Monday, February 18, 2008

Debtors' prison

Thanks to the email correspondent who sent me the link to this video; it features the US Comptroller General, David Walker, laying out precisely how bad the US deficits really are.


Whilst the numbers are far vaster than those that affect this country, one must remember that we have about a sixth of the population of the US (and they have six times our GDP). Britain's debts are also growing at a dangerous rate.

Interestingly, for both the US and ourselves, the issue seems to be the huge costs of social security. And how do we solve these problems?

Well, one can raise taxes. However, you then run the risk of constraining growth and actually ending up with less revenue: it requires considerable skill to get all taxes at the right point on the Laffer curve.

Second, you can cut social security spending.

One of the most significant sentences in Walker's assessment is the assertion that, "we cannot grow our way out of this." Because of the rising costs of the liabilities and the interest associated with the debts, unless the government raise taxes or cut spending, there will come a point (in 2040, in these US projections) when the government will barely be able to service the interest on the debt, let alone meet the required extra spending.

Is Britain in a better situation? I would say that it is, but barely. As such, it will be interesting to see whether the Tories really are able to "share the proceeds of growth"—leaving aside the issue of whether there will actually be any growth to share.

One thing is clear: successive governments—both here and in the US—have been woefully profligate and I can't help wondering if this is not, in a great part, down to our very system of democracy.

After all, every politician wants to be elected and is thus tempted to offer lower taxes to those who work, and higher benefits to those who don't. It is the natural way; you may not be able to please all of the people all of the time but, in order to get elected, politicians need to have a damn good stab at it. I believe that they cal it, "trying to occupy the Centre Ground."

And what is becoming quite clear is that, since they have been doing so (broadly speaking, since the idea of social welfare became the norm), successive governments have been promising the moon on a stick, but with no real idea of how they are going to pay for their pledges.

It is the ultimate in short-termism: some politicians will be aware of the problem but they are just holding on tight and hoping that the crash doesn't come within their lifetime—or, at least, not in their Parliamentary lifetime.

Something has to be done. But what? Our whole system of politics—this democracy that we are so proud of—is so fundamentally flawed that no one is actually going to take responsibility.

Until the crunch comes.

And every politician—or, to be more accurate, every political party—must be praying that they aren't holding the parcel when the music stops.

5 comments:

Wat Tyler said...

Devil

You post some shocking stuff, but this is the most shocking I've yet seen.

Why aren't our Comptrollers like that? Because as you say, our debt problems are just as scary, and we ought to have some scary guy reading us the facts of life.

Something has to be done. But what? Our whole system of politics—this democracy that we are so proud of—is so fundamentally flawed that no one is actually going to take responsibility.

Gah!

We can all think of ideas, but the turkeys are at the controls and they don't look likely let go any time soon.

But maybe we could at least get a no BS Comptroller.

Devil's Kitchen said...

Wat,

"Why aren't our Comptrollers like that?"

Apparently they are too busy out having cosy dinners with special interests, or flying around the world with their wives at our expense...

DK

Charlie G said...

A new use for the expression 'democratic deficit': there is a deficit between what voters/the elected politicians think is the best thing for the country and what actually. Sure, some things are a matter of preference - but when you try to flaunt the basic constraints of reality - it catches up.

Case in point? The devaluing dollar. Another? Immigration - if the US/West Europe hadn't spent the last 60 years trying to beat the global markets through protectionism and capital controls we wouldn't have such unnatural and destructively high level of immigration into our countries at present. This isn't like early US immigration - people looking for freedom, a fresh start. This is people desperate for the slightest economic opportunity - opportunities we've starved many of. We may have gradually let down tariffs and subsidies in a variety of areas (though not banking apparently..) - and usually because large economies like China & India have ended up more competitive in spite of our protectionism - but we have never relinquished tariffs and subsidies over our primary production industries - the sectors where developing countries have the most natural comparative advantage.

When you're talking about capital, trade, labour, credit etc you are talking about global markets. Trying to manipulate them to favour your country over efficient global market allocation may yield short term gains, but in the end the natural tendency of the market towards efficiency catches up. The next few years might witness a rather turbulent transition of power and wealth away from the West as the financial system unravels.

SACKERSON said...

It would be v. intersting to see a more detailed UK/US comparison - I tried here:

http://theylaughedatnoah.blogspot.com/2008/02/uk-public-debt-twice-as-bad-as-americas.html

... but there are differences, e.g. teachers' pensions in the States are, I believe, funded by local arrangements.

Can anyone help crisp-up the figures?

Budgie said...

The UK is worse than the USA having a bigger trade deficit and a bigger budget deficit (as proportions of GDP). We have huge personal debt like the USA. But our state sector is bigger having grown substantially which means the productive sector has shrunk (%GDP).

Result: recession; reduced tax revenues leading to higher taxes plus cuts in services plus higher borrowing.