Realist, not conformist analysis of the latest financial, business and political news

Drinking Brine

Tom Sowell said that the problems of today are the result of the solutions of yesterday.

Which got me thinking about a very important solution of a very different type – water.

Bear with me.

As an economy thrives and entrepreneurs spring up and businesses invest, the money being deployed becomes more scarce – more and more ideas are chasing fewer and fewer dollars.

And so the cost of the money rises – the rate of interest demanded by savers for the money which will be lent, goes up.

Eventually, all the good ideas and good businesses have all the money they need, and so the clueless come out of the woodwork, lulled by the benign environment into thinking that the time is right for their crazy idea – that now is the time for them to open up that Skegness lido they’ve always dreamed of.

The economy has rolled over into irrational exuberance, and money is starting to be misallocated into stupid shit that no-one wants.

Then the contraction begins – the lido in Skegness folds after a year or two, and otherwise sensible businesses that over-invested and opened four new stores instead of two start to feel the pain. As the people who work in these businesses lose their jobs, them and their friends and families get the sense that the economy is not doing as well, and they start to cut their cloth accordingly. Slowly, the economy starts to contract, and the malinvestments start to get flushed out of the economy.

And this is a healthy but painful process – if we are thirsty for progress we must first endure the harsh sunlight of capital misallocation beating on our shoulders, before the benevolent rain of creative destruction.

But some can’t wait.

Politicians in particular have a problem – in good times, people vote for them, and in tough times………not so much.

The temptation is to delay the tough times until your successor can carry the can.

Poor old Keynes inadvertently gave politicians the answer they were looking for – the idea that during the downturn, the government should spend money into the economy to keep it going along nicely. Making sure that those lifeguards sacked from the Skegness lido can swiftly get jobs working at a government Skegness lido prevents them claiming the dole, and keeps them in the economy earning and spending until the economy washes out all the malinvestment and starts growing again. At which point the government Skegness lido closes and the lifeguards go to work at a lido somewhere where the biting Easterly wind doesn’t sandblast your skin off. The government has bridged the gap.

There’s one problem.

The government has no money of its own, so where will it get the money for their lido?

Well, Keynes said it should run a surplus during the good times and stash that surplus money away so it can be used during the downturn – a national rainy-day fund, if you will.

But guess what? Politicians don’t run surpluses.

Why would they? Every penny spent making lives better for voters today makes it more likely they will vote for you. And every penny saved against a rainy day makes it possible for your rivals to win votes tomorrow, by doing the same once they are in power.

So politicians don’t ever HAVE a rainy day fund. But that doesn’t stop them wanting to bridge the gap.

So they borrow the money.

And now what they are doing is not Keynesian, or even neo-Keynesian, but pseudo-Keynesian

By bridging the current gap with borrowed money, they simply make sure that the next gap will be costlier to bridge. Because the interest on the borrowing means that the gap will be wider.

But that’s not even the biggest problem – the biggest problem is that the gap is intrinsically important. We NEED it, to give us pause.

Whereas bridging it enables us to carry on being silly and prevents the misallocations from being flushed out – a lido remains operating in Skegness despite having no customers, and the lifeguards continue to work. Their lifesaving skills (which should be fruitfully employed elsewhere) stagnate at a lido with no punters. Their customer service skills deteriorate as the customers disappear, and what they learn instead is how to sit in a chair and stare into space. Their skills are degrading. Hysteresis, technically.

And so by delaying the collapse of the Skegness lido in pursuit of benign conditions for the voters, the government destroys the skills of our workforce.

Sowell was right – the problems we battle today were caused by the government’s interventions yesterday.

Surely using government to solve our problems is like a man quenching his thirst with seawater?

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5 years ago

Any chance you could put the author of each piece on the Twitter feed so that I don’t click on any Alex Noble pieces?

James Morgan
James Morgan
5 years ago
Reply to  Matt

Mean! Ignore that nasty comment Alex. I was thinking what an excellent article.

James Morgan
James Morgan
5 years ago

Great stuff. Yes.

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