Macroeconomic Folk Tales

Inflation, Employment, and Debt (IED) are three of the most important macroeconomic variables and unlike manufacturing output or GDP, they are also highly tangible for people. The first job and the first mortgage are customary rights of passage in many countries. We interact with prices constantly, usually to complain about how they’re rising.

As a result of their prominent place in the public consciousness, IED each have an associated ‘folk tale’:

• For Debt it is the familiar story of the ‘household budget,’ where governments, like households, must keep their budget balanced and not live beyond their means. Government borrowing is like excessive use of a credit card: high risk and prone to catastrophe. The story usually involves mentioning your personal share of the debt ($69,060 in 2019 for the US), inter-generational debt slavery, imminent crisis, and the word ‘trillion’ as many times as possible.

• For Inflation the story is hyperinflation. Whether Zimbabwe, Argentina, or Weimar Germany, inflation is always and everywhere a genie in a bottle. A wheelbarrow of money becomes less valuable than the wheelbarrow itself and bank notes are used as kindling.

• The Employment story has two sides. For the (well) employed it is a narrative of individual success. Your high salary, your promotion, and your position are the product of your intelligence and hard work. The antagonist is the welfare recipient, who by the same logic refuses to work or apply themselves. Whether the ‘ ‘welfare queens’ of the US or Australia’s ‘dole bludgers,’ the story is the same; people are only a welfare check away from kicking back on the sofa with a can of beer.

These folk tales are not restricted to the general public and can be found coming out of the mouths of prominent politicians, economists, and Central Bankers.

These folk tales are more than just harmless stories. The idea that stories matter would have have been a controversial claim in economics even a few years ago (much to Keynes chagrin). Today, it has found support in Nobel Laureate Robert Shiller’s work on ‘Narrative Economics.’ His research, which has focused on large meta narratives from ‘labor saving machine’ to ‘confidence,’ shows that the stories we tell each other dramatically effect economies by changing our collective behaviour.

The question then is how to construct more accurate and helpful folk stories around IED, because the current crop are not fit for purpose. The German government is clearly not a household when investors are willing to pay for the privilege of lending to it. The Coronavirus has exposed millions of people to the awful reality of involuntary employment. Two decades of deflation in Japan should be the folk story we turn to when someone mentions inflation, not Zimbabwe.

Time to think about the next generation of stories.