63 Comments

• 

  reggie says:

  “Everybody pays for everybody else’s salary”
  That may be true but when private sector wages plummet public sector wages are cushioned ( good news in households where there is a mix of public and private employers.)

  3^rd of December, 2011
• 

  Chris says:

  Absolutely right. Public sector staff create wealth by enabling the private sector to operate efficiently – not educating it’s workforce or keeping them healthy (or paying more for private healthcare’s in the US) these are not my ideas but worth mentioning

  3^rd of December, 2011
• 

  SirenofBrixton says:

  Great piece. Re reference to communism, there was a good piece in Rolling Stone that argued that the Occupy protests are a result of capitalism crushing people’s individual efficacy. Communism had fucked up incentives but capitalism has resulted in the same outcome.

  3^rd of December, 2011
• 

  Hamish Atkinson says:

  This is the key point here – paying wages sufficient to attract the quality of people necessary to provide the quality of service that you require. Everyone wants something for nothing – taxpayers want the best service at the lowest price. But supply and demand means that they won’t get it.

  If we paid doctors peanuts, we’d get monkeys treating us when we are ill, and people would dies because of that. Therefore, we are happy to accept that doctors have high salaries, whether they are paid for by private health insurance, or by our taxes funding the NHS. Pretty much everyone can appreciate the benefit of the supply and demand curve in this case.

  Other areas are less clear cut. But it’s obvious that if we erode the real wages of teachers by making them contribute more towards their pensions, the average quality of people that decide to be teachers will fall in the long run.

  As tomorrow’s economy is increasingly dependent on the knowledge and entrepreneurial mindset of tomorrow’s school leavers and graduates, should we not instead be increasing the wages for teachers, especially in poor areas? We should be thinking of this as an investment, not a cost.

  3^rd of December, 2011
• 

  WHS says:

  Seumas Milne has called this a “neat” critique. It is neat, though pathetic. It naturally paints the imaginary mobile phone salesman interlocutor a inarticulate and brutish, because naturally you couldn’t imagine that you might be wrong.

  You as a teacher have your salary paid by the phone salesman through his taxes. You might pay his through your phone bill, but you could always not buy a phone. If he demanded a pay rise and Vodafone decided to put their prices up to cover it, you could (and probably would) take your custom elsewhere. If you as a teacher demand a pay rise and the government puts up taxes to cover it, I have to pay it regardless of whether I have kids in school or not. As working class families struggle to meet their bills, it consequently behoves the Chancellor to not put up public sector workers’ pay and give them more generous pensions than the rest of us.

  3^rd of December, 2011
• 

  WHS says:

  And, Christ, I’ve only just read the end of it.

  Your first mistake is to presume if you trim public sector wages the replacements might not be so good. Now who said there had to be replacements at all?

  Secondly, do look at the calibre of people who fill public sector roles, particularly looking at council officers. The idea these people would waltz into a job as a mobile salesman or any private sector job that requires a bit of salesmanship or brains is rubbish. The idea the public sector staff are “better qualified” is of course patronising very-pleased-with-yourself smug nonsense. Face it, most council officers couldn’t get jobs in the private sector because they’re too used to pushing paper around rather than doing something useful, and they know they would fall straight on the scrapheap.

  3^rd of December, 2011
• 

  Hamish Atkinson says:

  In fact, cutting the real wages of teachers in this changing world is to the economy like skimping on seeds or fertilizer in our fields – we reap what we sow.

  We should be encouraging the best people into the lives of are youngest. The pay should be high enough to encourage some successful entrepreneurs, engineers and scientists into the classroom.

  And by pay, I don’t mean just the salary – on the face of it UK teachers’ annual salaries appear to be similar to other rich nations (in PPP comparisons). But if you figure in the number of teaching hours per year, you can see that they get much less time to prepare their lessons than in most countries. Only maths or gym teachers have enough spare time to climb the ladder to headmaster.

  Figure in the class sizes and the amount of money spent per pupil-class-hour ain’t so impressive. We only get one chance to set our children on the right track in life – let’s take full advantage of it. We’ll reap the harvest.

  3^rd of December, 2011
• 

  joel says:

  Another perspective is that the opportunity for individuals to express their inherent capabilities depends on the extent social institutions can support or empower them. Society is a system, not merely a collection of individuals, and individual performance is dependent on the system.

  3^rd of December, 2011
• 

  martin says:

  Dear WHS

  A number of points I woukld like to pick up on in your comments. However, just to pick one, you say, “The idea the public sector staff are “better qualified” is of course patronising very-pleased-with-yourself smug nonsense”. In reply I would say anyone who claims “The idea these people (“who fill public sector roles”) would waltz into a job as a mobile salesman or any private sector job that requires a bit of salesmanship or brains is rubbish” is guilty of talking “patronising very-pleased-with-yourself smug nonsense”. Wouldn’t you?

  3^rd of December, 2011
• 

  Tony says:

  Sadly, the argument doesn’t support the headline.

  Inasmuch as everyone’s salaries are paid by their source of employment, yes, the salesman’s salary is paid by the teacher. But that only gets you so far. The salesman is–at least, can be perceived by someone to be–a wealth creator, and if not, he’s going to be let go. Tim’s chosen the easy example: a teacher is probably one of the paradigmatic examples of a provider of a public good (although one could argue over whether it’s overprovided at the moment). The Second Assistant Administrator for Diversity and Inclusion, Scottish Fisheries Department*, on the other hand, may be employed by the government, but do nothing that anyone would actually pay their own money for, and not create “wealth” in any real sense of the word. There are many government positions that exist not because they’re wealth creating, but because the particular incentives of a politician or bureaucracy preserving its power demand it.

  But the crowning glory of the article is the claim that “There’s no logical reason why an economy couldn’t be 100 per cent public sector.” The logical reason is actually contained in the prior statement: in the absence of some mechanism to collect enormous amounts of information about supply and demand (e.g. the Minds in Iain M. Bank’s novels), a command economy is going to be hard pushed to actually reallocate assets efficiently enough to produce growth. I suppose Tim could say that’s not a “logical” reason that such an economy is impossible, but merely a logical reason that such an economy would be a misery. But to have a dynamic economy such as ours be run entirely by the public sector is very close to a mathematical impossibility.

  These kind of “anti-socratic” dialogues are always sort of silly, however, and seem “neat critiques” only to those already convinced. You can either address the best arguments of your opposition, or come to the not exactly earth-shattering conclusion that the other side (like your own) contains many people who may have a point, and other people who don’t express that point very articulately.

  *OK, I made that up, but you get the point.

  3^rd of December, 2011
• 

  Tim says:

  …..and by the way public sector workers also pay tax

  3^rd of December, 2011
• 

  Tim says:

  …even if they don’t have mobile phones!

  3^rd of December, 2011
• 

  james says:

  I worked for 40 years ion the public sector after leaving Cambridge University – many of my colleagues in that period deciced to leave the [ublic sector and work in the private sector – because of their experience and education many achieved immense incomes in the private sector which would have been unobtainable in the public sector – many public sector workers are extremely well qualified and efficient – way beyond the norm in the private sector

  3^rd of December, 2011
• 

  Sean says:

  The underlying issue is not public vs private but how to efficiently utilise the resources available.

  From my experience everything that is said about how public services are run (badly) can be said about any large organisation. Small companies tend to be more efficient because if they are not they fail.

  Pretty much all public organisations are large and therefore inefficient leaving them open to accusations of wasting money.

  Large private companies are much the same but aren’t paid in taxes so less anger.

  3^rd of December, 2011
• 

  Snett says:

  The government is quite content to change the terms and conditions of its own workers. In effect breaking their own contract with their own workers. Now while the private sector workers whine about public sector pay and conditions. I would remind them this is not a race to the bottom. This government has treated its own workers with contempt but it regards all workers as expendable and this bodes ill for the private sector. We are in this together but do not think for one minute that includes David Cameron or any of his cabinet. When they have finished with the public sector they will assault the private sector by removing the employment laws that protect workers under the guise of reducing red tape. You have been warned !

  3^rd of December, 2011
• 

  Moobs says:

  Oh Tim, this is unforgiveably glib. To say, in effect, of course we can have a 100% public sector economy, just look at communist societies, is to obfuscate the distinction between a notional public sector and the one we actually have.

  Assume that the all the structural problems with a communist society were resovable. That society would have all the elements of the private sector that create wealth subsumed into it. Resource exploitation? Public Sector. Manufacturing? Public sector? The parts of the economy that take a “thing” and add value to it are transferred from private to public sector.

  Our public sector is *almost* entirely wealth consuming. A simple way to test it is to imagine shrinking the economy to the boundaries of the public sector. Imagine the private sector vanishes overnight. Could public sector wages be paid from public sector tax yield? Nope.

  The public sector does not create wealth. It certainly recycles some wealth back to the wealth-creating sector which allows the latter to create more wealth than it might otherwise do. However, if our public sector (rather than an imaginary communist one) was the whole of the economy it would wither instantly.

  3^rd of December, 2011
• 

  Ermie Gumweed says:

  Firstly, the Government is very keen to create a rift between private an public sector staff. In that way it can justify the ‘well, you deserved it’ culture and create the divisions that prevent dissent. I have worked in large and small companies, public and private sector and have also been self-employed. I agree with Sean, the waste is in large organisations, not in public or private organisations. The large private organisations pay just as many pen-pushers as public organisations. Also, it is true that public organisations tend to employ a much higher percentage of more highly educated people, simply because the work they do requires qualifications. You can’t be a planner without a planning degree, you can’t be a doctor without a medical degree, you can’t be a teacher without a degree and you can’t be an engineer without an engineering degree. That isn’t to say that people in the private sector aren’t also highly qualified, but a larger proportion of the jobs can be done without a higher level qualification, for instance retail and sales, both of which make up a significant part of the private sector. In response to WHS “do look at the calibre of people who fill public sector roles, particularly looking at council officers” that is a particularly offensive and naive observation. To start with council officers don’t fill the majority of public sector roles. Secondly, council workers are required to work within strict legal guidelines. Most people’s contact with council officers is when they want to argue against those guidleines and feel that the person is being obtuse; they are not – they are fulfilling the requirements of their job. To pick up on reggie’s comment ‘when private sector wages plummet public sector wages are cushioned’ well, by April public sector wages have been frozen for two years and 710,000 workers will be made redundant in that sector. I deal with the fallout from that in my voluntary work where people in dire straits are being made homeless due to the length of time it takes to process benefit claims as there aren’t enough staff to process them. They can’t change the system because it is written in law. Finally to base any argument around wealth creation is a fallacious argument. Not everything is about wealth creation. Some things are about making a better, more fair society where EVERYONE has a good quality of life and their children have chances and the promise of a future. This is down to everyone but the public sector is indispenible in this respect and public service staff should be treated with respect and decency and their importance in society acknowledged.

  4^th of December, 2011
• 

  Jane Lowry says:

  Please ‘private sector’ workers don’t succumb to the divide and rule tactics of the ruling and wealthy sections of our society, who naturally want to maintain the extreme privilege they have built up incrementally at the expense of ALL working people (and everyone) since roughly the 1980s. It has been accomplished under the guise (of US origin) that if only you work hard enough and long enough – or somehow get famous enough – you too can be rich. It is not so.

  I don’t have the statistics to hand, but they are readily available, that show that incomes of the vast majority of people – ‘private’ and ‘public’ sector – have fallen in real terms quite substantially since the 1970s. The incomes of the top say 10% meanwhile have risen over the same period by many hundreds of percent. The real problems in our society lie in these figures, and supportingly in the facts of the ‘normalised’ avoidance of tax by virtually all the major corporations and the individually wealthy. It is they who are literally stealing this county’s – and other’s – wealth and in vast quantities. One statistic I do remember off hand is that something like 60% of all world wealth/’trade’ goes through tax havens, ie avoids or evades tax. This is surely the condition of our society that we should all unite to change, rather than bicker amongst our poor exploited selves. Of course we all create wealth – and all the conditions that we all need to flourish in our lives.

  4^th of December, 2011
• 

  Dom Camus says:

  @Moobs – Is it not rather silly to suggest that the impossibility of paying public sector wages only from public sector taxation alone means they’re not wealth-generating? A functioning transport system, for example, generates wealth for those who use it rather than for the Department for Transport.

  4^th of December, 2011
• 

  David Johnson says:

  I think the recent arguments about public vs private sector have often been guilty of missing an important point. The question of “what is wealth?”

  Money won’t keep you alive if you eat it, and it isn’t the best thing to burn if you want to keep warm. Money is not wealth, money is simply a means of transferring wealth between people.

  The world is not a zero sum game. We are not better off now than 100 years ago because we printed more money, but because we discovered and invented things which ameliorated our lives. It makes no difference if progress is publically or privately funded, the wealth creation is just as real.

  4^th of December, 2011
• 

  Guy Chapman says:

  Ha! Nice. I’m just finishing “23 Things They Don’t Tell You About Capitalism” – you and Ha-Jon Chang obviously have the same hymn sheet :-)

  4^th of December, 2011
• 

  Mr H says:

  An interesting article with some well-expressed responses. I am intrigued by Hamish’s assertion that ” … only Maths and Gym teachers have sufficient spare time …” particularly as I sit here on a Sunday afternoon writing reports before preparing worksheets etc for next week’s lessons!

  4^th of December, 2011
• 

  David Hardman says:

  You accurately pinpoint the interdependencies that exist within the economy. Robert Frank’s recent book, “The Darwin Economy” makes similar points about the public sector, especially as a counterpoint to those libertarians who object to any taxation….essentially, the public sector provides the infrastructure (whether in the form of physical things or in the form of education) that makes wealth creation possible.

  Commentator WHS (who clearly felt compelled to comment before s/he’d finished reading the article) refers to council workers shuffling paper around, and suggests that they could not get a job in the private sector. No doubt the reverse is also true in many cases – a private sector employee would not automatically be qualified to do my public sector job. But in fact, just as it is a mistake to stereotype the public sector as “paper-shufflers”, so it is a mistake to stereotype the private sector as “producers of physical things”. One of the problems we have is that from Thatcher onwards we have neglected manufacturing and put undue faith in financial services, itself a kind of paper-shuffling which, in the worst cases, involves financial systems so complex that no-one properly understands them. We have created a rod for our own backs by placing such reliance on a single unstable form of activity. We need fewer paper-shufflers in the private sector and more people who make real stuff.

  4^th of December, 2011
• 

  Public Privates says:

  It has been written that “a council worker couldn’t just walk into a job as a phone salesman”. EXACTLY EXACTLY EXACTLY! Labour educated the millions of people that are to honest to ever be salesman and created the public jobs for them that saved public money upstream, so they can uphold the mobile industry, again fostered by Labour, with their wages.

  4^th of December, 2011
• 

  Tim J says:

  I think there’s a more subversive point here too. “The economy” is simply people doing things for other people. We choose to use an imaginary counting system to ration this. Occasionally the counting system goes wrong. Nobody’s needs or ability to contribute have changed, but weirdly, when the counting system goes wrong we stop making things and doing things.

  We need the counting system because it appears to be the only way human beings can trust each other enough to co-operate in meeting each other’s need, but I think we sometimes treat it as being more real than it is. It’s not just the division between public and private sector that’s artificial—the whole setup is. The real issue is how to share out activity and goods in everyone’s interests. We use the numbers to try to do that, but it’s an imperfect system especially when the numbers take on a life of their own and behave differently from how we intended.

  4^th of December, 2011
• 

  Garry Haywood (@_garrilla) says:

  Good blog Tim. Of course, the issue is not in which sector is wealth created, but how is wealth created. It’s not created by sectors, but by humans. There are no boundaries that usefully explain wealth creation, but there are plenty of dependencies.

  4^th of December, 2011
• 

  Andy Davies says:

  @tim Public sector workers don’t really pay tax…

  Their salary comes from other peoples taxes so any ‘tax’ they pay is just really the recycling of others.

  Agree there’s a symbiotic relationship between the public and private sectors but there’s lots of things the public sector should stop doing.

  The state always seems to grow and never brink.

  4^th of December, 2011
• 

  Andrew Cooper says:

  ‘I have worked in large and small companies, public and private sector and have also been self-employed. I agree with Sean, the waste is in large organisations, not in public or private organisations. The large private organisations pay just as many pen-pushers as public organisations.’

  Ditto and agreed! I spent 11 years in the civil service (HM Treasury) and then 30 in the private sector, 10 as an employee and the last 20 self employed. I’ve seen horrendous waste in PLCs and many highly efficient public sector organisation.

  The public sector bad/private sector good mantra is simplistic, short sighted and just plain wrong. We live in a world of complex, interlocking systems. The private sector couldn’t function without much of the infrastructure provided largely by public sector organisations (the civil and criminal justice systems, taxation, education, IP protection, transport, company regulation etc. etc.).

  Incidentally, why do those who are attacking Tim’s piece seem largely to rely on ad hominem attacks? (Pssst I think we know, don’t we?)

  4^th of December, 2011
• 

  Hamish Atkinson says:

  @Mr H: My source for that statement was an English teacher, so I admit it might be biased. His point is that teachers in the UK don’t have much time to prepare lessons and mark work. Maths is easier (quicker) to mark than English, which makes it easier to find the time required to climb the management ladder.

  4^th of December, 2011
• 

  Hamish Atkinson says:

  Interesting comparisons of teaching salaries, hours, etc between different OECD countries:
  http://www.guardian.co.uk/news/datablog/2011/sep/14/education-spending-class-sizes-school-funding
  http://economix.blogs.nytimes.com/2009/09/09/teacher-pay-around-the-world/

  The one that stands out for me is S Korea, a country that has turned itself from one of the poorest to one of the richest in a very quick time.
  Their high spending on teachers – salary 2.2 times per capita GDP compared with 1.6 (Eng) or 1.8 (Scot) and low number of teaching hours per year (550 compared to Scotland’s 860) must be a factor in this metamorphosis.

  I’ve chosen teachers for my arguments because they are indeed the clearest example of public sector wealth generation – they don’t just generate wealth, the generate what is needed to generate wealth – educated workers.

  I would agree with some other commentators that some public sector work doesn’t generate much wealth, which is why I think it is a good idea to elect a Conservative government every few years to help prune unwanted growth in public sector spending. But the Lib-Dems need to stand up to the Tories and ensure that the “pruning” is trimming the dead wood, not the trunk.

  4^th of December, 2011
• 

  David Jones says:

  With respect I think you’ve made a mistake here:

  It collapsed because the incentives were thoroughly screwed up. There’s no logical reason why an economy couldn’t be 100 per cent public sector

  …but what sort of incentives (and market signals) could the public sector respond to? Public sector provision doesn’t go bust if it fails to provide what people want, or fails to provide it cheaper than some other (public) provision. This isn’t an accidental feature of current arrangements, either. It’s just about as necessary a fact as there might be about public provision: it’s not responsive to market demand.

  4^th of December, 2011
• 

  Andrew Cooper says:

  Slightly off topic, but when we talk about ‘pruning’ it’s worth noting the ratios in this from Paul Krugman http://goo.gl/tCcVO

  4^th of December, 2011
• 

  Hamish Atkinson says:

  @Andrew, but what Krugman’s graph fails to show is the effect that GDP growth has on the debt to GDP ratio. 2.5% GDP growth will quarter the ratio in 56 years, with a balanced budget and no repayments.

  Also, that steep drop in debt in the 50s required quite a bit of austerity – rationing didn’t finish until 1954 and $3.3 billion (1950s $) of Marshall Plan aid certainly helped.

  There’s no Marshall Plan today. I don’t see China or OPEC stepping in with a rescue package to help us. So, there’s two ways out: Growth, or Austerity.

  Technology could help with the growth: Where are the greatest technology gains to be had? How about medical technology – that appears to be keeping people healthy and productive for much longer nowadays. How do we realize increased GDP from this technology? Work for longer. This would also have the benefit of reducing pension costs, thus lowering our debt. If we take this route, we can look at a lot of NHS expenditure as an investment, rather than a cost. At the moment, if we save the life of a 65 year old, nice though it is for that person and their family, this will only cost the country money. If they are going to work for another 5 years, they’ll probably pay enough taxes to pay for that treatment, and more.

  This is a straight benefit to the country, with no cost. We’re going to fund the NHS to save them anyway (we’re not living in Logan’s Run, thank God).

  So instead of austerity (firing people), we could reform pensions to reflect this increase in life expectancy. Which basically, is what the government is trying to do. It has to be said that combining a longer working life with an effective 3.6% pay cut is, quite understandably, upsetting the Unions. Maybe the Coalition could learn from the Medical profession, and sugar-coat their bitter pills?

  4^th of December, 2011
• 

  Nick says:

  But I get to choose whether or not to buy an phone, which phone to buy and which company to buy it from – There is competition and because there is competition the bad are driven out and phone salesmen (if not necessarily their bosses) have their pay set according to the laws of supply and demand.

  Your analogy would only be true if all phone companies were a legally enforced cartel selling one brand of phone and everyone was legally obliged to have one.

  Phone salesmen cannot vote in a government with a policy of making it compulsory to buy a phone, making poor phone salesmen unsackable and giving them a gauranteed earnings related pension but public sector workers can and do vote for the equivalent.

  Imagine phone salesmen going on strike to demand that the ownership of a phone be compulsory to support their income!

  5^th of December, 2011
• 

  Julien Couvreur says:

  The key to clarifying this discussion about fairness is the distinction between voluntary and coerced exchange. Taxes are taken by threat of force, even those who don’t want or use the service. Most government services are monopolistic to boot.

  5^th of December, 2011
• 

  Daniel Earwicker says:

  The bit about incentives being screwed up is the important bit.

  It’s the problem with all parts of our economy. Yes setting suitable incentives is a thorny problem in the public sector. But it turns out to be no less thorny in the private sector.

  For example, the major incentives in our private sector for the last few decades were to borrow money from abroad to spend it abroad, or invest it in speculation bubbles. How’s that working out?

  And ultimately incentives come from people’s desire to improve their own circumstances. But when people reach a certain level of affluence, what motivates them to reach further?

  For most people the answer is: nothing. They’re happy on the sofa with the remote control! Nothing wrong with that – it’s called success. But it’s not a recipe for endless growth, because it means the only kind of growth engine people are interested in is the “safe investment”, the kind where they can stay on the sofa and watch their pile of money grow. Becoming an entrepreneur? Learning JavaScript? No thanks!

  Consequently we’ve spent a few decades inflating our money supply in anticipation of growth that isn’t really happening (not here, anyway – it’s happening in the developing world).

  The result in the short term is a sequence of price spikes in specific things (as we hunt for that elusive “safe investment” – houses, internet companies, gold…), and in the long term it’s a general rise in prices.

  Oh, and a lot of disappointed, hard-working Chinese people, holding IOUs from people much richer than them.

  5^th of December, 2011
• 

  Fred Kristiansen says:

  You seem to have missed out the underlying reason for the imaginary confusion here. The private sector is not merely providing goods and services. The private sector provides a price discovery service, for labour as well as goods & services. The public sector cannot provide this through planning. Some comments here claim that there are highly efficent public sector organisations, but how can they know? The departments and quangos may be effective (at doing the alotted task, politically decided), but they cannot claim to be efficient (at doing the best task, with resources allocated to their highest-valued use defined through price information). And it seems David Jones is making a similar point here too; good.

  5^th of December, 2011
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  seb says:

  All the people who bring up the choice aspect: i.e. you can choose who you buy a phone from or whether to have one at all but you can’t choose not to pay taxes:

  That’s a bit simplistic: you might choose between a handful of mobile phone providers or handset manufacturers but you actually have far less knowledge or control over where your investment actually ends up than if you were paying for a public sector service. Everything is transparent in the public sector down to where the stationery is purchased whereas in the private sector you would have a hard time checking where all the components come from (Does your mobile phone include bits made by child labour? Do the factories chuck pollution into rivers somewhere in the world?) Many of the jobs in the public sector that people want to get rid of as unnecessary are actually the ones that monitor and check that public money is being spent effectively and ethically. So you know that a pound you pay in tax goes to people in this country working for organisations in this country that source things in this country wherever possible – the money stays in our economy. The same is clearly not true for a pound spent in the private sector where some of it may be going to foreign shareholders and other dubious places but chances are you haven’t got the time to even find out.

  By the way, the phrase “taxpayers’ money” is meaningless. When you pay tax it is no longer your money any more than when you spend it in a shop. Whether it’s a public service or a private commodity: you just hope that it does what it said on the tin.

  5^th of December, 2011
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  Tavdy79 says:

  “when private sector wages plummet public sector wages are cushioned” – Reggie

  When private sector wages plummet, the fact that public sector wages don’t fall at the same time prevents a race-to-the-bottom in salaries.

  If you have a choice between two jobs, one public sector and the other private, with identical benefits and the same wage (say, £15K) you’ll choose based on things like the work involved, the working environment, the team, training, and promotion opportunities. But if the private sector wage is £14K, you’ll start leaning towards the public sector one based on income. As the pay gap widens, private sector employers will start seeing problems with recruitment and retention, and private sector workers will increasingly be those who aren’t good enough to get public-sector jobs – all of which will increase costs. This prevents the private sector from lowering wages too much below the level in the public sector.

  Letting public sector wages fall won’t benefit private sector workers: it’ll mean their wages will fall even further – and this is bad news for everyone. Falling wages will cut consumption, which depresses the economy, which reduces tax receipts, which forces the government to cut public sector pay, which (combined with the depressed economy) encourages the private sector to cut pay, both of which further cut consumption, depress the economy, reduce tax receipts, and so on.

  5^th of December, 2011
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  Karen says:

  A number of commenters have responded with the argument that the private sector worker’s salary is paid by the public sector worker ONLY if the latter ‘chooses’ to buy a particular product or service, whereas the public sector worker’s salary is taken, by ‘force’ of taxes, from the private sector worker regardless of whether s/he wishes to use the public service.

  This, I think, is where our present battle will not be won by sheer reason. Rather, a moral question divides us: do we wish to live in a society that shares the cost of public goods, or would we rather only pay for the services and goods we elect to use, for better or worse, in sickness and health, etc.

  Of course, many would opt for the first society and then raise the spectre of overpaid civil servants and bloated bureaucracies – in other words, taking education as an example, they would say ‘I want public schools, but I do not want to pay teachers /that/ much’. This is where we can again fight with reason, given that public sector salaries are demonstrably not out of whack with private sector ones – in fact, one can make far more money in the private sector in most cases. So if someone’s complaint is not with paying for the service, per se, but with paying ‘too much’: I call bullshit.

  5^th of December, 2011
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  Richard Gay says:

  Public spending is not paid for by taxes, at least not at the federal level. The funds are created from nothing by the treasury. Taxes are a policy tool for restraining aggregate demand from growing too large and producing inflation. If taxes are too high and public spending too low, the economy contracts. If a contracting isn’t needed to stem inflation, then deflation results and the economy suffers. Federal public spending is not dependent on federal taxation.

  5^th of December, 2011
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  David Andersen says:

  The incentives are supposedly the key and yet the author says nothing more about them or how they would work.

  “There’s no logical reason why an economy couldn’t be 100 per cent public sector.”

  Of course there is. It’s called politics and 3rd parties making choices for others wants and needs. This is already tried in various forms around the world and it rarely works well, if ever.

  5^th of December, 2011
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  Slippy says:

  As ever things are not so black and white. Clearly there are some public sector workers which are wealth creator,council civil enginers, doctors etc but there are many who are not. The aurgument that these people are also tax payers is true, however they will always be a net tax drawer as the amount of tax they pay only offsets part of their salary from the government. It is a different aurgument tosay if their public good outways that net tax pay. Clearly the teacher, civils, doctor would be ‘good value’ but would the diversity coordinator.

  This value for money aurgument is not transparent in the public sector where it is harder to value the productive good. Take doctors, most people would say pay them more, however over the last 10 years or so the pay has risen hugely to a point where a 40yr old doctor can be earning £125k from the NHS and £75k privately, perhaps double what he was earning a while ago, yet the ‘productivity’ has not particularly risen and some say it has fallen.

  6^th of December, 2011
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  Alex says:

  “But my mobile phone bill pays for your salary”
  “Only with the money my taxes paid you in the first place”

  To say communism collapsed because “incentives were thoroughly screwed up” is a gross simplification of a thoroughly bad system

  Also there are private schools which a) are paid for by parents who still pay taxes to pay for places they don’t use at state schools and b) on average achieve far higher GCSE results than state schools c) pay better wages than state schools to do the same job and hence tend, on average, to attract better quality teachers

  6^th of December, 2011
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  Andrew Cooper says:

  @Hamish – thanks, interesting points. I think More or Less needs to look at debt (again) and maybe at the who-pays-for-whom issue as well.

  Seems to me the distinction shouldn’t be between private and public sector but between jobs which generate income from exports/providing services overseas and those which just churn money around within the UK. Let’s call the former earners and the latter churners.

  You’d need to look at each job separately.

  E.g. a high street mobile phone sales person or an accountant who only worked for, say, an estate agent only dealing with UK properties would just be a churner while a while a (public sector) diplomat in the trade mission of an overseas embassy would be an earner. A Vodafone employee who plays a part in generating export income from overseas subsidiaries would be an earner while a high street phone seller would be a churner. (Not sure what you’d call the lawyers and accountants who dream up Vodafone’s tax avoidance schemes, but that’s probably not printable.)

  @slippy ‘Clearly there are some public sector workers which are wealth creator,council civil enginers, doctors etc but there are many who are not.’ Eh? Do you mean ‘wealth creators’ in the sense that they make themselves wealthy? In my taxonomy, doctors which only treated British patients would, of course, be churners.

  6^th of December, 2011
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  Rebecca says:

  Apples & Oranges.
  Paying salaries through taxes vs. paying salaries through mobile phone usage is not the same thing. Anyone can select which mobile phone company to use. Taxes on the other hand are not optional.

  7^th of December, 2011
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  Robin L says:

  Media coverage in Britain makes us inclined to think that the public sector is wasteful and flabby, because it is an easy headline. The civil service are not going to attack the Daiy Mail for yet another story about “pen pushers”. But hugely successful multinational corporations are in my experience also flabby and wasteful organisations. The difference is that the media cannot report this because a) the information is much harder to obtain and b) big banks, energy companies and so on will sue. Obviously people doesn’t care about waste in the private sector because they are not directly paying their salaries (although they are indirectly doing so). But it is worth keeping in mind that there is wastefulness and efficiency in all industries.

  7^th of December, 2011
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  Stephen says:

  There are so many logical fallacies in the comments its difficult to know where to begin…
  1. BT, British Gas, British Rail etc. all used to be in the public sector and charge for a a product. When they were privatised some things got better and some got worse but the employees did not all magically become ‘wealth creators’ the next morning.
  2. In the US most doctors are in private practice.. does that make them wealth creators, whilst their UK counterparts doing exactly the same job (minus the screwed up incentives) are not?
  3. Is a private landlord who collects rents from others a wealth creator but a housing association or council who does it a burden on enterprise?
  4. If only people who generate export value for UK PLC are the ‘real wealth creators’ and not ‘churners’, then how did we make an economy prior to globalisation- as no-one was making any ‘real wealth’?
  5. Isn’t it the truth that the economy is complex network of obligations- that can as easily be between local villages as between continents. That there can be ‘churners’ as Andrew Cooper charmingly puts it, or rent-seeking monopolists in public and private sector. Many job-types exist (or have existed) in both public and private only differing in how the money is collected and distributed. And that a few types of activity are best exclusively done in private sector (shops) and a few in the public (RAILWAYS!).

  7^th of December, 2011
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  Bongbong says:

  If we insist on using a system that deems ‘wealth-creating’ to mean selling a mobile phone, rather than educating a class of children, then people will come up with these arguments.

  The idea that a public sector job is only a burden on hard-working, private-sector-employed taxpayers misses the relative genuine values of both. It also misses the point that money circulates – economic activity is about providing a product or service deemed to be of value, and having money handed over in return.

  Inefficiency and corruption are rife in the private sector, too – just asks anyone who works in a large private corporation.

  7^th of December, 2011
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  Dave says:

  When we are talking about public sector pay, are we referring to the astronomical pay that the taxpayer is giving to the bankers, especially those in high positions? Are we referring to the huge bonuses that all taxpayers are contributing towards for those banks that we own? They are public sector, too?

  I worked for a local authority and there was a huge amount of incompetent and lazy staff, at all levels. There were also some exceptionally brilliant workers. I have also worked for private companies, where there were many lazy and incompetent people alongside some exceptionally brilliant workers. The main difference was that the public sector NEVER sacks anyone just for being crap. In fact, it seldom sacks anyone for anything. One high-level exec was repeatedly promoted when they were complained about by staff because they were such an incompetent manager.

  In the private sector, these sort of people DO exist, but:

  a) They can be got rid of, and often are
  b) No-one is being forced to pay them, if a company boss chooses to employ idiots and customers desert the company, so be it.

  In the public sector, everyone (including those who are hard-working public sector employees) has to pay for incompetents and too often has to put up with a crap service and can’t go elsewhere.

  I think there are lots of rubbish people in both sectors, and lots of brilliant people in both. The point is that we have no choice over where to take our custom with public services, and that discourages hard work, the removal of rubbish staff and encourages an atmosphere of 25 year olds biding their time till their pension (as I experienced at the local authority).

  7^th of December, 2011
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  Andrew Cooper says:

  I agree with everything you said, Stephen, and I’m delighted that you think I’m charming. Churners it is, then. Much snappier than the potentially confusing ‘rent seeking monopolists’.

  7^th of December, 2011
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  Hamish Atkinson says:

  It seems to me most people object to taxes because:
  1. They don’t have a choice about whether to pay them or not (unlike the Buffets of this world). This tends to make the Public sector intrinsically inefficient compared to the private sector. (Although large monopolies in the private sector have just as much scope for inefficiency)
  2. They believe that a lot of the things taxes pay for are a waste of money. (e.g. Trident – a weapon so powerful we can never use it)
  3. They forget that the marginal cost of a government worker is much less than the gross cost (her gross pay, less income tax & NIC, less VAT, excise duty, stamp duty, IPT on everything she spends, less the tax raised from other people or companies that receive her money, less what you would pay her in income support and housing benefit if she was unemployed, plus the cost to the private sector’s ability to generate taxes from having that worker not available to work in the private sector). When you take all of this into account, it is a lot easier to justify the real cost against the benefit to the country of the work she does in the public sector.

  However, this last point – the marginal cost – changes dramatically depending upon the current state of the economy and thus the demand for labour coming from the private sector. If you make her redundant when demand is weak you will probably have to pay her income support and housing benefit until the economy recovers. Thus, the marginal cost of that public sector employee is much less now than it was when the economy was booming from 1997-2007. This tends to support a Keynesian view, that the public sector should be trimmed back when the economy is booming (to allow the private sector room to grow, and saving much more marginal cost), but expanded when the economy hits the buffers (and the marginal cost is lower).

  Personally I believe that every time there is a labour recession (i.e. determined by job growth rather than GDP), we should make free training or education available immediately to those that have been made redundant, rather than waiting for them to be unemployed for 6 months. We should give everyone a modest budget for training and education, that they can spend as they wish. In full blown recessions we should offer expand their budget (a sort of buy one, get one free). If we don’t want to foot the bill for this then we should at least make the same student loan system available for adult retraining as students benefit from for undergraduate degrees.

  7^th of December, 2011
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  Andrew Cooper says:

  Watching the excellent ‘Inside Job’, with its familiar story of CDOs, CDFs and other TLAs on BBC2 last night, it struck me that we need a third category to add to my churners and earners.

  These are people who destroy wealth in order to enrich themselves: many of the casino bankers and their advisers featured in the documentary, for example. I propose we call them ‘burners’.

  As I understand it, burners are like car manufacturers who build cars that will fall completely to pieces as soon as they’re driven and then them to others (or, sometimes, themselves) saying ‘this is a completely reliable vehicle’. At the same time they take out a huge bets that the car will fail.

  Anticipating us non-economists/casino bankers shouting ‘Why the hell haven’t these people been locked up?’ tney have ensured that laws are changed/dumped to make this trade completely legal. I’m sure someone will correct me if I’ve missed something.

  (I realise that my earner/churner/burner taxonomy doesn’t fit with the title of this blog but then I’m not an economist. Obviously.)

  8^th of December, 2011
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  Sanjeev Sabhlok says:

  Tim, just yesterday I wrote a blog post praising your work. However, I’m sorry to say that this article of yours has been a great let down.

  I’ve suggested a few possible things for your consideration here: http://sabhlokcity.com/2011/12/oops-tim-harford-puts-his-foot-into-his-mouth/

  I’d encourage you to revise the deeply flawed view expressed in this article.

  Regards
  Sanjeev

  8^th of December, 2011
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  trousers_2000 says:

  Coming back on a point Hamish made about doctors “Therefore, we are happy to accept that doctors have high salaries, whether they are paid for by private health insurance, or by our taxes funding the NHS.”

  The main reason doctors are paid a lot is simple supply and demand – supply is artificially restricted (via a limited intake into medical schools and then further training) and demand is inelastic as people will pay what it takes to get treated.

  There are thousands of people out there who are smart enough to be great doctors, but missed out getting into the system by a fractional margin. High fees are the result, and I for one would be happy to pay less for my medical care if I could!

  The single most important contributors to public health in the last century have been water and sewage engineers. Clean water supplies and good sanitation have saved more lives than medics ever have. I don’t see many water engineers earning £200k a year though!

  8^th of December, 2011
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  Bernard says:

  Hi Tim.

  Love your work, but this article is disingenuous in the extreme. You yourself point out in one of your books (I forget which now… the strains of old age) that the reason communism is irrelevent these days is because the economy is far too complex for any planning department to allocate resources efficiently. This point highlights the impracticality of a 100% public sector economy even without getting into the question of incentives and the ‘Yes Minister’ question of how planners behave when there are no useful checks on their authority.

  The point that individual public sector workers have no more reason to accept austerity than individual private sector workers and that suppressing public sector wages may cause a talent drain precisely illustrates the usefulness of market forces in restraining the power of planners to make bad decisions.

  9^th of December, 2011
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  Hamish Atkinson says:

  Several people seem to have drifted off on a tangent from the original tack of this article. In particular, I’m sure that Tim is not advocating a resurgence of communism when he writes, as an aside, that “There’s no logical reason why an economy couldn’t be 100 per cent public sector.”
  His point is that a lot of the activities that are funded from taxes are indeed wealth creating.

  In addition, a lot of services that are not funded from taxes, but paid for by the users of those services, can either be provided in the private sector, or in the public sector.

  For instance, housing, railway travel, education, and health care all have examples of both public and private provision. Privatization often increases the efficiency of these services, but not always – read the sections on the lemons problem and executive pay in Tim’s Undercover Economist for examples where the private sector is inefficient.

  The natural efficiency of the the private sector relies on two bedrocks: competition and computation. By computation, I mean the way that free market prices (supply and demand) automatically compute what should be produced and how much money to spend on it.

  Public sector provision tends to be less efficient for both of these reasons – they tend to be monopolies and the state decides the prices, and makes decisions, rather than supply and demand.

  But, is Tim’s statement about the 100% public sector correct? All the practical examples so far have been communist states, which have been failures. The USSR, Eastern Europe, N Korea and Cuba are not good adverts for communism. It’s easy to see why Tim has attracted so much flak for that aside.

  But is centrally-planned communism the only model that can be thought of as 100% public sector? What do we mean by 100% public sector? Central planning as opposed to the free market? The abolition of privately-owned capital (i.e. all companies owned by the taxpayer)? I very much doubt that any interpretation of 100% public sector would be as efficient as a model including the private sector (and thus countries would tend to gravitate to a public-private model). But surely it is possible to conceive of a 100% public sector model that incorporates many of the advantages of the free market (in terms of the freedom of consumer choice to influence what the government produces), without enriching a handful of billionaires at everyone else’s expense? For it to be anywhere near as efficient, it would need to get incentives for working hard (or smart) right.

  Any suggestions? I’m sure Occupy LSX would be interested to hear them?

  11^th of December, 2011
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  Hamish Atkinson says:

  @trousers_200: If constriction of supply is the only factor affecting doctors pay, then surely the government should be investing in extra places at medical schools, reducing the cost of going to university (subject only to working in the UK afterwards), and relaxing immigration restrictions for qualified doctors, nurses and teachers? That’s a no-brainer for a Conservative government that wants to save money, right? Oh, hang on…

  11^th of December, 2011
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  Reaguns says:

  Great article and great comments.

  I believe in as small a public sector, and as low taxes as possible.

  But I agree with several arguments FOR the public sector, not least because some dear friends and family work for them, and I’ve made the mistake of saying they don’t generate wealth!

  I’ve frantically looked for defenses since, from the capitalist perspective.

  What I’ve found is:

  1. We need the public sector in order to have the private sector as we depend on them for security, law, infrastructure, education, health.

  2. Andrew Lilico wrote a piece lately saying how some forms of attacking public sector pensions are an affront to capitalism as they violate property rights.

  3. Warren Buffet says rich people in america assume they are rich because of their talent. Buffet says its because of the their talent and the fact they were born in America – they wouldn’t have become rich if they’d been born “in Bangladesh or some place”. So they should pay tax

  4. Tim’s argument here.

  I agree with many of your criticisms too regarding coercion, regarding the lack of incentive in the public sector, with the guy who said large private sector companies are as bad as large public sector ones (I’ve been there too), liking churners/earners/burners and Steven’s analysis was awesome.

  One thing though. Public sector workers don’t pay tax! Private sector workers pay tax, the government then hands that to the public sector workers at say £550 per week, and they pay back about £200. The government could just as well pay them £350 per week. Now its correct that if different activities moved in/out of public sector the taxpayers would change. But this would be better as then they would understand that they don’t pay tax, they just get a straight up government salary. Right? You’re going to disagree with me now aren’t you.

  14^th of December, 2011
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  Reaguns says:

  Also I agree with sabhlokcity in that this is about freedom from government, not just pure economics, thats why we want a small government, small private sector. I might sign up to his blog, anyone else?

  I’m not sure Tim is suggesting everything that has been inferred by people though – I don’t think he wants communism or 100% public sector. I think the Undercover Economist would be one of the best persuasions around in converting any socialist/communist into a free market capitalist.

  14^th of December, 2011
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  Kerry says:

  trousers – I’ve heard from a GP friend that the situation with supply of doctors is even sillier than you think. GPs’ surgeries are private businesses that can choose how many GPs to employ, but there is a minimum amount they’re allowed to pay, and it looks as though that amount is too high because there are part qualified GPs and med school graduates who can’t find a job, while most of us will be familiar with the 10 day wait for a 3 minute appointment with our GPs…

  14^th of December, 2011
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  Reaguns says:

  @Kerry I can well believe that. I have been fascinated by a phenomenon that I have noticed again and again over the last 10 years, whereby a number of my friends who are/were junior doctors and teachers constantly complain of their precarious position, of how few jobs there are for doctors and teachers, yet on the news I only ever hear that there are not enough doctors and teachers.

  The other profession where I hear the same thing, is in IT, companies complain they cannot get the staff, yet loads of software graduates and workers can’t find work. In this case I know for a fact, that its a simple problem whereby the companies refuse to pay wages for experienced people, and refuse to hire inexperienced people. Some workers on the other hand will not drop their price.

  I don’t know if this illuminates the doctor/teacher problem though, its not as clearcut.

  14^th of December, 2011
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  Reaguns says:

  How can my friend in the public sector, who works on licensing of shops or something, use this argument? Because the guy would say I sell mobile phones blah blah, she would say yeah but the government could nationalise that and privatise shop licensing then I’d pay your wages? To which the chap, if he was me, would say “I wouldn’t want a damn license for a shop, I’d just open the shop if that wasn’t government enforced, so I wouldn’t pay your salary at all.”

  14^th of December, 2011