Uncertainty: What Next?

I start with an apology. I promised that Monday last I would be posting a blog, jointly authored by my friend and colleague Michelle Thomson, reflecting on our own research into Brexit and on the outcome of negotiations between the EU and UK. We didn’t. We couldn’t. Negotiations have dragged on beyond the absolute final date of last Sunday. By Friday morning of December 18 the only thing that is certain is uncertainty. But that in itself is telling.

Scanning the political and economic horizon across the globe it is very noticeable that the major challenges we face are all filled with uncertainty. Not only uncertainty however, but also very high consequences. Gone are the days when politics operated in a context with given and limited ideological divides. Gone is the easy convenience of incremental social and economic progress, which although too slow for people such as myself, was nonetheless on a clear pathway.

There was always uncertainty of course. But it seemed more limited and manageable (at least that is how I reflect upon it). There were even university courses addressing themes of “Continuity and Change” (I tutored on some, including in the early days of the Open University). Continuity and stability were often given particular prominence, with less focus on dealing with uncertainty. Economics was reduced to mere equations and to spreadsheet style exactness. The “greats” of economic thought who actually appreciated the centrality of uncertainty and human behaviour, from Adam Smith to Karl Marx were often ignored, or reduced to mere caricatures.

Today however we are surrounded by uncertainty. Predictions of what will happen if only we follow the latest magic bullet are increasingly shown for what they are, the dying embers of an always false certainty about the future's predictability.

Allow me to give one example. Back in late 2016 when I was an MP, I made a speech on quantitative easing. Post 2008 it had been hailed as the magic trick of central bankers. Although I would change my words if I was speaking on the topic today, I think there is still some merit in my argument (but await censure from friends and foes alike). My key point was that whatever the predictions were, the actual behaviours that occurred were very different from those intended. A hoped for increase in business investment for example, was never achieved. Here is part of my speech taken from the Hansard record.

The ordinary person in the street would recognise that we live in troubled times. There is increased uncertainty and the stability and certainties of the past seem to have flown past. For example, who could have foreseen at the outset of QE that today many economies would be experiencing weak growth, low business investment, collapsing prospects for pensions, near negative interest rates penalising savers and a huge increase, as the hon. Member for Bishop Auckland (Helen Goodman) said, in wealth inequality.

I would like to add something else to the equation. We need to recognise the political instability that has arisen. People are feeling that they are disfranchised, have no voice and are losing hope. That is one of the profound social and political consequences that deserves to be considered.

It was not supposed to be like this. It may be wise to cast a critical eye over what seemed to most people, myself included, an entirely logical response to the crisis some years ago. It is good that people are able to reflect. Although it comes hard for many politicians, it is good when we, too, are modest enough to recognise that we do not always get it right and that we need to learn from experience. For example, many people in recent years feel that the UK Government’s economic plan has been blind to some of the consequences of QE……….

Let us recall some of the antecedents of QE…... it was back in 1969, in a paper by Milton Friedman entitled “The Optimum Quantity of Money”, that the idea of what we know today as QE was created. Friedman contended that if policy interest rates reached the lower bound of zero, it would be appropriate for a central bank to purchase assets—Government bonds in the first instance—to create a wealth effect that it was no longer possible to achieve through the conventional interest rate policy of the central bank. Friedman’s notion of quantitative easing was that asset prices would be boosted, leading to an increase in confidence and spending through the wealth effect. In turn, economic activity would be given a boost.

(But) it has not led to what Friedman expected. In particular, the key aim of creating an increase in confidence and therefore investment has not transpired as hoped. Today, too, central bankers seem content to see inflated asset prices.

But who speaks for the millions of savers around the world? Who speaks for the ordinary men and women who have paid the price of banking failure? Where were the UK Government when our economy failed to diversify or balance in the aftermath of the global financial crisis? Where were the necessary fiscal measures when it transpired that the relatively poor were paying the price for the mistakes of the wealthy?

As I reflect in late 2020 on some of the major economic and political challenges of our time, for example the demographic challenge of a declining working age population combined with a burgeoning older population, we see many economists and politicians continue to cast a blind eye over the problem as the uncertainty it brings doesn’t fit with their preferred theories (or ideology).

Similarly, the challenge of climate change, although receiving more attention than demographic issues, is too often reduced to a simplistic discussion of government targets (as if government targets were the sole driver of human behaviour).

Add to this, and other challenges, the immediate problems of an unknown Brexit and the world is a place of remarkable uncertainty. In such circumstances, governments amongst others need to be more fleet of foot, more open to innovation and change, less rooted in the false certainties of the past.

My own prejudices (and some research) suggest to me it is small and medium sized countries that are best equipped to cope with the rates of change that we face. More fleet of foot, more innovative and more in tune with their populations. But time will tell.

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