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Sunday, 8 February 2009

Sound thinking from the WSJ

The following from the Wall Street Journal sounds like the first piece of economic common sense since we first started hearing about fiscal stimulus.

"A dollar doled out in jobless benefits may well be spent by the worker who receives it. That $1 of spending will count as economic activity and add to GDP. But that same dollar can't be conjured out of thin air. The government has to take that dollar away from someone else -- either in higher taxes, or by issuing new debt in the form of a bond. The person who is taxed or buys the bond will have $1 less to spend. If the beneficiary of that $1 spends it on something less productive than the taxed American or the lender would have, then the net impact on growth will be negative.”

Unfortunately, we still have the one-eyed Scottish idiot with his GDP fetish. As said before GDP is supposed to be a measure of the value of goods and services provided by the economy, assuming that they are fairly priced. This government has always been eager to boost GDP by taxing Paul to pay an inflated salary to Peter, on which he pays more tax etc, etc, etc. irrespective of the value of the services provided. This boosts GDP, which means that in the wacky world of New Labour economics, we are less indebted, because they measure government borrowing as a percentage of GDP.

But hang on, I hear you say, we really do owe that money and the actual amount the government has borrowed in our name has gone up. Yes, I reply and that is only half the story because of all the off-balance sheet shenanigams, but the real problem is that so much of this government-funded GDP (NHS staff paid twice as much for the same output, civil service salaries higher than the private sector, dievrsity co-ordinators, NHS computer systems nobody wanted, ID cards, the Olympics, extraordinarily expensive PFI schemes and the rest) represents little or no real value, but gets included in GDP because real hard cash was spent on them, far in excess of the true value. The short term injection of cash is like a junkie's fix, and like a fix, it is killing the junkie.

So what is the alternative? The answer lies in true wealth generation. Businesses with long-term competitive advantages that will produce sustainable wealth. London had one such in the financial services industry but overdid it with funny paper, and this was missed by the government. The rest of the economy needs less government interference, not just because that interference creates costs and slows down existing businesses, but because the world moves quickly and the businesses of the future will arrive sooner than we know it. But where will those industries set up? In a country riddled with debt and government interference, or in a business friendly country with reasonable regulation and a light tax burden.

Go figure.

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