Duncan’s Economic Blog

Economics in the Mirror Universe

Posted in Uncategorized by duncanseconomicblog on April 18, 2011

I’m something of a closet Star Trek fan, and like all true Star Trek fans I’ve always enjoyed the Mirror Universe episodes. For those not blessed by having seen these, the Mirror Universe is a dark parallel to the ‘normal’ Star Trek Universe in which familiar characters exist but things are suitably different. The world is a darker place and things we expect to be true no longer are. Spock, for example sports a rather fetching goatee beard.

I mention this because as I read the economic ideas and analysis coming from the right, I occasionally have to stop and ask – are we living in a Mirror Universe? They are using words and ideas that I’m familiar with but somehow they seem to think the normal chain of causation, of action and reaction has broken down.

Of course, Mirror World logic has existed on the right for a long-time. Most (in)famously there is the Laffer Curve, the idea that cutting tax rates raises tax revenues by making work more attractive.  Now whilst there may be cases where taxes have been set too high and lowering them will therefore raise revenue, in the real world such cases are comparatively rare. Not so in the Mirror World of the Tax Payers’ Alliance and the Spectator though, where we always seem to be on the right-hand side of the Laffer Curve and so any tax cut will increase revenues.  

In the past few years though Mirror World logic seems to have spread to the right’s entire approach to fiscal policy. Whereas the IMF has chosen to stay in the real world and argue that although government deficits must be cut, the impact of the cuts will hurt the economy, much of the right has adopted the Mirror World Logic that cuts will actually help the economy to grow. So rather than arguing that the cuts will be painful but are needed to appease the bond markets they instead embrace the new theory (actually the very old theory) of ‘Expansionary Fiscal Contraction’. This theory, recently described as ‘oxymoronic’ by former US Treasury Secretary Larry Summers (I’m not sure he needed to add the ‘oxy’), tells us that as the Government gets out the way the private sector will step in so the economy will almost seamlessly rebalance from public demand to private demand, from consumption to exports and investment. In the real world of course nothing is seamless, cutting public sector jobs does not automatically create private sector ones and slashing government demand doesn’t mean private demand will automatically take its place.

In the Mirror Universe it would appear that cutting government debt is utmost importance, even if household debt soars at the same time.  Leading to, as Paul Krugman put it, “the spectacle of a government that inveighs against the evils of debt pinning all its hopes on an assumption that over-indebted households will dig their hole even deeper”. As I said at the beginning, in the Mirror Universe things are not quite as they appear.

These are just some of the most extreme bits of Mirror Universe logic I’ve spotted in recent months  but I’m sure there are many more – for example the fact that those most keen on fiscal tightening are often also those most keen on monetary tightening at the same time.

Next time you hear someone expounding a theory that seems to not only make no sense but also reverses commonly understood logic it’s worth pausing for a moment and asking yourself -‘Does Spock have a beard?”

9 Responses

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  1. Paul Newman said, on April 18, 2011 at 12:51 pm

    You are confusing two things. Fiscal contraction can be expansionary when you are over borrowed by forcing restructuring into productive activity . For example reducing Labour costs it also reduces the crowding out effect which over time is toxic, over half of top graduates now go into state employment . That is wrong obviously .(Your analysis of is always static a not uncommon problem )
    Borrowing is, of course only deferred tax rises and as removing money from the real economy and handing it around the state by taxes is always bad for output over time .
    The European model has tended to confuse socialists on this point by appearing to show that some high tax countries perform reasonably well .In fact cause and effect are the other way around .Economies formed in a free market have been able to sustain the parasite of redistribution better than those with less advantageous positions . The model is falling apart as we speak as you would expect .
    Whether or not flinging demand into the least part of the Economy on the basis some of it might land somewhere useful is a good idea or not is only a short term judgement where smoothing out the bumps now will be paid for later anyway. It may increase activity but growth that is a simply an unsustainable green housed exotic is worse than useless

  2. Dave Holden said, on April 18, 2011 at 12:57 pm

    In Star Trek is there a “Hall of Mirrors” universe because I think this is the one that Krugman inhabits😉

  3. gastro george said, on April 18, 2011 at 1:53 pm

    Newmania clearly inhabits an alternative universe.

  4. Dave Holden said, on April 18, 2011 at 3:38 pm

    Edward Harrison has a pretty thought provoking piece here:-

    http://www.creditwritedowns.com/2010/06/stimulus-is-no-panacea.html

  5. Teedjay said, on April 18, 2011 at 6:37 pm

    Can someone explain to me why the state is not a part of the “real” economy and why graduates working for the state is “wrong obviously” as Paul Newman asserts?

    Police officers protect wealth and ensure that people can work safe in the knowledge they have protection if they are attacked or their property is stolen.

    Doctors and nurses help keep the population healthy and hence economically productive.

    Research scientists whose salaries and budgets are provided by the state are not economically unproductive. They find stuff out about the universe and invent things and discover new cures for diseases.

    Inventions like the Internet (US government), the WWW (CERN, European governments), and infrastructure like roads were largely built by state money. These things are productive, no?

    • Andreas Paterson said, on April 19, 2011 at 9:46 am

      Teedjay – As an alternative, consider ignoring Newmania. He talks an odd hybrid of conservative prejudice and total gibberish that doesn’t really make sense in this dimension.

  6. Paul Newman said, on April 19, 2011 at 9:40 am

    Teedjay – I agree with everything you say ,broadly , ie yes health is essential but does it have to be the exceptional 1945 model we have ? That does not follow but basically the sort of areas you mention are valid places for state activity,.
    Its a question of balance , Duncan always thinks taxes should be higher , always thinks spending is a good thing regardless of outcomes , that is a bizarre ideological distortion .
    His argument here is analogous to the debate on welfare . New Labour remain committed to gross redistribution which entrenches poverty ,their other , semi secret policy , of providing public sector employment in non productive areas is a better idea but is not sustainable.
    Duncan cannot see that when too much non conditional money is thrown around it can be harmful both to the Economy and to the underclass.

  7. BenM said, on April 19, 2011 at 6:36 pm

    @Paul Newman

    “Duncan cannot see that when too much non conditional money is thrown around it can be harmful both to the Economy and to the underclass.”

    LoL!

    The old stingy Tory trick of trying to assert that giving the poor some money is somehow damaging.

  8. Keith said, on April 20, 2011 at 5:08 am

    Well giving money to the poor is damaging for the rich as they might have to pay more income tax. Less money for the Bollinger.


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