May 5, 2002

Don't be mislead by mantras

Posted in ·
Share 

In the 1930s, central banks caused the great depression failing to see that there was too little money in circulation. In the 1970s, conventional wisdom believed it possible for a country to spend its way out of recession induced by an oil crisis. The failure of this policy had dramatically negative consequences for government, the power of politicians and the efficacy of left wing ideologies in general.

History is littered with examples of conventional wisdom that was wrong. However, there appears to be a certain amount of human inertia when it comes to thinking around issues. The great US economist, Paul Samuelson, called this inertia “government by shibboleths”. He believed that certain economic policies acquired mantra-like characteristics, so that if they are repeated often enough they become unassailable. Gradually, the mantras come to replace hard thinking when economic dilemmas are thrown up.

This election reveals the power of mantras over thinking in a variety of areas, none more so than in the economics profession itself.

With all this shenanigans about which manifesto is more delinquent, economists have reduced themselves to po-faced bean counters. Economics is a fantastically inventive pursuit, a science that is capable of answering the big questions. Yet we economists sell ourselves short by narrowing the focus to what is impossible, rather than celebrating what is possible.

Reducing economic debate and input to whether or not a manifesto will lead to higher national debt is like being a boring, sensible — and ultimately cowardly — adult, who tells a child not to dream. This approach is ludicrous, outdated and dangerous.

The best grown-up ideas come from being silly, from dreaming, from being a childlike adult. Economics is similar. The value of economics is in being holistic, otherwise it is doomed.

For politics, economics should liberate not incarcerate and, when necessary, provide the foundations for the one thing that is lacking in politics: vision.

Take for example, the key battleground of this election — quality of life for the 25- to 45-year-old generation. Every party is saying that this is where it is focusing. The four big items are healthcare, education, childcare and housing. Most parties agree that it would be better to have a more efficient system and most have broadly the same way of going about their business. They will all deliver better resources, without raising taxes because of the engine of robust growth.

The problem is that growth itself is at the core of the childcare, education and housing problem. Astronomical house prices, together with commensurate mortgages, force both parents to work. Even if they were not forced, huge leaps in the education of women over the past 30 years throws cold water over the idea that all smart, confident women will stay at home minding babies.

Growth, and its offshoot consumption, also dictates that our career structure is dominated by salary increases and an obsession with advancement up the greasy pole. Even the solutions, such as paid leave and longer career breaks, pitched mainly at working women, are based on the premise that the worker will get back on the treadmill to advancement and more cash sooner rather than later.

Why does the career escalator become all encompassing? Why is ‘having it all’ — a full a career, a full life, a beautiful house and two pretty kids in a nice creche — so absolutely important? Because we are being duped. So too are our politicians. We are being duped by the myth of consumption: the more we earn, the more we can spend and the happier we become.

‘Having it all’, generates the statistical concept called economic growth — which is utterly meaningless to most people. Eventually, this figure becomes as irrelevant to the citizen as the Soviet five-year plans. However, the politician can win the annual prize for unnatural statistical gymnastics at the IMF or the European Commission by trumpeting our double-digit growth rates when our neighbour is struggling to get his sluggish economic machine going at all.

Let us call the statistical gymnastics associated with high growth, the Nadia Comaneci School of Economics. At its core, the Nadia Comaneci School of economics is based on consumption.

Spending generates tax revenue and the overtime necessary to get up the greasy poll generates income tax. Both these tax revenues drop out of the model allowing the government to pay for health care. So as long as we are all working full throttle, spending like crazy and getting into debt, tax revenues rises, GDP performs statistical miracles and the health system can be financed.

But the lifestyle that is necessary to finance the health system is also overburdening the health system from two critical angles. First, hard work, anxiety and hassle make us sick and tired, driving us to seek medical solutions for a variety of ailments that are lifestyle-based not medical, such as stress, obesity and the variety of allergies which have emerged in recent years.

All these factors waste doctors’ time and overburden the service. More insidiously, the increase in consumption which is financed by (and is in some ways a validation of) the career escalator, drives a wedge between the public and private sector, leading to a haemorrhaging of talent from sectors such as health.

So, ironically, the faster the growth rate, the more likely it is that we have a worse not a better health system and the more likely it is that childcare remains a huge issue and that house prices continue to concern young couples. And so these young couples work extra long hours, rewarding themselves with such trophies as cars, gadgets and Manolo Blahnik shoes.

So what should economics do? Economics should call a halt to this nonsense and make us realise that the root of our system is a tax system that sends all the wrong messages.

Spending on luxuries — whether it be big houses, big cars, fancy holidays or cosmetic surgery — creates a rat race where my spending throws down the gauntlet for you to spend accordingly. More than anything else this is at the root of the ‘having it all’ culture which is misleadingly called the ‘quality of life’ issue in this election.

If we taxed consumption and abolished income tax, a radical and much fairer system would prevail.

Consumption is the difference between income and saving. This gap could be progressively taxed (after allowances) in the same way as income tax is at the moment.

For example, if you earned £25,000 and saved £5,000 and had allowances of £10,000, you would pay, let’s say, 15 per cent tax on the remaining £10,000. If you earned £200,000 and saved £10,000 after similar allowances (depending on marital status or children) you would get taxed at 70 per cent on that portion of the remaining £180,000 you chose to spend.

To avoid paying tax, the person facing a 70 per cent tax bill on £180,000 would simply choose to save or invest.

This way, we would all moderate our spending in a sensible way. People wouldn’t feel the need to work all the hours God gives. Fewer euro would be spent in the health system on ‘lifestyle’ ailments.

It is highly likely that house prices would moderate and there would be much more balance in our lives. The quality of life issue would be solved at a stroke. But, to do this, you need to have vision, be radical and be confident that economics can provide the answers.

Otherwise, we will continue to be ruled by bean counters and desperate politicians and blighted by mass political apathy.