I Wonder What Would Happen If.....?

I've probably mentioned on this blog before that when it comes to economics I'm no expert, but fortunately other people are, which is just as well, when I began wondering just how other countries go about tackling their own national unemployment problems. After all, Britain has a problem with unemployment, but in comparison to the likes of Greece, Spain, Italy, etc. our problems are minor one, although the fact that we still retain our own national currency, whereas they do not, possibly plays a significant part in explaining the often vast differences.

 

Anyhow, from the limited amount of reading I was able to do on the subject, some experts believe that there are a limited number of ways to help reduce unemployment within a modern economy, through public spending, through interest rates, or through taxation, although one would also assume that you could also affect employment through a combination of these three measures.

 

Public spending is thought to be the most direct method of affecting employment, whether through the introduction of public works projects, through education, or through direct welfare payments, which is said to be the quickest of the alternatives, simply because it's the easiest and fastest to set up and disperse to the end recipients. Studies in America suggest that those in receipt of welfare typically spend their entire incomes on basic commodities, such as food, heat, light and housing, making little if any provision for savings, or God forbid paying down any other existing debts. The thinking goes that because these consumers spend virtually every penny they have, then that is good for retailers and manufacturers, who sell more and produce more, thereby requiring more staff to sell and produce more products; which therefore increases the country's overall tax yield and also increases overall employment.

 

In a similar fashion, but over a much longer time period, public works projects, like schools, roads, municipal buildings, housing, etc. also help distribute wealth around the economy and reduces overall unemployment. However, more studies in the USA seem to indicate that schools actually create more jobs for each billion dollars invested in them, simply because, as well as directly employing teachers, cleaners, builders, electricians, etc. in building the school, college or university, there is the added bonus of the additional educational benefit that these places of learning have on the pupils who attend them, creating smarter, more skilful and better qualified future workers for the nation. Of course, the only major downsides to this sort of public expenditure is the length of time that they take to come to fruition; and the sometimes high costs of financing them, which has to be done at the cost of a much higher public spending deficit; and the costs of supporting it with interest payments. Interestingly, the same American studies, also concluded that the worst area of public spending for actual job creation was within the defence industries, where basic project costs and specialist salaries tended to make such spending excessively high.

 

The third area of financial control that governments can use to try and reduce unemployment is through the tax system, with lower personal, corporation and unemployment taxes being used to promote personal spending. More money in your pocket usually means more money to spend on other things, including holidays, consumer products, home improvements and the little luxuries in life, which suitably boosted by this additional consumerism should lead to greater economic activity overall, higher employment and increased tax yields, all of which are once again good for the country as a whole.

 

As has been mentioned though, the one big financial downside to such generous government spending, such as public works projects, tax cuts and benefit increases, is that the money to pay for them has to be borrowed and repaid over time; and clearly the trick is to pay down these debts, whilst at the same time benefiting from the additional jobs and economic activity that the government investment has bought and paid for.

 

Now, as I say (again) I'm not expert on these things, but it seems to me that just as you can have two entirely different approaches to personal debt, so you can have two entirely different approaches to national debt. The first approach, is don't have any debt, or if you have to borrow at all, do so for the shortest amount of time possible, before repaying it in full. That's a bit like those people who own Credit Cards, but make sure to pay the full balance off at the end of every month, so that there's no discernible debt to speak of. The second approach, is to have debt, but keep it manageable, accepting that you're paying a little bit of interest, but that's a price worth paying for having the funds you want, when you want them. That's a bit like the Credit Card holder who only pays the minimum, or a little bit more every month, so that they pay their debts down over a period of time, not straight away.

 

For me, that's how our present coalition government are behaving, making a choice between paying off the Credit Card as quickly as possible; and in doing so, damaging the economy, as opposed to paying the debts off over time and helping the economy to recover in its own time. Clearly, even for a five year fixed term government, there will be instinctive need to clear as much of the country's debt as possible, before going to the country with the claim that they've rescued the economy from near ruination, which was never the case to begin with. In over 300 years of borrowing, the British government has never failed to repay its debts, or meet its international obligations and it was unlikely that this was ever likely to be the case following the last Labour government's period of office. In fact, rather than the coalition's austerity measures being driven entirely by any sort of financial imperative, one might suggest that they were mostly driven by political dogma and ideology, the Coalition choosing to pay off the nation's Credit Card at the end of the month, rather than defer some of the pain and pay a little more than the minimal amount, just over a much longer period of time. Ironically perhaps, according to most reports, despite all of their posturing and prevaricating over the country's enormous debts, the coalition's austerity measures that have caused so much pain to so many people, have achieved very little in real terms, as our current financial deficit remains as high as it was nearly four years ago, when they first entered office.

 

Although much of the government's money comes from the people of the UK through taxation, a significant amount of their revenue also comes from borrowing, ostensibly in the form of securities, bonds and bills. Some of these government backed bonds or gilts can be redeemed in as short a time as 0 to 7 years, while others can be redeemed after 7 to 15 years and others again only after 15 years, all of them with the appropriate amount of interest being levied on top. The point being that government borrowing is certainly not conducted in 5 year blocks, whereas this current administration seem bound and determined to try and squeeze years of borrowing into an almost impossible timescale, to the extent that they're likely to irreparably damage the entire economy for the sake of their own ideological dogma.

 

Going back to the point that some American studies have suggested that increased welfare payments can help reduce unemployment by creating an increased demand for products and services that then create a need for more employees, thus reducing unemployment. One of the first acts of the coalition was to savagely downsize the public sector workforce in the UK, the very sort of local people who would have spent their salaries locally; and the they wonder why local economies suddenly fail. Without those hundreds or thousands of reasonably well paid workers, local businesses and local employees begin to feel the effects of a much diminished local economy, to the extent that businesses close, people are made redundant and far less tax is generated and raised. I know it might seem like a fairly simple analogy, but if you think of the economy as a balloon; and the government decides to arbitrarily to let some of the air out, then commonsense would suggest that the balloon is going to get smaller.

 

'Speculate to accumulate' is a fairly common and well known mantra, one that the coalition government is more than happy to suggest to the privately owned "for profit" sector, but seemingly reluctant to adopt for its own operations. Whilst clearly recognising the private sector's reluctance to commit billions of their own money to necessary schemes, without first receiving government assurances about potential coverage for possible future losses, rather than offer the guarantees, this government simply offers worthless platitudes. A good example of the coalition's lack of commitment might be deemed to be the housing sector. It's estimated that we need something in the order of one million new homes just to meet the current demand for housing, whilst at the same time it is costing the national exchequer about £22 billion per year for housing benefits, 40% of which goes into the private sector, often to Buy-to-Let landlords who use the money to further extend their own personal property portfolios; and at the same time help to inflate the property market generally. Now, the Insurance company Legal and General have proposed building five New Towns at a cost of around £5 billion; whereas the Labour Party have pledged to invest up to £10 billion to help meet the cost of the planned 1 new million homes they would like to build between 2015 and 2020. Either one, Legal and General or Labour, or even both, just how many jobs and how much good is it going to do the national economy if these projects came to fruition. More jobs, means more fresh money, means more demand for goods and services, means more new businesses and opportunities, means more new workers, more money, more taxes.

 

So here's the question: what would happen if one of the political parties vying for our vote in 2015 was to commit themselves to undertaking a fully costed new house building program, to undertake a fully costed infrastructure project, designed to improve our nation's transport systems, to undertake the construction of new schools and technical colleges to improve the skills of our native workforce, to undertake the formation of enterprise zones, where small and start-up businesses could be encouraged and supported, to undertake a regeneration of our traditional fishing and manufacturing communities, to undertake a refurbishment and regeneration of our native energy sector, to undertake the establishment of manufacturing centres for renewable energy devices.

 

And what would happen if, instead of raising the capital for these new programs using bonds over 5, 10 or even 15 years the government in power were to spread the costs over a 25 or 30 year period, the same sort of time period that a householder might purchase their home. Again, what would happen if the government of the day were to share the financial cost with the private sector based on a long term equitable return on their investments. Just how many new jobs, new opportunities, new businesses, new taxes would such programs create over the next few years, thousands, tens of thousands, hundreds of thousands, millions? Instead of paying £20 billion, or £30 billion in housing benefits to greedy landlords and at the same time artificially hiking the prices of existing properties through the roof, wouldn't it be better to just build the houses and homes that we need, with the added bonus of creating hundreds of thousands of new jobs and regenerating our entire national economy?

 

Time and time again the theory that the private sector will eventually provide and often at a much reduced cost to the public sector has been proven to be untrue, not least with transport, with hospitals, with schools, with energy, in fact almost any sector that you care to name. It is a lie, a myth, a fallacy, a fable, it simply isn't true, because if it was we would have some sort of evidence to prove the case conclusively. That being the case, then governments like the one we have at present are not the answer to our country's problems, as they are too short-sighted and too ideologically bound to be brave or daring enough to put their hands in their taxpayer funded pockets and do what any sensible person would do.