What if the national economy is like a household budget?

An inexpert population frequently internalises misleading economic ideas: experts should consider engaging on these terms rather than always trying to get the economics ‘right’

Matthew BishopIn 2012/13, there were 571,334 Year 11 students in UK state schools. Just under half went on to AS Levels the following year, of which only 23,049 took economics, or 8.9% of the total. We can hazard a guess that far less than 8.9% of the general public – say, 2 or 3 in every 100 adults? – have any formal training whatsoever in even the most basic economic contentions.

It takes accumulation of expertise to grasp complex, technical ideas, and our ability to do so evolves as we become more proficient. I was fortunate to study economics at A-level, and learned about a whole range of concepts – GDP, inflation, supply-side, opportunity cost, exchange rates, rent-seeking, monetary policy, comparative advantage etc. – that many SPERI Comment readers take for granted.  Yet we are a minority: to the vast majority these seemingly straightforward notions are impossibly esoteric.

This is why what Liam Stanley calls ‘narratives of austerity’ are so powerful, even though we – the dreaded experts – know they are nonsense. We know there is a consensus among economists that austerity doesn’t work. We know that slashing spending in a downturn to ‘manage the household budget’ will only undermine growth and make that budget trickier to balance as debt grows.  We know the suggestion that we’re ‘reaping what we’ve sowed’ runs counter to economic logic. As Polly Toynbee is fond of saying, of course you don’t rescue an economy in a slump by applying leeches!

But this is the problem: we only know these things because we study the economy.  To the wider population, our ‘expert’ interventions don’t resonate.  When we demand increased borrowing now to cut debt later, we are arguing against all intuition.  ‘No thanks’, people think: ‘I’ll vote for the person I trust to cut spending and debt’.

George Osborne won the battle of ideas, and gained an enduring reputation for careful and austere stewardship of government money, despite being the most fiscally incontinent Chancellor in modern British history. But, again, we know this; we’re the experts.  Yet Osborne defeated us, and a left that might have defeated him, by riding the wave of the simple, intuitive, yet utterly misleading narrative.

So, what is to be done?

The problem, as Jonathan Hopkin and Ben Rosamond have suggested (here and here), is that you cannot fight ‘political bullshit’ with facts: ‘Opponents of austerity need to think more about the theatre of the public sphere, rather than trying to reason the status quo into submission’, they argue. ‘Perhaps the only hope is to fight bullshit with bullshit’.  They are absolutely right, but I would add two nuances.

First, you cannot fight bullshit that has been widely internalised as everyday common sense with expert facts.  The battle is over at that point: you need to find and fight a different one in order to progress in the war.

Second, you cannot just tell people they are wrong. We are all simultaneously intelligent, well-intentioned, and completely unaware of the limits of our own knowledge.  If an expert haughtily says you’re wrong, citing a confusing counter-intuitive idea to prove it, it’s likely you’ll remain unpersuaded and even more determined to seek refuge in the simple explanation that makes sense.  This is especially so today, when, as Simon Wren-Lewis notes, expert advice is less trusted than perhaps ever before.

There was a revealing exchange last year on Question Time, in a discussion about debt (video here). ‘Economics is really simple’, declared a man in the audience.  ‘I’ve got £10 in my pocket. If I buy three pints of beer in Cambridge then I’m probably borrowing money. If I keep doing that, I’m gonna run out of money and I’m gonna go bust. It’s not difficult guys!’

Yanis Varoufakis was on the panel, and his response was characteristically combative: he pointed out why the man was clearly wrong, why his personal budget was not a good model for the country’s economy, and why a ‘savings spree’ would ultimately lead to a decline in national income and increased debt, rather than the opposite. He also appeared very satisfied with himself afterwards, and was subsequently cheered by many commentators, such as Chris Dillow, who welcomed a ‘rare’ intervention in a media that tends ‘to pander to [economic] misconceptions rather than correct them’. Dillow lamented the persistent public belief in fallacious metaphors, ‘the most notorious being that governments should manage the public finances as if it were a household’, and delighted in the dispatching of ‘the silly BBC Question Time audience member who was so ably corrected by Yanis Varoufakis’.

Yet at the end of his schooling – if you watch closely – it is obvious the audience member remained unconvinced. It doesn’t matter that Varoufakis was right: the common-sense – ‘it’s not difficult guys!’ – is too deeply embedded; the explanation too convoluted; and all he will have heard, like millions of viewers, is some complex jargon flying high above his head.  Add in a broader mindset of professional disparagement – he is denigrated and dismissed as ‘silly’ – and is it any wonder people detest experts?

A more humble – and altogether more imaginative – approach would have been to recognise the limits of everyday understanding of economics, and treat the man as a worthy interlocutor in a way that values his opinion and innate sense of propriety.

In this instance, Varoufakis could have started by recognising that, for the tens of millions of Britons not trained in macroeconomics, it’s an obvious truism that the national economy must be like a household budget.

I’ve always felt that this is actually a potentially useful metaphor if harnessed thoughtfully.  People’s instincts aren’t misguided: any good Keynesian recognises that budgets should be balanced over the long-term.  The problem is when ‘national debt’ is reduced to ‘credit card’.  People, like countries, carry lots of different kinds of debts, of different sizes, with different maturities, for different reasons.  This makes sense to them, so why not go with the grain of their understanding?

Varoufakis could have said that, yes, the man is right: if he borrowed to finance his drinking, of course that would be problematic. But by the same token, if he or his family never took on any debt then that could diminish their overall quality of life too.  Few of us have ready cash to buy a house, so we borrow many multiples of our income to do so – enjoying the security that comes with asset ownership – and this is far more than any country borrows, relative to its income, for anything.  We might finance a car to drive to a better-paying job.  Or our children might take on student loans, hoping they will eventually reap monetary rewards.  Although we have to ‘live within our means’ in the long term, in the short term we – people and countries alike – cannot afford to constrain our borrowing when it comes to building assets that take decades to generate wealth.

Such an approach would not only have been conciliatory, comprehensible and convincing, but, crucially, it would have opened up the possibility that a credulous public belief in austerity could be questioned on its own terms.  This is surely a better strategy for engaging inexpert people than confusing, contradicting and even humiliating them by, for example, cleverly and smugly invoking the paradox of thrift.

If physicists laughed at everyone who attempted to comprehend what is happening at CERN, or linguists mocked every grammatical error made by friends practising their holiday Spanish, people would soon give up trying to participate out of exhaustion. The same is true of professional economists: what matters is not getting the economics ‘right’, but rather speaking to people in a language that respects the limits of their knowledge, in ways that actually lead to a meaningful conversation.  Only by choosing our battles more carefully can we hope to win the broader war of economic ideas, ‘bullshit’ or otherwise.