Popular economics

The upside of everyone believing that they are experts on the national economy, arguably, is that the economy remains in the limelight since everyone is talking about it; the problem is that the popular version of economics is based on a rather simplistic analysis of a very complicated state of affairs.
An ever weakening rupee is a hot topic, particularly how it has by and large failed to have any impact on exports, and in fact conversely has flared inflation; there are those who still argue that the rupee should have been kept stable. Essentially, this will remain an academic debate disassociated with ground realities, until the cost of maintaining a stable exchange rate is brought into the equation. Pumping dollars into the market to keep the rupee stable can only make sense if the Central Bank can print dollars. In all probability the decision to devalue the rupee was not a choice, and unless steps are taken to balance the external economy, and quickly, the slide will continue and the Government will more or less be helpless to stop it. The problem is controlling the demand for dollars, emanating out of unbridled imports under the free markets paradigm.
Notwithstanding my allergy with GDP, the previous government in its final budget, adopting a core principle of supply side economics, reduced taxes for everyone; definitely a very popular move. This was supposed to encourage people to save and invest resulting in more and more people starting businesses and creating employment, which supposedly should have hada positive impact on GDP. While ab initio the logic of these arguments eludes some of us completely, nonetheless where is that growth? Without state sponsored industrialisation, growth will remain an illusion.
The Government has dropped price bombs in the shape of increased cost of utilities with more price bombs to come in the shape of increased cost of petrol, and all this at the behest of IMF. Popular economics wants the government to continue protecting the masses from the real cost of living, which is fine until you figure out the how. The Government can only pay for these subsidies through borrowings, printing money, taxes or in our case by ignoring the elephant in the room, circular debt; problem is that under all these options the bombing only gets delayed and the size of the bombs get bigger and bigger. Targeted subsidies perhaps are the only solution to insulate the deserving of the society from the impact of the inevitable price bombs.
As regards the fall in market capitalization and drop in activity in the capital market, I confess I am ill-informed about the intricacies of speculative activities, to put it politely.
The problem with popular economics, based on television knowledge, is that the debate continues to hover around problems, with the Government wasting time defending positions which are basically indefensible rather than focusing on solutions; consequently nothing gets done right. This inaction is perhaps a reason why IMF gets the space to force policy directives as part of its lending conditions which necessarily may not be in our interest.
Popular economics based on cursory understanding of capitalism and free markets are being more and more subjected to critique in the developed world as well. There are those who today argue that minimum wages have little impact on unemployment and do reduce poverty; and that earnings are more related to bargaining power than productivity. For the record we seem to want to ignore the minimum wage and labour unions have become an anathema in Pakistan as well; deemed the worst kind of evil. Further, reducing taxes on labour does not necessarily encourage people to work more thereby increasing economic growth, and people don't end up saving more; we have already experimented with that particular policy. And, countries with universal, government sponsored health care have lower costs and equal or better outcomes. Finally, international trade can make some people worse off, and that free trade agreements have more to do with corporate lobbies than free trade; all free trade has given us is an unmanageable deficit.
James Kwak takes credit for all of the arguments in the previous paragraph; he has even coined a word for popular economics, Economism. I really enjoyed his arguments on the origins of these ideas, who created them and why, and by whom and how were they promoted a few decades ago. Free market and supply side policies are off the rich, by the rich and for the rich; much like democracy, but that is another debate.
Personally, the solutions for our economy do not lie in popular economics, or economism for that matter. Perhaps the solution is doing opposite of what we have been doing for the last two decades. In summary, the desired economic objectives will not be achieved by abstract notions, but will require concrete steps in the right direction, fixing the external imbalance.
(The writer is Chartered Accountant based in Islamabad email: [email protected])