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Is there really no alternative to perversity?

Hector McNeill1

Advocates of the mantra, "There is no alternative" would have something going for them if their policies were demonstrably beneficial for the constituency of this country. Prosperity is for asset holders and not wage-earners.

Policy-induced "stop-go", imagined to be a thing of the past, has morphed into neither "stop" nor "go", but policies maintain a sort of "quivering paralysis". What else can be expected when policy decisions negate what is required?

Is there really no alternative to perversity?

Inflation is caused by the inability of economic units to overtake the rate of increasing input costs, largely driven by monetary policy, with advances in productivity. As a result, cost-push inflation raises unit prices and depresses real incomes of wage-earners.

Therefore, when inflation takes hold there is a need to encourage investments with short to medium impacts on productivity. However, monetarists always do the wrong thing, they raise interest rates and this discourages economic units from investing in the needed productivity advances. At the same time, government might raise taxes so consumption declines robbing economic units of the needed throughput and use of capacity to minimize operational costs and upon which continued learning curve cost reductions are so dependent.

As a result the economy becomes depressed leading to undercapacity operations and therefore a further rise in overall costs. Monetarists interpret this perverse transition as a success of aggregate demand management. However the inflation they have attacked was not created by excess demand but rather in their policy distorting asset market prices, and their success in "taming inflation" has only built up problems for the next future. As a result the monetarist governors of interest rates and debt, in theory, are an effective "stop-go" mechanism whereas they might prefer to call it an "accelerator" which gives an image of a subtlely manipulated mechanism to "manage" that imaginary factor called "aggregate demand". The result, because of the perverse impact on productivity and technological advance, we participate in an economy robbed of vitality, hovering in a state of a policy-induced "quivering paralysis".

With quantitative easing the monetarist foot has pushed their accelerator onto the floor. This is driving cost-push inflation and a diversion of needed funds into assets and away from the accumulating policy-induced risks imposed on the supply side productive economy. This is leading to declining investment and productivity and an inability of the economy to raise nominal wages to compensate wage-earners for their falling real incomes; a state of affairs being felt by over 50% of the electorate. As usual, the income of those who speculate in and hold assets continue to rise, after all, the government's economic policies have always been directed at, and as confirmed by the Chancellor, "The promotion of prosperity" .... .... , for some.

There is a constitutional issue here. The constituents of this country, in the absence of an effective political opposition, need to ask and get answers to a simple question,

"What is the objective of macroeconomic policy?"

and on receiving a clearly definitive answer ( ;-) ) to demand that economists and the relevant minsters explain the mechanisms whereby they will sustain conditions that guarantee a growth in real incomes of all2.

They are unlikely to respond because this would place monetarism and monetary policy into the public arena as a subject for popular review, understanding and discussion leading to some notions of options. This would naturally lead to the public demanding some choice in the matter to support those options that would, for example reduce income disparity or have a likelihood of being more equitable in terms of benefits. The politicians and the party benefactors who control the media, naturally, would find such a spate of democracy a threat, with the electorate getting ahead of itself. They would do all they can to prevent this but would proclaim their unswerving support for the government's promotion of "prosperity". As I have stated often, we face a constitutional crisis caused by the lack of public choice on questions of macroeconomic and monetary policy and this has an unacceptable cost.

1  Hector McNeill is director of SEEL-Systems Engineering Economics Lab

2  The reader will know that they will not be able to provide this although they might get some academic to present a counter position argument between the "mumbo jumbo school" and that of the "gobbledygook school". Even worse, they might get the Bank of England to explain everything so we can all go home content in the knowledge that our "World beating" economy is in safe and competent hands reaffirming our durable faith in democracy.

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