Economic Nonsense: 31. The modern economy is so complex that only government can manage it

Actually, the opposite is true. The modern economy is so complex that even government cannot manage it. Who can manage it, then? The answer is no-one. No single authority or group of people can handle the volume of information, the speed of its responses and the complexity of its relationships. This is not to say that the modern economy is out of control, but only to say that the self-regulating mechanisms within it can respond more rapidly and more surely than any body outside of it. A market economy is a self-regulating system. It responds to new information and signals people to change behaviour accordingly. Much as a thermostat detects temperature changes and adjusts the heat supply, so the market detects imbalances, shortages and surpluses and leads people to alter their behaviour in ways that redress them.

Some people wrongly suppose that if the economy is not centrally controlled in some way, then chaos will result. Not so. The order of the market arises spontaneously from the millions of interactions constantly taking place. It holds more information than any group of planners could hope to access, and it is faster to react to changes than any controlling authority could manage to achieve. It is also more intelligent, representing as it does the minds of the many rather than the limited brain power of a few people grouped around a table trying to direct it.

The economy directed by the actions of many allows different individuals to purse their separate goals, where the centrally directed economy is geared to achieving the aims of its planners instead. The market economy thus allows people to give effect to their own values and priorities, to be autonomous actors rather than the agents of someone else's will. It allows for a society that is more free as well as more efficient.

Economic Nonsense: 30. In economic downturns government can boost growth by increased spending

The problem with this is that in economic downturns the government often does not have the money to do this. In a downturn tax receipts tend to go down because there is less economic activity. With less being earned, less tax is paid. If government wants to expand its spending it will need to raise more in taxes or borrow more, neither of which are good at stimulating recovery and growth. If, during times of economic growth, government builds up a reserve surplus, then it might have the resources to do things such as infrastructure projects when a downturn comes. Unfortunately governments rarely do this. When money comes in, the pressures are on them to spend it, and if they spend it during the good times, it is not there any more when the bad times come.

Tax taken and spent by government is money that cannot be spent by the private sector. The goods and services that people might have bought, or the investments made possible by their savings do not take place if the government has taken the money to spend on its own projects.

Some commentators say that in a downturn businesses and private citizens are simply not doing the investing, and therefore government has to step in and do some of its own. There might be very good reasons why people are not investing in a downturn, and they are even less likely to invest if government has raised their taxes or by borrowing money to pay for its projects has raised the cost of borrowing.

There are things that government can do to make investment more attractive and encourage more businesses to start up or to expand. It can lower Corporation Tax; it can tweak Capital Gains Tax; it can give small and new businesses a holiday from National Insurance contributions. All of these are on the supply side, where the effort is needed, rather than on the demand side subject to all of the above caveats.

Economic Nonsense: 10. Government spends more efficiently than private individuals

This is not only untrue; it is laughably untrue.  Sometimes supporters of big government spending claim that government is more efficient because it doesn't need to make profits.  Sometimes they say it doesn't need to spend on advertising.  Sometimes they say it can borrow more cheaply than private businesses because it has taxpayer backing.  The facts show that even with profits, advertising and higher borrowing costs, the private sector is vastly more efficient.  The UK's nationalized industries were ailing giants that gobbled subsidies when they were state-owned.  When they were privatized they became profitable private companies that paid taxes instead of collecting subsidies. Private investors are more careful because it is their own money at risk.  The public sector corresponds to the fourth quarter of Milton Friedman's quadrant:  they spend other people's money on somebody else.  The private sector is competitive; it has to attract funds competitively.  It has to anticipate future demand to avoid investing unproductively.  Private projects seek ways to curb costs, to employ people efficiently, and to keep as close as they can to a timetable.

Public projects are notorious for cost overruns, for over-manning, and for being completed years behind schedule.  Private projects are undertaken in response to market signals; they are subject to commercial pressures.  The aim is to produce items that will meet future demand and generate profits.  Public projects, by contrast, are subject to political pressures.  They are often undertaken with a view to electoral popularity.  The projects chosen, their scope and their location are often undertaken to secure the backing of various interest groups and localities, in the hope that this will translate into electoral support.  None of this makes for efficient spending by governments.

Spotting C Northcote Parkinson in the wild

That Parkinson's Law is generally applicable is obvious. But in the great man's work there are other observations which we can spot occasionally out there in the wild as it were. That the Royal Navy will have more Admirals than ships has been true for some time now, that committees and bureaucracy will, in the end, strangle the life out of any and every organisation is also obviously true. He also pointed out what is happening here:

Civil servants went on a £1billion spending spree in just eight weeks to hit the Government’s target of spending 0.7 per cent of the nation’s income on overseas aid.

The extra cash was spent at the end of 2013 on humanitarian programmes in Syria and the Philippines and a fund which was started by billionaire Bill Gates to help victims of Aids, Tuberculosis and Malaria.

MPs said the fact that the taxpayer funds were spent so quickly raised serious questions about whether value for money was achieved. Civil servants are now set to be called in front of an influential committee of MPs to justify the spending.

The point of spending by a bureaucracy is not to provide value for money. Nor is the point of political spending to actually achieve anything. In this story we combine those two to lethal effect.

The point of political spending is to allow a politicians to announce that something is being done so vote for me. Doesn't matter what is being done, how effectively it is being done or even whether it needs to be done at all, let alone with other peoples' money. The point is the purchase of those votes.

Similarly, the point of a bureaucracy is not to provide value for money. It is to spend the budget allocated to that bureaucracy and to thus make the case that the budget, and thus the bureaucracy, should be larger in the next budget period.

These two have combined here to produce the sight of a bureaucracy shoveling money out the window, into and on anything at all, in order to enable the politicians to purchase votes.

Well done everyone.

The solution Parkinson offered to such problems was simple. It isn't possible to reform such practices. One must simply stop doing the thing itself. No, we don't mean stopping charitable aid to poor people if that's what we all decide we want to do. But stop running it through these inefficiencies of government.

How are your taxes spent

HM Revenue & Customs recently sent me an annual tax summary for 2013-2014.  This is an interesting document as it shows how my income tax and national insurance contributions were calculated, and how my money was spent by the government. We know that the only certainties in life are death and taxes, but we often treat taxes in abstract and do not think about them in absolute and concrete terms.  This new document provides a detailed monetary breakdown of how my taxes were spent excluding indirect taxes such as VAT and other duties.

A quick calculation of my contribution produced the following percentage breakdown:

Welfare	25%
Health	19%
Education	13%
State pensions	12%
National debt interest	7%
Defence	5%
Criminal justice	4%

85% of my taxes were eaten up by the above categories.  The balance was spent on transport, business and industry, government administration, culture etc. all less than 4% of the total.

I was stunned that welfare payments accounted for 25% of my total tax burden and that national debt interest accounted for 7%, higher than spending on defence at 5%.  It should also be noted that state pensions accounted for over a tenth of my personal contribution.

We all have to individually decide if we are happy with the way our hard earned cash is spent.  As Thomas Sowell said we all need to think what is the fair share of the money that I have earned that you are entitled to.   But what the tax document maeks clear is that if the government is going to successfully reduce the national tax burden on the hard working people and families, then tinkering around the margins is not going to make one iota of a difference.  Besides reducing the level of national debt, the only way forward is to tackle the top four categories that accounted for 69% of my taxes.  This requires political will that may or may not be there.

Is this a fiddle in the Autumn Statement?

As we all know, knowledge is local and dispersed. A corollary of this is that you, the readers collectively, will always know more on any specific subject than one single writer on this side of the software. At which point to ask you a question. We've got the BBC telling us that public spending is going to fall to levels not seen since the 1930s. This does seem unlikely: although if we could get government back to the sort of levels of interference in our lives of the 1930s that would be both nice and an achievement.

The Office for Budget Responsibility (OBR) says spending on public services is heading for an 80-year low.

In its report accompanying the Autumn Statement, it projected that spending by central government on public services was going to fall from 21.2% of gross domestic product (GDP) in 2009-10 to 12.6% in 2019-20.

As a proportion of GDP, that would probably take spending on public services to its lowest since the 1930s.

That report is here.

Note that this isn't public spending as a whole: this is nothing to do with pensions or the welfare state or other transfer payments. This is solely what is spent upon public services, not money shuffled from one citizen to another.

And the question is, how important is that word "central" in that calculation?

For example, just imagine we moved NHS funding from its current system to the Swedish or Danish one? There it is, respectively, the counties and the communes that raise and spend the taxation that pays for the health care systems. That money simply doesn't flow through the national treasury nor the central government (which is why Denmark's standard national income tax rate is 3.76% and the top one 15%). We can all think of reasons why this might be better (local accountability, greater efficiency) and possibly some that it might be worse (postcode lottery!). But it's not obvious that there's either less or more government spending on public services in either system: but there's obviously a huge difference (as much as 10% of GDP) in central government spending.

So, of this reduction in central government spending on public services how much is a reduction in government spending on public services and how much is just the movement from central to some other level of government spending?

We could argue that the Scottish and Welsh NHSs, for example, are covered by the Parliament and the Assembly, therefore aren't any longer central government. There's a change coming in the allocation of business rates. As was these were all collected centrally and then apportioned. The new system will see some being retained locally and spent locally: if that a reduction in central spending but not in public spending? As things become devolved do they fall out of central spending but still remain public spending?

In other words, how much of this reduction is not really a reduction, just changes in the budgets that the spending is coming from?

Over to you: and let there be more light than heat.

Beware the people promoting infrastructure spending

The IMF has told us that building infrastructure can pay for itself. This is, of course, true. However, we do need to be rather careful about the implications of that fact. for while it's entirely possible for something to pay for itself that doesn't mean that everything will do so:

The study finds that increased public infrastructure investment raises output in the short term by boosting demand and in the long term by raising the economy’s productive capacity. In a sample of advanced economies, an increase of 1 percentage point of GDP in investment spending raises the level of output by about 0.4 percent in the same year and by 1.5 percent four years after the increase (see chart, upper panel). In addition, the boost to GDP a country gets from increasing public infrastructure investment offsets the rise in debt, so that the public debt-to-GDP ratio does not rise (see chart, lower panel). In other words, public infrastructure investment could pay for itself if done correctly.

The words to concentrate upon are those last three "if done correctly". For no, this does not mean that bunging £40 billion at a train set will pay for itself. Nor that damming the Severn Estuary will nor any other of the various plans people are floating. As Greg Mankiw says:

Certainly this outcome is theoretically possible (just like self-financing tax cuts), but you can count me as skeptical about how often it will occur in practice (just like self-financing tax cuts). The human tendency for wishful thinking and the desire to avoid hard tradeoffs are so common that it is dangerous for a prominent institution like the IMF to encourage free-lunch thinking.

It still depends upon what you're building and where you're building it and how you're building it.