Friday, 11 February 2011

Twitter is not the best place for economics debates

One of my good friends (former Lib Dem voter now supporting Labour) and I have been trying to have a debate on Twitter regarding the government's spending review/prospects for growth in particular he didn't agree with my blog Debt vs Deficit. I don't think Twitter is the best way to articulate arguments - I was finding myself frustrated when one sentence was taking up the allotted 140 characters so I shall summarise here.  The gist of his points are (feel free to correct me):
  • Cutting now reduces jobs which reduces tax income and increases the benefit bill.
  • He would rather give companies tax breaks to increase jobs before reducing government spending as this will increase tax revenues.
  • The Coalition are destroying the welfare state "and leading us to a country where their will be a vast gap between rich and poor"
  • Jobs are part of the way out, Gotta include regulation on banks and closing tax loopholes to stop it happening again.  (I don't think anyone could argue against this!)
  • I sound like a Tory when I say the welfare state provides incentives not to work.
Now I consider him to be a socialist (he says "Social Democrat") and full of good intentions.  There is a lot of what he says in general and in the discussions we have had recently that I agree with.   I am going to use the below to spell out my argument for continuing on the current course of action however I must emphasise that I don't agree with every adjustment that has been made in the spending review I just believe that the reduction needs to happen (and should happen quicker than the current government is doing).

Firstly, let me say the easiest thing to defend for me is my statement that the welfare state provides incentives not to work.  I think it's clear by providing unemployment benefit and other support (housing allowances, free school meals etc) there is an incentive for certain people not to work as their marginal cost of working is higher than the wage that they will bring in.  That does not mean that I think the welfare state shouldn't exist, mealy that the incentive exists.

I don't think there is an argument about weather the deficit needs to be reduced, and hopefully there isn't an argument that we need to start running surplus's.  Back in 2007 we were paying around £28bn a year in interest, this year we will be paying over £40bn and by the end of the parliament, despite the harsh measures that will be put in place we will be paying an estimated £63bn.  This is money that we are not getting back, money we have to spend in before we can run a surplus to bring down the debt level and reduce future payments, hence money we are not able spending in future on education, health care - unless we keep borrowing more and getting ourselves further into the shit.

Our disagreement obviously boils down to how this reduction comes about, although I think I place a much greater importance on the reducing the debt as I see this as something potentially catastrophic.  He is quite right in suggesting increasing government spending (G) as in normal situations an increase in G would normally result in a larger increase in GDP due to the multiplier effect that this spending has (directly increasing GDP and then filtering through the economy).  However I don't see this as a normal situation.  The mountain of debt is so large leading to consumer confidence and investment confidence being so low that I don't think increasing spending will have a positive effect.  Consumers don't have the same propensity to consume (they also have less access to credit) and Investors will get nervous and demand higher interest rates or withdraw from the economy.  

I also feel that there has been so much waste in spending by Labour, spending for spendings sake that there is plenty of functions that aren't fit for purpose and as such should be scaled back.  I also don't think that governments can create wealth, they should be there merely to redistribute and ensure the vital services are provided for everyone.  Government run institutions aren't efficient, my thoughts are the cuts will help to readdress this and bring their spending to more realistic levels.  The private sector made massive cuts in the wake of the crash yet there wasn't a huge effect on jobs. 

Like I've said, I don't agree with everything in the spending plan, but do subscribe to it's overall goals.  I would do things differently of course, but who wouldn't given a chance to implement their own ideas.  The thing is, although I am supporting it, I do think we need to be flexible.  I think it will be the right way to go for the whole parliament but if it is having terrible effects on the people on the street then we should look again.  I for one don't give a shit about the growth figures (the final quarter's figures were nothing to do with government cuts, just things out of their control) what really matter is the ramifications for the ordinary person.  People will be squeezed yes, but can they cope?  I think the 2012 budget will probably need more to ease the burden on those less well off whilst more policies are still needed to help improve social mobility.
Oh and one final point, inequality grew over the 13 years Labour were in power, I think the vast gap already exists!

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