I’ve noticed here on LibDemVoice that when we have a discussion about the economy and what the Government can afford, it usually descends into a very technical argument about the nature of money: is money a flow, as mainstream economics says, or is it destroyed by tax, as Modern Monetary Theory (MMT) advocates believe?
Wouldn’t it be nice if there were an alternative way to think about expenditure that avoided these arguments and got to the root of what is really going on when we decide whether something is affordable? Well, there is! Instead of counting money, try thinking about the actual resources consumed.
How does that work? Here’s an example:
Most LibDems agree that fixing the crisis in social care should be a priority. That means we need more social care workers. There are currently around 1.8 million people working in social care in the UK (Report for Skills for Care and Development). Let’s say, for the sake of argument, that we decide adequate social care requires 10% more workers. That’s nearly 0.2 million people.
Here is where thinking about resources kicks in. Let’s say you do somehow recruit 0.2 million more social care workers. That doesn’t by itself change the size of the available workforce, so it must mean 0.2 million fewer people doing something else. Some other industry will have to produce fewer goods or services because it will have fewer workers. Which industry? Well, in theory the Government could make that decision by taxing or cutting spending on some specific thing. Or it could let the market choose — which will mean the jobs will be lost in whatever industry is least able to compete for those workers. But either way, we will gain more social care but lose out in some other way.
Another example: junior doctors are about to go on strike. They want more money, which the Government says it can’t afford. How would that work economically? Again, think about resources rather than money: the relevant resource here is all the things that people might buy with their money — food, travel, housing, and so on. The total quantity of available goods and services people can buy (the size of the “cake”) won’t change just because you give junior doctors a salary increase. What would change is that doctors would get a slightly bigger share of that cake. And — guess what — that must mean a smaller share for everyone else, translating into a small loss of standard of living for the rest of us.
None of that says these policies are right or wrong. You may think there are excellent reasons to give junior doctors a salary increase or to increase the numbers of social care workers. It’s just that we need to be aware of the consequences and ask: do the benefits of each decision outweigh the disbenefits?
A third example: the Government is backing construction of the Lower Thames Crossing — a new road tunnel under the Thames near Gravesend. Ignoring the tunnelled part, that requires about 10 miles of new six-lane dual carriageway. Allowing for junctions, that’s on the order of 100 hectares of land take. That’s land that can no longer be used for housing, farmland, parkland, or anything else. Obviously there are lots of other (probably more important) arguments both for and against the Lower Thames Crossing; I picked land use just to illustrate how thinking about resources works.
The key point illustrated by all these examples is that once you are using a resource (workers, land, whatever) for one thing, then that resource is taken. That means if you want more of one thing, that almost invariably means less of something else. That’s why we need to be very wary about constantly demanding that the Government gives us more — more healthcare, more social care, make everyone better off, etc. All very good, but what does it mean less of?
Is there any way out? Yes, you may be able to increase the total quantity of a resource. For example, you can build more housing: that ties workers up while the housing is being built, but then the houses are there permanently. Or you can build a railway, which can then transport more people using less energy and less land than a road would require. By the way, I often hear the argument that you can increase the size of the workforce through immigration, but unfortunately that one doesn’t really work: if you increase the population, you’ve also increased the numbers of people who need goods and services. If the population grows by 10%, you may well be producing 10% more — but if the need for goods and services for everyone has also grown by 10%, then you haven’t actually improved anything.
Coming back to money, this is the real reason why Governments can’t just spend money without limit: spending money consumes whatever resource the money is buying, and that stops that resource being used for anything else. Resources aren’t infinite! If we can remember that when we are making policies and calling for the Government to do more things, we’ll end up with much more credible policies that stand more chance of succeeding should we get into Government.
* Simon Robinson is a Liberal Democrat activist based in London. He blogs at www.libdemworld.com.
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9 Comments
In economics, the cost of something is often expressed as the ‘opportunity cost’, which is thinking about the alternatives that have been sacrificed by devoting resources to the output chosen.
In the example you give of employing more care workers, this would not come at the expense of reduced production of some other good or service if the extra workers were currently unemployed, or moving from jobs that would then be filled by those currently unemployed.
“Wouldn’t it be nice if there were an alternative way to think about expenditure that avoided these arguments and got to the root of what is really going on when we decide whether something is affordable? Well, there is! Instead of counting money, try thinking about the actual resources consumed.”
This is an alternative to mainstream thinking; but, it’s very much in tune to with what both old fashioned Keynesians and MMTers say. If money is spent without the necessary resources being available in the economy high inflation is likely to occur. On the other hand if money is not spent when resources are lying idle we experience higher than normal levels of unemployment as the economy is pushed into recession.
Therefore the trick to successfully managing the economy is to adjust fiscal policies to steer a sensible middle path between the two. Monetary policies should play only a minor role rather than the major role they do at present.
Might it be that taxes do more than contribute towards government expenditures, not least the management of inflation?
https://www.taxresearch.org.uk/Blog/2024/05/07/there-are-six-reasons-why-we-need-taxes/
One thing that makes me curious is when I see a headline like “Taylor Swift’s £1 billion boost to the UK Economy” as we did last year. Surely that can only be true if most of the expenditure was paid for by either people having cash stuffed unproductively under the mattress that they wouldn’t otherwise have spent, or they borrowed the money to pay for tickets, travel, hotels etc thus increasing the money supply?
Because if (as I think is more likely) her tour just re-directed discretionary spending that would otherwise have been used for going to the pub, takeaways, cinema or whatever over time, then where is the economic boost?
Was the UK’s GDP really £1bn higher in 2024 because Taylor Swift toured?
@Nick Baird
Excellent comment, and absolutely right – the UK economy did not increase by £1bn due to Taylor Swift touring. It will have increased by some amount because some of what was spent would otherwise have been spent on imports, holidays abroad etc. However, most of the spending would have been spent on other goods and services that would have contributed to the UK’s GDP.
“Was the UK’s GDP really £1bn higher in 2024 because Taylor Swift toured?”
No, because the money spent on tickets for the concerts would otherwise be spent on something else.
It was probably still worthwhile to the UK economy but as Simon appears to argue in his OP the putting on of the concerts required the use of real resources. It’s essentially as export ( at least partially) and it’s the same for all exports. They cost something to produce. They are only worthwhile if the proceeds of the exports can be used to purchase something we aren’t good at making. These would only have been a percentage of the £1 billion.
The Germans probably wouldn’t agree but there’s no point in exporting just for the sake of running a surplus.
Thanks for the comments all.
@Jenny: Interesting point about the opportunity cost. Recruiting care workers from the pool of unemployed does require that you can find unemployed people who wish to and are available to work. If you can do that, then you still have the opportunity cost: If you employ those people as care workers, then you’re not employing them to do something else that might benefit people.
I agree with everyone that a Taylor Swift concert would mostly redirect spending that would have been spent on something else. But there is a proviso: Presumably the people who spent money on the concert did so because they expected to get more ‘utility’ out of the concert than from whatever they would’ve otherwise spent the money on. So you could argue there’s a benefit from that difference. It would be hard to measure though, and likely worth only a small fraction of the actual amount spent.
“…..and likely worth only a small fraction of the actual amount spent.”
Do I detect a hint of disapproval?
We might well think that young people should have better things to spend their money on than expensive concert tickets – for Taylor Swift or anyone else. However, as liberals (and I would claim to be a liberal Socialist) we should say it should be their choice to spend their money as they see fit.
So, presumably, both the promoters of the concerts and Taylor Swift herself saw an opportunity to make a profit so they went ahead with them. That’s the way things work in our society. I would have expected Lib Dems to be fully on board with that.
@Peter, no there was no disapproval at all intended when I referred to ‘small fraction’. Let me use another example to explain what I meant: Say, I go to my favourite bakers and buy a cinnamon bun for £1.50. I’m willing to do that because I get sufficient enjoyment (‘utility’) from the bun to be worth spending £1.50.
Next week the bakers has added a chocolate bun to the range, also for £1.50. I like the chocolate even more than the cinnamon, so I buy a chocolate bun instead. I’ve spent the same money but gained more utility. But the difference in utility is probably not great – almost certainly a lot less than £1.50 if you could attach a value to it. For example, maybe it was £1.70 worth of utility for the cinnamon bun, and £2 worth for the chocolate bun, so a difference of 30p)
In the same way, someone who spends – say – £500 on going to a Taylor Swift concert has (if all went well) gained utility worth spending £500 on. If the option to go to the concert wasn’t available [eg. because Taylor Swift wasn’t touring], they’d probably have spent the same money on something else, but gained less utility. But the difference in the utilities is probably less than £500.
Clearer?