So, about that GDP. It’s not looking so good, again. And the Financial Times’s blog points us to Dr. Tim Morgan, global head of research for City stockbrokers Tullett Prebon. Dr. Morgan has noticed that the government’s financial plans depend on economic growth, and that it is unlikely that net trade alone can provide enough demand for that growth to occur. Therefore, for the cuts to actually reduce the budget deficit, the consumer sector has to load up on debt. He observes that the consumer is doing quite the opposite.
This is not a surprising statement; after all, this very blog predicted exactly this problem in July, 2010 and re-iterated it several times since then. It is not a difficult problem to spot, either - the basic national income accounting would do it.
However, it’s a pretty common phenomenon that so-called “black swan” events are not unpredictable at all - in fact, they are usually both predictable and predicted. Whether it is considered respectable to predict them or not is another matter, as is whether it is politically possible to act on the prediction. And, of course, all are welcome to the general project of flinging shit at George Osborne.
Dr. Morgan’s argument is good as far as it goes. How far it goes, though, is quite telling. He argues that, on the assumption that the government cuts as far and as fast as it intends to, the public sector and construction are going to be sources of shrinkage rather than growth. Further, with real wages stagnating or falling, the consumer sector and the housing market will also be ex-growth, at least until house prices have got back to the long-term average or below.
That only leaves business investment and net trade as possible sources of demand. Of those two, there is a hard upper limit to the contribution from exports because the export sector is a relatively small sub-set of the whole economy. Given all this, it hardly looks like the right time to invest.
He concludes, therefore, that we are all doomed and nothing can be done except to go short equities and dig a hole in the ground (I paraphrase).
The problem here should be obvious. That the public sector must cut at the ferocious pace the coalition demands is not a law of nature, as pitiless as entropy and as well defined as e=mc^2. There is no evidence that anything would have stopped us from following the Darling plan, in which case things would be at least 50% less bad, or perhaps the example of the Clarke-Brown consolidation in the 1990s.
The other one is even more fundamental. Morgan talks about the “debt-based economy”. The consumer sector is not, necessarily, “debt-based”. It is, however, always and everywhere wages-based. If a listed company accumulates mounds of cash it cannot seem to make use of, its shareholders will demand that it buy back shares or pay out a special dividend. The business sector as a whole is doing just that - piling up cash. Arguably, the public could find better uses for the money and should demand that the private sector return it in the form of wages. Even the IMF likes the idea.
Morgan’s view, I think, is becoming more common around the world. I think this is an increasingly important trend. It is what I propose to call Sad Donkey economics. Eeeyore. Nothing can be done, we’re all doomed, dark, dark, dark. As we’ve seen, the reasons why nothing can be done are that some policy options are still considered unrespectable and therefore not considered.
The Sad Donkeys are probably best explained by the well-known Kübler-Ross model of the five stages of grief. In coping with trauma, this theory argues, we begin with denial, which intensifies into anger, proceeds to bargaining with fate, sinks into depression, and finally arrives at acceptance. I had never been particularly convinced of this, until I followed the reactions of French socialists to the arrest of Dominique Strauss-Kahn. Initial astonishment and disbelief was followed by a wave of fury and wild accusations in every direction, then by horror and depression, before everyone proceeded to consider voting for François Hollande instead, at least going by the polls.
Originally, the economic profession denied anything very serious was wrong - we could expect “expansionary fiscal contraction”. Then there was an outburst of rage. They abandoned the promise of renewed growth, and you may recall that the unemployed were meant to all be “zero marginal product workers” in the words of the repellent Tyler Cowen and the recession was a worldwide outbreak of laziness. There was a good deal of bargaining, mostly with the government for more bailout money. Now, with the rise of the Sad Donkey, we have reached the depression, which at least matches external reality.
You might argue with the time-line here, but then Elisabeth Kübler-Ross herself advised clinical users of her model that the five stages were not always followed in strict chronological order and could overlap or conflict with each other. As with Keynesian economics, the version in the quick-reference handbook differs quite a bit from the original theory.
So the good news is that acceptance may be around the corner, and that economics, as Winston Churchill said about America, will do the right thing once it has finished trying all the other alternatives. But we should expect a great deal more Sad Donkey before we get there.