The unofficial psychology blog from Paul Hutchings

The economy: Is it just me or…?

I have no academic knowledge of economics, I’ll say that straight off. Even though I’m doing a PPE degree I’m halfway through and have so far focused on the philosophy and politics parts, and avoided the economics – that’s how much of a lack of economic knowledge I have! However, either I’m really missing something fundamental or anyone who even thinks about the economy for more than a nanosecond has surely figured this one out:

The current plan (let’s call it Plan A as seems popular in political circles)

1. Take a public sector worker earning the average wage – call it 24k just for the sake of it (all figures are going to be very approximate or just plain made up – it doesn’t actually matter, the principles remain the same).

2. Make them redundant – you have to pay them redundancy pay which we’ll call an average of 6k (again, doesn’t matter because this figure will be the same across both scenarios).

3. Don’t have any jobs in the private sector – so have to pay them unemplyment benefit, housing, tax credits, etc.

So, that’s a saving of 24k, minus a payout of 6k, and providing support for them to the tune of another 10 – 12k. So by making them redundant we’ve saved approx 6k – except we haven’t, of course, because we were getting 6k from them in tax when they were working so we’ve made a net saving of pretty much zero. In addition, they haven’t got the money to spend so are purchasing less, and paying less VAT so it’s a net loss to the government and other private sector firms aren’t getting as much money. So, in sum, a person is out of a job, the government doesn’t have any more money from it, and the private sector is getting less money from the person.

And let’s not forget the fact that there is one less worker wherever they were made redundant from, so either others are having to work harder or things aren’t getting done.

So surely a better way would have been a different plan:

1. The Government borrows the money it was going to end up borrowing anyway and piles it all into the private sector – national insurance holidays for new workers, tax breaks for companies to employ people, anything that will incentivise the private sector to hire (but they can only get them if they hire).

2. Structure redundancies so that they fit with the creation of jobs – actively help people to switch from public to private sector if needs be.

3. Still end up paying redundancy, but none of the unemployment benefits because people are in work – and paying tax!!

So is it that simple or am I missing something huge? And if not, why isn’t it being done? If this is what the new plan is, why did it take our brightest and best 18 months to figure it out?

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