So the International Monetary Fund has revised its economic growth forecast for the UK upwards. It now expects 2.4% growth in the UK this year, up from the 1.9% they predicted a few months back. Cue celebratory articles across the media, and welcome reaction from the government, business groups and economists.
Why not? This is good news, right? Well, not necessarily. The way these forecasts are venerated, along with other statistics such as productivity growth or inflation or house prices, betrays a fundamental misunderstanding of how they are produced, what they mean, and how important they are.
First, these numbers are averages of often revised inputs. Second, they are conceptually very loose. Whose consumption basket is being measured by inflation? That of young families, pensioners with health problems or football millionaires? At best they give delayed indications of general trends (though because of the frequent and long-delayed large revisions, these are mainly of interest to economic historians). Reporting unemployment or inflation with decimal places, for example, is simply hilarious.
Media, government and industry are all guilty of paying too much attention to these numbers, and endowing them with quasi-religious symbolism. Rather, policy should be focusing on helping people adjust as economies evolve. It is a mistake which, in the long term, has the potential to be hugely damaging to the financial wellbeing of individuals, businesses and the country as a whole.
The ritual of macroeconomic stabilisation policy begins with forecasts. Remember the most salient fact: there is no organisation, public or private, which can boast any sustained record of effective macroeconomic forecasting. In particular, the world’s central banks have elaborate mathematical models that have managed to miss every turning point in their own economies. We should not be surprised that they are surprised.
The most compelling recent example in the UK has been that latest figures reveal unemployment down to 7.1%, edging closer to the 7% threshold at which the Bank of England not long ago said it would consider whether or not to raise interest rates. At the same time, the bank said that it thought that this moment might be a couple of years away. Surprise. But with many judging that the UK is not ready for a rate rise yet, the bank’s position has primarily caused market confusion and uncertainty. And of course, the number might be, retroactively, revised upwards again in a few months.
Discussions around seriously difficult and poorly understood subjects are being turned into the equivalent of celebrity snapshots. This type of commentary is just noise.
Looking underneath the noise, we need to understand that “growth” isn’t equivalently “good” for everyone. This is clearest in the US, which has the best “growth” record of any of the advanced economies. There we see, along with growth of the aggregate economy, a systematic redistribution of income and wealth towards a small part of the population.
This is explained by global work redistribution and, increasingly, by technology that is displacing middle class workers with software and robots. The US shows it is possible to manufacture and export more while not employing many more manufacturing workers. It is this kind of dissection of the sources and nature of growth, rather than talking about house price movements, which is essential to understanding the social implications of developments in the economy.
Instead the short-term and data-focused commentary we currently see across the media reinforces and perpetuates the notion that government policy can have a decisive impact on the nature and direction of future growth.
The reality is far different, for two reasons.
First, governments will always be behind rather than in front of trends, no matter how hard they try; the data simply isn’t good enough to accurately predict the future. Accepting this implies the need for more stable policies and some humility about what any policy might actually produce.
Second, no government, let alone one of a country of the size of the UK, can alter the fundamental trends in trade and technology we see developing around us. What governments can do, however, and should do, is help their citizens best adapt to what is happening in the world, especially via education and the fostering of greater understanding of global trends.
An important component of this is governments ensuring they keep updating the social safety net. This is vital because the speed of economic change is usually greater than the ability of many of the affected groups to adjust to it. The quite rapid shift of the UK economy away from manufacturing toward services, starting in the 1980s, is a good illustration of the consequences of neglecting to implement an effective social response.
If government really wants to help its citizens, its businesses and its industries adapt to the shifting global economic sands, it would do well to remember that instead of shaping those shifts, its job is to ensure we all adapt and succeed alongside them.