Economic Illiteracy

With some frequency I come across instances of economic illiteracy, usually from politicians and commentators, but, alarmingly, sometimes from economists themselves. Here are some examples:

“It’s unfair to saddle* the next generation with debt”

This one became popular in certain quarters when it was pointed out that the best way to restore government debt to an acceptable level would be to borrow a little more in order to stimulate growth through fiscal expansion. In other words the argument amounted to suggesting that austerity was counter-productive in achieving its declared aims. Ben Chu argued persuasively that this was yet another of Krugman’s ‘cockroach ideas’, but a piece in the New Statesman came a little closer to exposing the contradictory economic illiteracy of this point of view. In a market economy (as championed by the proponents of austerity), isn’t there a transactional ethic whereby we pay for what we get? So is it fair that future generations should inherit all the social capital and public infrastructure (Roads, railways, utilities, education, justice etc. etc.) that we create for them, all without expecting to pay for any of it? Should it all come free and gratis to the next generation? If the answer, on grounds of fairness, is ‘no’, then debt is merely the price that future generations need to pay.

* And isn’t that delightfully prejudicial use of the term ‘saddle’ a sly piece of question- begging?

“Labour spent too much”

From 2010 onwards this claim took a number of forms. A mythology of financial irresponsibility in the years leading up to the 2008/9 financial crash was created from 2010 onwards. In large part this was allowed to happen because Labour had somehow decided that Gordon Brown was electorally toxic after losing the 2010 election and as a result no defence was offered to the charge that Labour’s financial irresponsibility was somehow a a contributory factor to the crash. In 2012 Rumesh Patel joined other commentators in refuting the claim that ‘Labour created the biggest deficit in the developed world by overspending.’ This came too late, the myth was embedded and in 2015 Chuka Umunna was saying ‘So, yes, we should start by acknowledging that, in hindsight, after 15 years of economic expansion, we should not have been running a small but historically unremarkable deficit going into the 2008/9 crash.’ At the same time Liz Kendall’s view was less nuanced. She simply said that Labour had spent too much. By then it had become yet another cockroach idea, unable to be effectively challenged despite all the evidence to the contrary.

Osborne and the regions

As Chancellor of the Exchequer George Osborne offered the view that certain regions were economically challenged because they had become too dependent on the public sector as a source of employment. South Wales and the North East were put forward as leading examples. Osborne’s bizarre analysis became part of the justification for inequalities in the application of cuts in government spending: local government in places like South Wales and the North East was deprived of funds to a far greater extent than the (Tory voting) South East. South Wales and the North East had suffered economically from a historical decline in mining and heavy industry. Moving government functions such as the DVLA and HMRC out of the economically overheated South East and into these regions had been one of the few regional policy successes of the post-war era. Of course there was ‘disproportionate’ dependence on the public sector – that was the whole idea! Osborne’s economic illiteracy in apparently misunderstanding this was nothing short of breathtaking.

“Building more homes will not solve Britain’s housing crisis”

Ann Pettifor’s 2018 piece in The Guardian argued that the UK’s housing crisis is not caused by an excess of demand over supply, but rather by the fact that property has become an asset class and is subject to a Bitcoin-like bubble effect that prices buyers and renters out of the market.

In the first place I am struck by the sheer incoherence of her argument Read it carefully. She slides effortlessly between the national picture, examples drawn from the London market, and back again. It is as though solving the London market’s speculative bubble will somehow magically solve the national problem. The London market is exceptional, but its issues are not replicated elsewhere. There is a strong argument for direct action (limiting foreign investor ownership, taxing gains in value etc.) within the M25, but this is not necessarily the answer outside the M25. In any case, a cautious approach to this would be wise, for fear of moving the speculative focus outside the M25. Pettifor manages to ignore the main reason why property has become an attractive asset class in the first place; shortage of supply guarantees capital gains and strong rental income, it really is as straightforward as that.

As part of her argument Pettifor calls on the fact that data shows there to be an excess of dwellings over households. As evidence goes this is about as specious as it gets: the data could just as easily be used to show that there is a shortage of affordable housing; in any case it would be a strange state of affairs if there were an excess of households over dwellings! We know that the private rental sector has expanded, but it is equally true that multiple-occupancy renting disguises the number of people who actually want to constitute a household.

I have written in some detail about how the housing shortage damages the UK economy. I am not advocating merely increasing supply without ensuring that new homes are created in the places where demand actually exists. Nothing in Pettifor’s piece changes my view, either of the problem or its solution.

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