Tuesday, 26 June 2012

Comparing macro and micro economics

Dickens famously wrote:
"Annual income twenty pounds, annual expenditure nineteen, nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

He was talking about personal or household income of course, but the same rules apply to every entity, from an individual to a country. Economists seem to have forgotten such basics.

When the household can’t get by on nineteen pounds and sixpence there are only two options, earn more or spend less. Some short term re-organization may be possible, HP may spread the cost of an essential purchase, a loan may help to survive the bumps, but in the longer run we all know you can’t borrow out of debt or borrow to spend more than your income in the long term can support. The same applies to countries.

If the household has a couple of unemployed teenagers then one solution would be for them to get jobs and increase household income, problem sorted. However making home based work for the teenagers is not a solution because to be effective the work has to generate income from outside the home. It’s no use paying them to clean their rooms and do the garden then charging them rent. That just circulates more cash while doing nothing to increase household income. Indeed just the opposite, it ties up the ‘teen labour resource’ internally so they don’t have time to bring in external income.

Scaling the principle up to country proportions the fallacy of ‘green jobs’ to ‘stimulate the economy’ is revealed as nonsense.  Power costs a certain amount. Making its creation less efficient and employing armies of people to maintain that less efficient power system does nothing to increase national income. Just like pocket money for the kids it simply passes money around locally. Also, just like the domestic micro-economic case, it ties up the labour resource. We now have thousands of people doing what is essentially domestic housekeeping to keep a basic power supply service running. Loads more lined up to install smart meters so we can use less of that energy.  The ‘green job’ can only be economically effective if it reduces the amount of money leaving the country by reducing imports, or creates external income by exporting the skills or energy.  It doesn’t, and the entire notion should have been forgotten about at that point, with any subsidies directed towards helping exporters and people bringing in foreign wealth.

Recently we are hearing more about the nonsense of PFI schemes. Again a well educated schoolchild could understand the built in fallacy of these. The building should cost the same whoever builds it, maintenance is the same whoever owns it. So adding a layer of bankers, high profit PFI firms and shareholders must cost more. It’s like our 20quid income family needing a TV set. Years ago they might have gone to Radio Rentals and rented one, that was OK until everyone realised it cost less to buy the TV, pay the HP, and after a couple of years they would own it. And being fair to Radio Rentals they were not creaming off anything like the profit levels of the PFI industry, but even then it didn’t add up. Yet our mad government have gone exactly down the high cost rental route for major infrastructure projects. 

They will no doubt try and do the same for HS2, while desperately trying to prove that saving a few hours a day (on a journey that can be done anyhow) is worth the vast bill. Ignoring that they could save many more man hours by (say) removing the hours of queuing at the Dartford M25 crossing by abolishing the tolls. To return to the domestic analogy it’s like our family deciding they want to buy a new BMW to park next to their perfect serviceable Ford Mondeo because it’s faster, instead of mending the garage door to make it quicker to open.

Governments display a pathetic and childish lack of sense over spending, applying complex economic and financial tools and theories to arrive at a conclusion that defies and ignores ordinary common sense and experience.

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