Wednesday, 25 January 2012

Former Archbishop of Canterbury backs cuts in welfare.

One of the main arguments he puts is that Britain's national debt is too high, and that cutting welfare payments would reduce the debt.

Like about 90% of those who sound off on the subject of the debt and deficit, he doesn’t get the distinction between micro and macroeconomics: a major blunder. He is clearly not being divinely inspired.

So for about the hundredth time, I’ll explain the distinction.

A micro economic entity, like a household or firm, can certainly cut any deficit it has by cutting expenditure. Unfortunately, if a government does the same, it causes a drop in demand and a rise in unemployment: an outcome presumably not favoured by his grace.

Moreover, in that a deficit is required for stimulus purposes (i.e. employment raising or employment maintaining purposes) it is daft to even aim to cut the deficit.

But that’s not to say the debt and/or deficit cannot be cut. Reason is that the debt and deficit are partially structural in nature: that is they exist thru pure simple failure by politicians to collect enough tax. And that part of the deficit / debt is easily cut. To do so, proceed thus.

1. Print money and pay off creditors – and probably the best way to do so is to cease rolling over debt.

But that alone would probably be too inflationary. So (step 2), get some of the money for debt repayment / deficit reduction via extra tax. As long as the deflationary effect of the tax equals the inflationary effect of the money printing, there is NO NET EFFECT.

But that’s not to say that cutting the debt is necessarily desirable. Britain is currently borrowing at a negative real rate of interest far as I can see. We’re ripping our creditors off. So let’s carry on – that’s what I say. At the very least, there is no great urgency to cut the debt.

The former archbishop’s views on welfare dependency may well be valid. But his views on the deficit and debt are flawed.
Clerics – Christian, Buddhist, Jewish, Hindu, Muslim, Zoroastran, Druid, etc etc  -  please keep to your holy books, and don’t express views on subjects you haven’t studied.


1 comment:

  1. maybe he doesn't like welfare benefits because they drive up the price of expanding the flock. More people at the end of their rope means more low hanging fruit for salvation dealers.


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