Explaining macroeconomics to the Swabian housewife

Matthew Bishop has a nice simple post at SPERI suggesting how the ‘economy is like a household’ idea can be tackled. He is correct that this analogy has tremendous power, to the extent that I doubt we would have seen so much UK austerity without it. He uses an exchange between Yanis Varoufakis and a member of the Question Time audience to suggest that attempts to simply explain the economics are ineffective. He suggests that the “problem, as Jonathan Hopkin and Ben Rosamond have suggested (here and here), is that you cannot fight ‘political bullshit’ with facts”.

I want to make some observations, in ascending order of importance.

1. I think he is right that economists can usefully point out that households do not always balance their budgets. But all the examples he gives help explain why it may make sense for the government to borrow to invest. Indeed he could have added comparisons between governments and firms in this respect. That is why it is easy for economists to now argue that governments should be borrowing more to invest. I’m sure most economists would use exactly these analogies: after all most do try to teach this stuff.
   
   
2. However these analogies do little for the issue the audience member thought we were dealing with. He thought the analogy was exactly the case of spending too much on excessive drinking, and needing to sober up financially. While the examples Matthew quotes get you over the simplistic idea that governments should never borrow, they do not explain why (a) it is OK in principle to keep the ratio of government debt to GDP constant (governments live forever), and (b) why it makes sense for governments to borrow a lot more in a recession (the automatic stabilisers), or even (c) why the government should go out of its way to borrow even more in a recession when interest rates are at the Zero Lower Bound. We can try and get these ideas across as simply as we can, as I have tried many times (and suggestions on how to do it better are always welcome), but it is very difficult to do so in a minute or two on Question Time. It is sufficiently difficult that before the General Theory it was not understood by most economists.
   
   
3. I think the suggestion that economists are too busy trying to be correct and therefore too scornful of simple analogies is a little unfair. Only a little: in a live public appearance there is always the concern about what your colleagues in the department will say afterwards. Economists are also aware, as Chris Dillow points out, that partial analogies used in one context can easily backfire in others. However I doubt very much that most economists do the equivalent of mocking “every grammatical error made by friends practising their holiday Spanish”.
   
   
4. The big difference between economists and scientists at CERN is not that economists are less respectful of lay people’s mistakes. It is (a) they have politicians repeating false analogies about their subject as if they were facts, and (b) large sections of the print media doing the same, and (c) most of the rest of the media too clueless to challenge these falsehoods.
   
   
5. This is why, for an evidence based discipline like economics, the response ‘economists know that the economy is not like a household in important respects and here is why’ is not at the end of the day arrogant or dismissive. If Brian Cox was asked on Question Time ‘what is all this about the Earth moving: it is obvious that everything moves around the Earth’ we would not blink an eyelid if he replied ‘No, scientists know that is not true and it only seems that way to you because..’.
   
   
6. What austerity tells us, just as the climate change denial tells us, is that in today’s world respect for science is fragile. In the US public opinion about climate change is sharply divided along political lines, despite the near unanimity among scientists. It is this that should really worry us, and not how climate change scientists can better communicate with the public, desirable though that might be in itself. A world where the scientist has to compete on equal terms with the ignorant polemicist is not a healthy world.

The big story behind Port Talbot

In today’s print edition of the New Statesman I have a brief review of Yanis Varoufakis’s new book. (The review also looks at Piketty’s newly published collection and translation of newspaper articles. I’ll talk more about each when the review appears online, but for now you can read a similar (in parts) double review by Paul Mason.) The organising macroeconomic theme in his book is the need to find systems capable of successfully dealing with current account surpluses. In my review I say I’m not sure whether this framework is really capable of holding up everything that the author wants it to support, but there is no doubt of the importance of the issue. For example, it seems to me this is the framework, albeit at a more industry specific level, with which to see the current crisis over the threatened closure of the UK’s steel plant at Port Talbot.

The surplus in question here is the surplus Chinese capacity to produce steel. Ambrose Evans-Pritchard in the Telegraph, who has a similar perspective, reports an OECD estimate that China's excess capacity is over twice the size of total European Steel production. Because China is able to subsidise production in various ways, this means this steel can beat UK production on price. The US department of commerce is reported as thinking that the subsidy on some types of steel justifies a tariff of 236%!

If this is correct, then this story is not about neoliberalism or the free market, but a story of a rigged market. To put it another way, it is a market where one set of producers have the ability to eliminate their competitors by flooding the market at a loss because they have the ‘deep pockets’ of a state behind them.

The EU have been trying to raise tariffs against Chinese steel producers for three years, but have been blocked by a coalition of countries led by the UK. The UK Business minister Sajid Javid has been quite explicit about this: he prefers cheap steel because it helps other parts of UK industry. It may also have something to do with wanting to curry favour with China because of other matters (which was the point of John McDonnell’s Little Red Book stunt, if only he hadn’t started reading from it!). This is not Javid upholding the principles of a free market, but instead allowing a large state to rig a market. The irony in this case is that the state in question is not the one he works for. 

Postscript (11/4/16) For more detail, see this from Ben Chu