Wealth creation and macroeconomics

The parasite problem

Source: The Economist

Aug 29th 2011, 15:57 by Buttonwood

IT IS a running joke among my friends that none of us does anything useful for society. Lawyers, bankers, chartered surveyors; all of them exist to advise other people who have created wealth. One of my friends was an engineer (he actually designed a railway bridge) but joined the useless brigade by becoming a consultant. Your blogger is the lowest of the low; a parasite on parasites. Financial journalists exist to comment on the habits of other people who simply shuffle pieces of paper (or rather rearrange digits on a computer screen) for a living.

But when you start to think along these lines, it becomes very hard to decide who is actually creating all the wealth. Farmers used to claim a kind of economic virtue; they produce the food that prevents all those factory workers from starving. And that virtue has been transfomed, in modern economic parlance, to the manufacturing sector which produces real stuff and not all those ephemeral service activities.

This virtue has always seemed overstated. Are all manufactured goods intrinsically superior to services? Would you rather have a wig or a haircut? Just as there is only so much food we can healthily consume, there is only so much physical stuff we need. We have service-dominated economies because people like to consume services from TV programmes through video games to leisure activities like eating out. When General Motors sells a car, the chances are that it is selling it to someone who works in the services sector; so who is the parasite in this situation?

At the national level, we can say that most countries cannot produce all the things they need (or at least desire). Britain, for example, needs food from abroad. So it needs industries that can export stuff in order to generate the earnings that pay for imports. Here the bankers start to look a lot more valuable; Britain's invisible earnings from financial services are highly valuable. Even your blogger looks less parasitical; The Economist makes most of its sales overseas, so makes a modest contribution to Britain's upkeep.

At the global level, however, the national accounts cancel each other out. The debate evokes the old saw about the island that prospers because everyone takes in each other's washing. Or as Burt Bacharach and Hal David put it more memorably in Lost Horizon "The world is a circle without a beginning and nobody knows where it really ends". One man's income is another man's expenditure.

All this explains why the current economic debate is so hard to resolve since as Messrs Bacharach and David added in the same song "everything depends on where you are in the circle that never begins." Take the public sector versus private sector trade-off. Some say that the public sector is a parasite that depends on the wealth generated by the private sector. And we can probably all agree that there is a point at which the public sector can overwhelm and crowd out the private sphere. But look at the problem from a different point in the circle. Who educates the private sector workers? Who keeps them healthy (in Europe at least)? Who provides the roads and public transport? Who provides the legal system that guarantees property rights or the police that patrol the streets? All functions provided by the public sector.

Every dollar borrowed to pay for stimulus is a dollar that must be repaid from future private sector taxes, say those on the right. The government has no money save that it confiscates from the voters. True enough. But every dollar cut from benefits or from the public sector wage bill is a dollar that will not be spent buying goods and services from the private sector. Those who want a balanced budget* immediately might not like the results.

Indeed, the huge public sector deficits seen in the western world are, in large part, the result of decisions made by the private sector to stop spending. At the aggregate global level, the deficits and surpluses of the private and public sectors must add up to zero (since the balances of individual countries cancel each other out). The public sector has acted as a giant backstop.

All this suggests that some humility is needed from both sides in the economic debate. We cannot run huge public sector deficits forever but that is not the same as saying that we should never run a deficit, nor that we should balance it now. We do not want "too much" government interference in the economy but there are plenty of vital services that the government provides. We are all of us economic parasites in a way, since we are dependent on the decisions and the well-being of others.

* Some people want an amendment that balances the budget only over several years. It is very hard to see how this would work. In Britain, Gordon Brown had a rule that balanced the budget "over the cycle"; when things got tough, he simply redefined the cycle.