Does the economy actually matter?
24 December 2017
TUMBY BAY - I can’t say I know much about economics and I’m not sure I really want to but we are so constantly bombarded by it in the media that perhaps I should.
If we believe the economists and politicians the economy is the be-all and end-all of everything we do. It is, so it seems, the very reason for our existence.
At this point it might be wise to remember that it takes something like 6,387 economists to change a light bulb. I don’t know how many politicians it takes. Maybe we need a royal commission.
Anyway, Donald Trump has just given the corporations in the USA a massive tax cut. 35% down to 21%, which is apparently all they were paying anyway thanks to those smart lawyers.
That aside, he says it will make America great again. Again.
Our own politicians, Turnbull and O’Neill, also tell us that it is their sacred duty to get rid of debt (which is Trump is plainly not doing) and strive for a budget surplus. For this purpose they draw deft and erroneous correlations between the nation’s budget and household budgets.
Deficit budgets are political death apparently.
They also constantly tell us that fixing the mess that the last lot left behind is paramount and growing the economy is axiomatic.
Once that is done, we are assured, it will rain milk and honey on everyone.
This kind of economic evangelism can be mesmerising for the average punter, especially around election time.
So what does it actually mean? Does it actually mean anything at all? And, if so, does it really matter?
Before we try to answer those questions we’d better attempt, in our clumsy way, to define what they are actually talking about.
Unfortunately, the experts either don’t really tell us what the economy is or they offer confusing and conflicting definitions. What they do tell us, however, is how to measure it.
According to the good Doctor Google, “a country's gross domestic product or GDP is a measure of the size and health of its economy.
“It is the total value of goods and services produced over a specific time period. An annual GDP growth rate of 3%, then, simply means that the economy has grown by 3% over the past year”.
Interesting goal, to keep the thing, whatever it is, growing, like a pot plant. Plenty of sunshine, water and the odd bit of fertiliser. And the pollies are never short of fertiliser.
But isn’t whoever wrote that just talking about corporate growth. No mention of actual people individually increasing their production (and wages).
And what about all the other stuff people need?
You know, well-being, access to services, equality, health, security, leisure, a clean environment and all those other freedoms. Aren’t they part of the economy? Apparently not. Is that strange or what?
Ah! Of course. If the corporations grow and make lots of money they can pay more taxes which the government can spend on its people.
Except Trump has just reduced their taxes and Turnbull and O’Neill are talking about doing the same thing. How does that work?
Something called ‘trickle down’ I’m told. If the corporations make more money they can employ more people and pay higher wages and everyone benefits.
Not sure about that. What about all those robots? Aren’t they saying they can bring their factories back from low labour cost countries and set them up with robotics?
More jobs for robots? How does that trickle down? Oh, into the pockets of the bosses. Now I understand.
Didn’t the guy who invented gross domestic product (GDP) to measure the economy, one Simon Kuznets, say, “The welfare of the nation can scarcely be inferred from the measurement of national income”?
Okay, so that line of thought is a can of worms. Let’s try something else. What about this budget surplus/deficit stuff?
Back to the housekeeping analogy.
If you are a family it makes sense that the less debt you have the better.
Unfortunately, for many families, there are certain debts that are unavoidable. Having a mortgage on the family home for instance.
The key here is not so much avoiding debt but managing it well so you don’t get in too deep. A long range plan is a good idea.
This juggling act is standard practice for most families, especially younger ones.
Now let’s look at the government, which is supposed to maintain some basic services for its people, just like Mum and Dad do for their kids.
Which begs the question: why do they have this single-minded obsession with getting into surplus? With an attitude like that something has to give.
So what will give? You guessed it. Dear old average Mr and Mrs Citizen. Certainly not the corporations.
So, does cutting essential expenditure on schools, hospitals, infrastructure and so on in pursuit of a balanced budget make sense?
Does cutting the corporate tax rates so government is receiving less funds to spend make sense?
I think it does to the government and the corporations lobbying for the tax cuts but not to the average punter trying to get by.
I would have thought that having poorly educated people who are unhealthy and living with crumbling public infrastructure would actually weaken the economy, not strengthen it.
Wouldn’t having a productive, vibrant and dynamic workforce eventually take care of any deficit?
Who knows? I certainly don’t, I’m still confused.
I think the answer to all those questions I posed is: it depends on who you are talking to. What makes sense to the economists and the politicians may not actually make sense to anyone else.
Sorry about that.
I would refer to the stock market as a dog track rather than a glorified casino. In the past two years take a look at franchising in the retail sector and the corporate impiety involving 7-Eleven, Domino Pizza and most recently RFG.
Its chthonic executives are no better than many of the untermensch found at a local dish lickers track.
Posted by: Bernard Corden | 25 December 2017 at 10:46 AM
Worth a read:
Posted by: Bernard Corden | 24 December 2017 at 08:12 PM
The great secret of economics is that no-one actually knows what the economy is, much less how it really works.
The so-called "dismal science" is, in fact, not a science at all. It is simply a branch of history, whose practitioners struggle to understand how something so fantastically complex as "the economy" actually works.
Economists have developed a few algorithms that explain things like money supply or the relationship between supply and demand and they have invented useful if sometimes misleading concepts like Gross Domestic Product. These merely create the illusion of science, not the reality.
The true test of any science is that its theories can be used to predict future events, not simply explain the past.
For example, the standard theory in quantum mechanics, a branch of physics, has been unfailingly successful in predicting how things should work at the sub-atomic level and repeatedly demonstrated its value in many areas of scientific endeavour.
In a similar way, Newton's Laws have proven to be extremely reliable in predicting how objects in motion will behave.
There are no equivalents to be found in the economics. Economists are today's equivalents of alchemists, forever engaged in the search of the proverbial Philosophers Stone that will explain everything.
Politicians have compounded the disaster that is economics by laying claim to the notion that they somehow have control over the economy. They are quick to claim the credit for any apparently beneficial economic development and equally quick to explain how anything bad has nothing to do with them.
The ugly truth is that politicians never have, don't now and never will control or manage the economy. Their claims to do so are "maus wara tasol".
At best, they can exert some influence by manipulating the money supply through budgetary or taxation policy or even by simply printing more money (disingenuously called "quantitative easing"). This can produce short term changes but the long term impacts are invariably difficult if not impossible to predict.
We are now routinely subjected to a barrage of supposedly informed opinion about the state of the economy that frequently is about as useful as a form guide at the races.
The state of the stock market, which all too often is nothing more than a glorified casino, has somehow come to be regarded as an important predictor of the economy's health. This is despite the fact that history shows that the stock exchange is invariably the last place to realise what is actually going on in the economy.
If you want evidence of this just read "The Big Short" by Michael Lewis, in which he graphically describes how the so-called experts in the world of finance completely failed to understand the true origins of the Global Financial Crisis until it was far too late to save themselves without massive government intervention.
So, whenever you hear a politician opining about the state of the economy, you can be pretty confident that he or she is basically clueless but wants to create the opposite impression.
The only certainty in modern, neo-liberal economics is that it is the little people who end up being screwed when the proverbial hits the fan. Then we are all called upon to dig deep to rescue the big end of town from yet another disaster perpetrated in the mindless pursuit of wealth at any price that we call capitalism.
Posted by: Chris Overland | 24 December 2017 at 10:20 AM