Friday, November 12, 2010

Why gdp is misleading and why I’m begining to understand gold?

Britains trillion pound horror story

Amongst the generalities untested assumptions and half truths, this programme made a terrifying point. The public sector being a monopoly tends to beget itself, growing (and in fact having grown) forever bigger. Eventually it is so big ie the majority of the electorate are employed under its umbrella, at which point it can never be cut down to size. There are, we were told 7.5 million public sector workers, of which the poster children for the state, eg nurses, police etc, the front line services, make up only 2 million. The public sector is bigger than the private sector. Then there are those unemployed and on benefits but effectively paid by the state, and we were told that benefits last year were in excess of income tax. There is more but I've run out of space.

Posted by bellwether @ 09:14 AM (2657 views)
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53 thoughts on “Why gdp is misleading and why I’m begining to understand gold?

  • Did anyone see the Channel 4 documentary yesterday evening at 9.00pm? The estimate of UK debt was about 4.5 trillion – the figures ”seemed” to made sense.

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  • The point re GDP is how much of it is actually production that might register outwith our borders. Our currency is ultimately backed not by GDP itself but by the GDP that matters/might matter externally. Largely speaking a lot of civil service functionaries working and then spending their public service salaries on haircuts, clothes and the like is not the profile of an economy destined to do well in a longer term competition for global resources.

    Is it also possible that the house price increase under labour was not just credit expansion but the growth of the public sector and this increased public sector income being put to work in bidding up house prices.

    Is the inflationary compenent I’ve missed all along the expansion of the non productive state, attributing an ever greater share of our resources (and as a proxy our currency) to essentially pointless ends.

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  • The debt in £50 notes would be 6500 miles high….

    Enough said.

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  • I remember noting somone saying that GP income had more than doubled under labour. The point being made was not so much an attack on gp’s but of unfettered spending, there was no reason to double gp salaries, being a doctor tends to be sort of vocational and in any event doctors were pretty well paid before the increases. The increases were just a pointless and unproductive state sponsored redistribution of wealth. You pursue this thing to its logical end point and you have a debauched currency ie one that is largely meaningless outwith the border of the country that produces it.

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  • I watched the whole show and overall thought it was OK (bit too long at 1.5 hrs) however before getting too carried away has anyone looked at the numbers in more detail? – I’d be interested to see if Mark Wadsworth has anything to say on this as part of his number crunching exercises and maybe the UKIP stance.

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  • I’d suggest not getting too carried away about the debt point. The real story is the overgrowth of the state, any deficit questions are merely a sympton of this.

    I guess this is not a message that will be popular with anyone engaged in a pointless public sector position. I’m not saying all public sector is pointless, but it is hard to argue against the proposition that it is now too big.

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  • Jack agreed the show was too long and a great deal of it sensationalist but the core point was fascinating, and rarely made today. Speaking against the public sector is now almost a form of political incorretness, perhaps akin to being openly racist.

    I suspect you will find Wadsworth to be against a large state, certainly it appears to me to be a close bed fellow with homeownerism

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  • sibley's b'stard child says:

    I agree Jack, it was a very illuminating doc although it was a little too conservative for my liking. Certainly, one of the key tacet messages was ‘let’s sell-off the NHS and divvy it up amongst the highest bidders’. True, it was insightful look into state profligacy however it seemed their answer would be to get rid of it entirely.

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  • bellwether said…I’d suggest not getting too carried away about the debt point – I take your point however most people (IMO) will focus on the numbers especially when the title is Britain’s Trillion Pound Horror Story and the programme featured piling up £50 notes that stretched higher than Mount Everest etc.. etc… my question is has anyone challenged the numbers and are they accurate?

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  • We’ve been disussing this on the Hudderfield Examiner link below.

    But a couple of snippets from the other thread.

    debtfree
    I think the pile of notes was actually only 650 miles high :-0 , but an east mistake with so many noughts.

    Also apparently (to taken from tyrellcorporation)

    In Victorian Times Public secotr activity made up 10% of the economy.
    In Communist China public sector activity makes up 25% of the economy

    Now in the UK it’s 53% of the economy.

    The numbers simply don’t stack up. I’m sure this has built up under all governments, but has clearly gone crazy and totally out of control under someone with a History Degree who was put in charge of running the nations finances.

    I think we have an ultimate problem of short termism and perhaps we should have a more perminent UK PLC accounting department that TELLS a new government how much is available to be spent.

    It was also telling when various politicians were asked the question about how much debt the country is in. Now IMO this is very important to know. Some refused to answer – fair enough if you don’t know the figure.

    But worse some mistook deficit for debt. Now if the politicians have managed to confuse themselves !!!

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  • Jack C

    I’ll have to disagree on the programme length as it’s an important subject and 1 hour for these things never seems enough – your average drossy blow ’em up film lasts the same amount of time.

    But agreed a bit sensationalized, but it’s those bits that stick in your mind.

    I just wished I’d paid more attention. I might see if I can find it on the internet and watch it again.

    Agreed, I’d like to here from MW and Flashman on the subject.

    My general guit feeling is that things have spun out of control to the point control has now been lost without some sort of re-structuring (maybe on an international scale).

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  • So now I understand the problem!
    The massive and unsustainable level of debt was not caused by bankers and ‘wild west’ self serving speculators, it was all caused by civil servants. Well blow me down, I should have realized that.

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  • BW: “There are, we were told 7.5 million public sector workers, of which the poster children for the state, eg nurses, police etc, the front line services, make up only 2 million.”

    Correct, I have been saying this for ages. They missed off ‘social workers’ (sort of middle ground between teachers, police, prison officers, probation officers and district nurses) which are about 300,000 but they admit they included teachers, nurses, doctors in the private sector, so that all evens out nicely.

    “The public sector is bigger than the private sector.”

    Now that is simply not true, and an exaggeration at best. It is perfectly easy to imagine a teeny tiny state, with only 1 million coppers, prison officers, firemen etc, which raises 50% of GDP in taxation (preferably LVT but flat rate 50% income tax will do) and which pays this out as a Citizen’s Income of about £10,000 per person per year (or less for kids, more for pensioners) and everybody just pays for his own health care or his children’s education out of that.

    A far more relevant statistic is not just the 7 or 8 million directly taxpayer funded jobs, but the fact that the state spends nearly twice as much on ‘procurement’ from the private sector as it does on public sector wages and pensions. Yup, one fifth of GDP goes in juicy contracts to party donors, brothers in law of councillors etc.

    “benefits last year were in excess of income tax.”

    Quite true, but misleading. Income tax in the narrow sense is only about ten per cent of GDP, “welfare” is about five per cent and old age pensions six per cent. The other taxes on income (national insurance, corporation tax, value added tax) add up to nearly twice as much again as income tax.

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  • But STR if the programme is correct we might be at a point of no returm, once pensioners, the unemployed, those on benefits and public sector workers are the majority amonst the electorate you have no political will for change. Turkeys do not tend to vote for xmas.

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  • str 2007 – it is an important subject and for me it was just a little slow in parts (the frequent ads didnt help – which is why I watch a lot of stuff on Virgins catch up TV as it automatically cuts them all out)

    Anyway lets see if the guy’s who like to do the numbers have anything to say on this but in the meantime I agree it looks like they have lost control of the overall finances – it’s going to take a lot more than a 5 year parliament to sort this mess out.

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  • Front line public services: 2m. Others: 5.5m.

    A great concern has to be that the decisions on where the cuts should fall are taken by the others and effect the front line. It’s an old cliche but turkeys never do vote for Christmas.

    On the UK public sector figure of 53%. This was meant, along with recipients of benefits, to keep Gordo in office – and it very nearly worked.

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  • Mark agreed the split into public and private is too neat where the private sector has a snout in the trough of public money. It would be interesting to work out how much money is circulating in an almost hemetretically sealed system created by the state. Of course it is not hemetrically sealed in the sense that taxation is insufficient to fund the state so money (without the backing of productive capacity) is created to make up the difference.

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  • @MW,

    Yes, that is right, a lot of private sector companies who leech off the public sector. Many of these private sector companies are in effect acting like the Lord Manors who leech off other ‘tenants’.

    To do CI, you will need to close the border and place a limit on the size of family who qualify for the CI. With EU citizens free to come and go, CI will be a total disaster.

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  • str 2007, tyrellcorporation,

    In Victorian Britain, we spent less but we also got less. There was no NHS; the schools were private; street lighting was rare. The average life expectancy was 40. That’s why spending was only 10% of GDP. Think of all the things that government does to prevent people from dying and help us live longer – that’s your biggest cost right there. If we all died at 40 we’d save a fortune on healthcare and pensions.

    Even complex health & safety laws are fundamentally about helping us to live longer and in better health. You can argue that it’s a poor cost/benefit ratio, since £millions spent on X delivers less than £millions in benefit. Indeed, that is the best argument to make.

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  • @ 10 str 2007

    “debtfree
    I think the pile of notes was actually only 650 miles high :-0 , but an east mistake with so many noughts.”

    Scary statistics time. Britain is £4.8 trillion in debt. That’s £77,000 for every person in the country, or a stack of £50 notes 6,500 miles high.

    http://www.telegraph.co.uk/culture/tvandradio/5602956/TV-highlights.html

    (If you built a stack of £50 notes to reach that figure, it would be 6,500 miles high. And if you sold every single house and flat in Britain, you’d still be £1 trillion short of paying off the debt).

    http://blogs.telegraph.co.uk/news/jamesdelingpole/100063360/do-any-of-you-realise-or-even-care-just-how-stuffed-we-are/

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  • Drewster and others I think the main question here is have we are reaching or have reached a size where our electorate is so supported by the state that it will only ever vote for increases in spending.

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  • Typo at my critical point !

    Drewster and others I think the main question is are we reaching/have we even reached a size where our electorate is so supported by the state that it will only ever vote for increases in spending.

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  • @bellwether – if you look at str2007’s post Friday, November 12, 2010 10:00AM where he said “The numbers simply don’t stack up. I’m sure this has built up under all governments, but has clearly gone crazy and totally out of control under someone with a History Degree who was put in charge of running the nations finances”

    My guess is that if people knew at the last election what they know now Gordon & Co would have swept back to power

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  • BW: “have we even reached a size where our electorate is so supported by the state that it will only ever vote for increases in spending.”

    Do the maths!

    There are approx…

    40 million voters
    12 million pensioners (high voting turnout)
    5 million adults on income support etc (low voter turnout)
    7.5 million taxpayer funded workers
    4 million working for ‘private sector’ companies whose main customer is the government
    = 28.5 million who derive most or all of their income from ‘the government’.

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  • Bellwether
    That was the point I was making (beyond the point of no return).

    MW
    Did you feel the toatl debt level numbers being discissed were correct and if so (leaving LVT aside just for the moment) is there any hope of the books being re-balanced ?

    And what in broad brush stroke terms what would re-balance them
    IE Income tax up 10%
    Retirement age 70 (say 15 years before average death etc)
    Reduce Public Sector worker numbers and or wages by 25%
    With regard to pensions – should these now be scrapped altogether based on % of final salary and index linked etc.
    On this subject I recall you saying before that for all the tax benefits of SIPPS etc. the City take all of that.
    So given the average household will need £15-£20k p/a in retirement and if that is on average goingto be 15 years then should all couples save their own £300k pot (if only we didn’t have inflation !) ?

    drewster
    Accepted we didn’t have the same level of service in Victorian times, however there also needs to be some level of ‘building on past achievements’ aswell. IE Alot of roads, buildings, sewerage systems were put in place then, they may have a refurb programme in place now, but it’s not like starting from scratch every 10 years, if you see what I mean.

    The fact is we’ve been clearly living beyond our means for along time and now we need to clear down some debt and re-organise for the future.

    I believe we’ll soon be paying in the region of £60billion in interest payments per annum, a not insignificant sum that IMO could be put to better use.

    I question his who should grasp the nettle and how tight should we hold it and for how long.

    It does seem to me that if anything good is ever developed in this country we sell it, if we find anything good (North Sea Oil) we simply spend it.
    We fail as a nation to build up good assets, or good enough assets to pay the way.

    It’s my opinion we need a more long term financal backbone and a clear layout of the financial structure with regard to commitments.

    Voters should have a clearer picture of what they’re voting for and how it should be spent.

    IE a central body should say hpw much is available and an election should be won by the government who best choose to distribute those available funds.
    Simplistic I know, but the current system clearly isn’t working.

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  • These arguments about the relative merits and value of private and public sectors always seem to turn on political viewpoints. Channel 4 has a bit of a habit of allowing people with trenchant views to put together programmes that are little more than vehicles for their propaganda (the global warming programme a while ago is another example).

    GPs, to take one area of the public sector mentioned above, have done pretty well out of their new contracts, something which was not foreseen apparently when these were drawn up to make gp provision work better. But I don’t see why they should be paid less than private sector workers because their occupation is vocational. There is no questioning the value of doctors (is there?) against the value of lawyers, bankers or whatever.

    It seems to me that the private sector offers poor value for money as much as the public might, not only because of the fleecing of the taxpayer by the likes of PPP but the awful service/products offered by so much of the private sector. We are sliding into an age of propaganda, in which bankers tell us they need to be paid a fortune because of their skills (bitterly funny), the PM tells us the benefit cuts are “fair”, the unemployed are told they are lazy, house prices are fair value because of “affordability”, shortages, interest rates.

    The majority in this country (indeed the entire world) are being stuffed by the minority, and all these arguments about efficiency, book balancing and value are mostly to cow people into accepting it.

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  • after watching the program last night, I understood all that was said, that the public sector is bigger than the private sector and that the public sector does not create any wealth at all, the economy cannot sustain this it just consumes wealth in fact it is consuming us the people, the more they need the MORE we pay and boy are we going to pay,WHY because we let them, the future, more recession, more protests, more anger, more violence, BROKEN ECONOMY. PS you may have noticed that this is a global problem YES because they all work in the same system, it is the system that is at fault [ be the change]

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  • @ bellwether 21:

    “When the people find they can vote themselves money, that will herald the end of the republic.” Benjamin Franklin

    sums it up.

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  • GDP is actually very misleading.

    Why? Because governments can ‘increase’ it any time they like by printing money, spending it on any old tat then just counting up what is spent.

    The UK’s GDP would look very different it were restricted to +tradeable+ goods and services.

    By contrast, most of what the government produces is actually worth less than the cost of the materials and labour that go into producing it and much of it has zero or even negative values.

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  • STR 2007, that was another wild inaccuracy.

    The UK government/taxpayer is on the hook for £1 trillion official debts + £1 accrued trillion public sector pension rights. The PFI liabilities are peanuts (and we are getting something in return, unlike what we get from a retired civil servant).

    We could pay off the official debts in ten or twenty years if we put our minds to it, Brazil did something similar over the past ten years. And the long term pensions issue is clearly a pay-as-you-go problem.

    Problem is, the Tories need to get a lot of those 28.5 million potential votes and they have no intention of making any inroads into the deficits or debt.

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  • STR, replying to the second part of your question, I did the ‘broad brush strokes’ last Sunday, as it happens. Simples!

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  • debtfree

    Re: the size of the £50 note pile – I had to work it out, I’m quite sure Ana-lytics, The number cruncher, MW or most of you lot will be able to fault my calcs but here they are :

    I clearly wasn’t listening properly, I thought they said 650 miles, my calcs deduce that it is nearer 6500 miles – sorry.

    But hey whats 5850 miles of £50 notes between friends.

    It really is staggering though that statistic, I walked to school with a Surgeon today, first guess at the height of the pile was Empire State Building, second guess (in some disbelief) was the height of Everest !

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  • str 2007 said…”I walked to school with a Surgeon today” – is he affected by the cuts?

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  • nod2glod thanks for the quote, I think I had seen this before but didn’t appreciate how it might be directly relevant until.

    Mark thanks for finding some figures on this. I suppose an ever expanding state would be rather supportive of house prices albeit in a currency that would ultimately buy little outwith its own borders.

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  • mw
    Thanks for those numbers, so the overall debt is really only half what they were discussing.

    So just a 3250 mile hile pile of £50 notes then !

    The not insignificant cuts you talk of though only address the deficit, that pile of notes is going to take some undoing.

    Jack C
    🙂

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  • Guy’s on a lighter note (pun intended) did anyone pick up on the extension of the panto twitter spat between Sir Alan Sugar and Kirstie yesterday? a little too personal (IMO) to post up as a main article but it did make the drivetime headline news !

    http://www.dailymail.co.uk/tvshowbiz/article-1328786/Alan-Sugars-Twitter-feud-Kirstie-Allsop-reignited.html

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  • MW, you’ve just gone down somewhat from my highest estimation for using the word ‘simples’.

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  • Large parts of the public and private sectors are too intertwined for any of these “the private sector supports the public sector” arguments to mean anything. When the public sector administers a broadband licence or an off-shore wind farm licence should we say that the public sector workers who administer these licences are supported by the private sector? Off course we shouldn’t because only the public sector can administrate these things. What about the public sector department who administer the salary for these licence administrators? They are also demonstrably a real part of the economy and cannot be considered to be supported by the private sector. What about the vet who is paid buy the administrator of the salary of the administrator of wind farm licences? Is that a real part of the economy. Of course it is.

    GDP is one of the most accurate measurements of the size of the economy. The problem comes when people second guess what it tells us based on inaccurate data and a minimal understanding of how GDP is calculated and what it really means. To be fair most economic degree student struggle with it for a year or two before everything clicks into place. I suspect that at the heart of the misunderstanding of GDP (apart from not having the appropriate academic background) is a desire to morally judge some spending or output as ‘worthless’ and some as ‘real’. Everything is actually real unless of course we want to stray into existentialism. Before we start to understand GDP we have to cast aside spurious moral judgements and biases as to what constitutes real production. I think humans naturally believe that only ploughing fields and manufacturing widgets is real. I can also understand how someone would judge the purchase of a holiday using credit, to be not real. However the chain reactions and kinetic reactions from all activity stretch out to infinity and we cannot therefore judge these things with a brutally simplistic moral compass to guide us

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  • No wonder GNP fell out of favour as a statistical measure.

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  • Flash I’m not sure which post you were responding to. A central element of the thread is whether the state within the uk is larger than ideal.

    This is not as much a point relating to deficit (although relevant) but a question of whether there too many public sector workers, too many on benefits that sort of thing. It cannot be the case, or is wildly improbable and a matter of great fortune, that the current situation is the ideal, so what direction should we be moving, more public sector or less. How much of our economy should be state sponsored or state involved. These are not easy questions but neither can they be left unaddressed.

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  • bellwether: “Flash I’m not sure which post you were responding to”

    Your headline is: “Why gdp is misleading…” and more than 50% of the debate has been about the extent to which the state is supported by the private sector. I naturally though that I might, therefore, talk about why GDP is not so misleading and then spend the rest of my post responding to the bulk of the debate

    “This is not as much a point relating to deficit”

    I’m not sure what you are responding to @40 because I didn’t mention deficit.

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  • as a secondary point if we are to assume that we might work better with a smaller state (my view) are we still in a position to move in that direction. By MW calculations > 70% of the electorate are directly supported by the state. This is not a situation one would see as favourable to any party seriously planning to reduce the size of the state.

    A further point is that any shift to a more private sector orientated economy would be painful in the short/medium term, and short/medium term pain even if for long term gain is not something that people, as a group at least, tend to be good at.

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  • The headline was just designed to draw people in. I feared a less attention grabbing headline might see the overall message lost.

    In fariness you say next to nothing about GDP, beyond inferring that it is something few people understand (even many economic degree students). I think we are also meant to assume it is something you have a firm grasp on

    Lets for the sake of argument say that we live in a country where 90% of people are employed by the state, working on internal projects. My point would be that the GDP of such country might look impressive, lots of activity, spending on state enterprises etc, but it would not be the sort of activity that would be supportive of a strong currency o/s of its borders. You disagree?

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  • 43 for you flash

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  • And to add more fun to this, most of the £2T (as regconised by MW) + PFI are indexed link, so REAL, not nominal GDP growth is needed to service them. If we get few years of negative growth in the next 30-40 years, things will be even more acute.

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  • I would have thought a more important question is how the country can produce wealth while at the same sharing it amongst its citizenry. How much should be apportioned to private and public sectors is to some extent a moot point and usually strongly influenced by political views. In general essential services are provided by the state because that is the only way the entire population receives them (cf US health care which is denied to a considerably number of its citizens). There is more to it than that, but broadly speaking private companies work best in some areas, the state in others.

    Incidentally MW, we did get something in return from retired civil servants – after all, a pension is just deferred salary .

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  • The headline was just designed to draw people in.

    I know 🙂

    “Lets for the sake of argument say that we live in a country where 90% of people are employed by the state, working on internal projects. My point would be that the GDP of such country might look impressive, lots of activity, spending on state enterprises etc, but it would not be the sort of activity that would be supportive of a strong currency o/s of its borders. You disagree?”

    Yes I disagree. What if the state manages its people and resources very well? What if the productivity of the state managed work and spending is higher than that of its neighbours?

    I do indeed have a firm grasp of GDP and all that is contained in its calculation. I’m willing to bet good money that you have a very firm grasp of Tort and contract law. There are two main methods of calculating GDP and they both give near identical results, which is quite instructive to anyone who is mathematically inclined. Do a google search on calculating GDP. I think you will find it interesting

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  • I’ll think about this.

    As to your questions, more questions.

    What if the state manages its people and resources very well? What if the productivity of the state managed work and spending is higher than that of its neighbours?

    I wonder if it is likely that the state would manage productivity well? Is this bourne out by state run economies in general? What of the notion that by creating a monolpoly and losing competition things tend naturally to become less efficient whether in the public or private sector? I also wonder however well run this internal economy might be whether its currency could have much if any claim for resources outwith its borders. What would it be offering in return?

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  • mark wadsworth says:

    @ BW 42, don’t worry about this short term/long term nonsense.

    It is incredible how quickly free markets can adjust to things, as an extreme example, when Poland joined EU in 2004, their wages were about one-seventh of UK wages (at prevailing exchange rate). So a lot of them came over here.

    In the next four or five years, their currency strengthened, our weakened; our wages were static and theirs were rising, and now their wages are one-half of ours (plus in purchasing power terms, they are better off back in Poland). So they are all leaving again.

    In normal circumstances, there are millions of new job vacancies every year and millions of redundancies or retirements – if the rate of job creation goes up ten per cent and the rate of job losses goes down ten per cent, it’s easily a million new jobs created every year (however menial or glamourous they may be).

    And so on.

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  • BW:”Is this bourne out by state run economies in general?”

    Are there any? Sweden is probably the closest, if you define such a thing by its public expenditure. They seem to work pretty well.

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  • Haven’t the libertarians been making these points for ages? Presumably the baby tossed out with the bathwater. Hayek addressed this, and beloved Ayn.

    “It is incredible how quickly free markets can adjust to things” – the flexibility of anarchy in networks vs rigidity of hierarchies and fixed order. Network nodes take initiative to establish new connections, hierarchy nodes wait for instruction. Networks re-route, re-shape, hierarchies have prescribed routes. Distributed intel vs bumble central controllers.

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  • mark wadsworth says:

    LTF, don’t fall into the trap of thinking that Sweden is Big Government just because it is High Tax.

    See my comment at 13 – crudely put, Sweden has stupendously high taxes which is all dished out as welfare, or health vouchers or education vouchers. Actual provision of e.g. health care is by private doctors and clinics (the same model as in most of Europe, and a very good model it is too). And unlike the UK, they have some sort of sense of collective solidarity, whereas here everybody hates everybody else.

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  • MW
    Well I didn’t actually claim that high tax = big govt; I suggested it as one definition. Another might be number of nationalised companies; another, the proportion of the population employed in the public sector. However, high taxes clearly work quite well there.

    I agree that Sweden (and northern Europe in general I think) have a better sense of society, not to say a better developed culture. We are a small-minded country, and that’s reflected in our politicians and their actions.

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