What a confused state economists and central bankers are in these days. One can’t envy them their job – always difficult but apparently now veering towards the impossible.
The latest cause of confusion is the apparently senseless relationship that we are seeing today between interest rates, money supply, employment levels, wage growth and inflation.
Interest rates remain at all time lows, the bank is pumping money into its QE programme and inflation is rising. Yet wage growth and business investment both remain stubbornly low or non-existent. This has everyone confused. Some reactions are reminiscent of what we heard from some economists following the 2008 financial crash – “what is happening out there simply cannot be happening.”
When a whole discipline is based on mathematical equations predicated on one narrow assumption of what it means to behave ‘rationally’, it is maybe not surprising that things start breaking down as soon as they come into contact with the messy real world of human beings, living in a world that is changing rapidly and unpredictably.
When things get complex (and a globalised, rapidly digitising world with changing social values and easier movement of people is pretty complex), it becomes ever harder to believe the output of mathematical models which, however sophisticated, are always simplistic.
The latest salvo from Bank of England Governor Mark Carney is about the impact of immigration on wages. This is a question which, today, is not only one of economic interest but also highly political.
The wisdom put forward by the establishment in the run-up to the Brexit referendum and subsequently is that immigration does not depress wages. This assertion was always met with some scepticism among many – including those at the bottom end of the wage spectrum and people like me. Still, it was the dogma.
Yet Carney is now claiming that a rapid fall in immigration – such as we are seeing today in Britain – risks pushing up wages and stoking inflation. The Gov’nor tries to finesse these apparent contradictions by claiming that this is a short term issue and driven by rapid changes.
He sticks to the conventional wisdom by claiming that a steady long term increase (or decrease) in immigration does not, and will not, have any impact on wages. In this way, Carney tries to square both the economic and political circles.
Far be it from me to attempt to second guess the Gov’nor’s analysis. But that’s not the issue here. Many people are feeling scared about the security of their livelihoods. They previously could look to authoritative figures for confidence that someone has a steady hand on the tiller. But not today. Experts are derided. The government is seen as anything but competent. The world is changing rapidly and dramatically and nobody seems to know what’s going on. Old certainties have disappeared and there is real fear.
This is a very dangerous place to be. It is exactly the place that spawns demagogues and, eventually, autocracy and dictatorship. We are seeing this all too clearly in too many places.
I am not sure where the answers might lie. But I suggest that trying to revert to what went before won’t work. Experts speaking ex-cathedra will not suddenly regain credibility. And neither do they deserve to if they continue to speak with arrogance and a confidence that is well beyond their abilities.
The same applies to politicians presenting themselves as having all the answers while trying to present their political opponents as nothing but blathering idiots. Maybe it’s time we were all honest with people. There is more that we don’t know than that we know. We have to make decisions under much uncertainty. But working together we can steer the ship relatively well. And we can all pitch in when we have to recover from some decisions which, while taken in good faith, didn’t quite work out as we thought they might.
This sort of approach is as far from current political discourse as it can get. Blame, pointing fingers and jumping on any perceived minor mis-step for political advantage is the norm. It’s depressing for us all when even a party leader eating a bacon sandwich becomes front page news if it can be turned into personal ridicule.
Nobody seems to be aware of the extreme dangers of our current brand of politics in an increasingly difficult and, for many, scary world. But we only need to look back to the 1930s to realise what we might be creating for ourselves.