Sunday, 27 June 2010

Send out the Clowns; There shouldn't be clowns

Japan's economy has by all accounts been in intensive care since the 1990s though I suspect it's not that apparent to the Japs; life goes on, people work, the nation exports. But economist Joseph Stiglitz, reported in today's Indie, blames Japan's policy of cutting public spending for plunging the country back into recession and warns Cameron of the risk that Osborne's cutting will be the same here.

But here I think the fundamental difference between Brown's incompetence and Cameron's prudence will become apparent. And it's the difference between consumption and investment spending. Brown would hire a clown for a birthday, Cameron would buy a piece of antique silver. Tomorrow the clown will be gone, and there is nothing to show for the money spent, but the silver remains, as valuable an asset as the cash that bought it.

What Osborne is cutting on a massive scale is Brown's expenditure on clowns.

Cameron is well aware of the risk of a double-dip recession, and he's creating fiscal room for measures to avert it should it come (and it's by no means even probable that it will) - capital, or investment spending. Hiring a Walking Coordinator for £25k a year sounds like a minor spending decision, but the lifetime cost of the purchase over 40 years will be around £1.18m including pension costs. Firing a single Walking Coordinator can therefore save up to about a million. Spend the same first year cost of £25k on re-roofing a police station and you get an asset of immediately increased value, and even though depreciated over the life of the new roof the annual costs are a fraction of hiring a clown. And you can re-roof another one the next year. And the next. And if the fiscal danger is over, you can stop spending.

With infrastructure spending, you not only have the asset but get the same economic benefits as hiring clowns - but instead of the £25k going to one person it goes to thirty or forty, including the roofer, the builder's merchant, the distributors and the slate-hewer. None of whom are dependent on the one job for their livelihoods. But neither will any of them feel obliged to vote for the man who hired them, and this, last, reason was always the driving force behind Brown's clown hiring.


Chuckles said...

Not always -

English Pensioner said...

My father was a Chartered Accountant, qualifying in the 1920's. Unlike the modern breed, he had some strange, old fashioned, ideas about money, which he passed onto me, and which I have always stuck to. The most important of his principles was that you should only borrow money to acquire an asset which is unlikely to decline in value. Thus he approved of my borrowing money to purchase a house, but would have been appalled if I had borrowed money to buy a car or fund routine expenditure. As a result, I never did, and although we had some difficult times, we survived and now have a reasonable standard of living in our retirement.
These are principles that all governments should adopt; if the country can't fund its current expenditure from its income, it should cut its expenditure, and if this means hard times for some, so be it.

Budgie said...

Raedwald - you are more optimistic than I am about Cameron/Osborne. The wide 'spread' of the verdicts so far about 'the cuts' means only that 'the cuts' are ill defined and woolly. But we already know this to be the case.

Only the intention to cut has been stated, the reality awaits the departmental reviews. You can be sure that the departmental managers will cut in the most painful way possible, to cause the most outrage. They have no incentive to do otherwise.

The only way to succeed with cuts is to close whole departments down. An example would be to close DfID and transfer the responsibility to administer emergency aid (only) to the FCO. Another would be to shut down the NICs departments totally, rolling NICs into Income Tax.

Cameron/Osborne will fail with their existing method: either the cuts just will not happen, or the political outrage (see above) will be so intense they will back down. We will be left with a massive bureaucracy but reduced services and even worse productivity.