Knifonomics (part 38): if you can understand this…

…then you can probably understand a large chunk of what matters in practical management of the economy and allied matters. So much economics is rubbish, witness the terrible track record of academic economists when they issue their fatwas on Maggie, Brexit etc.

The other consistent issue is the abuse of JM Keynes’ thinking and advice to justify almost any stupid politically inspired policy (see the last Labour administration). As it’s been pointed out:

Keynes was determined to establish for the post-war world a global exchange rate regime that placed equal obligations on deficit and surplus countries to adjust, thereby ensuring that the new system did not have a deflationary bias. This is most definitely not the system that we have today.

The extract is from a very good article by City economist Roger Bootle and businessman John Mills (a Labour supporter), both of whom have long argued that the pre-Brexit overvaluing of the pound has beeen very bad indeed, and that the current correction is essentially good **. The whole piece is sound, but here’s a key paragraph, looking at the basic concepts:

Moreover, there are links between the current account deficit and the UK’s other serious deficit, namely the fiscal one. The financial balance of the UK private sector, UK public sector and the overseas sector must sum to zero. Accordingly, if the government tries to improve its financial position (i.e. the gap between expenditure and tax revenue) without there being an improvement in Britain’s overseas balance, then this can only happen through a worsening of the private sector financial balance, which is often difficult to achieve. Another way of putting this is that policies of austerity often fail. By contrast, a spontaneous improvement in the current account of the balance of payments would usually improve the financial balance of both the public and private sectors. Higher incomes (from net exports) would automatically improve the financial balance of the private sector and, as they pay taxes on this income (and receive fewer state benefits because of increased income) the public deficit will fall.

You don’t have to agree with them***, but as a context in which to discuss the detail, it’s spot on.

tiltoninthedowns
I’m unable to show you the grave in which JM Keynes would be spinning, frequently. His ashes were scattered here, at Tilton Downs

** see also the straightforward and prophetic Larry  Elliott, saying much the same thing

***and in fact, the astute and readable Tim Congdon by and large disagrees. Read his response to Bootle and Mills. At least the debate is healthy

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