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April 17, 2005

What’s Really Wrong With the Economy.

Ross Clark provides a couple of numbers that should, if anyone were thinking about the economy on a long term basis, scare the crap out of them:

Gordon Brown claimed in his last budget to have presided over the longest period of continuous growth since 1701.

Now this is good news, of course, increasing wealth being what we’re trying to achieve in the running of the economy. What is worrying is that at this time of growth, a time when the budget should be substantially in surplus, we actually have a PSBR of 30 billion or so. 3% of GDP or so.

Now people can claim that this is all about investment (it isn’t) or that the business cycle has somehow been abolished (fatuous stupidity), even that sugar plums and marzipan will be free to all on Tuesday next, but the simple truth is that there will be a recession in the future. Unemployment will rise, tax revenues fall, business slow down, a fall in GDP, at some point, maybe not next year but certainly within the next decade, the sums will stop adding up. Now if such a thing happens from a position where the budget is in surplus, this is manageable, the PSBR (via the various automatic stabilizers) moving from surplus to deficit and thus ameliorating the effects. Classic Keynesianism if you wish.

But if you start from a position where the PSBR is already 3%, then it will only widen further, to what? 6%? 10%? Does anyone seriously think that we would be able to finance such a deficit? To suck in that much money interest rates would have to rise, making the recession worse, increasing the deficit and....well, you saw what happened to Argentina, didn’t you?

OK, OK, I’m exaggerating. No, I don’t think that UK PLC is going to go bust in the next decade. But I do think that having a budget deficit of 3% of GDP after 51 quarters of successive growth is insane. We haven’t left ourselves any room for manouvre when it goes pie-shaped, something that the merest glance at economic history will tell you it inevitably will.

The second number is of similar long-term importance:

...the Centre for Policy Studies calculates that in the year to the first quarter of 2004, productivity in the economy as a whole grew by 1.2 per cent, yet in the public sector it shrank by 1.3 per cent.

Paul Krugman has been saying two things consistently for the past decade. That productivity isn’t everything, but in the long run it is pretty much everything, and that average wages in an economy are determined by average productivty in that economy.

To have a part of the economy where productivity is declining means that given the above, that part of the economy is driving down average wages. Over the long term, of course. One response to this would be to try and ensure a shift in the economy, to move people away from a sector of such decline, so as to reduce the effect on the wider level of wages. For example, if it’s happening in 1% of the economy, it doesn’t matter all that much. If it’s happening in 40% of the economy, it does. If it’s happening in 40% and falling of the economy, at least we are moving in the right direction.

But it’s happening in 40% of the economy and rising. This reduction in productivity, this  factor which will reduce average wages in the future, is precisely where more people are being hired, more money is being spent  and more of the future wealth of the country being pissed away.

Gordon Brown is often held to be a clever man. Indeed he is. Insane, but clever.

April 17, 2005 in Economics | Permalink

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Comments

A classic example of waste in the public secotor is Scotland. The NHS in Scotland spends 23% more per head than in England, but quality of and access to health care is considerably worse than in England. England's taxes (yes England - there is a net flow of money into Scotland of many £bns) are being pissed away because the Lib-Lab coalition haven't got the balls to shake things up and do things properly. Although I am not an advocate of the privatisation of key public services, this has to be an example where a semi-privatised service would do some good. Productivity up, costs down - within reason.

Why don't we do things like the Swiss? Everything works there.

Posted by: lascivious | Apr 17, 2005 1:12:34 PM

Public sector productivity is bound to decline year after year because of the Baumol effect; it's heavy in labour-intensive services in which labour can't be substituted for capital. Put another thousand bobbies on the beat? Productivity falls. Cap class sizes at 30? Falls again. Put more cleaners into hospitals? Falls again. All of which goes to show nothing other than that productivity numbers ain't all that.

Tim adds: I’m sure I’d be a lot more impressed by this Baumol effect if the first few references (at G natch) were not you and your muckers discussing it at CT, or those discussing you discussing it.

Your examples above depend on how productivity is being measured. Perhaps more bobbies on the beat (if we could tear them away from their paperwork ) would reduce crime? Moving already extant resources to more productive uses would not, of course, meet your dread effect.

Finally, I find the whole idea ludicrous. You appear to be stating that as we have more things provided by public services, therefore it is inevitable that average wages will fall. Is that really, as a man of the left, an idea that you want to put forward?

Surely, it would be far better to state that, if Baumol is right, that we therefore need to find a new method of delivering these services so that they do not, inevitably, drive us into penury? Y’know, like reform of the delivery system?

Posted by: dsquared | Apr 17, 2005 10:03:52 PM

You could probably double the effectiveness of the bobbies if you ended drug prohibition. In addition non-drug related crime and the murder rate would decline as well. Insurance rates for property would decline too.

Lots of positives.

One need only look at the American experience with alcohol prohibition.

Unfortunately because of the American mania for prohibition, nothing will change.

More is the pity.

Posted by: M. Simon | Apr 18, 2005 8:55:40 PM

dsquared,

The problem is not with the philosophy of the idea.

The real question is: is the idea right or wrong?

Competition keeps the public sector tolerably honest.

Posted by: M. Simon | Apr 18, 2005 9:01:10 PM