CSR and economic confusion

Economics is an imperfect science. It never fails to amaze me how clueless everyone is when it comes to understanding the economy and even worse when it comes to trying to manage it.

I bring this up, because at the moment, some sort of understanding of economies would be useful.

James Heckman, a Nobel winning economist, was recently asked how best to tackle the downturn. He said: “I wish I knew more and I wish our profession did. Macro economics is not a science, it’s a patchwork of theorems and bad data. There is little serious work on the subject, which seems dominated by beliefs.”

Reassuring isn’t it?

The Conservatives this week announced £81bn worth of cuts over the next five years through the comprehensive spending review. They claim the cuts are ‘unavoidable and are the only way to reduce the deficit albeit at the price of 500,000 people losing their jobs in the public sector.

Labour on the other hand say purely taking money out of the economy risks a double dip recession. More welfare money will be spent on supporting the unemployed whilst less tax will be paid into the system. According to postman Alan Johnson, about £41bn of cuts in combination with targeted public sector investment and increased taxes is a far safer route out of recession.

Both are just economic chancers in reality, betting on one ideology over the other. Neither knows the answer and that is no disrespect to them, because no one ever has. And if no one has ever known the answer, what chance does a layman like me have?

I look to the newspapers for guidance, but they don’t offer much help either. Take Sunday’s Observer for example.

Will Hutton said: “Never before has a country with such a large economy, carrying so much private debt, taken the experience of near financial collapse to squeeze its budget with such severity and speed…

…

“The gamble did not have to be taken. The scale of spending cuts were not ‘unavoidable’. The country was not on the brink of bankruptcy. The stock of national debt built up over the decades lies in the middle of the international average as a proportion of GDP. Indeed, the national debt has been proportionally higher for 200 of the last 250 years.”

Well someone tell DC quickly. He is making a grave mistake.

But then a page later my fears are put to rest by Andrew Rawnsley, who concludes the cuts are not as severe as expected.

“The great squeeze will reduce public spending from its current level of 48% of GDP to about 41% by 2014-15. That is above, not below the postwar average for Britain. It is fairly typical of a European welfare state. Spending will fall to about the same proportion of GSP as in 2007-08 when Ed Miliband was a senior aide at the Treasury to Gordon Brown. In cash terms, at the end of the four years, the government will be spending 6% more than it does now. In real terms, the coalition will be spending more than when New Labour came to power in 1997.”

Well in that case I'm not so worried.

Who do you trust, rather than, what do you believe seems to be the most relevant question at the moment. And until the impact of the cuts start to be felt, this will be the dividing line in British politics.