Debunking Economics - the podcast

Ever wondered why Britain’s roads are riddled with potholes, why the trains keep breaking down and why there aren’t enough hospital beds? Simple. Britain is not making enough capital investments. Taking the public and private sector together, it amounts to about 6 percent of GDP, well below the 22% in the US - which has its own infrastructure problems. China can spend as much as 40% of GDP on capex projects. Steve says there are two reasons why Berit5ian’s infrastructure is failing. First, not enough engineers. There needs to be more teaching of STEM subjects in schools. But more importantly the adherence to the notion that governments need to balance budgets means capex investment is often pushed aside by more pressing short-term spending. Phil asks whether the sensible way forward is to allocate an amount of money for capex investment that sits outside the budget that the government tries to balance each year.

What causes an economy to fall from a peak? Many economists will argue it’s exogenous shocks but, as Phil and Steve discuss, there’s not too many of those around. Maybe COVID was one, but even that came about because our economic system has drawn us closer to wildlife habitats. Or is it a lack of resources? We run out of capacity to produce more, whether it’s factories, people or natural resources, like fossil fuels. Does the shortage relative to demand force prices up and its inflation that ultimately kills growth.No, says Steve. Karl Marx had it right when he postulated that the rising pressure on wages will cut the profit that capitalists thought they would be earning, which would mean they cut investment. Talk about cutting off your nose to spite your face.So, if that’s how economies peak, what is it that pulls hem out of a trough? And is there anything we can do to minimise the impact of business cycles, or are they simply the natural order of things?

It’s a sad fact that war can pay. The US arms industry is one major beneficiary. The UK is a long way behind, but it also a big supplier of armaments to the world. If governments of the world upped their defence pending to 3 percent of GDP that would see a massive increase in demand for weaponry. In Britian’s case it could re-engage the manufacturing sector and maybe even lead Britain back to a trade surplus. Phil asks Steve why we seem happy to see government spending on defence, supporting growth in the private sector. What a shame we don’t apply the same logic to helping other sectors grow – sectors that don’t involve killing people. 

Phil tells Steve that he’s always struggled with Karl Marx’s idea of surplus value. The idea that workers work for themselves, then a bit more to create the profit for a business. Phil says, that seems like a cost-plus approach, whereas in his marketing days, it was all about creating a brand that people would pay more for. The extra value was created by the goodwill associated with the brand. How do you apply Marx’s theory of surplus value to a $1,000 Gucci handbag, for example. Steve says it still applies and explains why in this week’s episode.

Europe and the US are both recovering from the same problem – COVID and the inflation that followed. But last week the Fed in the US dropped interest rates by half a percent, with markets expecting a soft-landing for the US economy. Europe, meanwhile, is struggling, with Germany’s economy heading backwards for more than a year. So, when the big difference when both economies are coming from the same place? Steve Keen tells Phil Dobbie that the US would be struggling just as much if it restricted itself to the Maastricht rules on fiscal policy and government debt. Instead, Joe Biden spent big on the Inflation Reduction Act.

The UK’s unemployment rate is 4.1%, the inflation rate is growing at 3.1% and the economy is growing at 0.6% quarter on quarter. That’s how the economy is doing, what more do we need to know?Well, it would be useful to know whether the unemployed are predominantly in certain income groups, or that income growth was greater in particular parts of the economy Like, more for capitalists and less for workers?As Steve and Phil discuss this week, economists are building business models built on aggregates.  Breaking down aggregate data into functions in society, or income, will add a lot of extra complexity to models, but they would do a much better job of showing us what’s going on. For example, central bank policy right now aims to restrict spending and wage growth to tame inflation. But, even if that was the cause of inflation, what if those creating inflation by spending more on services, are distinct from those facing the consequences of central bank policy, losing jobs and paying higher mortgages?Steve points out that as the economy slows – and it has to because of climate change -  knowing the distribution of income and consumption becomes vitally important. Unless we are prepared to see the rich grow richer at the expense of everyone else.Economic models are built on aggregates of key variables.  Those aggregates hide distribution impacts. That makes it easier for central banks to pursue monetary policy without worrying about the consequences.

The pandemic was the biggest economic disturbance since the second world war. In both cases supply chains were severely disrupted, either by German U-boats or, more recently, factories and borders closed to stop the spread of disease. On the face of it, though, we have got off relatively Scot-free. We haven’t seen the massive fall in GDP experienced after the war. In fact we saw a sharper fall in GDP in the 2008 financial crisis.What is different is how we have handled the readjustment. After the war the focus was on growth, with very low interest rates, even though the inflation rate in Britain almost reached 17%. This time we’re told growth is again the focus, but the policies being applied, by governments and central banks, seem to suggest otherwise.

A couple of years ago, when warning of the need to fight inflation, Jerome Powell, Governor of the US Federal Reserve says interest rate would rise and jobs might disappear. Yet, interest rates have risen, and unemployment hasn’t fallen anywhere near as much as expected. So, what’s going on? Does it mean, thankfully, that monetary policy isn’t working as well as expected? Now the talk is of a soft landing, where jobs have been protected and inflation has come down. The work of fine tuning by the central bank, or just a coincidence. Phil Dobbie and Steve Keen talk about the interplay between jobs, wages, inflation and central bank policy.