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Daniel Oppenheimer's avatar

Re "Treasury Brain" - the problem is that there is no consequence for Government if they engage in short-term "cost-cutting" that will actually increase costs. If, when they slashed investment to pay for political priorities as you describe, analysts put out reports saying "actually this is bad news for Govt finances longer-term so this is a sell for gilts", you would see a lot less of it. But they don't - they simply look at the raw numbers for next year and write things like "Chancellor creates headroom for tax cuts". So of course the politicians are incentivised to tell the Treasury to look for short-term savings.

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あの人's avatar

Two points about the cost disease email.

One, we have a good example from recent history of how low productivity elsewhere in an economy will hold down wages in higher-productivity sectors. This is China in the early 2000's. At this time some 50% of China's workforce was still in the low-productivity agricultural sector, falling to 25% by 2019. The low productivity, and thus low wages, in agriculture meant that the growing industrial sector in China's cities only had to offer wages that were modestly above agricultural wages to hire workers when expanding production or starting new plants.

Second, I thought your correspondent misunderstood how rewards in the high-productivity sector would be allocated. If one, small sector of the economy has much higher productivity for labour than the rest of the economy, the workers in that sector will not generally see higher wages, except to the extent tht they have specialist skills that other workers don't have. This is because, again, the firms have the option of hiring and training new workers from the low-productivity sector, which they can do by offering only a modest premium on the prevailing wage. So the higher productivity will benefit capital owners in the high-productivity sector.

To make a concrete example of that: I work for a City firm that hires stock brokers and software developers for it operations at the going rate for those professions. These workers have specialist skills that command a premium, but my employer still only has to pay the going rate for their skills, and is left making some £200,000 of profit per employee per year, which accrues as equity and is generally returned to investors via dividends and share buy-backs.

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