There is limited room for manoeuvreby Jagjit Chadha / July 19, 2016 / Leave a comment
“So, there are six cardinal colors: yellow, red, orange, green, blue, and purple.
And there are 3,000 shades.
And if you take these 3,000 and divide them by six, you come up with 500.
Meaning that there are at least 500 shades of The Blues.”
H20 Gate Blues, Gil Scott-Heron
When faced with a complex systems of inter-related equations, economists are used to undertaking perturbation analysis in order to understand relationships. To do this, we shock the economic system and trace out the effects on certain variables. We may be in interested in whether the system is stable; does it return to equilibrium in the dynamics of how variables respond, or jump from one resting point to some other? David Cameron’s decision to hold a referendum and then Britain’s decision to “Leave” the European Union has certainly shocked our economic and political settlement. The question is whether this shock has revealed something about the system or has acted to undermine its fundamentals.
The collective response was a palpable emergence of the blues in many metropolitan quarters. How could the country have become so fragmented that those with frustrated expectations could out-vote those who were willing to maintain the status quo? And subsequently measures of economic and political uncertainty have rocketed. We neither know what kind of trading regime for our goods and services will obtain post-Brexit, nor do we know when any deal might be struck (when it is, the financial sector may undergo a sharp contraction). We also do not know very well the preferences of Theresa May’s new Cabinet and do not have an especially effective Opposition. The economy’s immediate response to Brexit has been to go into a tailspin: measures of consumer confidence, business investment and house prices have fallen sharply. Indeed, as a further sign of the blues, people are turning to holding notes and coins, with the growth rate in those holdings considerably greater than that of income. As all serious economists warned: the vote to the leave the EU will increase significantly the probability of a recession.
Accordingly, the standard levers of stabilisation policy are being…