Coffee House

The poverty of economics

9 October 2012

The IMF’s growth downgrades will make tomorrow’s newspaper headlines but the more striking point is its decision to massively rewrite British economic history. As Citi’s Michael Saunders notes (PDF), the IMF now believes that UK economy was massively overheating in the boom. What we had thought was normal growth was, in fact, crazy exuberance.  Britain’s economy was more overheated by any in the G7, the IMF now tells us. Things were worse in 2007 than in the ‘Lawson boom’. Had we known about this overheating, of course, it ought to have been remedied by an interest rate rise. The asset bubble might never have been blown and the cheap debt party (in which the bankers were bartenders, not organisers) might never have got so out of hand.

No metaphor involving horses and stable doors could do justice to this tragic failure of economics, or express its uselessness as a warning system. Most economists know this and joke about their ‘dismal science’ — but the danger comes when people forget that fact. The Bank of England set Britain on a cheap credit binge, thinking they had found a holy grail of stability because CPI inflation index was stable. But this was all based on an outdated economic orthodoxy, one that didn’t factor in freakish shocks like the deflation from globalisation. The result is what we now know to be a near-fictitious account of UK economic stability.


And today the Bank of England is conducting the biggest Quantitative Easing experiment the world has ever seen — telling us not to worry because the economic consensus says it’ll all be fine. Maybe so. But when the IMF rewrites history like this, it should be a warning: economics is, as a social science, fundamentally flawed. You can’t predict the future: there are too many variables. Policymakers are at their most dangerous when they forget that economic forecasts are just educated guesses – the truth can, and often does, lie elsewhere. Banks and governments placed such calamitous debt-fuelled bets in the boom years because they were assured that they were not, actually, boom years but some kind of great moderation. The end of boom and bust, etc. Too much faith in faulty econometric models was a major cause of crash. Or, I should say, a cause of the  bubble – which was always going to burst.

The moral now is that we should take all forecasts and assurances with a massive pinch of salt. The Bank of England ought not to be so cocksure about their forecasts when they’re justifying the printing of all this funny money. Economics has not caught up with the globalised economy: the tools at our disposal are insufficient for working out what was happening in 2007 let alone what’s going on in 2012. That’s why the Bank should tread very carefully with this £500 billion QE programme. No one can say with any confidence how this massive gamble will end.

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  • Nigel

    Lets face up to the most scary economic prediction that you could bet your house on. With a deficit of £100+bn and going up even in these austere times the UK will not able reduce the size of its credit card in my lifetime with the current political consensus i.e. do as little as possible to avoid upsetting the electorates vested interest representatives. Nor will the US or any other western economy. So how does that make the future look. Usually wars result! What are we leaving for our children to deal with?

  • tiptoejoe

    From an
    economic stand point Great Britain is experiencing the same kind of recession
    that the U.S has been going through. The U.S has already started a quantitative
    easing program. This can help at first but flooding the market with money only
    makes it less valuable. How can the common man get extra money from the government,
    only to have the prices of goods and services raise because of this program?
    The answer isn’t to print more money unless you have the gold to back it. The monetary
    system that is used to calculate the value of money is being toyed with when
    the governments dose this. Inflation and other ripples of this program spread,
    which leads to more problems. The solution would be figure out how to make the
    country more money. They should look into exporting and importing of goods
    which are in abundant so that they can be taxed. Taxes have never been a good
    thing to the public, but one thing is for sure and that this program will not
    fix anything. its just a way for the rich to stay rich and the poor to stay poor.

  • Nick Kaplan

    Or as Hayek put it “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

  • ButcombeMan

    The IMF may be re writing YOUR version of history and your analysis, it is not re-writing mine.

    What REALLY troubles me, is that you are the top honcho around here and you seem to have had the same, utterly barmy view, of the lead up to the Big Brown Mess, as the Great Leader and Phone Thrower himself.

    Did YOU really believe Macdoom had done away with boom & bust? Were you THAT silly?

    The Great Leader has not apologised, Blair has not apologised either, for letting Macdoom get carried away. Balls has not apologised properly. The Labour Party generally have not apologised.

    The Governor has not explained.

    At least Greenspan HAS apologised.

    Maybe you should too?

    If you thought in 2006 what you are now suggesting you thought, you and people like you, were a part of the problem.

    • HooksLaw

      Brown made Greenspan his consultant and knighted him.

  • pcc

    It was a failure of simplistic policy, in the years to 2007, rather than Economics – in targetting an inflation index and not considering the inflation in certain asset classes such as residential property. It was an obvious issue at the time.

  • bloughmee

    King and Lagarde on the same stage?

    Where was Guido and his sack of dynamite that day?

  • jw collins

    I surely wish we (GB, U.S., The World, would call QE what it really is… is the transfer of value from private hands (citizens) to government hands. Nothing more. Government pumps money into a system it controls, takes the printed money and dilutes the value stored. Nothing more. It’s the coward’s way out. It’s the easy way out. It’s the simpleton’s way out. And of all irony, it’s not a way out at all. It just buys time.

  • dorothy wilson

    If Darling has emerged with his reputation augmented could it be because he wasn’t Chancellor long enough for his plans to be augmented and then followed through?

    • HooksLaw

      The notion that Darling has any sort of reputation is a jest.
      The reality is he did nothing to rescue the UK economy. He simply delayed taking any measures at all and merrily borrowed money and spent to hide the mess until after the election. He refused to spell out spending proposals before the electorate.

  • Mike Barnes

    The economic models are working remarkably well. Read Krugman’s blog everyday and you’ll learn something. He’s been saying why austerity cannot work for about 3 years now, with reason, detail and models.

    Shame nobody listens to him, and we refer to the intellectually bankrupt politicians and their worthless ‘government credit card’ analogies.

    • bloughmee

      Nobody listens to Krugman because he’s a blithering idiot.

    • HJ777

      The only thing you’ll learn from reading Krugman’s blog is that he hasn’t the faintest idea what he’s talking about.

  • Nick

    You can’t predict the future:


    Yes you can. You total up all the debts the government has. Then its obvious they can’t pay, not that they won’t pay.

    Now you look at the consequences of that fraud.

    The left believes that there is a pot of gold called the rich. If only they could take their money, they can keep the ponzi going. However, there isn’t 5 times GDP salted away by Brits in off shore accounts.

    The right think, if only they cut a bit, then there is money for tax cuts. However the overspend is 30% of government spending. On top of that the true debt is 7,000 bn and rising with inflation. They can’t afford that escalation.

    So the prediction is clear. If the state owes you money it won’t pay

    Nothing to do with corporates or bankers. Its politicians.

    • Dimoto

      Thanks for that “forecast”.
      I guess we have to take Fraser’s advice, and take it with a massive dollop of salt.

      • james102

        53% of households in the UK are net recipients of welfare.

        We give foreign aid to India who gives foreign aid to Afghanistan…

        Our political class increasingly behave like aged members of
        the National Union of Students with about the same amount of managerial expertise.

  • Archimedes

    You should probably be more worried about what logic the BoE will follow, if the Fed’s unlimited purchases continue – and all the global monetary havoc that could wreak.

    Keynes suggested monetary and fiscal stimulus in order to avoid a depression. Economists, central bankers and politicians are now using it to achieve a level of growth that they consider satisfactory.

    • dalai guevara

      Bang on, growth measured in a fiat currency that is. It’s the only way out. Cannot wait to hear who will get this year’s Nobel Prize for Economic Sciences. Blythe Masters?

      • Dimoto

        No doubt some obscure American academic, who will then become an instant “economic guru” dishing out incoherent advice to all and sundry.
        That’s what usually happens.

    • Dimoto

      ” … we should take all forecasts with a massive pinch of salt”.

      Spot on !
      Including the witterings of that cabal of resentful French people which styles itself the “IMF”. And to think we backed Lagarde !
      She schmoozed and flattered the far-too-susceptible Osborne to persuade him to cough up, but now the gloves are off – I guess our contribution failed to meet the lady’s ambitions.
      As for the journos who report, magnify and distort every “forecast” from every no-account source, they bear major culpability too.

  • Hilton Holloway

    I’ve been waiting four years for somebody to write that first paragraph.

    Too late now, we all know it was ‘the bankers’ who caused the crash, as opposed to a $9tr property bubble bursting, caused by a combination of too-low rates (set or influenced by the government), the US making sub-prime mortgages a legal requirement and governments expanding spending on the back of massive overheating of the economy…

    • lamby100

      i think it’s a given that all this money printing will lead to a horrendous inflation problem down the road. the question is when, and how bad will the problem be. the BofE are no better than the politicians in kicking the can down the road and the public are still sold the idea that normal growth rates should be around the 2% rate. when this inflation spike does kick in, if we think things are bad now, we haven’t seen anything yet!

    • HooksLaw

      The US democratic government might well have made sub prime a virtual legal requirement but did our banks have to buy all the special vehicles that they were bundled into?

      • the Londonistan bankster cabal

        Yes. Yes, you did. Otherwise, we’d lose status as an international player, and we can’t have that, can we?

        So it’s worth every penny you pay, to maintain our station. It’s your station too, you know. You wouldn’t want to let go of all this splendor, would you? We didn’t think so.

  • james102

    The problem is economics is not a science. The attempt by
    economists to turn it into one, by using mathematical models, has rightly been
    described as ‘physic envy’.

    • telemachus

      Aye but has QE helped anyone but the bankers.
      We know that QE puts more money into the banks but they are likely to hang onto to it to rebuild their finances.
      Hence complaints by small businesses about their inability to raise loans
      Hence we are not growing

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