Boom. Just when you thought we were getting over the post-Covid cost-of-living crisis of the early 20s and could get back to grappling with the (in comparison) rather mundane economic problems of runaway public spending and an absence of economic growth to fund any of it – and just being generally poorer than we were 20 years ago – that man Trump comes along with his helpful Epic Fury.
Quite how he didn’t foresee that Iran might not take it all lying down is beyond even the analytical ability of my 12-year-old son. And trust me, we do talk about such things in the Sloan household. There was, earlier this month, a WhatsApp exchange (yes, we let our kids use these devil devices) on the killing of Ayatollah Khamenei. For the record, the Sloan household has it down as a war crime.
But to the substantive point – another cost of living shock. And quite possibly a global recession lurking just around the corner. Thank you ever so much, Donald.
But it’s not as if the cost-of-living crisis ever really stopped in Guernsey, is it?
Set aside this week’s announcement from the gas company, the continuing rises in water, electricity and heating costs over the last couple of years have been quite unreal. Inflation might not be what it once was, but we seem to have 8-10% increases in essential utilities baked in, year in, year out.
And it’s the attitude that’s the real kicker. A shrug of the shoulders. A sense that nothing can really be done. A few platitudes about global markets and inevitability. It’s becoming the island’s default culture – sleepwalking into going out of business.
We’ve drifted into the mindset that we can just keep heaping on costs. As if there’s no breaking point. As if households are infinitely elastic. They aren’t.
The bailouts and policy responses of the early 21st century have rather anaesthetised our experience of downturns. I’ve written about it before – those interventions didn’t remove economic hardship, they deferred it. And in doing so, they’ve contributed to the position we now find ourselves in: structurally more expensive, and, in real terms, poorer.
‘We can’t justify a £52 lunch – middle income families cut back on days out,’ ran a BBC headline this week. It was actually quite an interesting piece – highlighting how much higher everyday costs are than they used to be. The lunch in question wasn’t extravagant: a couple of paninis, drinks, snacks at Costa.
I can remember lunch at Costa costing less than a fiver. Times do change.
I’m not sure the Sloan household will be eating out at Costa that often at those prices – and we’re apparently not even members of the ‘squeezed middle’. Now, I appreciate that this type of hardship isn’t going to generate much sympathy from some of my colleagues in the States, who tend to focus more on those lower down the income distribution – or, as the press put it last week, ‘the unsupported’.
But as I tried to explain during the GST debate, this last cost of living shock affected pretty much everyone. Outside the top few percent, most people live fairly close to pay cheque to pay cheque. They simply cannot absorb continual increases in taxes, utilities and everyday costs on top of everything else.
And that’s the real issue – not just the cost itself, but the growing sense that nobody is really in control of it. And worse, that no-one in government cares.
As an economist, I’ve rather gotten used to people discounting that kind of argument. Brexit probably started it, but social media – and now AI – have accelerated the trend. Expertise is no longer deferred to; it’s something to be worked around.
Which brings me to a comment attributed to Paul Krugman, Nobel laureate, which came to mind during Scrutiny’s public hearing with the Housing Committee last week – economists are most listened to when they are in least agreement, and least listened to when they are in most agreement.
The catalyst? The suggestion that the Housing Committee is considering rent controls – a policy lever that creates an unusual degree of harmony of opposition amongst economists of both left (Krugman is no economic Genghis Khan) and right.
When economists across the spectrum agree, it usually means something has gone badly wrong in the policy discussion.
It was, for me, a mildly disappointing hearing.
Housing’s approach is, in many respects, entirely sensible – do a lot of small things better and hope the cumulative effect nudges supply up by 10–15%. But the difficulty is one of scale. On my back-of-the-fag-packet maths (it’s an idiom – I gave up cigarettes shortly after alcohol 14 years ago), we need increases of that order just to stand still, given years of under-delivery.
Incremental improvements are helpful. They are unlikely, on their own, to fully resolve the problem.
For context, this isn’t just a Guernsey issue – housing costs have risen sharply across much of Western Europe. But our constraint is more binding: we can’t simply move down the road to somewhere cheaper. Which is why the scale of the challenge probably requires something more than marginal gains – though perhaps Housing is keeping that in reserve for the final action plan.
In case you didn’t know, Paul Krugman is one of the most influential economists of our time. According to the Open Syllabus Project, he is the second most referenced author on US college economics course syllabi (don’t ask me who is first – Wiki didn’t say). He also happens to be the reason I studied economics, having had my head turned by his 1994 book Peddling Prosperity, in which – spoiler alert – his general premise is that much economic nonsense is espoused by politicians (or ‘policy entrepreneurs’, as he called them) and passed off as serious thinking to a receptive public.
My personal bugbear nowadays is the phrase ‘economic enabler’. It really is a nonsense term. It can be used to justify pretty much anything – and often is. It’s economics by management consultant, and over the last 10 years the States has rather overdosed on it.
I used to use Krugman’s work when teaching first-year maths at Hull. One of the joys of a common first-year programme in the business school was trying to bring undergraduates of all persuasions up to a common (fairly minimal) level of maths and statistics. Many’s the time I saw marketing students’ jaws slacken as they attempted to fathom the intricacies of the Gaussian distribution.
The main example of his I used was this: it’s very easy to justify just about anything you want with a time series if you control the start and end points. Decades make for nice, neat markers – but often there’s little real insight to be gained from such arbitrary cut-offs.
Which brings me to the Oliver Wyman report on developing the finance sector.
I can’t say too much, because at some point, wearing my Scrutiny hat, I may wish to look more closely at Economic Development’s plans that flow from it. But what I think I am safe in questioning is this notion that because growth was 3% per annum in the three years to 2017, this is somehow a helpful guide to what might be achievable as a long-term structural growth rate.
To be clear – it isn’t.
That three-year period was a cyclical (and delayed) rebound in profitability of the finance sector after years of post-financial crisis doldrums. Using it to guide expectations going forward is, at best, optimistic. At worst, it suggests a misunderstanding of the underlying dynamics.
And that, I think, is part of the broader problem.
We’ve started to behave as if the numbers don’t really matter. As if higher costs can be absorbed forever, higher growth assumed, and gaps quietly filled with optimism and language, perhaps a nod to the odd economic enabler.
In some areas, it feels as though we’ve almost given up measuring anything properly at all.
But the numbers don’t disappear.
I don’t expect that to be a popular observation. It will be understood by a few and ignored by many.
But that doesn’t make it wrong.
And the longer we pretend otherwise, the more unforgiving the outcome will be.
Boom. Arithmetic always wins.
