Economics 101

money

Maybe I’m turning into that Grumpy Old Man that nobody likes, but I am so frustrated by so-called experts who spout absolute nonsense in the media, and nobody even bats an eyelid much less call them to account.

This morning on “AM” there was a piece about unemployment remaining stubbornly high and people taking cuts to wages. Those who do have work (full time or casual) are feeling insecure about their work situation.

The obvious problem affecting employment is that the cost of employing people is higher than the extra returns businesses get by employing more people. If it costs more to employ someone that you get in return, you will either employ fewer people or reduce their wages. That is why cutting penalty rates for weekend work is a good idea and may actually lead to more people getting weekend work and in the longer term wages going up.

The reverse situation is that if you can see that employing an extra person will generate more profit than the cost of employing them, of course you will put on more workers.

So what did the “expert” give as the solution? Get out and spend! If you feel worried about your job security get out there and boost the economy.

To see how stupid that idea is, just consider that if that were an anxious employee a thing you could do would be to support your employer. If you spend all your pay at your boss’s shop that should help him to pay you more, right? Well not exactly. The wages the employer pays come out of the profit margin not out of the total price. I spend $100 in the shop the employer might only have $20 extra to put back into employing someone, or into paying me more.  The other $80 goes into buying the products, electricity, insurance, taxes, rent etc.

The correct answer to increasing employment is that we all need to save more, not spend more. Put the money in the bank, invest in shares, whatever. When you do that it provides money for the most efficient enterprises to invest in their business and make employees more productive and allow them to employ more people.

Running an economy on the sugar hit of consumption spending just gives it a bit of a sugar hit but makes it slow and flabby in the long run. Increasing savings is like the high fibre diet that we know will make us healthier in the long term, but seems no fun at the beginning.

Oh and the other good thing the government could do for the economy is cut its spending way back so that it  no longer runs at a loss every year, then cut taxes so that people are free to spend or save the way they see fit. Yes there would be an increase in unemployment in the short term, but business would quickly take up the slack and increase productivity and employment.

It’s not going to happen any time soon. Not as long as people think you spend your way to prosperity.

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