These days, economists only exist to make weather forecasters look competent. It should be clear by now from their failure to predict the crash of 2008 (or, for that matter, the DotCom bust, the 1987 stock market crash or any of the other busts going all the way back to the Dutch tulip bubble) that their models simply do not work. Nor does the medicine they prescribe. Like so many eighteenth century blood-letters, they keep applying the “cure” – ever lower interest rates, more quantitative easing, more subsidies for the rich and austerity for the poor – but the patient keeps getting paler and slips ever closer to the grave.
It is in this light that we should view the latest pronouncement by IMF economists that they are clueless as to why low oil prices haven’t resulted in economic growth:
“Since June 2014 oil prices have dropped about 65 percent in U.S. dollar terms as growth has progressively slowed across a broad range of countries. This outcome has puzzled many observers including us at the Fund, who had believed that oil-price declines would be a net plus for the world economy, obviously hurting exporters but delivering more-than-offsetting gains to importers.”
If we approached a recent university graduate and asked them about this, they would answer the economists’ puzzle in a word – DEBT!
The recent graduate has a degree, but is also loaded up with about £30,000 in student debt. This will have to be paid off before she/he can contemplate buying a house and starting a family. Any temporary saving they may be making on their travel costs or in a general fall in prices will go to paying off existing debt; not getting the credit card out and buying more stuff.
This should be reasonable enough to any ordinary person. We all get the idea of discretionary versus non-discretionary spending. Non-discretionary spending is all of the bills we have to pay just to live – rent/mortgage, energy, water, food, clothing, transport and debt repayments. For most of us, these costs are deducted directly from our bank accounts. Discretionary spending is what we have left over – the money we might spend on a night out, a holiday or some new consumer goods.
What is true for individuals is largely true for the economy as a whole. In 2008, private non-financial sector debt was higher than at any time in history. By 2014, it had almost returned to 2008 levels. Indeed, it is only the zero percent interest rate policy that has prevented a wave of corporate and household bankruptcy from collapsing the economy. Across the economy, companies and households have been using what savings there have been from low oil prices to pay down existing debt. Like so many university graduates, they know that you can only really get on with your life once you’ve paid off the debts you already have.
If this is so obvious, why don’t economists see it?
A plausible answer is given by John Ralston Saul:
“Before Benjamin Franklin began to think about lightening, the received wisdom had it identified as a supernatural phenomenon. For that reason, gunpowder was often stored in churches to give it divine protection. Church bells were rung during thunderstorms to ward off the bad spirits. Between 1750 and 1784, lightning struck 386 German churches, killing 103 bell ringers. In 1767 lightning struck a Venetian church whose vaults were filled with gunpowder. The explosion killed 3,000 people.
“In other words, there was ample proof that divine protection did not ward off lightning. But so long as there was no language to destroy the received wisdom, it remained in place.”
The “received wisdom” in modern economics (which is more religion than science) is that private debt makes no difference to the economy. As Steve Keen, one of the few economists who did predict the 2008 crash put it:
“It may astonish non-economists to learn that conventionally trained economists ignore the role of credit and private debt in the economy – and frankly, it is astonishing. But it is the truth. Even today, only a handful of the most rebellious of mainstream ‘neoclassical’ economists… pay any attention to the role of private debt in the economy…
“An economic theory that ignores the role of money and debt in a market economy cannot possibly make sense of the complex, monetary, credit-based economy in which we live. Yet that is the theory that has dominated economics for the last half-century.”
What is obvious to anyone with debts to pay off is a complete mystery to economists steeped in a religious dogma that prevents them seeing the “ample proof” that their model is wrong. The rest of us understand that an indebted company will use its oil price bonus to pay off its debts rather than pass the savings on to its customers. We understand that ordinary households with debts to pay off will use their oil price bonus to pay back some of what they owe. But only an economist would be insane enough to think that indebted companies and households are going to take the small bonus they get from temporarily lower oil prices and use it as a basis for running up even more debt!