Tag Archives: UK economy

Why we need economists

Being a former social worker and state secondary school teacher I am used to belonging to a profession that is disparaged in the media. Now I find that being an economist means that I am subject to similar vilification. What made economists (or rather the good economist) so disparaged is that they tell inconvenient or awkward truths about the economy and society. When faced with such truths politicians and the powerful will resort to abuse to silence the truth tellers. What is remarkable is that we have a parliament dominated by graduates from our elite universities and yet they are in greater ignorance of the world around them, than the parliaments of the past! Parliaments that were mocked for having too many of trade unions and country squires, men supposedly lacking in education and knowledge of the world around them.

Having made this declaration I must now produce the evidence to defend my assertion. These awkward truths usually are warnings about coming troubles that politicians would prefer to ignore. When the great crash occurred in 2008/9 politicians claimed that it was a once in a lifetime event that could never have been predicted. An economic act of God. The truth is that all the warning signs were there and instead of acting on them politicians refused to act, as any action taken would have been cutting spending and that would have been unpopular with the electorate. There were two causes of this crash were the banks irresponsible lending policies, such as 125% mortgages. The other guilty party were the governments and central bankers who rather than regulating the market for the greater public good, preferred to turn a blind eye to the irresponsible behaviour of the bankers. Their justification for their inaction was the doctrine of neoliberal economics, which states that economic well being is maximised under the free market economic system.

I suspect that those trade unions and squires of the past would not have been so gullible, as they had a superior understanding of human nature. They from their dealings with bankers would have known that these men were not the giants of the financial world but men as fallible as themselves. These men would have recognised that greed for ever greater and greater financial rewards motivated these bankers.

Awkward truth warning – little has changed since 2008 bankers are still lending irresponsibly and the government is still turning a blind eye to such behaviours. One area of concern is car finance, it is suggested that car dealers in their desire to sell more and more cars are not paying sufficient attention to the ability of their customers to fund their repayments and the risk is that these buyers will default in the future on their loans. This will cause the defaulting customers to return their cars leaving the dealers with an unsold mountain of cars other hands. This would in itself be sufficient to cause another economic downturn. The banks who source the funds which enable the car dealers to offer generous financial terms to buyers, rather than offering a word of caution or refusing to increase there lending to the dealers just continue to shovel cash in their direction.  Other forms of bank lending such as to the property market suggest that bankers have not learnt the lessons of 2008 and unfortunately neither has the government.

As an economist you learn to read the runes, in my case as I have no access to government statistics, it is those short comments in the financial section in the newspapers that give the game away. In this case it was a short piece of no more than three or four lines. A financier was asked if the Bank of England was now cracking down on irresponsible lending to prevent a repeat of 2008/9. His answer was no, as the governor knew that if he reduced borrowing he would cause an economic slowdown, which would increase unemployment with all its associated problems. If I read the article correctly little has changed since 2008.

I also realise that the banks have fought tooth and nail to stop the governments of Europe and the USA to make them resilient in the event of any future crisis. British banks have successfully persuaded the government that reserves of 3% are sufficient to enable them to ride out any future crisis. European banks have even smaller reserves. These reserves are either cash or assets that can be easily turned into cash to meet the demand for cash from their customers. (A greater ratio of assets to lending would limit the money banks could lend and in consequence reduce their profitability.) The suggestion is that in an event of a repeat of the financial crisis of 2008 the banks will lack sufficient reserves of cash to enable them to meet their customers demands for money. In a crisis customers fearing the future will withdraw their savings from the bank, either because they doubt the loudness of the bank or they want money in hand to deal with any future crisis. It will only take one bank to close its door for a general panic to ensue with the consequence that the government yet again will have to step in to bail out the banks. If the banks held greater reserves as have happened in the past such temporary crisis could easily be resolved  The banks would have sufficient quantities of cash in reserve to be able to pay those panicking customers who wanted their money back. Once it was seen that the banks had plenty of money the panic would cease. However if banks have insufficient cash reserves the whole system is liable to collective failure. If only one bank has to close its door, because it cannot meet its customers demands for cash, the contagion will spread and there will be a major run on the banks. Yet again the government would have to rescue the banks from their follies of their own making.

However we tellers of awkward truths have a problem. We cannot predict exactly what will happen or  when. We are tellers of possibilities and probable truths and us such we can be easily discredited. Economist predicted that a vote to leave the EU would have a negative impact on the economy. Then when in the days after the Brexit vote, the economy failed to collapse the naysayers could claim that they were wrong and that the collective opinion of economists was worth no more than that of the collectivity of politicians. What these naysayers overlooked was  that the Governor of the Bank of England being all too aware of the negative impact of a Brexit vote took immediate action to offset its negative economic impact. He simply increased the amount of to the nations borrowers enabling them to go on spending spree which prevented the economy from taking a nose dive. What the naysayers don’t realise it that it is a crisis postponed  not as they believe an imaginary economic ghoul or nasty conjured up from the feverish imaginings of the economists.

There is one prominent economist or truth teller who has consistently, warned of the impending credit crisis but is consistently ignored by governments and that is Anne Pettifor. She is never called to sit on the committees that governments set up to advise them on matters economic, as they don’t want to hear her truths. She has written extensively about the impending first world debt crisis, yet like some unheard of  Old Testament prophet her writings remain in obscurity.

Our one weakness as economists is that we cannot say exactly when or how or what we predict will happen. Even more frustratingly we can be right but events prove us wrong. There are no economists that can accurately predict the future, we are the scientists of the possible or the perhaps. The economy is such a volatile and complex construct that sudden and unexpected changes can make fools of us. This is why a leading politician* can say with confidence  ‘we have had enough of experts’ (meaning economists) and be praised in the media for his sagacity and foresight.

Yet our awkward truth remains the economies of Western Europe and the USA are over indebted and not one government has taken any realistic debt reduction measures. The fact that Britain with Japan shares the unwanted title of the most indebted of developed countries has passed our politicians by. They will speak endlessly about the public sector or government indebtedness, but they are focusing on the mice in the room while ignoring the elephant that is private sector indebtedness. Prior to the crash of 2008 government debt was less then a tenth of private sector debt. While great pains have been taken to reduce government debt little has been done to reduce private sector indebtedness*. This indebtedness will possibly rise to unheard of levels as the Governor has said that he is relaxed about the possibility of banks increasing their assets to nine times the size of GDP. Banks assets are loans, so he is relaxed about the banks increasing the nations debt to nine times the total of its wealth!

*Michael Gove a prominent politician who campaigned for Britain to leave the EU

* A policy practice that is common to all Western European governments.

Is George Osborne the greatest economist of the 21st century

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Describing George Osborne as this century’s greatest economist, is to choose a deliberately provocative title. While it is intended to be a title that catches the eye, I do have a more serious purpose in drafting this essay. There from the perspective of this writer a certain admiration for George, he is the supreme Machiavellian politician. He can persuade others to accept that black is white, even if they know he is wrong. As Chancellor he has set the agenda for the political debate. Labour politicians have responded to his agenda, rather than trying to set out their alternative approach. There are differences but these are intended magnify the difference in the eyes of the beholder (electorate), for an economist they are but trifling differences. Last week’s political debate illustrates this all too clearly. George Osborne announced that because of budgeting restraints that all NHS staff other than receiving annual increments would not get an increase in their pay. In his eagerness to appear responsible he said that if he became Chancellor he would follow George’s lead and implement a pay freeze.

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There are two types of great economist, the first are economists such as John Maynard Keynes or Milton Friedman who revolutionise economic thinking and change the way governments approach economic policy. Secondly there are those such as Mao Tse Tung who set the economic agenda and policy making through sheer force of personality. (Often accompanied by the threat or use of violence.) Both are great in the sense that they revolutionise the practice of economic decision making and policy implementation. Communist China experienced several changes in the direction of economic policy under Chairman Mao. He tend to favour a razing to the ground of the economy and to be followed by a remaking of the economy in a purer communist mode. By doing so in the Great Leap Forward in 1958 he intended to take the control of the economy out of the hands of the bureaucrats and return control of the the economy to the workers and the peasants. The policy was disastrous which according to one source caused 60 millions deaths through starvation caused by reducing agriculture to a state of chaos. This use of greatness has no moral dimension, but views greatness as the power to revolutionise and change economic policy making for decades.

George Osborne is one of the Chairman Mao type economists. While knowing little about economic policy making he has through sheer force of personality changed the way economic policy making is viewed and discharged. He has made deficit reduction the central plank,of his economic policy. Unlike previous Chancellors he has made this the priority, other targets such as reducing and ending child poverty have been scrapped as being incompatible with this end. He has sold to the nation the belief that a continued and possibly constant programme of national austerity is necessary for national well being. Ed Balls I initially opposed this policy (as having a better understanding of economics he should have known that the policy was flawed from the start), yet after a few more squeals of protest he fell into line. He has promised that he will continue the programme of national austerity if Labour is elected. Quite an achievement for a ‘no nothing’ economist to dictate the direction of economic policy for at least 10 years and possibly more.
Having called George Osborne’s thinking flawed it is necessary to demonstrate these flaws. In 2009 Paul Tucker, Deputy Governor of the Bank of England produced a highly significant but little read report. He expressed concern not about the size of the government deficit but the size of the deficit in the banking sector. Then as now the deficit in the banking sector was just over 500% of GDP, while even today the government budget deficit will peak at 80% of GDP. George has closed his eyes to the potential crisis in the banking sector, where a ‘run on the pound’ will cause a catastrophic economic crisis that has the potential to reduce the incomes of British citizens to less than that of the impoverished Greeks. Is George hoping along with the entire Parliamentary community that nobody will notice this omission in his deficit reduction programme?

There other great flaw is his belief in ‘expansionary fiscal contraction’, one of the most nonsensical phrases coined in the debate on economic policy. His argument is that if the government to fund its deficit has to borrow large sums from the banks, it deprives industry of the money it needs for investment. Therefore if government borrowing is cut it will free funds for investment and the economy will grow and all will benefit. There has been no evidence of this ever happening (except in wartime), what has reduced the flow of money for investments, is the banks preference for speculative financial activities over long term investment. Banks prefer to lend money for speculation in the commodities, financial, equities and property markets. It this speculation that reduced the money for investment in industry. In fact 80% of all bank loans are to the property market, that is why they have no money to lend to industry for investment. A problem ignored by George Osborne who has preferred to give the banks £200 bn. A programme in quantitive easing, while announcing just £1 bn. for investment in the national infra structure.

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George Osborne’s success recalls to mind that other great non economist who rewrote the economics agenda and that was Ronald Regan. His rival George Bush Snr. denounced his economics as ‘voodoo’ economics, only to eagerly embrace it as Regan’s Vice President. Despite all the evidence to the contrary Ronald Regan’s economic policy was hailed as a success by politicians. He as with George Osborne preached the virtues of small government and he cut taxes and claimed to cut government expenditure. While he cut domestic spending on welfare he exponentially increased defence spending. Billions were wasted on his Star Wars programme. He funded this excessive expenditure through government borrowing and when he finally left office, the USA had its greatest budget deficit ever. George by comparison will by the time of the next election leave Britain with an ever spiralling banking deficit, leaving Britain at the mercy of predatory financiers.

However this essay is written in praise of George Osborne, so I must remain to central theme of why he is a great economist. While I could write about his Machiavellian skills in manipulating political friends and foes, there is a more interesting approach.

Economics is a subject that lends itself to charlatanry, because politicians are desperate for that one policy that will deliver success. When in conversation with economists their normal degree of scepticism is abandoned, they are so willing to believe that the proposed policy is the one that will deliver success. George Osborne must have realised early in his career that any well packaged and presented economic nonsense would sell. He would have had as a prominent politician have seen close up how the Treasury manipulated economic statistics and how whatever sleight of hand the Treasury used there would always be a coterie of economists praising the Chancellor’s policies. The reason economic charlatanry is so widespread is that economists only have the vaguest understanding of how the economy really works. To admit this as an economist would be to invite ridicule and so everybody pretends black is white even if they suspect that black really is black. Modesty is never a characteristic of any economist, bluster is the more usual characteristic. I am not suggesting that economists are ignorant of the working of the economy, so much as that they vastly overstate their understanding of the economy. If I can use an analogy into this pool of preening fish a predatory shark arrived, who realised how easy it would be to manipulate the consensus of views to suit his ambitions.

He would have found that politicians such as Ed Balls who play by the rules of the economic game were easy to manipulate. What any economist knows is that the future is uncertain, so predictions for the future have to be hedged around by ‘maybes’ and ‘perhaps’. Yet George Osborne has torn up the rule book, he knows what the future holds. He has set limits to future spending, including a welfare cap all of which Ed Balls as shadow chancellor has signed up to. If events turn out differently, George Osborne will happily abandon all his pledges giving some plausible explanation. While if Ed Balls becomes Chancellor he will be the hapless acolyte following the master, whatever happens he will stick to George Osborne’s targets.

At it’s worse economics as practiced in the UK is an invented game and those who stick to the rules in this imaginary game will always be at a disadvantage compared to those who have a complete disregard for the rules.