Why simple economics makes everything so easy to understand.
Economics is defined as the social science that studies how people interact with value. Seems easy enough to understand, so why do economists have such a bad name? Mostly that is because they can’t seem to agree on many things, but moreover the track record for making predictions even amongst some of the most renowned economists is quite dire. When Paul Krugman, who won the Nobel Prize, famously said that “the Internet’s impact on the economy has been no greater than the fax machine’s” (2005), it makes it difficult to know who and what is right. So, what to make of the current economic situation?
Fact is, 2020 created a big a hole. What makes things worse is that we already had quite a big hole left from the Global Financial Crisis of 2008. What we have done is spend our way out of trouble, and we can’t pay the bill as global debt is far larger than our economic output. Problem is, the bill has got to be paid, otherwise our entire global financial system falls apart. Clearly, if someone defaults on their debt they can’t borrow, because no one is going to lend to them anymore.
There are only three options out of this mess: one, we leave it to our children to sort out. Not the first time we have done this, lest we forget the UK only recently paid off the last of its debts to finance the great wars of the twentieth century. Politicians like it, because children cannot vote, and kicking the proverbial can down the road has been a tried and tested methodology to win current elections.
There are higher taxes, which is inversely correlated in popularity to the first option, amongst the people currently in charge of these things. Not entirely surprisingly, more taxes are also not popular with those voters earning more than the average. Their total tax bill has been more than half for quite a while, probably even higher when you take into account things like VAT or national Insurance “contributions”. However, there seems to be a limit to how much more we can be taxed, as it lowers consumer spending which now makes up the majority of our gross domestic production.
The third option is inflation or making the debt worth less by making everything else more expensive. Higher house prices. Check. Higher transportation costs. Check. Higher food prices. Check. Higher wages? Maybe, but this is where it gets complicated again and has to do with the money multiplier effect. Then you have interest rates, which may douse too much water on the fire, but otherwise we may also get hyper-inflation.
Which brings me back to human behaviour and the study thereof, which is what economics is all about after all. If you were in a café and had a nice meal with your friends but suddenly realised you didn’t have enough money, who are you going to call? The parents, of course. They will always come and help out, no matter what the cost, and it is called unconditional love. Who do the parents call if they need help? Ghostbusters. The point is, there is no one to call. Everyone is grown up, the rules are clear, and there is no free lunch, which only leaves one option out of our current dilemma: dine and dash. The plan or rather the hope is that things will be long forgotten by the time the next generation finds out the extent of the inheritance bill they have received. It is simple economics.
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