Question Time

Stuey1

This is what confused me yesterday on question time, it was mentioned that we (the state) should invest in building new houses and that will boost the economy - but I don't see how it boosts the economy if the government is paying for it?

I may be missing something obvious so don't shout - I just don't get how the government spending money generates any extra GDP

sidicks

The big "drawback" of GDP as a measure of genuine economic growth is that it include government spending - so higher government spending equals higher GDP (somewhat ignoring that this growth needs to be paid for by the private sector!).

Karkus will be along shortly to discuss the logic (or otherwise) behind the State creating growth...!!

Steve N

I feel the same about panelists that seem to have no great intellectual abilities or political background.
Charlotte Church,  Steve Coogan, Dom Joly, Jerry Springer, John Lydon etc etc.

Just there to try and drag in a few Sun readers I guess

IronGiant

from the BBC:  Topical debate, with political and media figures answering questions from the public.

pragmatic

Compare GBP to other currencies and we've lost a lot of value, compared to US $, JAP Yen  or the Euro are 3 countries with problems, compare against Aus $ or other Asian currencies have seen growth.

UK, US and JAP have all been involved in printing money, EURO has been staunchly against this and yet faces a similar devaluation.
While QE didn't decrease the GBP more (i'll take your word on that), unwinding QE would see an increase in Sterlings value?

karkus30

Yes, you are missing the magic Keynesian multiplier that apparently means if we spend our own money on a business, then it hardly affects the economy at all, but if the state does, then it creates almost unlimited wealth.

I sometimes think it is some weird gambling urge that convinces people that they can somehow beat the odds. Interestingly Keynes was a gambler and lost a lot of money.

Boosts to the economy are then of the usual type. The state borrows heaps of money, which the banks print out of thin air. All that money is just future debt funded by the tax payer. The money then flows into the coffers of planners, architects, investors, building firms and builders. Then it goes out a bit further into the pockets of building suppliers, furnishing companies and so on an so forth. This gives the illusion of growth and work. The money is on low interest and accelerates the industry in which the first tranches of money first arrive. Hey ho, its bubble time. We all know the next bit of the story, where everyone has foolishly invested against this illusory growth and the bubble pops.

Entrepreneurs are people who take a qualified risk with investment. They are very careful that they can satisfy demand. If they fail to correctly tell the market then they lose money and effort. However state investment skews the market and gives the wrong signals to investors. Meanwhile the costs of spending to the tax payer is killing any chance of saving towards a business. The market is unstable as no one knows when the state are going to suddenly place a wild bet and kill off the market place.

Imagine if you were a gambler. You know the market and you win a bit of money placing bets. The state has access to all your bet money and winnings and suddenly decides its going to place a massive bet which skews all the odds. Best thing to do when you know that might happen is not to bet. However, that isn't the worst part. The state can never lose, so it gambles without risk and you will pay any losses it ramps up. The gambling industry obviously will like that a lot, so will the race courses, gambling joints, gambling magazines etc.

sidicks

Government debt is financed through government bonds which are purchased by investors with real money.

No money needs to be printed.

karkus30

Its just asset purchase. Someone always owns the debt that's for sure. The tax payer is the debtor.

MikeTV

Don't worry - it's often misunderstood, and indeed debated to some extent. But  GDP is a measure of economic activity. Spending of any sort within the economy is economic activity. Economic activity is also income. It may seem strange that income and spending are the same thing, but it's true when you consider an entire economy - because whenever money is spent, someone else is receiving money.

To give you a more tangible example, lets suppose a sum of money just sits in a bank account and nobody spends it. There is no economic activity, and no income, because there is no spending. No construction companies are making houses, or employing anyone, and nobody is paying any taxes. But if someone then decides to spend that money on building a house, a construction company receives income, their employees receive income, the suppliers receive income, etc. That's economic activity.

Now, the assets in the economy may be exactly the same after the house is built (assuming the value of the house is the same as the cost) but there has been some economic activity, nevertheless. And that's what GDP is.

There is also a multiplier effect. Once the employees of the construction company have income, they can spend that themselves, as can their employees and suppliers, and so on. And the people who receive money from those can then spend that, and so on, throughout the economy. All of this spending translates to income for somebody else - GDP.

At the end of the day, the government is just a participant in the economy like any private company or individual. So anything they do affects GDP. If the government reduces spending, and everything else remains equal, the result is a decline GDP. That's not political, that is just a fact, due to the definition of GDP.

sidicks

Aren't you confusing:

QE - printing of new money
Debt issuance - exchanging real assets for government debt