Duncan’s Economic Blog

Cameron: The Economics of Ruin

Posted in Uncategorized by duncanseconomicblog on July 3, 2009

Peter Hoskin at the Spectator Blog has post up on Cameron’s speech to the LGA conference.

 He quotes:

 Imagine if some of our biggest business brands followed the logic of our government.  These businesses spend their entire time trying to reduce costs in order to provide better value and a better service.

 He then advocates that the public sector should do the same.

 Now, let’s imagine that happens.

 Business and the Public Sector both concentrate on ‘cutting costs’.  What does this mean? More unemployment and lower wages.

Individuals are both workers and consumers. Whilst it may be logical for one business to focus on ‘cutting costs’ to safe guard profit margins, it is illogical for all businesses to do the same.  It would be even more illogical if the State joined them. It leads to demand falling. The only way companies can then grow their profits is either through exporting (and not every country can be a net exporter) or through consumers taking on more debt to buy their products. Which increases the economy’s vulnerability to financial shocks.

This the situation that that the current economic system creates.

To embrace the logic of Cameron is to embrace the economic road to ruin.

This is previously the opposite of the agenda I and others are pushing.

 You can’t cost cut your way to national prosperity. That’s not a sensible strategy, it’s a race to the bottom.

15 Responses

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  1. Paul said, on July 3, 2009 at 11:14 am

    Weird, I was going to post much the same about the total failure of the Tories to see the link between public spending, jobs and spent income, irrespective of what the jobs are, but linking to a comment from tom Worstall on Don P’sd LibCon piece, in which he reckons that by cutting £35 billion in spending the problem is suddenly resolved.

    I just don’t get how such people fail to understand that spend = jobs.

  2. Mr. Mxyzptlk said, on July 3, 2009 at 11:17 am

    since when did that stop the torys any way you are on about “national prosperity”
    when the tory are only interested appealing to individual prosperity(greed)

    it don’t matter how bottom the bottom is as long as some feel they are at the top.

  3. pablopatito said, on July 3, 2009 at 12:12 pm

    I’m confused about what everyone means by cutting costs. Cameron talks about Asda reducing waste, but Asda is expanding its business, taking on staff and opening new stores. They’re not talking closing 10% of their stores and sacking 10% of their workforce are they?

    I want my hospital ward and primary school to become more efficient and reduce waste, but I don’t want them to close. Isn’t that what Gordon Brown wants to?

    I want less waiting times for an operation, and I want less waiting times at Tesco’s checkout. Isn’t that what both Labour and Tesco are aiming for? Aren’t they operating with the same philosophy? Cameron seems to think they’re different?

    What am I missing here?

  4. Chris A said, on July 3, 2009 at 1:23 pm

    While I normally agree with (or at least believe) what you have to say, I’m very confused by this post. How does cutting costs necessarily lead to overall demand falling [defining cost-cutting in the way your average business would define it, i.e. cutting the cost of particular processes while keeping their output fixed] ? Surely if a business cuts its cost in this sense, it can reduce the price of its products, people can afford to buy more stuff from the business.

    Is there a problem with the public sector cutting costs relative to output, therefore allowing it to increase its services without raising costs? Surely the mistake in Cameron’s logic is to imagine that business’s overall aim is to cut costs, rather than to improve the cost/output ratio (“Quick, let’s liquidate our business – we can get expenditure down to zero by the end of the month!”)

    • duncanseconomicblog said, on July 3, 2009 at 1:28 pm

      On your first point – depends. If the company uses the savings to drop prices you may, at times, be right. Often though the savings would not be used to drop prices. Simply to increase profits.

      Remember profits as a % of GDP are at all time highs and wages at lows.

      Equally it depends how ‘costs’ are cut. If it’s technological progress, productivity gains, etc. Then there isn’t a problem.

      I worry that ‘cost cutting’ in this sense though refers to wage and job cuts.

      Firms in isolation tend to forget that their employees are also customers.

      On your second point you are correct. That’s one Cameron’s many failings here. Business exists to make a profit, not offer services.

  5. thelocalgovernmentofficer said, on July 3, 2009 at 1:29 pm

    Aren’t you just arguing for a larger structural deficit, economically speaking? I mean what really matters to the economy is presumably the amount the government is putting into it, as against the amount it is taking out of it through tax.

    Talk of exactly how many people are on the public payroll is a bit of a red herring, I think. Reduce that and reduce tax, and absent a major differential in the savings rate, you don’t necessarily shrink the economy. I suspect in reality you do a bit because private individuals spend more on imported goods than the state does.

    Although on that note your fear that we could suffer by becoming a net exporter seems a long way off!

    • duncanseconomicblog said, on July 3, 2009 at 1:36 pm

      No, I’m not. I’m arguing that the surest way to lower the ratio of debt to GDP is growth. And that the Cameron agenda is an anti-growth agenda.

      I’m also pointing out that, unrelated to an extent, individual firms cost cutting can damage firms as a whole. It is this type of thinking which has created many of the conditions of today. The overpower of capital relative to labour driving debt levels higher in an effort to maintain spending.

      I don’t think we are about to become a major exporter. I was just pointing out that not every country can be a net exporter.

  6. Mr. Mxyzptlk said, on July 3, 2009 at 2:53 pm

    Uh no! dunc Cameron’s Agenda is Cameron

  7. newmania said, on July 4, 2009 at 4:43 am

    You can’t cost cut your way to national prosperity. That’s not a sensible strategy, it’s a race to the bottom.

    Once again Duncan you are arguing that waste and inefficiency is of itself a good thing which is absurd. You keep complaining about the level of profits , this is not a complaint I recognise amongst my clients who are pretty much scraping by or going under , do you only count the profits of profitable companies or do you include the loses of those no longer with us or on life support ? This is Construction for the most part but it is just as true of Insurance Brokers and Insurers . Between them two you have a hell of chuck of the real economy which seems to exist in another world than your picture of greedy exploitative capitalists .
    As a country I look at it this way. Some of us go out and kill animals which keeps everyone alive . Some ( women mostly ) sit around the camp fire doing cave painting and teaching cleaning the place up and that sort of thing. Your argument at bottom is that the less people hunting and the more people cave painting the better we eat . Obviously nuts

    I wonder if we have come all that far really , in such a tribe there was probably someone who by the incantation if some incomprehensible formula persuaded us that offering up half the catch to the gods for no good reason was a good idea. Thats you Duncan and this is all another way of saying what I always say to you.

    What about supply , do you understand that wealth does not come from thin air or not ?

    • duncanseconomicblog said, on July 6, 2009 at 7:57 am

      Newmania,

      First off -“I wonder if we have come all that far really , in such a tribe there was probably someone who by the incantation if some incomprehensible formula persuaded us that offering up half the catch to the gods for no good reason was a good idea. Thats you Duncan and this is all another way of saying what I always say to you.”

      That goes down as most amusing comment in a while. Well done.

      More seriously – ‘You keep complaining about the level of profits , this is not a complaint I recognise amongst my clients who are pretty much scraping by or going under , do you only count the profits of profitable companies or do you include the loses of those no longer with us or on life support ? ‘

      The level of profits in aggregate as a share of GDP is still very hihg. Obviously though GDP, and hence profits ,are falling.

  8. Sam said, on July 7, 2009 at 10:04 pm

    Individuals are both workers and consumers. Whilst it may be logical for one business to focus on ‘cutting costs’ to safe guard profit margins, it is illogical for all businesses to do the same.

    Sorry, this statement is absurd. You are suggesting that it would really make no difference if all businesses went out and hired a bunch of extra people to stand around and do nothing. Actually, if I follow your argument, you suggest that that would be a good thing. I am unable to grasp the confusion of thought that could lead you to think that.

    • duncanseconomicblog said, on July 8, 2009 at 8:14 am

      Not really Sam.

      It would not be rational one one firm to do that would it? Whereas it might be rational for a firm to cut costs.

      • Sam said, on July 9, 2009 at 7:00 pm

        The statement that it would be “illogical” for all businesses to cut costs by eliminating employees that perform no useful function is completely equivalent to the statement that it would be “illogical” for all businesses not to hire a bunch of extra useless people (unless you believe that businesses currently have some kind of mystic optimum level of useless people).

        One business eliminating useless employees is equivalent (up to a constant offset) to every other business hiring a bunch of useless people. That constant offset is equivalent to an extra tax on business.

        Obviously no individual business would choose to hire pointless people of its own volition, whereas a business might well choose to fire them, but that’s a distraction.
        Of course, sometimes all businesses are compelled to hire more people than they need (cf. Dock Labour Scheme). Do you argue that the Dock Labour Scheme was good for the UK economy?

  9. duncanseconomicblog said, on July 10, 2009 at 9:55 am

    Of course, sometimes all businesses are compelled to hire more people than they need (cf. Dock Labour Scheme). Do you argue that the Dock Labour Scheme was good for the UK economy?

    No. But I would argue that there are times when government is perfectly justified in hiring people to dig holes. Ideally I’d like a job creation scheme though, that was focussed on useful things.

    • Sam said, on July 13, 2009 at 4:28 pm

      No. But I would argue that there are times when government is perfectly justified in hiring people to dig holes. Ideally I’d like a job creation scheme though, that was focussed on useful things.

      Absolutely (and this is exactly the right way to do fiscal stimulus, no?) If you believe that countercyclical government spending is the right thing to do (which I probably do), then the government should be hiring people to dig useful holes in recessions, and letting them go in the boom times.

      I think I can make the case that most holes aren’t really all that time-sensitive, so from the point of view of the society that wants the useful hole, getting it 2 years earlier or 2 years later doesn’t make much difference, as long as it happens at some point. That being the case, shifting hole construction around in time to make the spending look countercyclical is at worst harmless.


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