Dear Lord Above, If Only City University Employed Economics Professors Who Knew Economics

It is possible that this expansion of the universities wasn’t all this good an idea. For example, the upgrading of Islington Technical College into City University seems to have led to people being employed to teach economics while they don’t grok economics.

Richard Murphy is the Professor of Practice in International Political Economy at City U. No doubt all are delighted at the prestige he brings to that institution. The children paying to attend that place of education might not be so thrilled.

To take an example. We are told that the British economy requires systematic change because there’s a low savings rate:

The FT includes an article on the personal debt crisis in the UK today. It makes clear the misery this creates. But it also makes clear that systemically we have little way of addressing this issue now. That is because in overall terms people in the UK can no longer meet their needs and save. This chart shows we are now net overall borrowers, and to a greater degree than other, equivalent, nations:

There then follows this chart from the FT.

National savings

With further commentary.

It is a pre-requisite of managing debt that there must, overall, be periods of net saving. Periods of rising income assist that. And these phenomena are not happening in the UK now, on average. The result is a rising debt problem as people borrow to make ends meet. And that, the article makes clear, is what most of the borrowing is about. The era when personal debt crises were created by profligate spending has gone: this is now about simply inability to pay basic rent, utility and food costs. So what is to be done? Of course Universal Credit has to end: it is known to be exacerbating this problem, by design.

But most of all, the UK needs a pay rise. At a time when profits continue to rise as a proportion of GDP, and stock markets continue to hover near record highs, what we have in this country is massive economic injustice. Millions of people are stuck in debt. Millions more have no margin for error when it comes to unforeseen but predictable crises. And that is happening in a wealthy country. We can afford a pay rise. The minimum wage is still too low. Benefits are too mean. But neither solve the crisis for the middle income earner. For them the solution is systematic change. And if government will not act then they need to. The UK needs effective trade unions geared to the needs of the modern economy. I fear it has not got them. And that too is part of this problem.

At which point some actual economics.

Consider what makes up the balance of payments. We’ll keep this simple so that the Senior Lecturer might be able to mouth along with the explanation. We have the current account, the net exports of goods and services and imports of same. We’ve the capital account, the net import of capital – equity, debt, direct investment etc – and export. Note we are being simplistic here, we’re not going to bother with financing flows, so no interest, dividends etc. But the point will still stand.

The important thing about the balance of payments being that it always does balance. A deficit on the current account will be equalled – by definition – by a surplus on the capital account and vice versa.

So, now consider this list of countries by current account surplus or deficit.

Every country in that chart which has a positive savings rate has a current account surplus. Thus a capital account deficit. Every country which has a negative savings rate has a current account deficit and a capital account surplus. That’s just the way it has to work.

If you export less in value of goods and services than you import then you must also be importing capital and vice versa. That’s just the way the balance of payments works.

That is, what the chart is not showing is savings by British households but the inevitable corollary of the country running a trade deficit.

Now, maybe this is a bad thing. Maybe it isn’t. And there are certainly economists who argue that it is that importation of capital – that domestic savings rate as against domestic investment – which drives the current account deficit, not the other way around.

But consider the cure that is being prescribed. Wages must rise so that the average peep has more, thus increasing savings. Which isn’t how it works at all. There’s something called the marginal propensity to save. Or the inverse, to spend. It works out that lower income people save a smaller portion of their income than richer do. Not exactly a surprise, give the poorest more income and they’ll get their protein from the butcher not the cat food aisle. Add the same sum to an already £80,000 a year income (chosen just because that’s about where top 10% households are) and it’ll be the ISA that gains.

So, we shift income from richer people to poorer. What happens? The savings rate declines.

Yet the prescription from our bod teaching economics at City University is that shifting income to the poorer is a method of increasing the savings rate.

That expansion of the universities really might not have been all that good an idea.

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