What I learned this summer

British politics has been providing some fascinating viewing recently. In particular I've been spending more time than ever reading political and economics blogs, and even the odd textbook, since the General Election in May.


(Central importance of economics. And relation to physics. My intellectual journey.)

(Terrifying thought that the govt has not actually been bothered about causing real pain and impeding the economy to the tune of 1 trillion pounds, in the name of a political conviction that flies in the face of daily evidence -- even the evidence from their own watchdog)

(Country is not a household)

(Why is private debt worse than public?)

(I never realised that people vote for themselves; I never have)

The thing that's most captivated me is how as a country we voted fairly convincingly for a party which told serial untruths about our collective economic state of affairs, and got away with selling the opposite of established, evidence-based macroeconomics as if it was inarguable prudence.

And since the election, the Conservatives have turned out -- as if it were even remotely surprsing that this should be so -- to have a rapacious appetite for cutting things that they either promised to protect, or weasel-worded around during the campaign. And guess what, the promised extra childcare allowance was immedaitely pushed back to the end of this parliament (if ever), and the double-talk of a "7-day NHS" amongst "efficiency savings" doesn't really stack up. Well I never.

We certainly get what we deserve, but did we really earn this situation? Humans may not be the robotic rational actors beloved of undergraduate economics [On which note, I've found that it also loves triangles -- curves and integration are too hard, you see. Oh what I'd give for an economics textbook that serves the mathematically conversant.] but it would be doing the electorate a disservice to completely discount their decision-making abilities. But that requires that the information we're presented with be of good quality, and the media manifestly failed in that respect.

We should, if sceptically armoured, expect the majority of the print media to be compromised, but that the state-owned BBC failed to alert its audience to the disconnect between government economic narrative and the opinion of the vast bulk of macroeconomists beggars belief. Even the news that the IMF and the UK government's own Office for Budget Responsibility credited austerity with damaging Britain's economic recovery after the 2008 crash made nary a dent on the media and hence public consciousness. Simon Wren-Lewis has written very convincingly of how the election was won by "mediamacro" -- the consistent presentation of austerity as economic consensus when the exact opposite was true, until it became the accepted norm. Ed Miliband was berated for not mentioning the deficit at a time when other countries were not at all concerned by their much larger ones.

The deficit was a convenient political red herring to justify cuts, and it's one that we swallowed compliantly. The moment when Miliband's argument that Labour didn't overspend before 2008 was shouted down angrily by a television audience member -- "yes you did!" -- was where it was most obvious that it had all gone wrong. Rather than stand his ground and use statesmanlike gifts of passion, rhetoric, and er, fact to turn the moment, Ed capitulated and most of Labour has been wallowing in contrite austerity-lite speak ever since. Some of them may even believe it. There _is_ a case that Labour mildly overspent -- through the boom years Keynes would have advocated running a small budget _surplus_ but Brown kept postponing identification of the point in his infamous "economic cycle" when that should have happened. Actually checking the numbers shows that Labour's overspending was not extreme and _certainly_ didn't cause the crash, but the bulk of the deficit came from the country's automatic stabilisers responding to the crash -- and due to the perverse economic policy pursued through the Coalition years we are still not back to where we were at the end of those allegedly profligate Labour times.

I think a significant factor in how the country got hoodwinked is hard-coded into the British psyche. It's rooted in the national feeling that it -- whatever it is -- is probably our fault. Sorry. You could see when Mr Yes-You-Did got so flustered, that he Really Believed that Labour had overspent. A quick Google for a UK deficit time series graph would have sorted that out, but there was no need to check because he Knew. We had earned it, you see: the narrative that it was our fault and now we're paying the price is almost irresistable to Brits. Which is peculiar because it really seems to me like the sort of self-flagellating we-are-but-worms logic that Catholic theology does so well, and Britain is if anything one of the world's more secular states -- but maybe that's because even we can't handle the combination of our depressive national psyche and a religion that thrives on generating guilt and contrition.

It's also very British to not belive the alternative story. That as a nation with our own sovereign currency we are able, at some level, to print money and buy our way out of our own debt. That seems like cheating. Not cricket. A definite feeling of sleight of hand going on.

But that feeling is somewhat more understandable. It's like believing the world to be flat -- based on local observations, a parochial observer of nature could reasonably conclude that the world is, if not perfectly flat, at least quite a decent approximation to it. You have to go beyond common everyday experience to get the global picture that shows the local one to be so much horse manure. Money is similar: pretty much everyone thinks they know what it is based on personal experience, but that's just the local picture. In personal experience money is conserved: your employer gives you some, so you now have it and they don't; you spend it, and now you don't have it and some shopkeeper does. Zero sum. Conserved. And let's not think too hard about why people will give you useful things like food, TVs and cars in exchange for what are actually just bits of slightly fancy paper...

The global view in this case is that money has evolved since the 1600s when trans-European trade and the emergence of financial centres started to erode the inconvenient old system of actually transporting quantities of rare minerals around the planet in order to exchange them for commodities. Barring a sudden discovery of vast gold, silver, or precious stone reserves in a mountain or cave somewhere (and an intelligent miner would keep schtum about that and certainly not dump it all on the market at once), money back then was pretty much the intuitive zero-sum quantity. But the arrival of fiat currency -- money which only has value because an institution, namely a government, says so -- changed the nature of money on a large scale. Fiat currency is a con trick at some level: it only works as long as people believe in it. If all the debts that had to be created to put money into circulation were to suddenly and spontaneously be cancelled, the whole system would whimper out of existence. But that doesn't happen. It feels to me like there's a parallel with entropy going on here: sure, that solution is possible, and indeed all the particle quanta in the universe could just resolve themselves back to the vacuum state -- but there is essentially only one way for that to happen, while there are umpteen gazillion ways for the money machine to keep on tumbling, tossing, turning, and generating emergent behaviours for the forseeable future.

A neat thing about this crazy con world of financial collective excitations is that if people will sell things, including their own time and effort, in exchange for that special paper, then a monetarily sovereign government can make more of that paper to get people to behave in a way that is collectively useful to the economy at large. For example, we are still effectively in a recession -- not technically, according to the politicised definition cooked up by Nixon, but certainly a heck of a sustained slump with zero interest rates, zero non-housing-bubble inflation, and still-high unemployment. Since the rates can't go lower than zero without people just taking their money out of the banking system altogether, attempting to solve the stagnancy problem by interest rate changes isn't an option. Notably, there's evidence that businesses and the rich are not even doing the beneficial investment job that capitalism is meant to do [Note, it's _long-term_ investment that returns social value. This fact seems to have bypassed the starry-eyed fans of financial markets when things went the way of high-frequency trading and short-selling.], and are just hanging on to their cash reserves at present. This is precisely the situation in which it's the role of the state to step in and provide financial stimulus to engage the unused capacity in the labour market. And it can do so via the con trick -- but a useful one -- of printing more of that special paper.

In practice this mechanism -- quantitative easing -- is conducted via a lot of fiddly technical apparatus, such as issue of government bonds with particular rules, which may or may not be immediately bought by the central bank in the partial fiction that it is separate from the government and has simply spontaneously decided to do so, but the big picture is: It's Money, But Not As You Know It.

Docutils System Messages

System Message: ERROR/3 (<string>, line 126); backlink

Unknown target name: "term".


Comments powered by Disqus