Why the cuts are good...

[JohnB]

We couldn't reduce banker's bonuses because they were contracturally sound, but you say the same shouldn't hold true for Doctors? Good luck getting any care in casualty or at your local clinic, once all the Doctors retire or move to private practice. And medical students with their 5 years+ of student debt will bail out without finishing their courses, or go overseas if there is no reasonable pay on offer to compensate for the study and responsibility, so there won't be any downstream replacements either.

Like what happened with dentists. The nearest NHS dentists are nearly 40 miles from me, and a lot of them seem to have a restricted service. It will take up a whole day for me to visit one, and cost a fortune for the treatment. Plus the bus fare for up to a 3 hour journey each way, or about £17 for diesel plus parking.

[Andy Hunt]

If the public sector guides and subsidises the development of the private sector (eg fossil fuel exploration, renewable energy), then is it not entitled to reclaim a portion of the profits for public good?

Is it really true that the private sector pays for the public sector? Is the private sector not a subsidised subset of the public sector?

[AndySir]

Would those public sector jobs paying tax exist if they were not created from tax revenues from the private sector in the first place?

Yes. I believe many public sector jobs were not only self-funding but made a profit until the 1980's. Recall British Telecommunications, British Airways, BP and British Gas were part of the public sector in recent memory. Did they magically transform into wealth creators upon the moment of their listing? As with this comment...

So how is the public sector's wealth created? Two ways, and two ways only: taxes, and public debt.

... you both seem to have confused wealth creation with economic systems. Regardless of the administrative structure both systems can create wealth. The argument that you appear to be trying to make is that the private sector is more efficient at it. I see you've done the same thing again at the end of your post so I'll try and make a clear distinction. Wealth is created when resources are transformed from lower valued item to higher valued items, the classic example being silicon -> glass -> microchips. The source of all wealth is what an economist would call natural capital or a more poetic man might call the bounty of the land. It is currently controlled by the private sector, previously the public sector, previously the aristocracy, previously the king and previously whoever turned up with enough force to hold it. Value is added by getting it from the land and sending it where its needed (primary industry) and making a useful product from it (secondary industry) but the value of a barrel of oil extracted by PDVSA is the same as the value of a barrel of oil extracted by Exxon-Mobil.

It is a virtous circle, when the economy is growing and the private sector is doing well - you can spend more on the public sector.

Once again you are giving a rather narrow description of the current economic model. Do not forget that the foundation of corporations came when the public sector was doing well so it could afford to afford to charter a company (Dutch East India being the most famous example).

As a thought experiment imagine taking the average GNI per Capita for the UK of $37,230 (PPP in 2009, according to the World Bank) as your wealth and spending it yourself. First items on everybody's list are going to be food, housing, heating, healthcare, security, transportation and education. You could try it again with the global GNI of $10,604 if you want to depress yourself (would probably get you food, shelter and one of first world health, education or security). To put it another way, if you pay directly for your own healthcare would the NHS now be a wealth generating industry?

[biffvernon]

Money, Energy - one thing they have in common is that you can allocate them how you like, once you have earned them!

I don't see a commonality.

Money is created, then earned, borrowed or stolen. It can then be reused and recycled ad infinitum.
Energy cannot be created, it has to be dug up or caught, and can then only be used once.

The laws of banking and thermodynamics operate in different paradigms.

[the_lyniezian]

Can I just ask the question: if government spending is set to rise in the next few years, what good are the cuts? Is it simply to stop it rising further?

[the_lyniezian]

Money, Energy - one thing they have in common is that you can allocate them how you like, once you have earned them!

I don't see a commonality.

Money is created, then earned, borrowed or stolen. It can then be reused and recycled ad infinitum.
Energy cannot be created, it has to be dug up or caught, and can then only be used once.

The laws of banking and thermodynamics operate in different paradigms.

So far as I understood it, any money supposedly "created" is ultimately supposed to representreal wealth in an ideal system. Say a bank is able to loan out money to the amount of 9 times its assets, or whatever it is, to enterprises which generate an income from natural capital. That money is then paid back (and invested) so somehow it works out as not simply creation of money, but actual real wealth.

There are videos on Youtube which explain it better than I do, even...

[AndySir]

So far as I understood it, any money supposedly "created" is ultimately supposed to representreal wealth in an ideal system. Say a bank is able to loan out money to the amount of 9 times its assets, or whatever it is, to enterprises which generate an income from natural capital. That money is then paid back (and invested) so somehow it works out as not simply creation of money, but actual real wealth.

There are videos on Youtube which explain it better than I do, even...

Money is the tool with which industry creates wealth, but it doesn't create wealth any more than a pickaxe creates gold.

[Totally_Baffled]

Can I just ask the question: if government spending is set to rise in the next few years, what good are the cuts? Is it simply to stop it rising further?

Yes, in effect spending public spending falls net of inflation (to keep its 2010 purchasing power public spending would need to increase by even more)

[the_lyniezian]

So far as I understood it, any money supposedly "created" is ultimately supposed to representreal wealth in an ideal system. Say a bank is able to loan out money to the amount of 9 times its assets, or whatever it is, to enterprises which generate an income from natural capital. That money is then paid back (and invested) so somehow it works out as not simply creation of money, but actual real wealth.

There are videos on Youtube which explain it better than I do, even...

Money is the tool with which industry creates wealth, but it doesn't create wealth any more than a pickaxe creates gold.

Not what I meant. I meant that any money "created" is ultimately there to become representative of underlying real wealth. Ideally.

[Totally_Baffled]

Yes. I believe many public sector jobs were not only self-funding but made a profit until the 1980's. Recall British Telecommunications, British Airways, BP and British Gas were part of the public sector in recent memory. Did they magically transform into wealth creators upon the moment of their listing?

Hi AndySir

Yes, - but then some of these originated as private companies (BG was was made up of 1,000's of private regional suppliers for example), some made huge losses and were private (at least in part) originally(British airways), some were private and bailed out due to politicial issues (BP - kicked out of Iran?)

All of which were re privatised eventually and are now run more efficiently and deliver more tax revenue then under state ownership (BA maybe the exception as they are finding it hard to compete with over inflated wages and are making a loss).

The public sector may nationalise companies for all sorts of reasons (politics being a big one), but generally I think it is fair to say that companies in todays world fair better in the private sector - they are more efficient, competitive and deliver more money to the public purse.

Governments and civil servants are not experts at running companies (why would they be?). The governments task is to take said tax revenues and use where perhaps the market doesn't deliver (eg social services, defence, street lighting, bin collecting etc etc), or where perhaps markets are overly monopolistic.

To put it another way, if you pay directly for your own healthcare would the NHS now be a wealth generating industry?

As for your other point - which is a good one, yes private health care is in effect wealth generating. As you point out if I (and many others) pay into a private health care scheme and that scheme turns breaks even or better - then it generates wealth.

However - the difference with the NHS is that obviously caters for all (rightly so) whether they pay into the system or not, and/or pay enough for their care.

In which case the NHS as a private company would be loss making and therefore needs to be publicly owned to secure tax monies to cover the loss.

Biff - you missed the point I was trying to make - but then I think you did that on purpose to perhaps avoid answering it?

[AndySir]

Wotcha TB. Both strands of argument, the relative efficiency of the private and public sector in the same fields and what constitutes a wealth generating business, seem to be suffering from the same (dare I say?) misunderstanding - that wealth creation comes from an organisation's profit. It does not, it comes from its produce. If both Dongles R Us or Dongles-U-Like transform iron into dongles the wealth is in the expected utility of the dongle, which is the same, not their mark up which may vary. Similarly with the healthcare example the wealth is the healthcare and remains the same regardless of whether it's provider is profiting on the deal.

With that in mind when you consider the relative efficiency of the public and private sectors you want to look at the cost of providing the service/manufacturing the item. A prime example would be the American health system, which generates large profits but costs twice as much for a lower quality of service (http://www.reuters.com/article/idUSTRE65M0SU20100623)

[Totally_Baffled]

Wotcha TB. Both strands of argument, the relative efficiency of the private and public sector in the same fields and what constitutes a wealth generating business, seem to be suffering from the same (dare I say?) misunderstanding - that wealth creation comes from an organisation's profit. It does not, it comes from its produce. If both Dongles R Us or Dongles-U-Like transform iron into dongles the wealth is in the expected utility of the dongle, which is the same, not their mark up which may vary. Similarly with the healthcare example the wealth is the healthcare and remains the same regardless of whether it's provider is profiting on the deal.

With that in mind when you consider the relative efficiency of the public and private sectors you want to look at the cost of providing the service/manufacturing the item. A prime example would be the American health system, which generates large profits but costs twice as much for a lower quality of service (http://www.reuters.com/article/idUSTRE65M0SU20100623)

I get ya now Andy, I think perhaps though if a the 'produce' is provided at a loss - the wealth from the utility from that produce/output would be short lived?(without a subsidy/tax payers support?)

To use a business buzzphrase, each sector should 'play to position' to maximise the utility of produce (wealth) by providing in a commercially sustainable way. Got to be competitive and at least break even to keep on producing/adding value

The exception being of course those industries where the market fails to deliver - healthcare being one, so taxation is used to provide a public service/maximise utility/wealth. In your US example, they have the balance wrong - they should use the tax on those profits to help the poor have free health care -but alas they think that is communism! (thats politics for ya!)

Sheesh just re read the paragraph before last again, I should be a management consultant or something, the paragraph would look great on a power point slide! (copyright Baffled's bullshit consultancy ltd! )

[AndySir]

I get ya now Andy, I think perhaps though if a the 'produce' is provided at a loss - the wealth from the utility from that produce/output would be short lived?(without a subsidy/tax payers support?)

To use a business buzzphrase, each sector should 'play to position' to maximise the utility of produce (wealth) by providing in a commercially sustainable way. Got to be competitive and at least break even to keep on producing/adding value

Yes, but it's worthwhile drawing a distinction between a commercial loss or gain and a gain in wealth. The former is a function of the system of allocation of resources and is measurable, the latter would be a change in quality of life and is not easily measured. Plastic pumpkins, an often used example on LATOC, might be commercially successful yet represent a decrease in wealth (the utility of the product arguably being less than the potential utility of the raw materials).

The exception being of course those industries where the market fails to deliver - healthcare being one, so taxation is used to provide a public service/maximise utility/wealth. In your US example, they have the balance wrong - they should use the tax on those profits to help the poor have free health care -but alas they think that is communism! (thats politics for ya!)

The flip-side of that coin - an increase in wealth for a commercial loss. Healthcare and food are tricky since they both have theoretical infinite value (the alternative being death, I suppose) so you can't really provide them at a loss of wealth except in comparison to a more efficient system. That same Commonwealth Fund report I linked to rates the NHS as second in efficiency to the Netherlands, incidentally. The advantage in the private sector is usually in deciding what things have value and allocating resources appropriately. An inelastic service such as health care (one for which we will pay anything we can afford) receives no such benefit.

[biffvernon]

Biff - you missed the point I was trying to make - but then I think you did that on purpose to perhaps avoid answering it?

Sorry, you made several points. Which do you mean? This one?

How else do you anticipate providing the access to the energy Biff?

Tradable Energy Quotas (TEQs), but that's the bleedin' obvious.

[biffvernon]

So far as I understood it, any money supposedly "created" is ultimately supposed to representreal wealth in an ideal system. Say a bank is able to loan out money to the amount of 9 times its assets, or whatever it is, to enterprises which generate an income from natural capital. That money is then paid back (and invested) so somehow it works out as not simply creation of money, but actual real wealth.

Anyone ever spotted an ideal system?

But the serious point is that the money created does ultimately represent wealth. Ultimately. But that only works in a growing economy. Money created today is not represented by wealth until tomorrow. Fine so long as there is no run on the bank. In a no-growth economy we find the extra wealth just doesn't materialize tomorrow.