My short course in economics begins with the potato men's sex lives
Applied economics, question 1: deconstruct the following sentence: 'Public money is for everyone, and that includes people who want to get drunk and see a filthy movie as much as the audience that wants to watch a Japanese movie every week.' This is the Film Council's justification for its backing for a film called Sex Lives of the Potato Men ('Smut for morons': Financial Times) and goes some way to explain why an eminent figure in the City wishes that the principles of economics were better understood. With touching faith, he counts cm people like me to do something about it. Oh, well, it does not take a qualified economist to notice that everyone's money is nobody's money. The Film Council seems to think of it as a fountain at which all are free to drink. Public funding is in the gift of the government and of its agencies (such as the Film Council) but — here's a principle — governments have no money of their own. All they have is the money they take from the rest of us, obliging us to work for them until Derby Day every year. Some of it, a dwindling proportion, goes on the services that governments are better able to provide than we are: public goods, as economists call them. Defence is a public good on these terms. Smut for morons is not, because even morons know better than governments how to get value when they use their own money to suit their own tastes. The sum total of knowledge in markets is greater than in, say, the Film Council. Not that this principle ever stops governments from finding more uses for more public money, as Gordon Brown will remind us next month. He has also found that it buys less and less.
Sink the unshrinkable
Chancellors from an earlier era must be tempted to ask where the money now goes. In their day they had to finance an army of occupation on the economy's commanding heights. All those state-owned or statefinanced industries — coal, cars, steel, shipbuilding — with their endless appetites for money turned out not to be public goods, after all. Privatisation whisked them away from the government's balance-sheet, moved them across an economic frontier and into unfamiliar territory, taught some of them to compete, and brought in £50 billion for the public finances — so you might have thought that the public sector had shrunk.
Not a chance. It has found new ways to expand. It always can. There are interests to be furthered in the process, careers to make, patronage to be disbursed and livings to earn. As for the £50 billion, it melted away long ago, to leave present-day chancellors looking for more.
Cut and cover
Oliver Letwin, this Chancellor's opposite number, has come up with his own plan for spending more money. In seven years' time, if he had a free hand, he would cause public spending to rise by one third. We would be working for the government until the end of May, but the break would come a few days earlier. He still found himself caricatured as a slasher and burner. It is another principle — not so much of economics as of mathematics — that a lower rate of inflation is not the same thing as a fall in prices, and that pruning an exuberant budget is not the same as spending less. Of course, those whose budgets are cut do not see it that way. They were counting on the extra money, they had budgeted for it, they were all set to spend it, and if they know their stuff, they will parade their miseries and play for public sympathy. Whitehall identifies this as the Beggar's Sore Technique. Chancellors must learn to sharpen their scissors and harden their hearts.
Coming to work
Next economic question: is immigration good for us? The Treasury thinks so. Six months ago its forecasts for growth were dependent on immigrants. They would boost the proportion of workers to non-workers in the economy, and help us escape the deadening demographic trends which would keep Old Europe back. This was the case for opening our doors to New Europe. Ten new countries might be joining, but France,
Germany, Italy and Spain were sheltering behind a rule which meant that the newcomers would not be free to come and work there for another seven years. In line with the Treasury's policy, Britannia waived the rule, thus lining us up — on Lombard Street Research's figures, which I quoted at the time — for an influx of 200,000 more people coming to work here each year. By now the rest of the government seems to have spotted this. Scufflings and bumpings backstage have sent David Blunkett forward with a brand-new system of permits, which is supposed to admit the newcomers only if they do work and, of course, if it works. It would certainly make work for the public sector.
Needy or greedy
Last question on the paper: how do the banks make their money? Out of you? If so, are they greedy, and should they be made to give it back? The government has now set a tariff for loans for small businesses, so the banks cannot compete for this market. If they had agreed among themselves not to compete, what would happen to them? (Answer: something lingering, with boiling oil in it.) What about the life assurers: are they greedy, too? If they didn't have shareholders calling for dividends, would they have more money to pay out in bonuses? At the Equitable, which has no shareholders, the policyholders were stuck with the losses. The moral is that your money is safer with greedy companies than needy companies, so long as they have to compete for your business. It is a fallacy to imagine that the less money everybody else makes, the more there is for you.
Now read on
Recommended further reading: my eminent City figure suggests Adam Smith's The Wealth of Nations. Unproductive public spending could, said the sage of Kirkcaldy, grow up to choke the rest of the economy, which has to struggle harder and harder to pay for it. This was how wealth was destroyed: 'Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct.' In Smith's day the money went on numerous and splendid courts and great ecclesiastical establishments, all maintained by the produce of other men's labour. It cannot be said that smut for morons is any improvement.
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