Monday, 23 June 2014

Austerity & The Confusion Over It

Apparently tens of thousands of people descended upon central London a few days ago to protest against the government’s austerity measures. The usual uninformed irritants were there – Russell Brand, Owen Jones, plus no doubt thousands of pumped-up socialists eager to confuse the merits of the free market with Fabian-esque paroxysms of top-down redistributionist hegemony. While their errors are usually embarrassing solecisms against sound economic theory, this time it’s even worse for them, as, thanks to Fraser Nelson’s data collation, their complaints are shown to be contrary to economic fact as well.

Not that they have ever let facts stand in the way of a good protest before, but one has to wonder quite why they are so myopic when it comes to the reality of the situation. Government spending is at an all time high, and taxation is hardly at the highest it has been either, so their initial premise needs some redressing. I think their confusion exists because the economic hard left have long ago stopped worrying about sound economic principles and empirical data – they just can’t help focusing on headline-grabbing malcontentment issues associated with inequality, foodbanks, zero hour contracts, welfare dependency, and various other cost of living issues, and scouring the nation looking to pour scorn on anything within the sphere of free enterprise.

That was a bit of hard cop. Now for a bit of soft cop. In all fairness to those demonstrating, there are many on the hard economic left who go about their business enshrouded in good intentions, and there are many on the hard economic right whose intentions are not good enough. Times are hard for many, and those who are prepared to stand up for the underdog and campaign for justice have at least a commendable heart, even if their reasoning is faulty. In actual fact, on the issues up for discussion here, the demonstrators have got their reasoning exactly backwards on both issues. They are advocating the very thing they should be opposing, and opposing the very thing they should be advocating.

I'll explain. Suppose that in the past few years your monthly spending has exceeded your monthly wages. Your partner suggests three ways in which you could be more fiscally responsible.

A} Cut down on your spending
B} Increase your earnings (either through more hours or higher wages)
C} Go to the cashpoint more often to ensure you’re never short of money

I’m sure no one needs telling why A and B are viable options, and why C is a ridiculous suggestion. But just in case there’s any doubt, the reason option C is ridiculous is that drawing out more of your finite supply of money is not going to help your fiscal irresponsibility if your spending already exceeds your earnings - it will, in fact, compound your irresponsibility.

Now replace you and your bank account with the government and the treasury's collection of taxes, and suppose that in the past few years your government’s spending has exceeded its income, or been irresponsibly spent. What could the government do?

A} Cut down on their spending
B} Increase our taxes

Option A is a viable option. Spending less money means working hard to find government waste or government non-necessities and cutting back on all the profligate expenditure it can. But this is the very thing that Owen Jones, Russell Brand and the other 50,000 people were arguing against. In times when fiscal irresponsibility has been levelled at the government, the demonstrators wanted more government spending, not less - the very opposite of the fiscal responsibility they claim to want to achieve.  

But what about option B? Option B is not a viable option, because increasing our taxes is not like earning more money. It is more like option C in the first scenario – it is like being in a state of fiscal irresponsibility yet going to the cashpoint more often to ensure you’re never short of money. The government’s money comes primarily from taxpayers – and they choose how they tax us. But there is a caveat that the left seem to be missing - the taxpayers are like the government’s cashpoint; whatever you take out this month leaves less for next month, and so on. Unlike in scenario 1 when cutting down on your spending or increasing your earnings is like adding to your monthly income, government's increased taxation is not like adding to their monthly income, it is like paying a visit to the cashpoint.

Yet despite this, option B is the one Owen Jones, Russell Brand and the other 50,000 people were arguing for. They have their reasoning completely backwards in both cases - they should be advocating A and opposing B, not the other way round. Instead they are arguing that cutting spending (profligacy?) is detrimental and that an extra few billion pounds in tax hikes can change government spending from fiscally irresponsible to fiscally responsible. That's as silly as saying that buying a £300 packet of toilet rolls can be fiscally responsible as long as you go to the cashpoint and draw out the money there. Taxing more does not make a government fiscally responsible - the only thing that makes a government fiscally responsible is spending less, by cutting out all the waste and non-necessities from its expenditure.

I hope now you can see that the enumeration is crystal clear. You as a worker can increase your income by working more or spending less, amounting to lower depletion of your assets. The government also cannot increase its taxation without a lower depletion of its assets. Whatever they don’t tax is either spent or it is saved. If it is spent (freely) then there is a net economic gain because both buyer and seller partake in a mutually beneficial transaction. And if it is saved then it is available for banks to use (savings are basically us lending banks our money for a small return of interest), and it is still available for taxation when it exchanges hands next time. Similarly, if you don’t spend that £300 on those toilet rolls, then the money either stays in your bank gaining you interest, and being available for banks to invest, or it is spent on one of those mutually beneficial transactions to which I just alluded.

Unless the demonstrators get the basics right, they will not be listened to. Instead of congesting parliament square and making lots of waffling reverberations, they'd be better off reasoning things through properly, and then putting pressure on the government to cut much of its waste and inefficient spending. The trouble is, a lot of that waste and inefficient spending comes in the shape of things the left historically supports - so don't hold your breath there either.