What’s wrong with the economy?

We’ve been sent the below from our friends over at Save Our Savers. They’ve produced a great new primer, ‘What’s Wrong With the Economy?’ in association with the Cobden Centre and the Adam Smith Institute. Even if you think you know what’s wrong with the economy have a read and, after that, pass it on to everyone else you can think of who thinks the 2008 crisis was ‘the’ crisis and the economy is on the mend.

Below is the main blurb introducing the paper, click on the final link to get the full document.

Recovery? What recovery?

A layman’s guide to why the economy is still in a mess.

Despite one set of seemingly encouraging quarterly GDP figures, there is still no real sustained recovery, with the economy flat compared to 12 months ago and the Bank of England’s chief economist expecting a sharp fall next quarter.

It is now five years since the financial crisis began and Bank of England Governor Sir Mervyn King believes the recovery is at least five years off.

Why? How deep is the hole we are in and why are the solutions proving so futile?

Together with The Cobden Centre and The Adam Smith Institute, Save Our Savers has produced an accessible guide to help anyone understand how we got into this mess, what is being done to get us out of it and the crucial questions that must be addressed if we are to avoid financial disaster and restore the economy to health.

The economy affects us all, yet public debate is often reduced to playground-like chants of “austerity” or “growth”. When the Prime Minister, Deputy Prime Minister and even the Chancellor muddle up “deficit” and “debt”, how well informed are the people making the vital decisions about our future?

The better we understand our financial plight, the more difficult it will be for politicians, bankers and economists to mislead us. Ever eager to win votes by spending taxpayers’ money, do our short-termist politicians even understand how wealth is actually created?

Many forecasters expect more Quantitative Easing from the Bank of England in early November. What is it and what effects does it have?

Steve Baker, chairman of the All-Party Parliamentary Group on Economics, Money and Banking says: “This invaluable guide should be essential reading for anybody wanting to make sense of our economic plight, starting with every one of our MPs.”

What’s Wrong With The Economy is available free to read online or download here.

3 comments on “What’s wrong with the economy?

  1. Simon Roberts
    November 11, 2012 at 9:05 am #

    Whenever I read such analyses, one thing always irritates me – the problem is so often referred to as having been incurred by “the British” (i.e. page 5 – “the British went on a borrowing binge”).

    The problem was not incurred by “the British”, it was incurred by politicians (past and present) seeking to ensure election by bribing their client groups with other people’s money. Our current ludicrous level of public spending (a higher percentage of GDP than communist China) exists to fund the welfare state and 7.5 million state workers.

    Someone recently asked me why, if such situations inevitably lead to economic collapse, do politicians continue down that road? Certainly, some governments deliberately expand the state in order to increase their electoral base but even the current government, which actually has an electoral mandate to cut spending, refuses to do so. Is it simply that they are afraid that so many people are reliant on government “services” and state employment that cutting them would condemn the government to never be re-elected?

  2. bpq
    December 11, 2012 at 9:19 am #

    The first 16 pages are fairly solid (although it does look sloppy to repeat the clearly false assertion that Einstein said “Insanity is doing the same thing, over and over again, but expecting different results.”).

    The real problems with this paper come in the summary. If this was a science paper then the end summary, or conclusion, would cause it to fail a peer review. To be specific about the summary:

    1 – “The problem is not a lack of demand, but an excess of debt”

    This is one of the sentences that actually could mean anything when you analyse it. It renders itself useless. Debt needs to be considered against future income. This is obvious if you consider how macro or even micro economies work. To take an extreme example to illustrate the point, if the UK suddenly invented a cold fusion machine then a national debt twice its current size would no longer be a problem.

    2 – “Despite living beyond our means, most proposed solutions involve us taking on still more debt.”

    While possibly true, this statement does not provide any insight. To cut to the chase, lets take our extreme example from above to illustrate the point. What if the UK took on another say, 100bn and used it to invent cold fusion?

    3 – “The only solution to a problem caused by too much debt is to have less of it. Our loans must be paid down.”

    Now the paper is compounding it’s errors. It’s already noted that the paper has not considered debt in context, so clearly this conclusion is far from water tight.

    4 – Savings are being undermined. But savings provide the investment funds without which an economy is incapable of long-term sustained growth.

    This sentence seems to follow from a mistake from page 12 where it was claimed that “…savings are the capital of capitalism. They provide the investment funds for companies to grow, to create jobs and to innovate.”

    This might be desirable, and is often stated in order to simplify undergraduate economics courses, but it is well documented that banks create the vast amount of credit without the constraint of reserves (see for example IMF paper WP/12/202, pages 11-12). In addition, I’d like to understand how it can be implied on page 12 that lack of savings are restricting lending (“[Savings] provide the investment funds for companies to grow, to create jobs and to innovate”), and yet QE money is put into asset inflation. You can’t have it both ways, and so given that QE is causing asset inflation, then why wouldn’t additional savings cause even further asset inflation?

    This could have been an interesting paper, but the unsubstantiated summary undermines it and makes it appear like propaganda. Despite raising some good questions, it seems fixed on the idea that only reducing government debt will fix the problems. I suggest that the authors take a look at their own graphic on 3 and ask the question “What is by far the the biggest debt number in this chart?”. Tip: It’s the number “219%” and it’s certainly not UK government debt.

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