A government trying to manage an economy is rather like a child trying to play that game of placing a number of small ball bearings into a series of slots on an enclosed board. The game proceeds by nudging or shaking the board in different directions to try to tempt each ball into one of the slots. If you nudge too hard or in the wrong direction you dislodge some of the balls you have already placed in the right holes. Success depends on administering the right series of shocks in the right directions to complete the task. Too much force will wreck it. Too little will not achieve it. There may be some way of calculating the right forces, but in the real world it comes down to experience and judgement, to trial and error.
So it is in practice with managing the economy. The government does not have the luxury of just getting one ball into one hole and declaring success. It needs to keep inflation down. It needs to curb the deficit. It needs to preside over decent growth of output. It wants real wages to go up, without inflationary wage rises.It wants more investment and saving, and fewer imports. It’s a lot of balls to juggle.
Time was when government simplified things. They decided there was a misery index. If you added the inflation rate to the unemployment rate you had the index. If it rose too high – into double figures – too many people would feel badly off and the government’s popularity was at risk. The last government gave up on that and declared the Credit Crunch was to blame.
It’s still a good start to keep the unemployment and inflation rates down. A combined index of under 10% is an exacting target which would make people feel better. However, it’s not enough. The government does have to hit targets to get the deficit down, and need to keep the growth rate up. There are at least four balls to juggle.
They are related. If inflation goes too high, curbing it will damage the growth rate and could boost unemployment. If the deficit is not brought down, that too can drive up long term interest rates and cause slower growth and less employment. Higher inflation with wages under strict control cuts spending power and therefore reduces domestic demand.
Last year public spending was still going up, the deficit was too high, inflation was rising. The good news was growth resumed, job creation picked up and unemployment started to come down. This year, to keep growth and job creation going, the authorities have to get better at hitting inflation and lower borrowing targets. If they don’t the nudges to sort them out could dislodge the areas that are working.