Tuesday, 4 October 2011

Osborne's Bad Logic And Bad Economics

In his speech, yesterday, George Osborne, repeated the oft stated mantra that "You can't get out of a debt crisis by taking on more debt." This is bad logic. There is no reason as to why the condition of being in a debt crisis, as opposed to not being in a debt crisis, should have any bearing upon the desirability of taking on debt. The two things are not necessarily related. The bad logic can be simply exposed by looking at several examples of how taking on debt can be beneficial in providing resources. Those resources can indeed be used to pay down debt, if you have any.

Suppose you are in debt, and you borrow a couple of quid to do the lottery. You win the Jackpot, and unless you really had a significant debt problem, its likely that you would have more than enough money, then to pay off all your debts!! Okay, that might be a flippant, or unlikely example. So, let's look at others.

Suppose you are a singer, or nightclub singer. You are in debt for £50. You ask a friend to lend you their car, or a tenner for cab fare. With it, you are able to get to a gig, you would otehrwise not have been able to get, which pays you £200. Again, you can then pay off your debt, as a result of going further into debt.

In fact, that kind of scenario occurs all the time, where people who are in debt, have to go further into debt, to buy a car, in order that they can take up employment that they can only get to by having a car. Of course, we wouldn't expect the Tories to understand these everyday facts of life for working people.

But, we would expect them to understand the basics of running a business. There too, it is an everyday occurrence for businesses that are in debt to have to take on additional debt in order to generate the income needed to cover the repayment of that debt. A firm that has debts of £100,000, which cost it £5,000 a year in repayment costs, will certainly understand the benefit of borrowing a further £100,000 to buy equipment that enables it to win a contract that will bring it in £20,000 a year in additional profits.

Its hard to beleive that we now have a Chancellor of the Exchequer that does not understand these basic aspects of how to run a household budget, or of a small business, but that is what we have if we were to beleive that George Osborne actually believed any of this guff. I doubt that he does, but the Liberal-Tories have tied themselves into this narrative about the deficit, and they are finding it hard to escape from it, despite all of the international, and national commentary arguing against it.

It is, of course, not just bad logic, but bad economics, because the running of a national economy is not the same as running a household budget, or running a business. Unlike, a household or a business, the Government is able through its macro-economic policy, by stimulating the economy, to actually create income, and thereby create the growth, which enables the debts to be paid off. As the fact that the deficit is growing demonstrates, attempting to reduce debt, by creating the conditions which reduce growth, is, in fact, counter-productive.

The question is not whether additional debt should be taken on, when you already have a debt problem, but is, what do you intend to use the additional debt for. If it is simply to finance additional consumption, it may indeed, be only adding logs to the fire. But, if it is used for investment, to create additional value within the economy, then, on the contrary, it is precisely the means by which the debt burden can be reduced.

The fact is, as Jeffrey Sachs pointed out on CNBC today, the US needs to address the problem of its lack of sufficient educated workers. The same is true in the UK, if we are to invest in and develop those high value industries that would enable us to compete in the global marketplace. Additional debt to cover the cost of achieving that would be a good investment.

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