The Apple cash pile model of fiscal deficits

Karl Smith is wondering who may be getting the upside of clearing but recessionary markets in the UK, or why they are otherwise not clearing. He is also keen on bashing Apple for reinvesting its abundant profits in a shiny cash pile. Might there be a salient comparison somewhere?

UK finance minister George Osborne with a red box

UK plc Chief Financial Officer George Osborne introduces a new laptop to customers.

So, which prices are moving in the UK? The government sector seems a prime candidate. The UK government has been following a strict austerian line — incidentally, so much for all the arguments that the eurozone’s structure forces austerity on its members: the UK behaves as if it was inside the eurozone, despite being out and having no such constraints; they could as well be in.

Let’s assume that taxes represent the price of government services. Basically a household pays some money and gets a basket of goods and services. Even if the goods are not priced proportionally to consumption, it’s still some sort of customer-supplier relationship, and in aggregate the distributive question — how each individual consumer is charged their share of total revenue — is not that material.

So what has UK Miscellany Services plc been doing? They’ve been increasing taxes and cutting services. Tim Hartford says they’ve actually done more of the former than the latter, which surprised me a bit, but either way the amount of tax raised for each unit of delivered services has gone up, that is the price for their wares has gone markedly up.

How would that have an effect in everyday life? A typical taxpayer might have been using a basket of government services, and find that suddenly one of them is not available anymore. If it was not essential (say the library they used to attend has closed) they may content themselves without it, or substitute for it with a cheap or free activity (e.g. read blogs instead of library books). The price increase here shouldn’t have a sizeable impact: it becomes a lower standard of living, and possibly even minimally so if there are free or low cost alternatives.

But if the service was essential, and more so than the marginally essential goods or services the taxpayer gets from the private sector, they will probably pay out of pocket. In this case the price of government services has clearly increased: they pay the same/more tax for a reduced basket of goods. And how do they pay for the substitute? They could save less, which would probably be desirable in the current predicament, but they may also, if as cash constrained as most people are, just substitute: buy the formerly government provided service from the private sector (possibly from a former government employee having converted their activity into a private business). This result in further price pressure on the private sector. This scales from one taxpayer to the aggregate of all taxpayers.

So basically the government, as a supplier of services, has increased its profit margin. As it happens to be a loss-making venture, it has really merely reduced its losses, but the effect is the same. What matters here is the change, not the absolute value. Then, what are the government doing with this extra margin: they are reducing their debt, that is increasing their cash pile — making their negative cash pile less negative than it otherwise would be. Like Apple.

And by hoarding profits both Apple and HM Government are contributing to a depressed world economy.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s