Friday, 13 March 2015

An ecosystem not an accounting ledger

Andrew Fisher, author of The Failed Experiment ... and how to build an economy that works, writes that we should conceptualise the economy as an ecosystem not an accounting ledger

One of the most nauseating aspects of this pre-election campaign is the ubiquity of policy statements along the lines of "we will introduce [insert policy here] by raising £3.72bn from a tax on [insert thing to be taxed]" or "we will cut [insert bad thing here] by x% to pay for [insert good thing here]".

The rigorously independent IFS has also created an online app to allow you to feel a bit like [insert tedious politician here] and play 'How would you balance the books?'

This is reductive simplism - and bears only limited resemblance to what would happen in real life: you cannot treat economic policy like an accounting ledger. The economy is not static but dynamic - like an ecosystem.

If you make changes they have knock-on effects. In the context of ecosystems we are comfortable with accepting this, we know the effect of deforestation or of hunting top predators to extinction. That nice Mr Attenborough on the BBC has spent decades patiently explaining to us - even if you dozed off during GCSE Geography or Biology.

The economy works similarly - cutting funding or raising taxes (and vice versa) has knock-on effects.

To use a real-life example to illustrate my point, take Iain Duncan Smith's much vaunted (usually by himself) welfare cuts. He has achieved nowhere near the overall reduction in benefit cuts that he promised and that was set out in detail.

This is not an issue of failing to deliver. Despite an unprecedented level of brutality - with benefit caps, freezes on increases, punitive assessments, sanctions and all the rest - the failure to fix the labour market or housing market has meant increased eligibility for tax credits and housing benefits because wages don't make ends meet and rents are so high.

On a micro level, on paper the bedroom tax should have saved considerable amounts (leaving aside any question of fairness). However, through the dynamic impacts of discretionary housing payments, and the lack of available housing to downsize into, it has not saved anywhere near its projected amount.

The accounting ledger approach really falls down when it comes to proposed investment (whether funded by increased taxation or borrowing). And this is why politicians find making the case for borrowing tricky - because they can't say definitively quantify those knock-on effects.

What we do know is that if we spend billions on, for example, building council housing then it creates good skilled jobs - and benefits supply chains. The workers employed will pay income tax and spend their wages in the economy. The people who move into those homes will want to furnish and decorate with a knock-on boost to the economy. The rents they pay will also provide an income to the council that - history tells us - more than compensates for the cost of maintenance; and for those tenants who don't work the housing benefit is lower because council rents are lower (and is merely being recycled within the public finances).

Of course there are even more tricky to quantify economic benefits - such as the health benefits of new higher quality housing, less overcrowding, the benefits of stability of tenure on children (compared to the disruption that housing insecurity can have on children's education), etc.

Despite the complexity of an ecosystem approach to the economy, it has two distinct advantages. The first is the tally with reality; and the second is it then becomes easier to integrate economic costs and benefits with social and environmental benefits. We look at the big picture, think more broadly and put our economic policies in a social and environmental context.

This second advantage is a key component for governmental economic policy-making. Private businesses externalise their costs, e.g. labour costs can be driven down because employers don't have to pay the costs of unemployment; and environmental pollution is acceptable because those costs (e.g. to air quality) are also socialised.

Government should not think it this reductive accounting ledger frame. We must set out our economic policies in their full social context - as part of the ecosystem - and if that means we can't in all honesty put a precise price tag on it then perhaps that's better than the fake certainty of the accounting ledger approach.

We should embrace the complexity of the ecosystem and reject the dumb simplicity of the accounting ledger. Or as the subtly-chosen photo illustrations suggest, think like Attenborough not Duncan Smith!


derine smith said...

Yeah dear, that is true I also came to know about this from my uncle Dr. Aloke Ghosh. He is a professor of accounting and also a well-known accounting analyst. So he keeps telling me about things like this.

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