IT is becoming impossible to decipher what is happening to the economy, for one simple reason: the data is of terrible quality. Take yesterday’s revised second quarter GDP figures, unchanged at 1.2 per cent growth. But their composition has been completely revamped from when the first edition of the figures were released a few weeks ago; they now paint a far better picture of the recovery’s sustainability, as I suspected they would.
The reams of analysis produced by the City and the media have, once again, turned out to be worthless. The original story was that the growth spike was due to unsustainable stock-building and government spending, and that investment was collapsing. The new story is rather different. Rather than collapsing 2.4 per cent, investment surged 1.2 per cent. Instead of contributing one percentage point of the growth, stock building accounted for a sensible 0.4 percentage points. It was not all good news: because real income is falling, and consumer spending rose 0.7 per cent, the household savings ratio fell substantially. But the morality of the tale is simple: don’t take data at face value. It keeps getting revised, often drastically so. Rely instead on gut instinct, surveys and multiple data sources. The sceptics are always right.
A FEW DO GET IT
ONE of the many myths of the recession is that finance was entirely unregulated prior to the crisis. Ed Miliband claimed as much yesterday in his inaugural speech as Labour party leader; the overwhelming majority of the population would undoubtedly agree. Yet that is a blatant falsification of history. There was an explosion in rules, regulations and regulators covering financial services over the past 15 years, many of them global – but the regulations addressed the wrong areas, were obsessed with box ticking, missed the real risks and actually encouraged banks to engage in dangerous practices while discouraging safe ones. Some parts of the financial world were largely unregulated; other parts were hyper-regulated; the whole architecture was backed by the implicit guarantee of the state and taxpayer, meaning that it was a rigged, rather than a truly free, market. Miliband, who has an MSc in economics from the London School of Economics, should know better.
While the Tory establishment failed to oppose Gordon Brown’s destructive reforms, some individual parliamentarians saw the writing on the wall early on. John Redwood, the Tory MP, was one of the few who spotted the flaws in Brown’s system of misregulation; as he put it yesterday, the City was more (but worse) regulated in 2007 than it was in 1997. He deserves to be quoted in full: “Brown set up an independent banking regulator, kept the Bank of England involved, and made the chancellor the chief regulator of the whole structure. He introduced extensive mortgage regulation which regulated the wrong things….and failed to stop the worst mortgage crisis in history… All his regulators, far greater in number and better paid than in the 1990s, got the main judgment call wrong. They did not control cash and capital sensibly, and allowed a boom. They then controlled money too fiercely, and brought on a bigger bust.” There are others in the Tory party who understand this well and yet are not in government, including Sajid Javid, Andrea Leadsom, Steve Baker, Michael Fallon and others. They deserve a bigger voice.