BoE Says Government Can't Spend Any More!

Andrew64

Here we have the Bank of England head telling the Government that it can't spend any more money:

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5043866/No-extra-cash-for-UK-economy-Bank-of-England-chief-warns.html

But here a member of the BoE's Monetary Policy Committee says the Government has to spend 90 Billion to prevent 4 Million unemployed:

http://www.telegraph.co.uk/finance/financetopics/recession/5039033/Unemployment-could-double-to-4m-predicts-David-Blanchflower.html

dopester

He is proposing that the Government spends up to £90bn on schemes designed to generate and safekeep jobs. The plan could include education initiatives and state-funded construction and other projects. He said: "There should be a substantial short term fiscal stimulus focused on jobs."

Where is the magic money going to come from - when we're already so heavily in debt, and can't afford the public sector and welfare state monster in it's current form...?

What economic benefits from new education initiatives (after Labour has pumped mulit-billions in to education education education already) ?

What are the economic benefits of hazy - but good soundbites - "state-funded construction and other projects" ??????????

The thought that Government, or some government paid for advisory groups, can actually identify where any stimuative funds are best directed - without pouring it away in to something futile - is laughable. Government is not the free market nor the private sector.

I fear they'd misdirect funds hopelessly from any area where they would do any good, and instead have us building the equivilent of new Millenium Dome type structures around the UK.

"Stimulation" Will Not Stimulate

Efforts to "stimulate" growth are likely to prove more counterproductive than in the 1930s. They borrow from the future in a futile effort to sustain the past. Consider the reasons why:

1. The same kind of public works spending that was very productive in the last depression would be a waste today. Lots of new highways, for example, would not pay off as they did in the past. Improvement of highways had a dramatic effect beginning in the 1930s in increasing the number of autos in use and amplyfying other activity that depended on autos, like building of suburbs and shopping centres. There will be much more modest effects today. The number of autos in use is not likely to go up no matter how many roads are built. Congestion can be much more efficiently handled by peak load pricing than by pouring more concrete.

2. Even during the last depression, when industrialism was still advancing to its mature phase, political efforts to "stimulate" the economy usually involved subsidising the faltering sectors of industry and impeding the emerging sectors. This tendency to retard is bound to be more pronounced because of much more frightening impacts of information technology in reducing economies to scale, reducing the demand for unskilled labour, breaking down the barriers between occupations, and shifting distrubution of income toward the better educated.

3. Investment in the "industrial base" in an attempt to preserve high wage jobs for voters with low skill are destined to show meager returns. They are force-feeding more capital into a declining sector. For example, plans to create "manufacturing extension centres" modeled on the agricultural extension centres of the last century are no more likely to halt the decline of manufacturing than agricultural extension services were to reverse the decline of farming.

The reason that manufacturing is in decline is not that private business is unaware of how to manufacture, but because information technology is supplanting industrial technology as the main area of value-added-activity. At best, political manipulations can slow the decline in the standard of living, while creating larger pockets of dependency.

4. Most "stimulation" involves either overt or thinly disguised income redistribution, which tends to delay the necessary adjustment in skills among poorly educated segments of the population who are prepared to work on the assembly line but not to contribute to the development of intellectual property.

5. Redistribution also diminishes incentives to save, while reducing the capital of those who do most of the saving. For instance, promises to assure everyone of health care, and lend every student the money to go to college, regardless of income, to be paid for by higher taxes on the rich. If people no longer feel the need to save either to protect themselves against medical emergency or to educate their children, their savings rate is likely to decline.

6. The tendency to regulate higher costs onto operating businesses to facilitate redistribution is a common feature of political systems under stress, and is remarkably evident today in both Europe and North America. But these higher burdens make the local economy less competitive, and thus impede recovery.

7. A common feature of all stimulative initiatives, especially those that involve little but income redistribution, without a substantial component, is that they expand government debt. This runs down the national balance sheet, increasing the debt burden without increasing earning capacity. In logic, this means a deeper depression in the end.

There are many experts, of course, who will say that the key to prosperity is to revive manufacturing. Their prescription to do this is to focus inventives in ways that encourage longterm, fixed investment. It sounds plausible when viewed from a conventional perpsective. But it is backward-looking and probably won't work.

The reason fixed investment is lagging is that its productivity has fallen. Most of all the industries that figured in the post-World War II boom now face saturated markets with worldwide overcapacity. Force-feeding additional capital into fixed investment in the manufacturing side will only aggravate the long-term problem by increasing the overcapacity. It also takes resources away from the small business sector which creates new jobs.

Saturated or slowly growing replacement markets with overcapacity require companies to compete by increasing productivity. This is a good thing in itself. But higher productivity with flat markets means fewer jobs. Short of buying the products directly and giving them away, which is obviously ruinous, there is little that can be done to rescue oldline manufacturing in aggregate.

The hope for the future lies in incubating new products and services, in other words, in entrepreneurship. To do that, flexibility and adaptability must be the hallmarks of the economy and government policy. Legions of small businesses should be encouraged to form. Many ideas need to be tested in the market place in order to come up with the 20 to 30 major innovations that will create vigorous economic growth.

Unfortunately, that is not likely to be the path that policy takes.