Harry Potter: “Hermione, when have any of our plans ever actually worked? We plan, we get there, all hell breaks loose.” (Harry Potter and the Deathly Hallows – Part 2)
It seems to be dawning on the public that, rather like the plot of a Harry Potter novel, the best economic policy is delivered not by design but by accident.
A mere six months ago, the chancellor George Osborne (remember him?) was hell bent on austerity, when even conventional economists were saying the economy needed a stimulus.
Then the Brexit referendum called by the prime minister (oh, what was his name? Ah yes!) David Cameron went the opposite way to what he expected. As well as Cameron “”Exiting, stage left”, Osborne abandoned the pledge to return the government budget to surplus, and a whole lot of planned cuts to government spending that would have cut GDP by just as much or more, vanished in a puff of Harry Potter smoke.
Much like the pound. John Mills, the Labour-supporting businessman, has been arguing for decades that the pound was over-valued, decimating British industry — but to no avail.
Then Brexit happened, and within weeks the pound fell by almost 20 percent against the US dollar. The short-term implications are mixed — import price rises have occurred (though by less than mainstream economic theory asserts they would) — but British manufacturers have a chance to compete. The recent boost to our import bill seems to have been driven in large part by machinery imports, which implies that the rebuilding of British industry may be commencing — thanks to a policy accident.
Theresa May’s comments on Sunday about a hard Brexit have pushed the pound down even further. The slump has caused fear in the city (at the same time as it has driven the FTSE higher via arbitrage trades), and fear that UK banks may decamp to Europe, destroying Britain’s chance to transform itself from a manufacturing to a services economy.
This attempt at transformation has been a failure anyway. Manufacturing has declined from about 23 percent of UK GDP before Thatcher’s “Big Bang” to about 11 percent now, but services haven’t made up the difference. The economy has gone from a near zero trade deficit on average before finance was unshackled, to a chronic deficit approaching five percent of GDP today.
We pay for that deficit by borrowing US dollars, or by selling UK assets, while countries like Germany — with a massively undervalued currency thanks to the Euro — rack up a surplus approaching eight percent of GDP.
Mainstream neoclassical economics alleges that such surpluses will just cause rampant inflation. In Germany? Yeah, Right. This just goes to show that their models and economic advice are about as powerful in the real world as Muggles are in Harry Potter’s fictional universe. Following their advice may actually be a bad idea, while doing the opposite by accident can end up working a treat.
David Cameron’s accidental Brexit, followed by George Osborne’s accidental abandonment of austerity, and Theresa May’s accidental devaluation of the pound, may actually be the best economic policies the UK has followed in decades.
Steve Keen is professor of Economics at Kingston University London and author of Debunking Economics. His new book Can We Avoid Another Financial Crisis? will be published in the spring