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.
In particular, Simon Wren-Lewis' [Mainly
Macro](https://mainlymacro.blogspot.com/) blog on macroeconomics and
particularly the "deficit fetishism" of the previous government (as a
stick with which to beat Labour for being in power during a global
crash) has been a profound influence in my finally growing up and
learning a bit about how economics works.
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. So naive narratives
about fiscal prudence need some serious updating, lest we cause
ourselves serious harm in the name of applying common-sense rules to
the new situation where much of our "debt" is owed to ourselves, and
much of the rest is actually private savings. Can we be that sensible?
And will the mainstream news media manage to keep up?
(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)