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Guest Post: Economics

After the 2011 tsunami, Fukushima nuclear power plant exploded and was unable to produce electricity, necessitating rolling blackouts and widespread efforts to save electricity in the Tokyo region/ East of Japan. The disruption that this caused was completely inevitable given the circumstances. At the same time, in the West of Japan there was also a widespread campaign to reduce electricity consumption. Lights in supermarkets were turned off, air conditioners not used despite soaring temperatures, workers all crammed into one office, people generally encouraged to turn things off regardless of inconvenience - to help the people in Tokyo.

All this, despite the fact that there was absolutely no way to transfer electricity to the areas with a shortage. The Eastern and Western halves of Japan operate on completely different electricity systems and are unconnected. Consumption in the West is entirely unrelated to availability in the East, yet people still believed that their sacrifice would somehow help their countrymen.

You might find this behaviour strange, or perhaps noble, but to me this represents more than just another oriental peculiarity or example of Japanese communalism. This is the way that most people around the world think, most of the time. It's based on the principle that resources are universally exchangeable and unfortunately, it is a damaging mistake. The reason why we make this mistake, is money. We are so familiar with equating the things we consume and do with money, we forget that different types of work and different resources are often entirely unrelated.

For example - if I manage to refrain from eating a chocolate bar, the number of motor cars does not increase. There is some real physical limit to the number of chocolate bars which can reasonably be produced in the present. There is also an unrelated limit to the number of cars which can be produced. A chocolatier cannot design a motor car and a chocolate factory cannot make one.

We are told, often and loudly, that the rich must pay their fair share in order to contribute to the poor. I suggest that this is not possible. The rich absolutely cannot pay for the poor, because the resources that they use are entirely unrelated to those which the poor need. The rich spend most of their money on positional goods. If we lower spending on diamond rings, will more food become available? Will lowering spending on Ferraris increase the number of houses? No.

"But," you cry, "if we spend money on the poor, we must get it from somewhere!"

Yes - we make it. If the supply of money is the only factor which is limiting production, then presumably producing more money will increase production ( for free since money costs nothing to make). I assume that price rises are driven by supply and (nominal) demand, so if production increases, presumably price inflation will be limited. In this case nobody has paid anything to feed the poor, though some people have chosen to work.

If there is some real limit to production, then producing more money will lead to inflation. But even in this case, it won't be the rich who pay.

Price increases for everyday goods, will effect the rich only a little and in order for the price of the positional goods which they want, to increase, the rich would have to be getting more money (or who else would pay for them). In real terms, they have lost nothing. In reality, the price increases would affect ordinary people - so they would be the ones paying for the poor.

If printing money is inflationary, then taxing it must be deflationary. Why not give the money to the poor, but reduce the inflation impact on ordinary citizens by taxing the rich? Again, this won't work. Given that the rich spend so little of their income on everyday goods, the only way we can have an effect on the demand for these goods is if they stop paying so much money to their workers, ordinary people.

If we want to pay for the poor and there is a limit to real resources, it will be the ordinary people who pay - through consumption tax or food price inflation - in real terms, through less everyday goods.

There are, of course, other reasons why we might want to tax the rich - perhaps their wealth causes great unhappiness to the rest of us, or they earn their wealth through exploitation rather than contributing to the common good. Perhaps by taxing the rich we will encourage people to work harder in real jobs. Perhaps the rich will work harder to make up the money they have lost. Who knows. Taxing the rich could equally cause them to work less hard and make us all poorer. The case isn't clear which is why people generally try and justify taxing the rich on the grounds of them "paying their way", even when their true motivations are quite different.

As far as I'm concerned the effects of taxation on this group are so unclear, we probably shouldn't worry about it over-much. Ideally, we would have a society in which wealth wasn't produced by antisocial activities, but destroying the entire mechanism of money as motivator isn't likely to achieve that.

In the same way, by not consuming a chocolate bar, perhaps I might, in the long term, lead to an increase in investment in car factories. Only if I use my money to buy more cars.

We are also told that increasing government debt means the impoverishment of our children as they work to pay it off. This is the temporal version of the Japanese Electricity Fallacy. As Bertrand Russell once wrote, "a man cannot eat a loaf of bread that does not yet exist". By taking a piano lesson today, I am not reducing the number of piano lessons available to my children. Government spending, resulting in debt can only reduce the welfare of future generations to the extent which it reduces investment in the economy. But the reason for increased government expenditure and deficits at the moment is the desire of the private sector to save.

That is what government debt is - the savings of individuals and businesses. And that is why interest rates are low - businesses fear that demand is weak and therefore don't wish to invest - they are saving their money. This saving does not result in productive investment. The government can help, by either giving money to people in the private sector who want to spend but have no money, thereby boosting demand and encouraging investment or by investing in public goods themselves.

"Ah!" you exclaim, "eventually, interest rates will rise and then we will be bankrupt!"

If interest rates rise, it will mean that the price of bonds have fallen. What would prevent the government from buying these bonds back at less than they issued them for in the first place, exchanging interest bearing bonds for zero interest cash? They would turn a tidy little profit on it at the same time (though the idea that the government (representing the country as a whole) should be trying to make a profit(at the expense of the country as a whole) is utterly ridiculous).

It is absolutely true that if savings are sufficiently high and growth in productive capacity sufficiently low, that the people making savings have absolutely no hope of getting their money back. They will lose out to either inflation or tax (this is what will happen to the Japanese eventually). But, what do you suggest we do about this? Surely the only thing we can do is attempt to boost demand and investment through government spending. The "do nothing" charter will absolutely doom savers to losing their money, and mean the rest of us have fewer sunglasses at the same time.

Having said this, there is a definite limit to what government spending can achieve. All unemployed people are not the same and giving them money will not neccesarily increase real production. It will however increase demand which will encourage those capable of production to get on with it.

In my humble opinion, we shouldn't worry about debt, deficits or unemployment - an excessive concern for any is likely to be counter productive. We should instead be pragmatic and attempt to buld the best possible society while ignoring the twin evils of egalitarianism and market fundamentalism.

[Even more than his previous posts, this - Mark's final contribution here - only represents his own opinion and is not endorsed by The Last Ditch in any way, shape or form. Tom]

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