Macroscope | My Harvard Business School training is worthless when it comes to understanding the economy today

People don’t like to admit that they are wrong – especially when everything that they have held true in their world begins to makes no sense. When that person is an economist it becomes doubly a conundrum, a riddle, a mystery, a puzzle; wrapped inside an enigma.

It is unfortunate for one economic relationship to break down, two is careless, and three leads the dismal science back into the Dark Ages. Take the key issue confounding economists today: why is economic growth so poor when the conditions to spur growth are so friendly? Negative interest rates, good trade ties, cheap labour, low commodity prices, and virtually zero inflation. This has been the case for five, six, seven years now – and still economies won’t grow.

Meanwhile “one trick pony” central bankers flog the dead horse of low interest rates with repeated vigour, proving the veracity of the Albert Einstein misquote, “insanity is doing the same thing over and over again and expecting different results”.

Many key economic relationships that we use to manage economies no longer seem secure. The Philips Curve linking inflation and unemployment? – doesn’t work. What of the theory that the printing of money causes hyperinflation, a lesson well learned by the post-war German Bundesbankers? Yet we have seen massive creation of liquidity and there is no inflation. How about the old chestnut, that a weak economy means a weak currency? – try telling the Japanese that. Why are wages so low when most of those in Western countries who want jobs – have jobs? Why, despite technology and robotisation, is labour productivity so poor? Is our data wrong? Are we measuring the wrong things? When will things turn around? And, is this time really different?

All the signposts have gone so the authorities don’t know which levers to pull to stimulate the economy. This last happened in the Great Depression and it took a world war to break the cycle. Politicians themselves can do much, especially to relax the supply side of the economy, but what politician is going to call for more austerity, less debt, fewer taxes, shrunken welfare, reduced protectionism, and the breakup of their global business champions that are larger than most countries? Those things only happen in the midst of a major crisis. It will come but we are not there yet.