While listening this morning to an early morning radio programme I was struck by one of the comments made by the broadcaster. This comment was made during a discussion of the economic consequences of Brexit. She said will it matter if the UK falls from being the seventh largest to the eight largest economy in the world? This is an example of the typical remarks made by a member of the economically illiterate media.
Nobody with any understanding of economics wants a modest downturn in economic activity, because that modest downturn can easily turn into a catastrophic downturn. What journalists and politicians never seem to understand is that the economy is inherently unstable and decisions should never made that threaten the stability of the economic order. There are times when the economy resembles a house of cards and the slightest puff of the economic wind can send it tumbling down. Yet there are other times when the economy seems to be as a house built out of granite and is impervious to any economic storm. The problem is that it is difficult to tell before an event whether the current economy is structured like a house of cards or a house of granite. Only a fool would start an economic downturn, as history all too often shows that minor downturns become major ones. Unfortunately for the British people the political and media classes seem to filled with these economically illiterate people. Typified in the figure of the politician Michael Gove who during the Brexit debate said people where fed up of experts (economists) and did not need to heed their advice.
Politicians and journalists have forgotten that the collapse of the 2008 started when a minor bank Northern Rock collapsed. This collapse exposed the fault lines in the financial markets which led to the catastrophic collapse of the banking sector. It would have been more accurate to use an example from the USA but my knowledge of which minor bank there presaged the collapse of the banking system there is lacking. However what I wrote about the UK economy is true of the USA. The collapse of these minor banks would have had minimal impact on an economy that was sound, but as the economy was of a rotten construction it brought the house down.
The first fact to establish is that the British economy is far from being strong, it is in a fragile and perilous state. The Bank of England has recently reduced interest rates to a new low of 0.25% to offset fears generated by Brexit which threatened to destabilise the economy. Prior to that the Bank of England has had to keep rates at 0.5% for several years. In a healthy economy interest rates of 5% or more would not destabilise the economy, whereas in a weak one a rise from the previous low of 0.5% to 1% would threaten to tip the economy into depression. The merest hint of a rate rise in America caused a minor financial panic.
The decision to leave the European Union (EU) is one such destabilising factor. After the initial vote there was some panic in the financial market and the pound fell to record low levels against the dollar and the Euro. If one major Japanese car manufacturer now located in Britain were to announce the cancellation of a major investment project, this would negatively impact on business confidence and could lead to copycat cutbacks in investment projects which would could lead to a recession. Nobody really knows which lever will be pressed which would start a major economic downturn in the UK, what can be said is the uncertainty generated by Brexit has revealed many potential vulnerabilities in the UK economy each of which could lead to a major downturn.
When an economy is on its knees, what should not be done if the economy is get back on its feet, is give it a metaphorical kick in the teeth. This is exactly what the ‘vote leave’ politicians and their supporters in the media have done.
What this journalist had in mind was probably the modest falls in national income predicted by economists when accounting for the expected increase in inflation caused by the fall in the value of the pound. The expected fall in income will be between 3% and 7% (Wyn Lewis ‘Mainly Macro” blog) for somebody on an income of £100,000 it’s a loss of £3000 a year. An unwanted cut but quite affordable. If it was an income of £60,000 it would be a loss of £1,800, again affordable but unwelcome. However for a person on the median income of £27,600 a cut of £828 will mean some bills go unpaid. Those on lowest income bracket who at present are just about able to pay their bills out of their limited income will find a cut of 3% catastrophic. Even with such a small cut in their incomes they would be unable to pay many of their bills. Any greater fall in income would push thousands if not millions into a life of despair and utter misery.
The previous paragraph makes the assumption that the fall in the incomes of all would be between 3% and 7%, but in an economy in which wealth and power are unequally distributed, the powerful (the upper middle classes) will be able to minimise their income loss and ensure that the less powerful take the greatest hit to their incomes. Broadcast journalists at least those who are national broadcasters on a BBC radio programme can bargain for increased incomes to offset any cut in their income due to rising inflation. The BBC would not want to lose a well known voice or face, as they know these well paid journalists could easily find employment elsewhere. This years pay cut (inflation imposed) of £3,000 can be next years pay rise of £3,000.
The position for a person in the precariat, such as self employed delivery drivers or care workers on zero hour contracts will be dire. They are in weak bargaining position and will have to accept in full the cut 3% cut in their real wage. Demanding a pay rise to offset the fall in their real income caused will likely lead to the individual being unemployed, as the employer can find alternative workers willing work for the now reduced income. The government in response to falling tax revenues caused by the falling national income will cut in work welfare benefits such as working tax credits. Resulting in a further fall in income for these workers. The businesses who employ such workers will be experiencing falling sales and to maintain the income they derive from profits will make further cuts in wages. Whatever happens to this much larger group the sheer volume of their numbers mean that the cuts to their income will substantially reduce the national income, leaving scope for above average pay increases for the lucky few.
To conclude ignorance is the new black, when speaking about the economy as Michael Gove said you don’t need to be an expert. Whatever is the received opinion at the dinner parties in Notting Hill or whoever the well-off congregate for social events, is the truth about all matters economic. People can without any sense of shame boast that they are terrible at maths, people ignorant of economics don’t even feel that minimal shame. The billionaire who approached David Cameron at a social event who said that the solution to the UK’s unemployment problem was to abolish the minimum wage represents the sophistication of the level of thinking in this group.