Re: How do cutbacks save economies? : Fri Oct 12, 2012 9:09 am  

Ferocious Aardvark wrote:

I think if you changed tack from the rather weird conviction your neurons seem to have gathered that the actual firm and sole proposition on this thread as a solution to the country's economic woes is the re-training of every unwaged person immediately as a full-time insulation fitter for the rest of their working lives, then it might just click that the poster only advanced insulation as one single illustrative example, and not as the panacea to solve the world's financial woes.

And to clarify, it was a comment originally made by Lord Robert Skidelsky at a conference on economics in June, as (exactly as you say) one illustration of something that could be done quickly.

Re: How do cutbacks save economies? : Fri Oct 12, 2012 9:59 am  

The problem is that people seem to think there is only one answer, and that answer will work instantly. There isn't, and it won't - you have to do lots of separate things in order to fix things and it needs to be given time.

If your personal income was £20k per annum but your outgoings were £22k per annum you'd have to make cutbacks. That's bad enough, but if, however you also had a personal debt of £20k that you needed to pay off, you will need to make MORE cutbacks in order to repay that debt. Once you have that under control, you should then have a little money to spend on luxuries. All in theory of course, but you get what I'm saying.

Similarly, austerity measures won't produce growth, but I'm not convinced anyone is trying to say it will. What it SHOULD achieve (Whether it is or not, is for another debate) is to slow down, then eventually halt the decline and reduce the deficit. Growth can be tackled afterwards once there is the money in the public purse to do so.

Re: How do cutbacks save economies? : Fri Oct 12, 2012 10:02 am  

ROBINSON wrote:

... What it SHOULD achieve ... is to slow down, then eventually halt the decline and reduce the deficit ...

How – given that it is currently increasing the deficit?

As touched on earlier, the household budget analogy is tempting but fatally flawed.

In the instance of a government, the income also goes down when they enact austerity measures – with a concomitant rise in outgoings because of that. The household analogy assumes a stable income.

[DaveO]

Re: How do cutbacks save economies? : Fri Oct 12, 2012 10:27 am  

ROBINSON wrote: If your personal income was £20k per annum but your outgoings were £22k per annum you'd have to make cutbacks. That's bad enough, but if, however you also had a personal debt of £20k that you needed to pay off, you will need to make MORE cutbacks in order to repay that debt. Once you have that under control, you should then have a little money to spend on luxuries. All in theory of course, but you get what I'm saying. But the government is not me or you. Governments can do things we can't. Such as print money and control interest rates on the debt. They can even just right it off or rather refinance the debt in such a way as that is what it means in practice (this was one of the suggestions made in one of the links below) . Similarly, austerity measures won't produce growth, but I'm not convinced anyone is trying to say it will. What it SHOULD achieve (Whether it is or not, is for another debate) is to slow down, then eventually halt the decline and reduce the deficit. Growth can be tackled afterwards once there is the money in the public purse to do so. It will only reduce the deficit if the governments income exceeds its outgoings and that isn't happening. Tax revenues aren't holding up enough and a big reason for this is demand it weak as people (as opposed to governments) do behave as you suggest and pay down personal debts rather than spending money. Or are now unemployed so are not spending anyway. It has now got to the stage that the idea of using "helicopter money" is being discussed. This is where the Bank of England prints money and gives us all a wadge of it which we then spend stimulating demand. As opposed to printing money to give to banks in the hope they will lend it on which is what they have been doing but which hasn't really worked. See here http://www.bbc.co.uk/news/business-19917480 and here http://www.bbc.co.uk/news/business-19918332 It is because governments can do these things that your example above based on personal debt is just too simplistic a way to look at it. Unfortunately it does seem to be how Osborne looks at it and the longer he does the more apparent it becomes that without any measures to stimulate growth he is just digging the hole deeper.

ROBINSON wrote: If your personal income was £20k per annum but your outgoings were £22k per annum you'd have to make cutbacks. That's bad enough, but if, however you also had a personal debt of £20k that you needed to pay off, you will need to make MORE cutbacks in order to repay that debt. Once you have that under control, you should then have a little money to spend on luxuries. All in theory of course, but you get what I'm saying. But the government is not me or you. Governments can do things we can't. Such as print money and control interest rates on the debt. They can even just right it off or rather refinance the debt in such a way as that is what it means in practice (this was one of the suggestions made in one of the links below) . Similarly, austerity measures won't produce growth, but I'm not convinced anyone is trying to say it will. What it SHOULD achieve (Whether it is or not, is for another debate) is to slow down, then eventually halt the decline and reduce the deficit. Growth can be tackled afterwards once there is the money in the public purse to do so. It will only reduce the deficit if the governments income exceeds its outgoings and that isn't happening. Tax revenues aren't holding up enough and a big reason for this is demand it weak as people (as opposed to governments) do behave as you suggest and pay down personal debts rather than spending money. Or are now unemployed so are not spending anyway. It has now got to the stage that the idea of using "helicopter money" is being discussed. This is where the Bank of England prints money and gives us all a wadge of it which we then spend stimulating demand. As opposed to printing money to give to banks in the hope they will lend it on which is what they have been doing but which hasn't really worked. See here http://www.bbc.co.uk/news/business-19917480 and here http://www.bbc.co.uk/news/business-19918332 It is because governments can do these things that your example above based on personal debt is just too simplistic a way to look at it. Unfortunately it does seem to be how Osborne looks at it and the longer he does the more apparent it becomes that without any measures to stimulate growth he is just digging the hole deeper.

Re: How do cutbacks save economies? : Fri Oct 12, 2012 10:38 am  

ROBINSON wrote:

If your personal income was £20k per annum but your outgoings were £22k per annum you'd have to make cutbacks.

No you wouldn't, you could get a second job, or take out a loan.

ROBINSON wrote:

That's bad enough, but if, however you also had a personal debt of £20k that you needed to pay off, you will need to make MORE cutbacks in order to repay that debt.

No you wouldn't, you could either do a deal with the lender and reschedule the repayments, or go down insolvency way.

ROBINSON wrote:

Similarly, austerity measures won't produce growth, but I'm not convinced anyone is trying to say it will. What it SHOULD achieve (Whether it is or not, is for another debate) is to slow down, then eventually halt the decline and reduce the deficit. Growth can be tackled afterwards once there is the money in the public purse to do so.

I have yet to hear any convincing argument as to why more money should end up in the public purse. So far as I know, the purse has for many decades been not only empty, but "minus" in the multi-billions, and so far as I can see, the only thing austerity measures are guaranteed to achieve is a net increased outflow of funds for all the additional benefit claims made on the public purse.

Give me one example of an austerity measure you seriously believe could effect savings to make up for paying a quarter of your population to be out of work.

Re: How do cutbacks save economies? : Fri Oct 12, 2012 11:53 am  

I do think people get too caught up in differentiating between selling/making "product" and "service" particularly if feeling services are "real" or sustainable.
To use an example from my business, I might be talking to a client who needs some more IT processing power.
I could sell them a server that they put in their data centre to meet that, and I've sold a product.
Or I could sell them some processor time on a machine (which may be a standalone or could be shared infrastructure) and I've sold a service.
Is there really a massive differentiation between them?

Re: How do cutbacks save economies? : Fri Oct 12, 2012 12:02 pm  

ROBINSON wrote:

If your personal income was £20k per annum but your outgoings were £22k per annum you'd have to make cutbacks. That's bad enough, but if, however you also had a personal debt of £20k that you needed to pay off, you will need to make MORE cutbacks in order to repay that debt. Once you have that under control, you should then have a little money to spend on luxuries. All in theory of course, but you get what I'm saying.

As has been pointed out personal or household income is not comparable with a country's income for many reasons. The main one being that households aren't generally buying products and services produced by other members of the household, so reducing expenditure won't have a big impact on the household's income.

However when the government make cuts they are laying off British workers who instead of paying taxes claim jobseekers, who now have no money to spend in the local economy so local businesses suffer. At a time when lack of demand is a huge problem, governments cuts only make it worse.

ROBINSON wrote:

Similarly, austerity measures won't produce growth, but I'm not convinced anyone is trying to say it will. What it SHOULD achieve (Whether it is or not, is for another debate) is to slow down, then eventually halt the decline and reduce the deficit. Growth can be tackled afterwards once there is the money in the public purse to do so.

But austerity in the current climate effects growth to such a degree that debt as a percentage of GDP isn't even decreased, so I won't even mention all the pain caused to British people and companies I'll consider simply debt/GDP to show how it is self defeating:

Facts: debt is currently approx 70% of GDP, The IMF say that the fiscal multiplier in developed economies is currently between 0.9 and 1.7.

Scenario A: GDP grows by 2%*, there is a deficit of 7% so debt/GDP=77/102=75.5%

Scenario B: The same as scenario A except we're going to cut spending by a further 1% of GDP. The multiplier is 1.3 ** so this reduces GDP by 1.3% relative to A so GDP is 100.7. For every £1 you reduce GDP, you reduce government revenue by approx .4, so the deficit isn't 7-1=6% its actually 6+0.4*1.3 = 6.5%. So Debt/GDP is 76.5/100.7 = 76.0%.

So for every extra £1 cut, debt/GDP actually increases by 50p.

You might be wondering why the government are cutting if the above is true: it was only a couple of days ago the IMF released their observations on the fiscal multiplier in current conditions, the OBR were basing its predictions on the multiplier being approx 0.4 (which if were true would mean for every £1 cut debt/GDP is reduced by approx 50p)

Now they know the true values will they change their plans? I doubt it, it would be political suicide, and I think they quite like the idea of a smaller state, even if they are ruining the economy.


* this value is just so i'm working with numbers not algebra, i couldve chosen anything and it still shows approx a 50p rise in debt over GDP for every £1 cut
** I chose the value at the middle of the range provided by the IMF, even using the lower bound the extra cuts are self defeating

Re: How do cutbacks save economies? : Fri Oct 12, 2012 12:03 pm  

ROBINSON wrote:

If your personal income was £20k per annum but your outgoings were £22k per annum you'd have to make cutbacks.

Mental picture of Robinson as Mr Micawber...

[DaveO]

Re: How do cutbacks save economies? : Fri Oct 12, 2012 12:17 pm  

Richie wrote:

I do think people get too caught up in differentiating between selling/making "product" and "service" particularly if feeling services are "real" or sustainable.
To use an example from my business, I might be talking to a client who needs some more IT processing power.
I could sell them a server that they put in their data centre to meet that, and I've sold a product.
Or I could sell them some processor time on a machine (which may be a standalone or could be shared infrastructure) and I've sold a service.
Is there really a massive differentiation between them?

Surely the server manufacturer sold a server i.e. a product in both cases either to your customer or to the data centre of the service provider? Unless you manufacture servers you are acting as a 3rd party middle man in both scenarios and in both cases are therefore part of the service industry.

That said I am not sure what your point is?

Re: How do cutbacks save economies? : Fri Oct 12, 2012 12:32 pm  

DaveO wrote:

Surely the server manufacturer sold a server i.e. a product in both cases either to your customer or to the data centre of the service provider? Unless you manufacture servers you are acting as a 3rd party middle man in both scenarios and in both cases are therefore part of the service industry.

That said I am not sure what your point is?

We are both manufacturer and data centre provider. One method counts as a product sale, and one as a service sale.
In fact the client could also lease the server from us in which case we've sold a service, or buy and lease via a financing company (which may be part of my company of may be external) in which case we've sold a product, to a financing company.

The point is that there seems to be a view that a service based economy isn't as real as a product based manufacturing economy, when in reality service and product aren't necessarily that different.