Martin Wolf has become the commentator amongst commentators during this recession. An FT subscription is almost worth it for his column alone. As he says this morning (and I quote very selectively):
In the OBR's November forecasts it further lowered potential output at the start of 2016 by 3.5 per cent. As a result, my colleague Chris Giles has estimated that the level of potential output forecast for 2017 is 18 per cent below that implied by the 1997-2008 trend. This is a huge fall.
That means we're likely to be more than one pound in six poorer than expected in 2017.
Now, somewhere, deep down, I have a sneaking suspicion I welcome some aspect of that. After all, in the Courageous State I call for finance to be curtailed, and no doubt that would for a period reduce GDP - as it is clear it contributed far too much to our national income in 2008. So, let's not take numbers at face value alone, there's always more to them than that.
And there is, as Wolf notes:
[I]t is unclear what economic forces are causing the reductions in potential output that the OBR and other forecasters believe in. In explaining the collapse, the prime piece of evidence is the declining level of productivity. This is startling: output per hour in the whole economy was 1.7 per cent lower in the second quarter of 2011 than in the fourth quarter of 2007.
Again, this needs interpretation: the reality is that if productivity had been maintained we would now have hundreds of thousands more people unemployed. And you never know, what we may be seeing is a real shift in attitudes that says people are more important than machines. We may also be seeing a shift to services, and Baumol's law virtually guarantees reduced productivity when that happens. So again, this may not all be bad.
But as Wolf also notes:
Yet these persistent losses may not be inevitable, but rather be the fruit of policy choices.
He's right, of course. The fact is that policy is constraining demand, and threatening profit. The almost inveitable consequence is a decline in productivity. And as Wolf puts it:
The priority, then, should be policies that raise investment, in both corporate and public sectors. It remains difficult to understand why the government cannot take advantage of today's low interest rates to expand investment in income-generating assets. Again tax cuts that would directly add to employment must make sense.
The conclusion I draw is that we do not understand the causes of the UK's falling productivity and should not assume lost output is permanent. Above all, the aim of policy is to ensure it is not. The country should accept such radically reduced circumstances only if sure they are inescapable. It cannot now be.
I agree. It's perplexing to be in a situation like this, where the glaringly obvious is not being done.
Mind you, I'd add a rider to Wolf: the incidence of the investment - ensuring that the impact is for employment and with greatest rewards to those lower in the income distribution, is vital. And that is possible too.
So why aren't we doing that? Could it be that it's because Cameron is only intent on saving the City?
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We are not “poorer”. Poorness is defined by net worth. You are talking about measures of income. Since approximately one sixth of all GDP was financed by government borrowings Wolf’s numbers sound about right, but we would only have been “richer” if we ignored the associated borrowing.
Most people have for all practical purposes no net worth
Your logic is completely wrong
Poor is a measure of relative income
And government borrowing in 2007 was 3% of GDP and all for invetsment and total less than 40% of GDP – so your logic is utterly flawed
To a degree. But isn’t the unspoken truth that in a world of increased technological development (or efficiencies) and limited (and increasingly cherished) natural resources, endless economic growth is neither necessary nor desirable. Most of the growth we have seen goes on nonsense: the £3 cappucino, the £400 smartphone, £30 a month on Sky TV.
Surely as part of any debate we need to discuss what sort of society we need and whether we need a measure other than crude growth. As I have mentioned before, if more people grow their own veggies that reduces economic growth and yet is on every sensible measure a good thing.
I know you don’t like people comparing national budgets to household budgets. But isn’t a fair comparison between the current state of Europe and the person who had a well paid job in the city and has lost it. That person could completely rethink his life, do a different job, something that pays less but is more rewarding. But at the moment, the debate is fixated on how to get the job in the city back.
I’m pretty sure that Krugman pointed to a similar debate in the US- where he rubbished the idea that their employment problem was structural (i.e. not a whole economy demand problem)…
http://krugman.blogs.nytimes.com/2011/02/12/structural-impediment/
As he said (I paraphrase) it was just another ad hoc non-evidence based excuses made by pseudo-economists as to why we should do nothing.
How much money money was being extracted from inflated houses each year before the bust? this is not coming back, GDP is a poor measure of individual financial “wellness”.
Hm, and who was extracting a great deal of it? Well banks via mortgages.
Oh, and the really clever ruse was that it was banks by creating excessive credit which pushed up house prices in the first place. Very few economists, apart from Michael Hudson, have cottoned on to this. I guess that’s because of ‘land blindness’.
great point, land values are a great indicator of housing bubbles, when skyscrapers start to sprout a collapse soon follows.
Carol Wilcox I have a list below of people who saw this crash coming and had the correct explanation of why it was coming.
People who saw the economic bust coming and explained what caused it. Martin Wolf seems to be absent
Steve Keen
Nouriel Roubini
Dean Baker
Joseph Stiglitz
Ann Pettifor
Robert Shiller
Paul Krugman
Michael Hudson
Wynne Godley
George Soros
Kurt Richebächer
Jakob Brøchner Madsen
http://www.investorhome.com/predicted.htm
So?
You never made a mistake and learned from it?
I have
I have also made mistakes,
You have missed off all the hedge fund managers that predicted it and made a fortune from it…
The simple fact is that much of our GDP pre the crash was illusionary, and hence were the tax revenue assocaited. Hence the spending off the back of it (which doesn’t look so bad measured against that inflated GDP) was a disaster for which we are paying now.
AsRichard has said before, we need a reallignment back towards actually producing stuff and not living the new labour fantasy of cool britaania all working in services and media.
The list is of people who saw it coming and explained the reasons for why a crash would occur, I am not sure how many hedges publicly explained the causes and results of the bubble to the public.
People Like Martin Wolf are in their position because of their subservience to the power establishment. J K Galbraith in 1975. He said that: “The study of money, above all other fields in economics, is the one in which complexity is used to disguise truth or to evade truth, not to reveal it”.
Please don’t forget Fred Harrison, author of the 2005 Boom Bust, House Prices, Banking and the Depression of 2010.
“THERE IS NO MEANS OF AVOIDING THE FINAL COLLAPSE OF A BOOM BROUGHT ABOUT BY CREDIT EXPANSION. THE ALTERNATIVE IS ONLY WHETHER THE CRISIS SHOULD COME SOONER AS A RESULT OF A VOLUNTARY ABANDONMENT OF FURTHER CREDIT EXPANSION, OR LATER AS A FINAL OR TOTAL CATASTROPHE OF THE CURRENCY SYSTEM INVOLVED”
Ludwig von Mises 1881-1973
Yes
And he was wrong on almost everything
We live in a capitalist society (hopefully loving and caring as well) and it is amazing how little time is spent “educating” ALL our children about the connotations of this.
For example how many of us were taught:-
* To read a balance sheet
* The principles of taxation
* Budgeting and forcasting
* Cash flow analysis
* Critical path analysis
* Management by objectives
Instead many of us leave school (and increasingly university) as naïve virgins entering a highly competitive rat race. The UK should redirect “education” resources to clue-up our citizens many of who (often comparatively wealthy people) are incapable of even creating a household budget.
One of the best post I have seen on here
They do.
It’s part of the national curriculum.
At least the kids get some education in the subject.
Now, where did I leave that ipad….ahhh…there it is, the remote for the 50 inch plasma is on top of it…I see the missus is back…and she’s left the cayenne parked over the drive…now I’ll never get the x5 out..
!
Forget the CPA and management by objectives—some basic macroeconomics (and perhaps a bit of economic history) would be very useful!
On the contrary …
CPA is a useful model for life/home/family budgeting
Listing all resources required to fulfil life aspirations will estimate the budget required to formulate both short and long term borrowing/financial planning requirements.
Only by considering the size and duration of loans to finance life style, and the interdependency between the loans, is it possible to factor-in unpredictable eventualities which prejudice continuation before completion… and hold a plan “B” contingency strategy in reserve.
Formulaic perhaps — but also simple, practical and demonstrable in a few easy lessons which given that a young person attends school for at least ten years could be taught in a few days. And even the thickest of people (which surely includes some of us) would at least be given insight into the hazards associated with taking out loans without first analysing the critical path that these loans may take.
MBO is perhaps more formulaic and may have limits in domestic budgeting/planning — but it provides a framework to identify an individual’s life aspirations and how to plan and manage motivational finance.
If a child learns nothing else at school she/he should be taught how to identify loan shark bankers and the prospect of forfeiting a costly house, car or other material possessions.
Otherwise known as living within your means.