Monday, 3 September 2012

Investment or Consumption?

 Last week Simon Jenkins wrote a  article in which he derided the call for a third runway at Heathrow as "big-willy" politics and called for more consumption rather than investment to stimulate the economy.  Whilst agreeing with Jenkins's view on the third runway (and I should include HS2 as well,  not to mention the renewal of Trident) I believe, having taught the Keynesian multiplier effect ad nausium throughout most of my teaching career, that his preference for consumption over investment is mistaken.  Hence:
   
Letters to the Editor,
The Guardian.

Dear Sir,

While I sympathise with Simon Jenkins's hint (Big willy politics is the most dangerous politics of all, 29th August) that "An economic stimulus that puts money directly into the pockets of consumers through higher benefits and/or lower taxes," rather than being "possibly immoral," might be a good idea, I cannot agree with his assertion that "consumption,not investment, is today's absolute priority." 

As every A-level student of economics knows, investment induces a Keynesian multiplier effect because it creates incomes without, initially, placing goods or services on the consumer market.  Hence employment is created which generates extra income which creates demand for the products of other producers, which creates additional  employment which generates  extra income which creates extra demand ...not exactly ad infinitum but for quite a while, depending on the amount which leaks out of the economy

A Government "give away"  achieved by putting money directly into the bank accounts of consumers, the so-called "helicopter money", is likely to leak out pretty quickly through expenditure on imported products  and foreign holidays, neither of which will do much to stimulate our own economy.

There is no shortage of worthwhile  "pump priming" projects which will enhance our economic and social well-being in the future. As your letters page on 28th August demonstrates, there is ample opportunity for, and few constraints on, desperately needed investment in housing, and, if Mr Jenkins were to travel on our Northern Rail network he would soon appreciate the need for an upgrade.  To give just one example, the Trans-Pennine Service provided by FirstGroup is often grossly overcrowded even at off- peak times.

Peter Wrigley


5 comments:

  1. "Whilst agreeing with Jenkins's view on the third runway (and I should include HS2 as well)"
    Agree re Heathrow but we do need more rail capacity between southern and northern England - whether it needs to be high speed or not is a different matter.

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    1. Agreed: I believe a general updating of the existing network would be of far more value than a prestige project which just cuts of a few minutes from the time to travel between London and Birmingham. But that would be "normal-willy" politics, to use Jenkins's terms, and insufficiently macho.

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  2. The coalition is "investing" £3bn (equivalent to 0.6p on the basic rate of tax) on refurbishing their dens in the palace of Westminster so clearly the money can be found for capital expenditure projects when it suits them!

    This is one benefit of the union that we Scots will not miss after independence!

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    1. Not to mention £9bn spent on the Olympics. A great party, and it was pleasant to have good news outweighing bad news in our media for a couple of weeks. But whether it is the best way to spend public money when 20% of our population is really struggling, and to be made to struggle even more, is highly questionable.

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  3. My friend John Cole, a former Bradford Councillor writes:

    Hi Peter

    Whilst I generally admire Simon Jenkins, on this occasion I take your side of the argument rather than his.

    One of the superficially attractive arguments of those in favour of an austerity programme is that it is somehow morally wrong to leave future generations saddled with debt from government borrowing in this time period.

    However, if government borrowing is used to finance infrastructural investment (on better rail services, replacing our soon-to-be knackered Victorian sewers, home insulation etc.) then the benefit is enjoyed by these same future generations of tax-payers. Future generations get the use of the asset.

    This would not be true of increased current consumer spending financed by "helicopter money" .

    Also, as you point out, infrastructural spending has a much lower import content and generates more jobs and a higher multiplier.

    Hooray for "little Kay"

    Best Regards

    John C

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