Patrick McNutt: Economics Has Become An Illusion

Policy makers should return to managed global exchange rates, fiscal stimulus to ease domestic debt burdens, and a continuation of QE in the EU.

Has economics become an illusion? Yes. Economic policy making is ‘but a walking shadow, a poor player that struts and frets his hour upon the stage’ of natural numbers, coupled with policymakers throwing ‘sixes and fives in games of chance’, as ‘wise folk know the conditions in every country’ – targets and trends, patterns and probabilities.

All the policymakers are merely players; they have ‘their exits and their entrances sans teeth, sans eyes, san taste, sans everything’. There are no hard lines of distinction. Deflation may be temporary if capacity is absorbed by the real economy.

However, a finite measurable increase in sales – and thus output – cannot be secured by small marginal reductions in price. Some industries are depressed and household balance sheets are insolvent.

US dollar strength against the Euro is due to deflation in Europe and deflation in Europe is driving up the US dollar. Policymakers ‘cannot sleep’; with their ‘eyes severe, and beard of formal cut, full of wise saws, and modern instances’ they are actors in a Shakespearean play of infinite length as big data, social media and the Internet of Things transform real lives.

In a deflationary period, a mismatch in prices and quantities occurs as companies and consumers both fear to spoil the chance of getting a better price later. Competition breaks down and imperfections – for example, short term working, poverty and inequality, exchange rate volatility, competitive devaluations and lower wages – emerge with lasting impact.

Without China’s continued growth, there is no economy in the world large enough to absorb further contraction in the EU and the US. Only those who believe that economic policy making is akin to a Shakespearean play ‘full of strange oaths’ will enjoy the summer recess.

But action is required now if deflation’s short period is to be defeated, best illustrated by the life of the mayfly than that of an elephant.

A menu of policies should include a return to managed global exchange rates for a period of time, fiscal stimulus in order to ease domestic debt burdens, and a continuation of QE in the EU. Falling prices are little comfort for the indebted householders and unemployed. It is better to end austerity now than regret doing economics by numbers.

The authror is a visiting fellow at Manchester Business School, and formerly the chairperson of the Irish and Jersey Competition Authorities.

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