DCSIMG

Alf Young: Fiscal explanations are lost in space

Mark Carney's explanations leave the lay observer in need of extra help. Picture: PA

Mark Carney's explanations leave the lay observer in need of extra help. Picture: PA

  • by ALF YOUNG
 

TO UNDERSTAND complex problems we need a language, but in the case of the economy the message is being lost, writes Alf Young

I chanced upon a gem of a discussion on radio this week. On Word of Mouth on BBC Radio 4, Michael Rosen was exploring the use of metaphor in pursuit of better understanding of scientific concepts. From black holes to electrical and magnetic fields, participants explained the origins – and questioned the validity – of many of these verbal formulations.

Black holes are neither black, nor holes. But that succinct tag has stuck. Whether labelling regions of our universe so massive nothing, not even light, can escape from their gravitational pull improves our understanding of what is really going on is anyone’s guess.

Benjamin Franklin, we learned, regarded electricity as a fluid. So adopting the language describing what he might do with other familiar fluids, like wine, he talked of electricity having a charge, in the same way that he might charge his glass with more champagne. Nowadays it is commonplace to liken the human brain to a computer.

By the mid-19th century, Michael Faraday, Lord Kelvin and James Maxwell ascribed to electricity and magnetism associated fields. In part because a field – be it for farming, sport or warfare – seemed to encapsulate all the things of which Britons like them, at that time, were most proud.

One contributor was particularly exercised by the way heat was first explained. The scientists, led by Belfast-born Lord Kelvin, who developed the laws of thermodynamics at the University of Glasgow, were drawn to economic metaphors. In describing how energy is produced, conserved, spent and lost, Lord Kelvin called one his laws the law of laziness. Another the law of greed. “How very presbyterian,” chuckled Mr Rosen.

But if science has long struggled with the most effective language to use to explain its concepts, what of the explanatory power of economics itself? As Mr Rosen was discussing the shortcomings of scientific metaphor, Scotland’s leading political polling analyst, John Curtice of the University of Strathclyde, was telling our politicians they are all focussing on the wrong issues if they want to secure victory for Yes or No in September’s referendum.

Professor Curtice was unveiling the latest findings from the Scottish Social Attitudes Survey. “Voters want to hear about the economic and financial consequences of the choice they make, and it is on the outcome of that debate that the result of the referendum is likely to turn,” he claimed.

Scotland’s Deputy First Minister seems to agree. “When we win the economic argument, we will win the referendum,” was Nicola Sturgeon’s response. But how does anyone win such arguments when, as with big scientific concepts, the language we use is barely able to capture the complexity of what is really going on.

Take the evidence of economic recovery in the UK (and Scottish) economies in recent quarters. On Wednesday, we learned that unemployment across the UK (and in Scotland) has now fallen to a five-year low. The headline rate is now 7.1 per cent across the UK. In Scotland it is lower still, at 6.4 per cent .

Last August the Bank’s incoming governor, Canadian Mark Carney, introduced a new system of forward guidance on when UK interest rates might have to start rising again. Under this approach, when unemployment fell to 7 per cent – a threshold the bank thought, last year, unlikely to be reached until 2016 – its monetary policy committee would begin to consider tightening policy again.

Now that jobless rate is within a whisker of the threshold more than two years earlier than anticipated – and the Scottish rate well below it – is the bank rate about to rise? Not a bit of it.

Yesterday, Mr Carney despatched that stillborn 7 per cent jobless threshold, sending it careering off-piste, never to return. “Even in the medium term, the level of interest rates necessary to sustain low unemployment and price stability will be somewhat lower than before the crisis,” he declared.

Next week the Bank of England governor is due to speak in Scotland. At least his forward guidance U-turn removes any pressure to explain how – were Scotland independent right now and part of a sterling monetary union with the rest of the UK – he, as its central banker, would have operated that threshold system differentially across unemployment levels in the two jurisdictions.

Disturbingly, Mr Carney’s speech at the Global Economic Summit yesterday was littered with scientific metaphors about “escape velocity” and “gravitational pull”. But he did acknowledge the perplexing texture of this recovery. “A few quarters of above-trend growth driven by household spending represent a good start, but they aren’t sufficient”, he claimed.

“It will take sustained growth, more balanced demand and a recovery in the supply side for advanced economies to break free into a more normal universe.” Suggesting it may take years before it is possible to attach any “superlatives” to this recovery, Mr Carney pointed out that, despite all the talk of austerity and de-leveraging, aggregate debt burdens of advanced economies are rising.

Rebalancing demand from deficit to surplus economies has still to be achieved. Confidence remains subdued. Three quarters of a million more people across the UK are, the governor acknowledges, “involuntarily working part time”. He pointed to “persistent headwinds” still buffeting the global economy.

On cue, as he spoke, a growing foreign exchange storm in Argentina and other emerging market economies like Turkey, and nervousness about the strength of Chinese growth was stoking market pressure. “Escape velocity won’t come cheap,” he warned.

I doubt that’s the kind of nuanced message his political masters will want to hear. With European elections due in May, the Scottish referendum in September and a general election looming in May 2015, they will increasingly crave a degree of economic certainty the hard evidence will almost certainty struggle to sustain.

The dominant Tory partner in the Westminster coalition needs a more convincing recovery story to tell voters than this week’s fiddled line about how much better most workers are faring in their pay, if you throw in tax cuts but exclude benefit changes. The Lib Dems need respite from the Lord Rennard saga. The SNP needs to find a way to insulate the economic case for a Yes vote from the kind of ongoing economic turbulence Mark Carney fears. Labour has found traction by putting the cost-of-living crisis centre stage. But it has much left to do to convince those most affected that it knows what to do about it.

Despite signs of recovery after five long hard years, even economic experts are struggling to understand the complex dynamics of what is really happening now. Economic credibility may well be the clincher in all those electoral tests to come. But where are those compelling metaphors when you really need them?

 

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