The desire to know what is around the next corner has been a universal throughout human history. In ancient Mesopotamia the entrails of animals were examined for anomalies and predictions made accordingly, while in the 16th century M. A. Delrio set out how to divine the future from the movements of water. These days we mostly turn to economists, event though their hit rate is not much better than extispex and hydromancers.
After failing to recognise the housing bubble and predict the 2008 crash, many economists in the UK have turned their focus on whether or not George Osborne’s budget will send us into a double-dip recession. The usual suspects have lined themselves up on either side of the debate, but as yet few have acknowledged that the budget might not be a key variable as to whether a double-dip recession happens or not.
It was refreshing to hear Ken Clarke on Radio 4 the other day effectively stating that we could get a double-dip with or without the Osborne budget. This was honest stuff, rightly acknowledging the possibility that getting public finances out of the red may not necessarily be connected to the national and global economic readjustments that are taking place post-crash.
This is not to suggest that all empiricist predictions should replaced by pure, Austrian-style logical deduction, although this would probably raise the standard of economic debate. In fact, I think economic history, statistics and trends can be used to see both what is going on and suggest what is more likely to happen on very specific economic questions. For example the house price to earning ratio in the UK suggests one of the following in the short to medium term:
- house prices come down (perhaps with bump)
- the housing market stagnates while inflation devalues this asset over a period of years
- increased credit is made available (it would have to be the government turning on the print press at this stage) so we get another bubble and bust.
Thus, there are indeed things we know. But we also need to acknowledge some more of those ‘known unknowns’. The reason Osborne needs to cut back government is so that the country doesn’t go bust. At present we have a false debate in which the fact of a double-dip (or not) will give undue credit or discredit where it is not due. If you want to know whether we are going to have a double-dip, I would suggest ignoring the economists and turning instead to a tasseographer. They may also talk nonsense, but at least you will get a nice cup of tea out of it.