If you want to get on the front page of the BBC website and all over the news one morning then run an economic forecasting model with all the spurious accuracy and doubtful assumptions about our ability to predict economic behaviour that this implies. That is precisely what the National Institute for Economic and Social Research has achieved with the release of their latest forecast. In 2011, you might like to know, growth in net trade will contribute 1% to economic growth – or if you want the decimal point 1.2%. How do they know? I don’t think they do.
The news reports have particularly picked up that national income per head will not recover their 2008 levels until 2014. They may be right. But does this really matter? Should we not look for evidence in the data rather than try to model it with spurious accuracy? Or, as Hayek suggested, should we not look for “pattern predictions”. I have been saying for over a year that the pattern predictions for living standards look grim. But I don’t have a spurious model that will put a second decimal place in my estimates so I have no chance of appearing on the BBC website.
Forget economic growth for a moment and let us look at the possibilities for growth in consumption (the underlying purpose of economic activity). These are the factors that make me wonder whether we will have stagnant consumption for a generation:
● The fact that the economy will take a few years to recover in national income terms.
● The “reconstruction” that households need to undertake to their balance sheets due to the high level of consumption.
● The higher level of saving that the next generation will probably undertake (certainly relative to recent levels of zero).
● The growth in government spending and regulation that will lower trend growth rate.
● The servicing of the huge level of government debt.
● A welfare and tax system that (relatively speaking) penalises those who save and, more generally, make proper provision for their children – something that will continue to lead to high levels of workless households with children.
● The ageing of the population (which will really begin to bite when the other things are sorted out – if they are sorted out) and all that implies for state pensions, public sector pensions and state spending on health.
Now there is a fine line between drawing inference from the data (rather than running it through formal models) and just arm waving and indulging in “do-it-yourself-economics”, so we do have to think analytically about these issues too. Sadly that gives me no grounds for comfort. Economic problems can be overcome by an efficient working of the price mechanism, by innovation and by entrepreneurship. However, the issues I point to above all inhibit the very mechanisms that are so reliable in overcoming our economic problems. Nevertheless, within the room for manoeuvre that the government gives individuals, people will no doubt be resourceful at improving their lot in life as best they can.