The cost-cutting error

It's being said that the government is looking to cut costs. Such a framing is in many cases wrong and dangerous.

To take an example, in this clip the BBC's Jon Kay puts it to Jonathan Reynolds that "we can't afford [the pensions triple lock]; the economy can't afford it...so how are you going to afford it?"

The problem here is that cutting real-terms state pensions is not a saving. A lower state pension means that younger people must either save more privately for their old age or work longer (or both). Cutting the state pension therefore does not save money. It merely shifts the cost of provision for old age from the collective to individuals. To speak of the government cutting costs in this context is therefore plain wrong. It's not cutting costs, but merely shifting them.

The same applies to some other possible government cost savings. In scrimping on hospital provision the government has pushed NHS waiting lists up to record highs, one effect of which is to increase the number of people going for private treatment. Again, what's happening here is not that the government is cutting a cost, but that it is transferring it - from the state to those who can afford to go private.

An even more obvious example of what I mean are benefit cuts. These merely transfer costs from government to benefit recipients who must cut their spending and lead meaner lives.

The cost does not fall on them alone, however. It also falls upon those companies who suffer lower demand when benefit recipients cut spending. When Tesco chairman John Allan says we have "a moral responsibility" to look after people suffering from the cost of living crisis, he's appealing to the government to help his firm. Smarter capitalists know that austerity hurts them too.

In cases such as these, therefore, talk of the government cutting costs is plain wrong. What it is doing is shifting the costs, from the collective to individuals.

In this cases, the key question is: who is best able to bear costs - the state or individual?

In the case of pensions, I think the answer is clear - the state. Private pension provision is difficult and expensive. Not only do we face high fees from the organized theft that is the fund management industry, but we also face investment risk and longevity risk. The state is better on all three counts.

Similarly, scrimping on NHS spending introduces risk into our lives - that of being impoverished by ill-health. Benefit cuts have a similar effect, forcing individuals and retailers into being more exposed to bad economic times. They therefore weaken the automatic stabilizers that help protect us from recession.

In all three cases, the Tories are stepping back from a classic function of the state, which is to pool risks. It is transferring risk from government to individuals, who must take more investment risk, risk of impoverishment by ill-health, or risk of income loss in bad times. In this context asking "how great is the 'black hole' in the public finances?" is the wrong question. The question is: which costs and risks should be borne by the state and which by individuals?

This is not to say however that all possible government cuts are merely shifting costs.

One pure cost saving would be the reduction in the deadweight costs of administering taxes and benefits. Shifting taxes from incomes to land would be one such saving; land taxes don't have the disincentive effects that other taxes do. So too would simplifying the benefit system.

Other cost savings would be reducing the functions of the police, for example by legalizing drugs. Yet another would be cutting military spending: if you cut health spending, we might buy a private operation, but if you cut military spending we'll not buy our own private nuclear weapons. You can think of other examples.

You might reply that even in these cases, cutting government spending is not a pure cost saving as it entails job losses. Not necessarily. We are close to full employment, which means we must consider not only the volume of employment but the nature of it: do we really want arms manufacturers and a surveillance state rather than care workers and medical equipment?

Now, you might quibble with my individual judgments of particular cases. But I think the distinction I'm making between cost savings and cost transfers is robust and important. What we must ask is not whether the government needs to find savings, but other questions: what costs must be borne by the state and which by individuals? And what goods and services do we want more of, and what less?

Comments

[Faceless bureaucrat]

I agree re. the NHS example and on balance, the benefits example, but isn't there a reasonable argument that the pensions example is about transferring money from working age people to pensioners. Increasing pensions by more than earnings will, all being equal, make pensioners wealthier and workers poorer?

[aragon]

By way of contrast here is the Telegraph View.

https://www.telegraph.co.uk/opinion/2022/10/18/keir-starmer-must-spell-real-plans/

Of course the Telegraphs premise that "I afraid there is no money." - Lyam Byrne, Chief Secretary to the Treasury under Gordon Brown.

Or the alternative that assumption "That is unless, of course, Sir Keir opts to take his party even further down the economically destructive route of taxing the "wealthy" to fund spending – perhaps, this time, via wealth taxes and other taxation of "excess" profits."

"economically destructive" and the scare quotes and the bond markets are the constraints on Government.

I am sorry I don't accept the Telegraphs premise or that you need to tax the workers/masses, given the vast inequality or that income and capital taxes cannot exceed 50%.

Faceless bureaucrat, if you include bankers on a mid career wage of 150K p.a. (and now uncapped bonuses).

Perhaps the workers would have less but how much scope is there to tax 150K p.a. than 30K p.a. not to mention the scope to tax the Plutocrats and there passive incomes.
Do we need for them to have support ships for the toys that they can't fit on their super yachts.

We need more structural changes addressing the unearned income (asset inflation) from FIRE (Finance, Insurance Real Estate) would be a start with property/land taxes and not engaging in in QE.

As for full employment their have been articles with three categories employed, unemployed, and discouraged, this third category are laying flat and not participating in the rat race.

https://www.spectator.co.uk/article/britain-needs-more-honesty-about-unemployment

(Reducing benefits is not the solution lack of worthwhile opportunities is the issue)

And Thatcherism start this in the North with the closure of heavy industry, while transferring of wealth to finance).

But with the Gig economy costs have been transferred to workers and wages suppressed, capital just takes to itself productivity gains and more of the wealth.

Which nation has the most industrial robots? China with it's Billion plus population has 50%, the UK less than the European average.

Fundamental services like housing, water and energy are monpolised to extract further economic rents from the poor (with the NHS to follow).

Neo-liberalism, sees inequality as a feature where as Socialism (or even Social Democracy) regards it as fault, and meet the needs of the population with much less inequality.

Universal public services reduce the need for inequality.

Sixth richest nation as wealthy as France?

A strata of uber-rich
above a population as wealth as Slovakia or Poland who may soon close the gap with the exception of the wealthy.

The dominance of FIRE (see above), is unproductive and it is the asset owners who have benefited from money creation, and economic rent extraction.

Here is a analysis from the right.

https://snowdon.substack.com/p/liz-truss-didnt-break-the-economy

"Hair of the dog economics [Neoliberalism] has had its day. The era of big borrowing has come to an end. We have run out of road."

"The MMT loonies will say that the recession could have been avoided if the Bank hosed us down with one more burst of QE."

I am not to refer to MMT, but that is a characterisation of my understanding.

Of course some argue the rot set in with Thatcher (or before) and with the abandonment of Keynesian and eventual adoption of Neo-liberalism.

Thatcher had the windfall of North Sea Oil.

Growth is part but not all of the solution, Chris did not suggest Inheritance Tax, for example to stop unearned fortunes been
passed on and pay more equitably for social/elder care.

Structural change ensured that Capital gained the increased wealth from the '70's onward and structural change will be needed to correct this, and redistribution from capital to the general population is also required.

As for growth give us fusion and the promise of Nuclear: "too cheap to meter." Not debt slavery due to monopoly economic rent on basic needs.

You have nothing to loose but your chains.

[Staberinde]

Don't be too quick to cut defence spending.

We live in a world with two despotic superpowers, one of which invaded a democratic neighbour and the other which intends do the same. Add North Korea, Iran, Saudi Arabia, and Pakistan to the list of deplorables looking to make the world a less stable, less free place.

These countries don't just seek territorial gains; they want to destabilised freer, fairer, and more open societies. They'll do it by pushing millions of refugees our way, through energy leverage, and conflict.

If you value living in a society like ours, and tend to get upset at injustice beyond our borders, you might want to invest in defence. Because you can't appease forever. You can't expect diplomacy never to fail. And you can't deter with old tanks, cardboard cut-outs of tanks, or too few tanks.

If we're talking about the fundamental role of the state, defence is #1.

[Simon Garrett]

" Increasing pensions by more than earnings will, all being equal, make pensioners wealthier and workers poorer?"

In the short run, perhaps. In the logn run, those workers will become pensioners, and will benefit from many years of compounded increase of pensions. And they will benefit from a full pension time of increases, whereas existing pensioners are already part way through their pension time.

[ltr]

We live in a world with two despotic superpowers, one of which invaded a democratic neighbour and the other which intends do the same. Add North Korea, Iran, Saudi Arabia, and Pakistan to the list of deplorables looking to make the world a less stable, less free place....

[ Rubbish; simply hateful rubbish. ]

[Dipper]

1. If cutting pensions ins't really a saving, then presumably doubling pensions should be no problem?

2. For some, being on benefits is a choice. If you increase benefits more than wages, then some people will migrate from employment to benefits, which reduces economic output, which requires higher taxes, which is an incentive to work less , ...

[aragon]

https://www.theatlantic.com/newsletters/archive/2022/10/uk-economy-disaster-degrowth-brexit/671847/

Isn't globalisation deindustrialization by offshored industry (creating a rust belt and impoverishing the workforce)

"Take out Greater London—the prosperity of which depends to an uncomfortable degree on a willingness to provide services to oligarchs from the Middle East and the former Soviet Union—and the UK is one of the poorest countries in Western Europe."

Dipper, why worry about reducing the income of the poorest in society, (less than 10K p.a. each, and with the gig-economy, often the most insecure.

They quit the rat race as it is not worth the candle.

Why not worry that 150K is not enough to incentivise our new prime minister with a personal wealth of £730m and a extremely rich non-dom wife.

How much should we pay, just to get him out of bed on a morning? (He can walk to work from the accommodation provided).

Doubling pensions seems like a excellent idea, as we have some of the lowest pensions and benefits in Western Europe.

You can't incentivise (flog) a dead horse! (to a useful purpose).