Isn’t this logic wonderful?

No doubt the list will grow, and the demand for spending with it. And that is spending we need: this is an economy working at way below optimality and as such additional government spending adds to growth. The glaringly obvious consequence is that it also adds to taxable income. And so it adds to tax yield. In fact, because those who receive extra government spending do at present on average spend 98% of the after tax sum that they receive (which we know because the savings ratio is so low) then in effect it’s only a matter of time before all the extra spending ends up being repaid in tax. A simple arithmetic progression requires that in the end this must be true, and that any debt increases the spending gives rise to are only temporary at best as a result. If in the meantime it has stimulated economic growth then more than the original government spend might be recovered. Again, that’s a fact.

Government spends £750 billion a year. We have outstanding debt of £1.5 trillion.

If all spending comes back in tax, how?

Or is the argument that if we upped spending to £1.5 trillion then the debt would disappear?

41 comments on “Isn’t this logic wonderful?

  1. “A simple arithmetic progression requires that in the end this must be true”

    He’s got this phrase (‘cos he ain’t that clever) from his physics leftie Progressive Pustule mate that’s punting this crap. The argument is paying a nurse costs nothing as, after tax, the nurse spends money, that people take for goods and services, that pay tax, and they buy goods and services, and so on until all the money spent on the nurse has come back as tax. Therefore the nurse has cost nothing. Magic!

  2. And in tomorrow’s instalment, he shows how to fly effortlessly through the air by pulling hard on his bootlaces.

  3. There is no argument. He has stated the truth of the world.

    Your mere facts and, candidly, hysterically neo-liberal so-called ‘economics’ are the pathetic ramblings of an austerity driven, baby-eating Tory who wishes to see the poor burned en-masse.

  4. Btw, arithmetic progressions with reducing terms tend to a limit. We can argue how large that limit may be compared to the original sum (he forgets that not all money gets spent on govt services – so returns to govt are significantly less than ‘input – savings’).

  5. I have commented that many of our neighbours used to disappear when the rent man was due as they owed several weeks rent. My father explained to me that this was the reason for our rent being so high.

  6. There’s also the fact that some of the money ends up overseas via imports. It may be taxed, but not by us………………lets say the government give you £20k (just because) and you go out and buy a new BMW. How much tax is that going to return out of the £20k to the State? Just over £3k vat, some profit tax for the dealer, possibly a small proportion of income tax and NI for the employees of the dealership, a first year lump sum car tax payment. Maybe 5-6K total.

  7. Will Snippa weigh in on dropping house prices in the next few months? Some clever scheme to wipe out that portion of mortgage debt which exceeds the equity, to be funded by mortgage QE. After all student debt can be wiped out the same way.

  8. @SE

    “arithmetic progressions with reducing terms tend to a limit”

    Strictly speaking, if it is an arithmetic progression, it has to increase by the same change each time, so it doesn’t tend to a limit.

    A geometric progression, which increases in the same ratio each time, does tend to a limit (if the absolute value of the ratio is less than one).

  9. > There’s also the fact that some of the money ends up overseas via imports.

    Only under a single currency or gold standard. If I hand £30,000 to Herr BMW of Munich, he can’t spend those pounds in Germany. They have to come back to the UK, either as spending or investment.

  10. Does his physics professor mate specialise in the development of perpetual motion machines?

  11. Ritchie the Wedgie has competition in the arrogant pr!ck stakes:

    http://www.bbc.com/news/world-europe-40452785

    French President Emmanuel Macron will break with tradition and not give a news conference on Bastille Day because his “complex thoughts” may prove too much for journalists, reports say.

    A presidential source said Mr Macron’s thinking did not “lend itself” to a question and answer session.

    That is the difference between France and the UK. Ritchie is not in Number Ten and will never likely be.

  12. “Only under a single currency or gold standard. ”

    True, |I hadn’t thought of that. I would add ‘or if you are the owner of a reserve currency’ to your list – the USA can print dollars and pay for imports and they get used all around the globe, never coming back to the US.

  13. Whatever the truth, Murphy and the EU entirely disagree.

    If Murphy is correct, then the EU is an utter disgrace, and Brexit can’t come soon enough. He is for Brexit, right?

  14. Andrew M – “Only under a single currency or gold standard. If I hand £30,000 to Herr BMW of Munich, he can’t spend those pounds in Germany. They have to come back to the UK, either as spending or investment.”

    Or the currency exchange rate can change.

  15. I know trying to understand the monkey is a hopeless task but if it was arithmetic progression then at each transaction the tax would increase by a fixed amount ie 20% then 40% then 60% etc. Secondly he labels government debt as savings – how in hell does that work? Thirdly he advises that because of the magic money tree taxes are irrelevant to spending – how does this square with the years he banged on about the tax gap as being the downfall of civilisation?
    Honestly does anyone understand what he’s trying to propose other than free money and unicorns ?

  16. Strictly speaking, if it is an arithmetic progression, it has to increase by the same change each time, so it doesn’t tend to a limit.

    In which case (and you are right – I was thinking of more complicated linear models that weren’t geometric progressions), it is not an informative model for any discussion of spending contributing to tax revenues.

  17. Secondly he labels government debt as savings – how in hell does that work?

    To a reasonable approximation (not that Ritchie is reasonable), all debt is somebody else’s savings.

    Unless you believe in the MMT. Which he does. So it is a remarkably inconsistent thing for him to say. Which is, to set up an absurd loop (but the absurd is commonplace in the discussion of the LHTD), a completely consistent thing for one of his “arguments”.

  18. How can two Professors, one of Physics for crying out loud, not know the difference between a geometric and an arithmetic progression?
    They should be chucked in the dustbin of people who want to rule us who can’t differentiate deficit and debt.

  19. French President Emmanuel Macron will break with tradition and not give a news conference on Bastille Day because his “complex thoughts” may prove too much for journalists, reports say.

    More likely is that Mummy told him to ready his apron and feather duster because Bastille Day was going to be cleaning day. I’d take side bets saying he’ll be in a French Maid costume while he’s cleaning…

    Wanna know why normal ‘Mericans laugh at Frenchies? Look at our President, then look at his wife. Then look at France’s President, and then look at his wife…

  20. I think he’s about to invent a new tax, that no one has ever thought of before.

    It might get named ‘VAT’.

  21. It might get named ‘VAT’.

    With the WGCE involved, it will probably be the “Value Reducing Tax”. Anything that adds value will be taxed by 150% of the value added. Because “inequality”.

  22. @SE “arithmetic progressions with reducing terms tend to a limit”

    Rubbish. The harmonic series does not converge. Neither does the sum of the reciprocals of the primes, for example. Determining whether a series has a limit is non-trivial.

    Besides, what Murphy is blindly grasping at is the idea of the present value of a stream of income (basically an annuity) which as any fule kno is a (truncated) geometric series. If the stream goes on forever it’s a perpetuity and its PV is the value of one instalment divided by the discount rate.

  23. The series a + a/(1-a) + a/(1-a)^2 + a/(1-a)^3 + … does sum to one. If money continues to circulate, it comes back to the state.

    Of course governments should show restraint. Excess money supply creates inflation. And, often more relevantly for governments in the West, we want labour to be exerted where it does most good, which may not be where state spending directs it.

    Currently the major restraint on government spending in the UK should be fear of misallocating resources, not the balanced-budget myth.

  24. There are some maths guys on here. Good
    Not being much good at the 3 Rs I’d just say
    0.98 X0.98 X0.98 X N repetitions leaves you with a small number-
    What is N in spudworld?

  25. “Social Justice Warrior
    July 2, 2017 at 8:43 pm

    The series a + a/(1-a) + a/(1-a)^2 + a/(1-a)^3 + … does sum to one.”

    Simple disproof : a = 1. Another: a = 2 doesn’t sum to 1

  26. SJW’s series converges only if a is negative, in which case it converges to a-1.

    I knew that maths degree would be useful one day. 🙂

  27. Ah, sorry, I mistyped horribly.

    The series should be:

    a + a(1-a) + a(1-a)^2 + a(1-a)^3 + ….

    a is between more than 0 and less than 1 – it’s a tax.

  28. How can two Professors, one of Physics for crying out loud, not know the difference between a geometric and an arithmetic progression?

    If either did, they’d be making a living doing something productive in the private sector. As it is, they do what the ineffectual and the incompetent always do when they have a degree… They flee to government or education or write for The Guardian.

  29. VftS: y’all need to Google “radius of convergence”.

    Limits are tricky. Does the the product of cos(π/n) for n = 3 to ∞ have a limit? This is what happens when you draw a square inside the incircle of an equilateral triangle, then a pentagon in the square, then a hexagon in the pentagon and so on to infinity. Does the size of the inscribed polygons tend to a non-zero limit? It does, but proving it’s tricky (and the limit has no closed form so has to be calculated numerically; it’s ~0.114942).

  30. y’all need to Google “radius of convergence”

    You really don’t. Financial mathematics is much easier than the equations make it look (especially if you type them wrong), because the result has to make financial sense. In this case, it makes sense that if I keep taking a fraction of a pile of money I’ll end up with all of it. It also makes sense that that doesn’t apply if the fraction is negative or zero, and that the fraction can’t be more than one.

    And it’s a “radius” of convergence when using complex numbers. Mathematical trickery aside, real numbers are sufficient in finance.

  31. “if I keep taking a fraction of a pile of money I’ll end up with all of it”
    Only because money comes in discrete units. If you take 90% of your money starting with 100p you end up up 10p then 1p then 0.1p but there’s no such thing as 0.9p so yes, you end up with all the money in practise, but in theory you still have a vanishingly smaller and smaller amount, 0.01p 0.001p 0.0001p etc.

  32. How can two Professors, one of Physics for crying out loud, not know the difference between a geometric and an arithmetic progression?

    A colleague of mine once had an argument with a physics PhD in Brazil. The chap with the PhD had measured the speed and drop height of a mass falling due to gravity down two support guides. From his measurements he had calculated that the mass’ acceleration was around 10.5ms-2. He couldn’t understand why my colleague had a problem with his result.

  33. “because the result has to make financial sense. In this case, it makes sense that if I keep taking a fraction of a pile of money I’ll end up with all of it.”

    Do people not, for instance, eat dinner in your world?

    Your hypothesis requires on no wealth being destroyed at any point. Which is something you do every time you eat something,

    Or burn petrol in your car.

    Or any other number of activities.

    Or let’s look at it another way – if the govt spends money into the economy and it all recursively has to come back as tax, then since money is fungible, ANY money spent into the economy has to recursively all end up as tax. Does it make financial sense that the overall tax rate on any given money spent is effectively 100%?

    No. Prima facie. Since people save money and the govt is *still* running deficits.

  34. Your hypothesis requires on no wealth being destroyed at any point. Which is something you do every time you eat something,

    You’re confusing money and resources.

    Money is tokens we use to allocate resources. Using up resources doesn’t make the money disappear.

    …people save money and the govt is *still* running deficits.

    Yes. I qualified my statement with “If money continues to circulate”. In so far as the private sector saves money, the public sector has to run a deficit. That’s trivially true.

  35. “In so far as the private sector saves money, the public sector has to run a deficit. That’s trivially true.”

    That’s fine as long as we are not implying that the public sector therefore “has” to have net debt (as the MMT crowd almost imply), ie to enable private savings.

    The private sector only has net savings “because” the public sector has net debt.

    For example, personal savings could be reflected by more “productive” corporate debt (the private sector could be net nil with regard to the public sector), rather than public sector debt reflected by lots of pointless diversity officers and other waste.

  36. “In so far as the private sector saves money, the public sector has to run a deficit. That’s trivially true.”

    Bollocks. I suppose no-one in Hong Kong, Singapore or South Korea have any savings then, as their governments run budget surpluses?

  37. Jim,

    I think Paul means that “private” (by definition) equals “non public” (rather than private just being households and stuff), and savings / borrowings must balance.

    If households have savings, others can be borrowing (productively), rather than the state.

  38. “I think Paul means that “private” (by definition) equals “non public” (rather than private just being households and stuff), and savings / borrowings must balance.

    If households have savings, others can be borrowing (productively), rather than the state.”

    Well South Korea has savings of 35% of GDP, and runs a budget surplus of 2% of GDP. Which according to SJW is impossible.

  39. It’s an accounting identity. Your saving is someone else’s borrowing. Unless you keep banknotes under your mattress.

  40. Jim,

    Best I could grab in a hurry:

    http://kostat.go.kr/portal/eng/pressReleases/1/index.board?bmode=read&aSeq=346143

    By asset type, the value of non-financial assets amounted to 11,078.5 trillion won (100.4% of the net worth of the total economy), and that of net financial assets (financial assets less liabilities) to -39.3 trillion won (-0.4%). (ie net nil)

    Fifth, it is estimated that Korean households and NPISHs had a net worth of 330.85 million won per household (2.61 persons per household basis) in 2013. In addition, as of 2013 Korean households and NPISHs held 64.7% of their assets in non-financial assets and 35.3% in financial assets. (ie the number you provide)

    I can’t see the state part of “net financial asset / liability” bit in the link, but by definition the -35% must be somewhere. If the state is running a small surplus, it’ll be corporates (or other prviate) borrowing.

Leave a Reply

Name and email are required. Your email address will not be published.