Economics - Freakish?

Posted on: 25/02/2013

Last week, I was lucky enough to meet and listen to Stephen J. Dubner, co-author of Freakonomics and its sequels.

Dubner is a genuine original thinker who has been able to debunk, in a highly entertaining style, some of the fallacies that surround the workings of economics.

"Expect the unexpected" would be good advice when listening to Stephen J. Dubner. He most times outlines situations that invite assumptions to be made, then explains why those assumptions turn out to be erroneous.

Of course, not all outcomes are as unpredictable as those that attract the attention of Mr Dubner.

Take the current underperformance of the UK economy.

George Osborne, the UK Chancellor of the Exchequer, has for the last three years been pursuing a rigorous cost reduction programme.

In simple terms, Mr Osborne has been attempting to slash Government expenditure. The main focus of this has been a massive reduction in employment in both central and local government, along with the Armed Forces. In addition, Government funding of capital projects has been reduced dramatically.

When the Chancellor embarked on this course of action, he was warned by many commentators that his policies would lead to a slowing down of the British economy. That has come to pass, with growth of GDP hovering around zero and a continuous threat that the country will slip into another recession.

Mr Osborne ignored the warnings, in a quest to reduce Government debt. So perhaps he would have considered no growth as a worthwhile price to pay to see such debt reduced.
Alas, it was not to be.

GDP growth has evaporated but the level of UK National Debt continues to rise. It is now not forecast to start falling before 2016. Three long years .... and few Economists have much faith in even that distant date as a starting point for debt reduction.

The worst part of this situation is that Stephen J. Dubner’s original thinking was not required to deduce the outcome of Mr Osborne’s policies.


There is a huge game being played by most Western Governments, each desperately trying to avoid their country being seen as having the worst performing economy.
Greece and Ireland would be most people’s choice for bottom of the pile in terms of economic woes but, on the World stage, it is the much bigger countries that really matter.
Spain is the biggest sufferer amongst the major nations. Unemployment is running at 25% plus and growing.

Yet the Spanish Government is desperately trying to avoid taking massive external support, because they know that to do so might lead to their country being a permanent pariah on the World financial markets.

So the Spanish twist and turn, whilst other countries, such as the UK and France strive not to be Spain in terms of economic ratings!

The problem of course is that none of the Western Economies are truly sound. For years, we have been living beyond our means, printing money to cover increasing  Government debt.

The answer?

There isn't a simple solution. But one thing is certain. It is better for the Government to keep on spending on infrastructure projects, rather than reducing such investment.
Infrastructure spending stimulates employment, whilst at the same time creating usable and useful assets. Such assets have a disposal value. Pension Funds around the World love investing in infrastructure rather than equities. It is tangible and often offers better returns than Government Bonds.

So Mr Osborne needs to start infrastructure investment immediately. Otherwise he will find he has a personal as well as national depression on his hands until 2015, at which stage the UK voters will get a chance to deepen his personal pain.


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