A sideways look at economics

Sometimes my morning run takes me from my house in Oxford to the canal towpath that runs north to south through the town. It’s very quiet and beautiful, mist rising off the jade water, the sun appearing through the mist. As you get closer to town, the canal is lined with narrowboats, some of which are visitors from the further reaches of the canal network. Others are permanent fixtures: homes alongside the towpath. The visiting boats are wonderful. They fill the mind with imagined journeys, cups of tea and scones, locks, jigsaws, kingfishers and slow, watery discussions. But I have mixed feelings about the permanent fixtures.

One reason is that I, like many joggers up and down that towpath, have become all too familiar with one of the inhabitants who shouts abuse at me as I run past. He doesn’t like people on the whole, and has reserved a particular ire for joggers, whom he describes as “breathing all over everyone”. Since he’s usually ensconced inside his closed narrowboat and I am usually a minimum of two metres away, even in these COVID-affected times it feels over the top to me, and it puts me off. Another reason for my reservations is the fact that those things are meant to be boats, they’re meant to move. I can certainly see the attraction of living there: close to the city centre; quiet; pretty; relatively inexpensive. But it’s a boat! I feel like the spirit of the thing is being crushed somehow if it’s never allowed to do its thing. I know, I know, it’s an inanimate object and doesn’t have feelings. I’m being irrational, but that’s how I feel.

I am old enough to remember when the economy did its thing too. Sometimes, like a narrowboat puttering along a canal. At other times, the best times, like a yacht skimming over the waves in a fine and delicate balance between the wind and the water, the sails and the tiller. It was fun observing it and commenting on the performance of the sailors. Anyone watching could see that handling the boat correctly required skill and close, constant attention. Minute, almost imperceptible adjustments of the trim of the sails and the position of the tiller were what kept the boat humming along. In safe hands, you almost forgot that anyone was guiding the boat at all. You could just sit back and relax and watch a finely tuned, well-built vessel doing what it was built to do. A joy to behold.

Of course, when things go wrong at sea, it’s not nearly so pretty. If the boat gets too close to the rocks then hard, ugly turns have to be made; everything slows down as the boat wallows in the waves, shipping water. There are awful moments when it looks like it might capsize or be holed on the rocks. And then, once the crisis is averted and the boat back in clear water, you can breathe out again and watch it pick up speed, the lines tauten, the sails snap full, and the whole crisp, joyful experience recommences.

And then there are the real disasters when the boat hits the rocks. Then the sails come down and the oars come out, or even, in worse situations, the anchor is thrown overboard and the boat hauled off the rocks that way, while someone is furiously bailing out or trying to bodge a fix to the holes in the hull. In those circumstances, the boat is a sad shadow of its former self. It’s not a boat anymore, it’s just a lump of wood and plastic that has to be hauled through the waves by brute force – ugly to watch, slow and difficult to do. It’s a weight that just, barely, keeps you afloat, that you have to drag along by muscular strength – not a boat but a life raft.

My anxiety, as we enter 2021 with the global economy on the rocks again, is that there is now a whole generation of people who can’t really remember what it was like when the economy was a boat not a life raft. Perhaps those people will believe that the only way the economy can move is through the ugly, brute force of macroeconomic policy. It wasn’t always so!

Time was when observers of macroeconomic policy would be obsessed by movements in interest rates of 25 basis points in either direction: was it too much or too little? Is the timing right? Hard to imagine now, but endless articles were written and heated discussions had on TV about that kind of thing. Was the inflation forecast too high by a tenth of a percent or so? Would GDP growth be 0.4% this quarter or 0.5%?

All those minutiae, that fine tuning, have been bulldozed by events from the Great Financial Crisis onwards. The global economy hit the rocks in 2009 and has been hauled off by the brute force of fiscal and monetary policy and QE ever since. Those actions were necessary, indeed vital at the time, and arguably did not go far enough. But the years between the GFC and the outbreak of the global pandemic have been ugly years, years when the life raft of the economy was dragged along by policy. And the advent of COVID has necessitated actions that are uglier still – sky-rocketing debt, QE to infinity and sledgehammer fiscal measures. Don’t get me wrong: these measures were and remain essential – for now, at least.

But measures like that have consequences, increasingly grievous the longer they are left in place. In the end, if we don’t change something, we’ll all become like the bloke on his motionless narrowboat, bored and angry, fearful of the world, shouting at passers-by who have the temerity to breathe in our vicinity.

This is not how it is supposed to be. The economy is not supposed to work this way. It is important to remember that it can skip along almost unaided, responding to the waves and running over them almost as though it has a character, an animating spirit of its own. Almost as though it relishes the sensation of freedom and speed. It’s hard to remember that at the moment, but it’s true.

My sincere hope in this new year is that we remember and restore that, the natural functioning of the global economy. We need to haul the economy off the rocks, yes. But once that’s done, just imagine if we could stop using brute force for a change, and let the economy come alive again. What a great year that would be.

Happy New Year!