Wednesday, 21 December 2011

Consumption or investment?

The Speccie offers a provoking thought on why 'starving the beast' (lower tax rates) has not led to smaller government in the US; the government simply resorts to borrowing against the future. Now, it suggests, "Requiring the American people to actually pay for all of the government they receive is, as Niskanen and others have convincingly argued, the most effective way to limit its growth". 

This may be fair enough as far as government services that are consumed as soon as they are produced are concerned - policing, teaching and so on - but what about government investment? Should the costs of a new school with a 60 year life be charged wholly to taxpayers during the two years it takes to build? Should the government undertake investment at all, or leave this to the market and rent the school, so that all spending is consumption? And what of R&D at Aldermaston and GCHQ that will benefit this nation ten years hence? 'Serve the check' may seem a simple and attractive mantra for we anti-Statists, but I fear it's hardly as simple as that.


Barnacle Bill said...

I fear young Raedwald the beast will never be put back in it's cage now.
Instead of the lion tamer having the chair and the whip, they are now the property of the lion, forcing us to jump thru the flaming hoops.

cuffleyburgers said...

Raedwald - you are correct hence the distinction made between current and investment spending and in fact G brown's famous golden rule of only borrowing to invest over the economic cycle was correct, the reason it went tits up was because for shortterm political reasons he redefined investment as spending and redefined the cycle to mean whenever provided he could borrow a bit more and then he abandoned it completely and look where we are now...

Weekend Yachtsman said...

It's the same strategy as that advocated by those who say P.A.Y.E. should be abolished: pay everyone gross and make them write a cheque to the government, because it's the only way they will realise how much they are actually forking over.

Of course, it would only work for those who actually pay taxes; benefit consumers and the public sector (let's call them "Tax-Eaters" as a great man once did) will not care at all.

Greg Tingey said...

Can I recommend: "Paper Promises" by Philip Coggan - I attended the book-launch a week or so back.
I would remind people that Adam Smith believed in government pump-priming in capital investment, where he was thinking of docks and canals ("infrastructure") and then recouping the maoney in more taxes, because of the increased economic activity and real wealth.

It is NOT an either/or situation, a balance has to be struck, between debtors & creditors.
What is clear is that the balance is in the wrong place - and certainly was in the wrong place back in 2007/8, especially in the USA - which had a very right-wing coporate-friendly & corrupt government at the time ( I say nothing about the present lot, if only because they are deadlocked)

NOTE: It would appear, especially every time they open their mouths, that the "Adam Smith Institute" have never read Adam Smith, um.

Anonymous said...

@ Weekend Yachtman

"It's the same strategy as that advocated by those who say P.A.Y.E. should be abolished: pay everyone gross and make them write a cheque to the government, because it's the only way they will realise how much they are actually forking over."

Precisely. And that is exactly what I did at the beginning of this year. I bailed out of corporate life because a) I was fed up of corporate life (or is that corporate lies?) and b) I didn't think that my £40k per annum tax take was being spent judiciously. Therefore I am withholding tax payments that will be best decided upon by my accountant - and I know whose side my accountant is on.

Coney Island

Anonymous said...

Why should the government be involved in schooling at all?

If we have to have welfare-schooling at all, then surely, all the government need do is pay for schooling that people can't afford. It doesn't need to run schools.

Ditto health.

Surely, if all the investment in hospitals and schools were to come from the private sector, the government would not have to concern itself with long-term 'investment'?

I fear that we've all become used to the status quo and have forgotten how to be self-determining, free and enterprising as a nation.

Woodsy42 said...

If I want something I wait until I have saved the money. Borrowing to 'invest' is still borrowing even if it's going towards a desirable 'asset' like a school.
And yes it should be charged against current income because if each school has a 60 year life 'current income' would need to pay for replacement of one 60th of the school building stock each year, that's a steady ongoing cost.

Anonymous said...

Fausty: "Why should the government be involved in schooling at all?"


outsider said...

Dear Mr Wuffing, you are of course right in theory but one of the severe limitations of economics is that it can only deal effectively with money transactions. Once you start start projected unmeasurable returns, all discipline disappears, so a little simplification is necessary for sound budgeting. A good rule of thumb is that you can borrow for a state investment that will produce cash returns (like a toll bridge) but otherwise it should be treated as consumption. Another useful rule of thumb is to limit state borrowing to 0.5 or 1.0 per cent of national income to cover the point. But all this pales into insignificance before the difficulty of measuring what are genuine cyclical deficits and surpluses.

Greg Tingey said...

Either you are talking ignorant twaddle, or you are a strolled-in USian troll.
Education and healthcare need to be funded by the state.
IMPORTANT NOTE: I did NOT say "provided" by the state - there is an important diffference.
Because, otherwise we'll get education and healthcare for the rich and powerful, and nothing for everyone else - rather like before 1850 or so, in fact!

I would point out that, compared to the USA, our life expectancies are higher, infant mortality is lower, and it costs less (even with NHS-mis-management and incompetencies).

Now, please make a reasoned defence of your position, if you can?

Anonymous said...

Anon @ 23:08 - My thoughts exactly.

Greg - Look at how much we're spending on education and look at the results. Near-illiterate, innumerate zombies who cannot and will not think for themselves.

The result of state education has been catastrophic. Far from being free, it is massively expensive. The government would be better off paying for children to attend private schools.

Blue Eyes said...

This starts from a rather purist standpoint that there should be cast iron rules on this stuff. Gordon Brown never actually missed his "borrow only to invest" rule but only by moving more and more into the "investment" column.

In the UK traditionally we have used the electorate as the backstop rather than the letter of the constitution.

Having had our fingers rather burned in the last few years I suspect that voters will be rather more prudent with who they elect.

Rush-is-Right said...

Raedwald, I'm with you most of the way but not this bit.. "And what of R&D at Aldermaston and GCHQ that will benefit this nation ten years hence?"

There can be no guarantee that R&D at Aldermaston or anywhere else will ever give rise to a future benefit. Almost by definition, Research is speculative. Perhaps there will be a pay-off, but more likely there won't. By far the safest course to follow is to write off the costs as you go along, which is what the accounting rules applicable to companies require them to do. Governments should follow the same rule.

Anonymous said...

Fausty: "The result of state education has been catastrophic."

To be fair to Greg, he does draw a distinction between funding of a thing by the state and provision of that thing by the state.

Problem is, the State is in the business of increasing its influence, what better place to start than in education ( now indoctrination ) and healthcare, to occasions when the citizen is at his or her most vulnerable.