Econ 101

I have been thinking for a while about whether everyone should be taught economics at school. The more the merrier I'm sure most would say but teachers' time is, of course, limited. Economics therefore has to be more beneficial than other subjects in order for it to make it into the busy curriculum.

I am going to leave exactly which subjects are less 'worthy' to others who know about such things, and instead focus on the benefits of economic knowledge. I am no expert on the subject but I have studied it, and often find myself enjoying a particular vantage point denied to those who haven't.

The boys behind Freakanomics have clearly demonstrated that an economically-trained mind can help explain most of life's peculiarities, or at least those concerning humans. The fact that their books are bestsellers leads me only to conclude that many economically-untrained minds find their results interesting as well.

Of course there are many benefits to greater economic knowledge for the individual, not least a better understanding of the world. My thoughts, however, have centred around the effects of wider economic knowledge on society as a whole which seem to be overlooked. That is to say that I haven't heard of them, and despite my looking.

In a democracy every voter has a responsibility to understand what they are voting for. This may be a lot to ask for, but incremental improvements are improvements nonetheless. In the past voters have chosen their representatives on the back of an ideology, leaving policy details for their representatives to decide. More and more these days, however, political debate is focused around policy detail, with the public being asked to decide between details, albeit important ones, by exercising their right to vote.

Take the recent election for example: all major parties went into the election with the pledge to reduce the deficit. Therefore the choice for voters was only how to reduce the deficit? This is not to say that this kind of scrutiny from the public is a bad thing. It is clearly more desirable to have an interested populace. The level of 'fine tuning' debated highlights how much agreement already exists, which is to be celebrated. But it does raise the question that if the voters are choosing the policy details, do they understand the problem well enough?

The Times recently featured the results of a Times Populus poll. Respondents were asked to indicate how much responsibility for the budget deficit resided with a variety of groups. They were asked to mark each out of ten, with ten meaning that they bear complete responsibility. A sample of the results are detailed below.

The banks - 65 per cent scored them between 8 and 10.
Gordan Brown & Alistair Darling - 42 per cent scored them between 8 and 10.
George Osborne & David Cameron - 21 per cent scored them between 8 and 10.
"Those who took out mortgages and debt they couldn't afford" - 40 per cent scored them between 8 and 10.

This should clearly be worrying. That 21 per cent of the respondents thought that the Tories were responsible for the deficit when they were in opposition, I find incredible. Since the crisis broke we have had significant media coverage, albeit much of it rhetoric, and an election to educate the public on the economic situation. Whilst I don't expect an average answer to include commentary on the exchange rate and its affect on the Balance of Payments, I would expect virtually all able adults to know at least who wasn't in power at the time.

The last result I have quoted there is also fascinating: 40 per cent of the respondents thought that those who took out debt they could not afford were largely responsible for the government deficit. This amazes me. I can see the logic in a train of thought that goes, people who can't repay loans, make banks fail, and cause governments to bail them out, but I can't believe 40 per cent of people think that this is what actually happened!

Firstly, and this I admit might be a bit of information the average man may have missed, is that the quoted figures for the 'deficit', and certainly what our votes were supposed to tackle, exclude the costs of bailing out the banks. Having said that, it was recently widely reported that the taxpayer can expect to make a decent profit on the bail outs. So I wonder why these people think we have to cut back because of a profit-making deal?

Of course they may be smarter than I give them credit for. They may actually be referring to sub-prime borrowers in the USA which certainly did trigger and significantly exacerbate the crisis. However the actions of these borrowers were not co-ordinated and, much like the classic floating table trick at a Seance where individuals lift a table without knowing that they are, attributing blame or cause to these individuals seems wrong. If I may stick with the metaphor, the question 'who caused the table to float?' may be more accurately answered, 'the magician overseeing the trick did'.

The truth I believe is fairly simple, the government of the day matched its spending to the size of the economy. I am leaving out ideological issues regarding the size of the state for a second. The size of the economy was found to be inflated, or enlarged by a 'bubble'. Whilst blame could be laid at some people's doors for bursting the bubble, the false size of the economy was as true before the crisis as it has been proven to be now that it has burst. The real economy has been found to be smaller than previously thought, and the government has to cut back its size to suit.

'Who caused the bubble?' is a different question and one where the possible answers are far too numerous to cover here. Suffice to say that whether you think it was bankers' greed, Thatcher's easing of credit regulations, globalisation, leaving the gold standard or a myriad of other touted reasons, recessions have occurred throughout economic history and although they are all different, it is widely accepted that they are a characteristic of human nature.

How and when the government's spending is to be reduced is a matter for debate, and for voters. The implications therefore of significant ignorance on this issue should be obvious. Huge decisions will be made on the back of the election results which are founded in ignorance. Debate is raging over public sector job losses 'caused' by bankers excesses and our 'debt-fuelled' society. Reducing your costs when your income falls is so obvious to me, that I can't believe people are arguing against job losses because the deficit was 'not our fault'. No one ever said it was!

Would wider economic education have averted this crisis? I think not. Would wider economic knowledge make the discussion and process easier? I think almost certainly. Would it also produce more appropriate policies to remedy the situation? I think it must, and that is the greatest shame here. Our ignorance as voters is misguiding our representatives from taking the right actions and restoring economic well being for all of us.

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