I DON’T UNDERSTAND IT

The TV at the moment is broadcasting important people talking about the terrible state of our economies and wringing their hands over what we are going to do about it, twenty four hours a day.

But, if the rich and their companies just paid the taxes they owe we could pay off all our national debts immediately. There would even be lots of money left over for our governments to kick start our economies again.

Heck, in Britain, if just the mobile phone companies paid the taxes they have somehow (with government help) managed to avoid paying over the last few years, we would be out of recession.

WHY ARE WE SO STUPID?!

Comments

I DON’T UNDERSTAND IT — 2 Comments

  1. I think you answered your own question with your title.

    There is an argument for the policy you’re advocating, but it’s not a policy which solves problems for free. There aren’t any policies that solve problems for free: it it were that easy…

    I’m only an amateur, but I’ll have a go. For a start, if mobile phone companies paid substantially more taxes (let’s not quibble about whether they owe them anyway) they would have less money for their shareholders and creditors. That would mean a lot of pension funds and banks more unstable than they are now, and therefore (political reality being what it is) more likely to receive government money, either directly in the form of bailouts or indirectly in the form of higher welfare payments compensating for income losses. So the government might increase its revenue, but would also increase its liabilities. This is the infamous “trickle-down effect”, not that consumer spending by the rich trickles down (that effect is negligible and inefficient), but that investment by the rich (rich institution, mostly) props up the whole system.

    The government could cut free of that whole system, but only by ceasing to rely on people having money to lend to it. But for the government to stop borrowing would need an instant cut in spending to levels most people would now find intolerable; and even if a lower level of government spending were desirable, the speed of the cuts would be a serious economic shock. That is the situation that Greece, and possibly now Spain, find themselves in (involuntarily): they have got into a situation where no-one will lend to them, or rather they fear that that could happen at any moment. The dramatic consequences, mostly in the total lack of control which results, are frightening.

    Of course, Greece and Spain have the added disadvantage that their currency is (forcibly) over-valued for their economies. We have the luxury of controlling our own currency, which gives us some more leeway. If we interpret the government’s monetary policy charitably the Quantative Easing programme is designed to push down the value of our currency so as to make it more attractive for rich institutions to lend money to our government. That is, of course, what the government mean by “keeping interest rates low”: they mean keeping interest rates low for the government so they can carry on borrowing money to fund government spending. The balancing act comes because QE not only reduces interest rates (helping government to spend more) it also raises inflation (effectively reducing consumer spending).

    There is an interesting moral hazard here. The government’s interest rate strategy (I know it’s technically the Bank of England’s strategy, but let’s not be naive) is to make lending to the government more attractive. Unfortunately that makes lending to other businesses correspondingly less attractive, and thus government borrowing makes rich institutions comparatively warier of investing in growth opportunities.

    If I may be allowed a digression, there is, however, one source of apparently unlimited credit, which is Chinese savers. If Western governments don’t like the tyranny of the money market they can also escape it by borrowing from Bejing. (We can, I mean: the Greeks don’t have a hope – Chinese investors aren’t stupid.) Financially borrowing from China makes Keynesian sense, in a recession. China has lots of cash to lend, and if we assume that we can grow eventually it makes sense for us to borrow it now. But politically it seems to me to be putting ourselves into the power of some people even more worrying than the bankers, and my hunch is that we have gone down that road far enough. Better the devil you know, perhaps.

  2. Oh, I understand what you’re saying. But I don’t buy it. It’s a stupid system. Any system of wealth creation that gives less and less to consumers is always going to end up eating itself. Which is what has happened. But the main point is that it is not the fault of the poor, it’s the fault of the rich. So the rich should pay for getting us out of the mess they got us into. Morally it’s their responsibility. And if we need more money for pensions then take the money off the rich. Simple.