Politics and Economics

There are clear limits to Socialist Economics – and the UK has passed them

In 2012-13 the UK Government is spent  £100,000,000,000 more than it raised in tax.  This is called the Government deficit.  This is less than the £155,000,000,000 deficit in 2009-10  (the last year of the Labour Government) but still unsustainable.  The difference in spending and tax revenue is made up by Government borrowing, which is bloating our £1,400,000,000,000 debt.  Can socialist economics eliminate the deficit, then start to pay down the debt whilst maintaining living standards?

Socialist economic logic:

Socialist economics has a predominantly social agenda not an economic agenda.  Its logic goes something like this:

“I need a certain amount of income to live a decent life therefore I am entitled to have it.

If I’m unable to earn this much myself then somebody else must make up the difference:

1.  My employer must pay me more for my efforts (minimum wage)….or

2.…. my next-door neighbour (who earns more than me) must give me some of their income (intra-generational redistribution of wealth)….or

3.…The Government must borrow more money, give some to me and get my children and grandchildren to pay back the debt (inter-generational redistribution of wealth)…..or

4.   ….a combination of 1,2 and 3.”

How far can we push these policies before they become detrimental to those they are designed to help?

Solution 1.  Minimum wage.

Setting a legal minimum wage can be a good way to ensure that workers have a fairer remuneration for their labour from their employer.  The trick is to put minimum wages at a level that benefits workers but not so high it puts the employer out of business or drives jobs to countries with cheaper labour.  Minimum wages put up the costs to businesses, which must be passed on as increased prices (causing inflation), which must be paid by workers.  Increased prices causes the businesses to be less competitive in global markets (causing unemployment).  There are two significant numbers regarding labour costs: $135 and $12. The first is what the average worker in the West earns per day; the second what the average worker in urban China earns.

What entitles the rich world’s 500 million workers to salaries ten times greater than the 1.1 billion workers in urban bits of the developing world?

(Full, brilliant article is here:    $135 – $12 = the pay gap the West can’t bridge.)

Solution 2.  Intra-generational redistribution of wealth – Taxation.

Western democracies accept that a certain level of wealth redistribution is healthy.  By reducing inequality we can ensure the whole country benefits from the talents of all its people and we enjoy a more peaceful, more harmonious, meritocratic society.  However, we are now paying much more for the increased number of elderly people in our society with their higher pension and healthcare costs.  This leaves less for working age benefits.

Remember in Britain more than half the adult population receive more in benefits than they pay in tax and the top 1% of taxpayers provide 30% of income-tax revenue.  So, the majority are supported by a minority of tax payers – i.e. the “rich” are already contributing.

Let’s try a thought experiment.  If we taxed everybody at 100% of his or her income we would collect very little tax.  Few people would work for no money.  If we set income tax at 0% we would collect no money. Therefore (logically) there is an optimum top tax rate whereby we collect the most tax.  Labour believed this was 40% for all but one month of their 13-year rule.  The current administration thinks it is 45%.  However all agree that taxing too much collects less tax.  We are just arguing about the correct percentage.

So can we squeeze the rich some more? A simple calculation:  Suppose we ask all people earning over £100,000 to pay an additional £30,000 tax per year on top of the tax they currently pay?  Totally ludicrous of course, as most earn little more than £100,000 and couldn’t find it, and those that earn significantly more (the one’s we all really want to tax) can easily move country and pay us no tax at all.  High taxes will also act as a disincentive for rich and talented individuals to come to the country in the first place.  So the constraints on incentives and resulting talent drain would make this whole concept fanciful as a way of raising revenue……but just for the sake of illustration let’s suppose it was possible…..

We have 500,000 people in the UK who earn more than £100,000 so (best case scenario) we’ve raised £15,000,000,000.  We’ve reduced the deficit from £100,000,000,000 per year to £85,000,000,000 per year.  Now what?

Solution 3. Inter-generational redistribution of wealth – Borrowing.

In the UK we have an annual £100,000,000,000 + deficit which is bloating our £1,400,000,000,000 debt.   The current interest payments are greater than the defence budget.   Money paid in interest is money not available for welfare, education, healthcare and investment.   Interest rates charged to countries are based on the risk of not getting back the money you lent.  Highly indebted countries pay higher interest rates to compensate for the extra risk.  This puts up the costs of borrowing even higher.  When the debt gets so big that a country cannot afford the interest payments nobody will lend it more money and its economy collapses – such as happened in Greece.  The UK is close to this debt limit so increased borrowing is no longer an option.

The current economic problems caused by our massive debt are obvious.  Moreover, effectively taxing our children and grandchildren so that we can have a better life now at their future expense is undemocratic and immoral. Taxation should be by consent and they have not voted for it.

There is a limit to how far we can push minimum wages, taxation and borrowing.  We have reached that limit.  We must now live within our means.

Perhaps Socialist economic logic is flawed?

How about:

“I need a certain amount of income to live a decent life therefore I must earn it.”

Standard

3 thoughts on “There are clear limits to Socialist Economics – and the UK has passed them

  1. Firstly, you’ve misdiagnosed Socialist thought by a long shot. Secondly, have you ever thought about the possibility that those pesky workers asking for slightly higher wages are actually not being paid enough? Nevertheless, it’s good to see more political debate on WordPress, I’m largely on my own.

    • Thanks for reading my post and leaving a comment. I’ve a lot of sympathy for social policy of the left. However I think the economics of the left if fatally flawed.

      I totally agree that the “pesky workers” may not be paid enough. However this in itself does not magically make the money available to pay them more. It has to be earned. Wealth redistribution is a great idea in principle but in practice it is hard to pin down the super rich to pay tax as they are so mobile and in any case there are very few of them. You see from my post that even ludicrous taxes on those earning over £100,000 would make only a small dent not he deficit. Tax cannot get anywhere near reducing he deficit. Massive spending cuts are inevitable.

      • I’m not sure we agree there. Reducing the mobility of the rich will be a key challenge of the next century, without ‘pinning-down’ their loyalties, no country will have a leg to stand on. Besides, there are things we don’t need like the Trident Submarines which could save us billions.

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