, then the gov has saved £24K for each of those people no longer employed by the gov.
However, if those people find private employment (and lets just assume the same numbers for easy maths) then they turn into net contributors to the gov of £10K: So going from £30K cost, to £6K cost, to £10K benefit.

If everytime the government laid off a public sector employee they found a £30k job in the private sector the problem wouldn't be nearly as hard to solve. But there isn't nearly enough demand in the economy, sack a load of public sector workers and you just end up with a load more unemployed people.

Also you estimated the multipier at 0.25, any particular reason you chose that figure when the IMF have said at the moment in developed economies it is between 0.9 and 1.7?

Richie wrote:

That's how cuts could work. TBH, I don't really understand how spending our way out could really work. OK, so there's the Keynesian idea of paying someone to dig a hole and someone else to fill it in and they both go spending that pay in shops etc. But how does that work when we don't have the money to pay them in the first place at all?

Can you not see how large government cuts would be bad for the economy at a time when for every £1 cut by the government, GDP decreases by £1.30? (the centre of the IMF range)

Re: How do cutbacks save economies? : Thu Oct 11, 2012 2:53 pm  

Ferocious Aardvark wrote:

Two factoids prompt the question:

1. The claim that 93% of households in Scotland take out more from the public purse than they contribute; as I've no particular reason to think Scotland's case is in any way extraordinary, then presumably broadly similarish stats would apply to other European nations;

2. The stats that the unemployment rate in the most troubled Euro nations, Greece and now Spain, is now around the 25% mark.

If these economies need to recover, how can they, if a quarter of the population is jobless (and as we all know the actual figure will therefore be higher) and if hardly any households are net contributors into the national pot?

This is a genuine question, not a speech, I'm asking what it is that the organisations that prescribe the medicine believe will drive the economic recoveries needed, and where governments with plainly no pot to pis.s in wil get the money to repay the "loans" etc currently being handed out by the trillion.

This is a problem over half of the UK are now net beneficiaries rather than contributors for the forst time. It is an unsustainable position. It may be that more even distribution of income would help but I'd be surprised if the figures would stack up. The fact is our living standards are likely to decline as the Far East and South America win the race for resources. Cuts to the welfare state will sadly occur as our relative wealth declines. The US is struggling but is in a much stronger position than Europe when it comes to competing for resources. Europe is likely to go into a period of stagnation and relative decline for decades to come. The EU's head in the sand attitude to global competitive pressures will add to the woes of the Old World.

Re: How do cutbacks save economies? : Thu Oct 11, 2012 2:58 pm  

Cookridge_Rhino wrote:

Why not? If growth is larger than the deficit we don't have a problem

If everytime the government laid off a public sector employee they found a £30k job in the private sector the problem wouldn't be nearly as hard to solve. But there isn't nearly enough demand in the economy, sack a load of public sector workers and you just end up with a load more unemployed people.

Also you estimated the multipier at 0.25, any particular reason you chose that figure when the IMF have said at the moment in developed economies it is between 0.9 and 1.7?

Can you not see how large government cuts would be bad for the economy at a time when for every £1 cut by the government, GDP decreases by £1.30? (the centre of the IMF range)

Just example figures explaining the theory Cookie. No attempt to say which would work and which wouldn't. I can see the theories and reasoning behind both (thanks to some input from other posters on the "spending" approach) and haven't expressed a belief in either.

Re: How do cutbacks save economies? : Thu Oct 11, 2012 3:03 pm  

Mintball wrote:

There are particular issues in Greece (around a culture of large-scale tax avoidance) that make that a specific case.

But the point is that austerity economics are a con.

The great idea (if you want to call it that) as propounded (certainly in the UK) is that cuts are essential in order to tackle the deficit. You stop spending as much – and use it to pay of the debt.

The flaw in this reasoning is simple. If you put more people out of work, you decrease revenues and increase expenditure (unless you have absolutely no welfare available for those who are out of work). So in reality, the debt increases.

There is an argument that, if you want to make cuts to public spending, then the best time to do so is during the economic good times – in other words, when the job market is such that people who are made redundant will have little difficult finding alternate jobs of a comparable nature (in wage terms at least).

It is absolute economic illiteracy to pretend that, without those jobs available, cuts will do anything more than increase a deficit.

The problem in the UK, however, is that the simplistic (and incorrect) equation is being used by the government as an excuse for cuts that have nothing to do with the economy/deficit and everything to do with pursuing a small state ideology, and finding ways for themselves and their friends in big business to make increased profits.

But while many people do not find the idea of cuts and austerity palatable, it seems intuitively correct, because it effectively treats the national economy as though it were the same as a household budget. And that, while understandable, is wrong.

But you need to produce sufficient things that people around the world want to buy to have the income and jobs to survive and pay the bills. Fact is, we're struggling on that front. You can't simply create jobs will public money as that money needs to come from either taxes (which requires private sector profitability) or government borrowing (which is not a long-term solution). The only long term solutions revolve around innovation / productivity increases / lower living standards.

Re: How do cutbacks save economies? : Thu Oct 11, 2012 3:07 pm  

Dally wrote:

This is a problem over half of the UK are now net beneficiaries rather than contributors for the forst time. It is an unsustainable position.

Before the financial crisis less than half of the UK were net beneficiaries. Yes this is an unsustainable position, but that's because we're in the aftermath of the financial crisis, and currently in recession. This isn't supposed to be sustainable, no one thinks these conditions will last forever.

Dally wrote:

The fact is our living standards are likely to decline as the Far East and South America win the race for resources. Cuts to the welfare state will sadly occur as our relative wealth declines. The US is struggling but is in a much stronger position than Europe when it comes to competing for resources. Europe is likely to go into a period of stagnation and relative decline for decades to come. The EU's head in the sand attitude to global competitive pressures will add to the woes of the Old World.

Yes Europe will go into relative decline, because we are industrialised whereas large parts of the world are still industrialising, this should come as a surprise to no one. If I started training for the 100m in weeks I could easily shave 1 second off my time, so yes that would mean Usain Bolt is in decline relative to me, but that doesn't mean he should be worried.
You seem to be under the impression that the world economy is a zero sum game, I would be surprised if you found many credible economists who held that view.

Re: How do cutbacks save economies? : Thu Oct 11, 2012 3:08 pm  

Cookridge_Rhino wrote:

Before the financial crisis less than half of the UK were net beneficiaries. Yes this is an unsustainable position, but that's because we're in the aftermath of the financial crisis, and currently in recession. This isn't supposed to be sustainable, no one thinks these conditions will last forever.

Yes Europe will go into relative decline, because we are industrialised whereas large parts of the world are still industrialising, this should come as a surprise to no one. If I started training for the 100m in weeks I could easily shave 1 second off my time, so yes that would mean Usain Bolt is in decline relative to me, but that doesn't mean he should be worried.
You seem to be under the impression that the world economy is a zero sum game, I would be surprised if you found many credible economists who held that view.

Actually, it is considered more or less a zero sum game. Resources are finite.

Re: How do cutbacks save economies? : Thu Oct 11, 2012 3:13 pm  

Government to find funds to send every secondary school pupilto the WWI battlefields in 2014. Not sure how that constitutes investment with a positive UK multiplier effect.

Re: How do cutbacks save economies? : Thu Oct 11, 2012 3:19 pm  

Richie wrote:

Just example figures explaining the theory Cookie. No attempt to say which would work and which wouldn't... and haven't expressed a belief in either.

Sorry, when you gave your example then said "that's how cuts could work" I thought you meant. 'This example shows how cuts could work', apparently I misunderstood.

Also an example doesn't explain anything if it is based on assumptions that are completely untrue.

Re: How do cutbacks save economies? : Thu Oct 11, 2012 3:28 pm  

Dally wrote:

Actually, it is considered more or less a zero sum game. Resources are finite.

It hasn't been until now, I'm not sure why this is suddenly going to change.

Dally wrote:

Government to find funds to send every secondary school pupilto the WWI battlefields in 2014. Not sure how that constitutes investment with a positive UK multiplier effect.

I think he said a pupil from every school, not every school pupil, which tbh probably isn't much of a change, every high school I know runs a yearly school trip to the battlefields anyway.

Re: How do cutbacks save economies? : Thu Oct 11, 2012 6:21 pm  

Dally wrote:

Government to find funds to send every secondary school pupilto the WWI battlefields in 2014. Not sure how that constitutes investment with a positive UK multiplier effect.

You don't think that sowing an interest in history, or just plain old research into anything will benefit a person, a society and business ?

I suppose we could invest billions into providing CNC Lathes for every schoolchild instead and get 11 year olds to produce nuts and bolts for the world, but thats kind of single focused education isn't it ?