Chris Giles at the Financial Times is the latest commentator to give voice to the question most economists simply cannot answer: ‘how come low oil prices failed to stimulate growth’:
“None of this was supposed to happen. Economists had predicted with great confidence two effects from cheap oil. There would first be a huge transfer of resources from oil producers to consumers, both within and between countries. At the same time, the gains would outweigh any losses.”
Giles provides an interesting whistle stop tour of the various winners and losers from the prolonged fall in oil prices. But his most accurate observation is that:
“Economists might be falling into the trap of believing that they were right all along and the good news is just delayed, but that is the prevailing consensus for the world economy. The oil price fall was good for growth, it is argued, but it will take until at least 2017 to realise it.”
To make the obvious observation that economists are wrong sounds like a cheap shot. Since 2008, we have come to accept at face value the statement that “economists exist to make weather forecasters look good.” Nevertheless, economists really are wrong in failing to understand the factor that has scuppered economic growth since 2008 – private (corporate and household) debt; which is almost back to the record highs of 2008.
The idea that people and companies who are already loaded up with debt are going to use the temporary windfall of a drop in oil prices to go on a spending spree is the kind of nonsense only an economist could come up with. An economics student loaded up with student loans (and more than likely an additional overdraft on top) is better placed to explain what we are most likely to do with any oil windfall we might enjoy. Might being the operative word here. Most of our fuel costs are the tax levied by governments… governments that are desperate to balance their own books. Nor is there any law of nature that says that energy and transport companies have to pass any of their savings on to us. When our costs come down, we have no obligation to spend. We may, quite reasonably, view any fall in prices as temporary. For this reason, we may choose to pay off existing debt or simply save against a rainy day.
Until economists drop the ridiculous belief that private debt has no impact on the economy, they will never understand why the good times have not returned.