economics lecture

I was out at an economics lecture last week, by Erik Britton and Dannay Gabay of Fathom Consulting. They are both former Bank of England economists and bright chaps.

http://www.fathom-consulting.com/about-us/directors/

I am interested in economics, but I've only really studied it at an introductory level, so much of the technical content was going over my head so rapidly that I didn't notice what I was missing. However I do rather take the view that economics is one area where people are arriving at explanations of the past, or predictions of the future, based solely on a handlful of prominent variables. So if they have picked the wrong variables then it does not matter how convincing they are, there is something out there to derail their theories.

I came away broadly convinced that we are looking at a fairly stagnant economy for the next few years. Japan has had a stagnant economy for decades, and there is nothing to say that Europe is exempt from such a malaise. The structural imbalances whereby China is perpetually short of domestic consumption, while the West overconsumes, all the while getting deeper in debt, were bound to end in tears.

The standard economic view is that savings are bad for the economy, while debt is actually good and creates activity. To me this seems counterintuitive. I suppose that it might work if the people taking on the debt were rational operators, if they are not, then it might work if they had a way to cope with the debt burden. In the past increasing GDP, inflation and devaluation were relatively pain free fixes.

This scenario is being unpicked now, we cannot argue that governments are rational, recent events show them to be short term, unpredictable and erratic, unwilling to make decisions, and unwilling to face the consequences of their actions. GDP is increasingly stagnant, inflation at hyper inflation levels is unlikely and unpalatable, while devaluation would be difficult within the Euro, and is only an option until your trading partners attempt it too.

The challenge going forward for government is to rebalance the economy and their role within it. For an individual it is always easier to budget when you know you will get a pay rise next year. It is when you move onto a fixed income that things really start to get difficult. It is impossible to be on a fixed income without some element of austerity creeping in.

As a country we are going to have to get used to living on a fixed income. We are going to have to make real decisions on what priorities are. The debt burden now is equivalent to the burden at the end of the second world war. Back in those days austerity meant rationing!

For the long term it seems likely that developed countries will face a low level of GDP growth. We are not going to be poor, but you cannot keep growing forever.

Perhaps what we need is dull managerialism, government that is increasingly competent, rational, capable of making decisions and learning lessons. A government that has a firm grasp on the back office costs, that is crisp and effective in making decisions. Government that manages its money like a canny pensioner, rather than some highflyer waiting his next bonus.