Tax

Tax (Photo credit: 401K)

We are in a world where anybody can give a piece of advice about anything. We call this action democracy but, in fact, it is very far from it. It is as if we think that freedom is equal to debauchery.

Today, politicians are debating if austerity policies are better than growth stimuli, but many people ignore what is the meaning of these concepts. This debate is very old, and it is repeated in every electoral process because their applications are the ideological basement of conservative parties and social democracy. It is the political debate the reason for thinking that they are opposite concepts. However, from a technical viewpoint austerity and growth stimuli can be complementary actions.

In economy, the concept of public expense is related to both current expense and public investment. When an economy technician is talking about increasing public expense in order to stimulate the economy, he is thinking about increasing public investment and he is not thinking about increasing the current expenses.

When we want to have a more efficient economy, we only want to optimize the current expenses. Investments will be returned in the future, then, they should not be a problem, if we can find funds today.

Following this scheme it is possible being austere and introducing growth stimuli. To be austere means to make structural reforms to reduce complexity (reducing unused structure and optimizing every cost) and to stimulate growth means to fund productive activities with public funds, either making public industrial companies where private initiative does not invest, or funding private investments through subventions and tax reductions.

Those actions are not incompatible, what can make it incompatible is the amount of public money available to do both tasks. In a crisis, available money in the economic system is always lower, then, reducing public complexity and costs is prioritized because this action increases the available funds today instead of reducing it.

In a private company this concept exists too, but we only equate investment to expense when the risk of no return is high. For instance, R&D investment is considered expense in the accountancy, although it can be counted as an asset if we can demonstrate a reasonable possibility to get a future return of the investment. The reason for this is prudence.

This is another reason because a real state bubble is so destructive. In the private economy, buildings are considered always an asset with a non-risked value and never an expense. We should have never heard something about an R&D bubble, because accountancy does not let it. The US technology bubble could be seen as an R&D bubble, but it is a different phenomenon because a technology bubble has not an accounted real asset behind. A real state bubble is showing a structural problem of the economy that could be corrected by the rulers, but as in a technology bubble the accountancy is reflexing always the most prudent value of the companies, it is only market madness.

Finally, we should analyze the reasons to think, falsely, that both austerity and growth stimuli are incompatible. It is only a problem of the politicians and not political, we know that politicians are permanently fishing votes. The easier way to do this is to give public money to their potential voters creating useless public activities with useless public jobs, or funding useless infrastructures to preserve useless private jobs. These actions increase, on the one hand, the current public expenses, and on the other hand, produce assets without a real economic return (a kind of public bubble).

Markets are conscious about this fact, and they prefer to see structural reforms reducing the complexity of the economic system that a set of odd investments, and an unjustified increase of the public staff.

Advertisements