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Thatcher's purse economics

It's as if hundreds of years' work by economists never existed. Journalists and politicians, especially on the right, seem to want to live by Mrs Thatcher's housewife's purse.

Even the richest man in the world, worth something like 40 billion US dollars, is operating on a small scale compared with the total UK economy, which turns over more than 2,000 billion dollars each year. And the average person makes financial decisions worth a tiny fraction of either of those numbers.

Economics, at least in the shape of macro-economics, is about the financial affairs of nations. In this context, what is done by one individual has little effect. This also means that the individual lives by different rules from the nation. Most of use have only limited choices in the conduct of our affairs. If we spend more on one thing, we must spend less on another. Borrowing may allow some extra flexibility, but we will have to bear the future burden of repayments.

So the economics of the housewife require that if income falls, spending must be reduced. It is much less straightforward for governments. Government spending provides the incomes for a lot of people. A sharp cut in spending necessarily translates, one way or another, into a sharp loss of income for very many families. That in turn results in a substantial fall in the domestic demand for goods and services. And so the economy shrinks some more, government revenues fall further while demand for benefits increases, and so the problem is not solved but made worse.

Cutting spending is, in any case, very difficult to do in the short term, and is liable to incur additional costs at first. The much touted "waste" that politicians repeatedly claim to be on the point of reducing is hard to find. It might well exist in the bloated management structures of the NHS and education, but dealing with them will be very difficult. Especially while politicians try to remain hands off to avoid taking responsibility, and adhere to the dogmas of privatisation and the worship of the commercial sector.

Increasing existing taxes is a far more viable way to attempt a reduction in the government deficit, although that too will result in a reduction in demand. But tax increases will have political ramifications, and neither Labour nor Conservatives are likely to support them ahead of a general election. When they do, there will be outcries. The wealthy are already moaning about a 50% rate of income tax, even though UK personal taxes on high earners are neither high by international standards nor high by comparison with those on average incomes. So are the whining wealthy to be appeased while the vast bulk of the population bails out a crisis largely not of their making?

Much of the journalistic outrage seems to be politically motivated. It seems that reason has been abandoned in the urge to find sticks with which to beat Gordon Brown. It may be that there has been profligacy in the past, but it goes back at least as far as the use of oil revenues for no better purpose than reducing taxes on the rich. RIght now is not the time to attempt to remedy it.

In the relatively short term, the government's extraordinarily high level of borrowing is not creating major problems. It is largely being financed by printing money, through the Bank of England's so-called quantitative easing. In boom times, the Bank's actions would no doubt lead to inflation. At present, though, the extra money is simply offsetting the money that is disappearing through the setback in the general economy.

Nor is scare mongering over a supposed need to persuade foreigners to lend money to the UK government necessarily relevant. Money flows have to balance in the end, but there are many ways for this to happen. This year, companies have raised huge sums in new equity, a process that may well continue. Some of that is coming from outside the UK. It is likely that at least part of the government's funding will come from overseas in an indirect way - economies are complex and hard to understand.

Should we complacent? No, there are real problems. But we have no hope of solving them if we attempt to apply housewife's purse economics to the nation's finances.

#128003 • 14 September 2012 4:30pm by Martin Brampton • Vote: Agree (217) Disagree (172)

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