Collective Conscious

Britain suc­cumbs to the fal­lacy of com­po­si­tion (via):

If the pri­vate sec­tor does trim half a mil­lion jobs due to aus­ter­ity, it will come on top of the half mil­lion pub­lic sec­tor posi­tions that will be done away with as part of the cuts.

This is the result of deficit-​​trimming pol­i­tics. The only pos­si­ble result. Why? Con­sider the fol­low­ing macro identity:

GDP = Con­sump­tion + Invest­ment + Gov­ern­ment + Exports — Imports

and

Con­sump­tion = (GDP — Taxes — Savings)

so

GDP = GDP — Taxes — Sav­ings + Invest­ment + Gov­ern­ment + Exports — Imports

or

0 = (Invest­ment — Sav­ings) + (Gov­ern­ment — Taxes) + (Exports — Imports)

or

(Pri­vate Bor­row­ing) + (Gov­er­ment Deficit) + (Trade Sur­plus) = 0

So it’s clear that the total bal­ance of sav­ings, deficit, and trade sur­plus can’t change. Now let’s take the trade sur­plus as given (at 0, for sim­plic­ity), and we have:

Gov­ern­ment Deficit = Net Pri­vate Savings

This is the cru­cial result. If the deficit is being reduced, then so too is the amount of sav­ing peo­ple can do, in large part because they are becom­ing unemployed.

On the flip­side, say that peo­ple want to do the same amount of sav­ing no mat­ter what, or, at least, that busi­nesses find the invest­ment cli­mate too risky to war­rant any invest­ment at all. Then, no mat­ter how much you slash the gov­ern­ment bud­get, the deficit does not decrease!

This is exactly what hap­pened in Ire­land. And now it’s hap­pen­ing in Britain. Cuts only beget more cuts; aus­ter­ity only begets more aus­ter­ity. Do we really want, here, the shell of the Amer­i­can gov­ern­ment, run­ning the same deficits as today, lit­er­ally caus­ing unem­ploy­ment — destroy­ing jobs, fir­ing peo­ple? In the name of deficit reduc­tion that by def­i­n­i­tion can­not succeed?

No: and espe­cially no, since the trim­mings off the gov­ern­ment bud­get will dis­pro­por­tion­ately affect the worst off among us — our poor, our unem­ployed, our chil­dren and our elderly. Only the rich will be bet­ter off as their taxes shrink, in accor­dance with the oft-​​repeated “starve the beast” the­ory of gov­ern­ment. But that the­ory assumes that gov­ern­ment is an unwel­come beast; and indeed, if we starve it, the rich will live well and get fat, while only the poor will suffer.

(Photo: seyed mostafa zamani)