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Why UK Treasury Economic Models are Out of Date, and Wrong

Economics / Economic Theory Apr 12, 2010 - 08:53 AM GMT

By: John_Cardy


Best Financial Markets Analysis ArticleI had a superb session on Budget Day last month with Joe Nellis, Professor of Economics at Cranfield, and he gave us some of his forecasts for economy in the next few years. The forecast could be summarized as that we would recover, but slowly.

It was interesting to see later, during the budget, the Treasury forecasts and compare, and as the papers have said today, 'Expert' forecasters think Darling is a bit optimistic.

But, as a non-expert, I think they are ALL wrong. I think there are some factors that their models cannot build in because they have no history.

Firstly, we have had 60 quarters of unbroken growth before this recession. It was the longest period of growth since 1945, so any modelling of recession behaviour is based on previous recessions, which happened a very long time ago. So much has changed in the 15 years since the last recession, I don't think the models will be forecasting correctly.

What are the changes?

1. Labour Movements. In the last few years we have seen political pressure over the number of immigrants here, most from EU countries that have the right to be here, and come in uncounted. No-one really knew how many were here, or what they were doing. I also think that no-one knows how many have gone home. So, labour was able to increase in the good times, and decrease in the bad times, without the government or economists really noticing. This has never happened in any previous recession, so is not in the model.

2. Communication. The world is now connected like never before. No-one really understands the impact of this, but you can bet that it's not in anyone’s model. What it does mean is that if I want to recruit a new web designer, he can be based in Delhi or Lahore, not in Oxford or London. It's easy to do, and to manage. Now, I can increase capacity cheaply and at low risk, without UK employment laws. So, as we come out of recession I can invest in new ideas and new projects without necessarily increasing the headcount. This makes me take more risk earlier in the cycle, increasing the likelihood that we recover faster.

3. Globalization of production. Much is being made of the lack of employment in this recession. But so much of our UK products are now made abroad, many of the lost jobs are not here, but in China, Indonesia or India. Even where production is not abroad, components or some processes are often made in the Far East, so the effect is the same. And in the Far East, they are flexible. So, as we increase confidence, we can increase production faster than ever before. You can bet that this is not in anyone’s model.

4. Types of Work. In the early 1980's we had plenty of people working in traditional, hard-working jobs like Mining, Steel etc. They went. So did most proper production. What is now called manufacturing is often assembly, employing far fewer here, but lots in the Far East. Consider the people you know. The parents at school. The people in your street. What jobs do they do? A huge proportion do jobs that did not even exist in the last recession. Computing, and the Internet has transformed the work we do, and that's not in the models. These jobs make it easier to recover from a recession. You can be more flexible in the hours you work. You can invest time in your own projects, increasing your IP, ready for when the upturn comes. Many people working in these have spent the recession re-investing time (and therefore money) in their businesses. When the recover comes, they will be stronger. This is the modern equivalent of investment, but I bet it's not counted in the models. When you switched off a machine it stayed switched off, and the people went because they did not have the skills to do anything else. Ask around, your friends have been doing things in the recession that will help the recovery to be faster.

So, overall I believe that it's very possible for us to recover quickly, more quickly than ever before. Whilst it was the deepest recession in modern times, the 'experts' also say it has not been normal. It was deeper than most expected. Given the depth, it was also shorter than most expected, and many 'experts'' say they do not fully understand why. In twenty years time, they will define 2010 as the new 1945, the new date where everything changed. We have not had any times like this before, so trust no-one who tells you the know what will happen next.

In twenty years time, Economists will have researched all this and will be agreeing that things changed in 2010.

John Cardy is a Director of a UK based Outdoor Toy manufacturer, selling Trampoline Products and Climbing Frames.  He writes a blog about life running a small business in the UK. He believes that people running real business have a more instinctive and instant view on what is really happening day to day and a better grasp on what the issues are than expert economists and politicians.

© 2010 Copyright John Cardy - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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