Before getting distracted by the spin put on Friday’s budget, it is important to be clear what the motivation for it is. It’s not a budget for growth, it’s a budget for the rich and those who fund the Conservative party. Abolishing the 45% tax band obviously benefits only the very well off, dropping the increase in corporation tax will mainly benefit shareholders who are mostly at the top of the income distribution, not extending the windfall tax on energy producers will exclusively benefit shareholders, not increasing NI rates benefit the better off far more than anyone else, ending the cap on bankers bonuses benefits the already very rich, and so on. Conservative MPs are much more right wing on economics than Conservative voters or even party members, and this is a budget for them, as long as it doesn’t mean they lose their jobs.

The Resolution Foundation calculatesthat almost two thirds of the tax gains go to the richest fifth of the population, with almost half going to the top 5%. They also point out that the stamp duty changes mainly benefit richer households in the South East. Of course poorer households will get a small amount of this giveaway, but less than is needed to cover the increased costs of essentials according to NEF. The IFS have looked at all the forthcoming tax changes (including frozen income tax allowances), and they calculatethat your income would have to exceed £155,000 before you are better off, and if you earn a million a year you gain £40,000

It is also a budget that is highly likely to mean cuts in public spending after the next election. The OBR were not allowed to publish their post-budget forecast, for the first time in their 12 year existence, because if they had been their budget deficit projections would have shouted ‘not sustainable’. Not sustainable is just a shorthand way of saying that taxes will have to rise or spending will have to be cut, unless something very beneficial for the public finances turns up. But of course it’s equally likely that something detrimental to the public finances will turn up. You don’t get to announce the biggest tax cut for 50 years in a deteriorating economic climate without severe implications for future spending.

Here are the Resolution Foundation’s assessment of the deficit and debt, and hereis the assessment by the IFS. Both suggest deficits in the medium term that are unsustainable. The new Chancellor also committed himself to reducing government debt relative to GDP in the medium term, meaning that if these deficit projections turn out to be even roughly right he is going to have to raise taxes or cut spending.

It cannot be stressed often enough that cutting taxes and spending less is a very unpopular policy to pursue, unless you are a Conservative party member or a large part of the commentariat. This is from the latest British Social Attitudes survey.

Just 6% of the population want lower taxes and lower spending on health, education and welfare, while 52% want the opposite.

So to the spin. What the government would like you to think is that this is about fairness vs growth. These measures are very unfair, but they say they are designed to increase long run growth so everyone will be better off (just the rich will be a lot better off than the poor). The spin, like the deficit spin that these same politicians lectured us with for the last 12 years but have now abandoned, is a load of nonsense. There is no relationship between tax levels and prosperity. Worse still, as I outlined here, the evidence clearly suggests that increasing inequality at the top reduces growth. Either the government is blind to the evidence, or they have to pretend it’s all about growth as a cover for the true reason for tax breaks for the rich: their ideology and party donors.

If this government really wanted to increase growth it would make trade with the EU easier, but right now it is doing the opposite. It would be focusing only on encouraging the energy of the future, green energy, which is now much cheaper than gas, Instead they are encouraging fracking (and saying you shouldn’t worry about small earthquakes) and more investment in getting oil out of the North Sea. If this government really wanted to increase growth, it would be helping the NHS reduce the number of people not working because they are sick by training more nurses and doctors and paying them more. Instead tax cuts now mean that in the future the NHS, with its record waiting lists, will be even worse than it is now, if it has a future at all.

If you (erroneously) think the markets know more about growth than researchers who examine the evidence at the IMF, then they too think the government is doing nothing for growth. If the markets believed this budget would increase long run growth, sterling would appreciate. Instead the uncertainty created by an unfunded tax giveaway for the better off has led to the cost of government borrowing rising substantially both just before and following the budget, and sterling has fallen against the Euro. (The latter is particularly significant, as you would normally expect an unfunded tax giveaway to appreciate sterling because of expectations of higher interest rates.)

Some of the criticism of this budget is also missing the point. It's very unlikely we will see a repeat of the Barber boom of the 1970s for two reasons. First and most importantly because we now have an independent Bank of England. Instead what this budget ensures is higher interest rates. (Can there be much doubt that if it was Kwarteng rather than the Bank that decided interest rates, then a short term inflationary boom would be a bigger possibility.) But as I noted in my last post, offsetting a short term inflationary boom with higher interest rate is not a precise art, so there is a possibility that the government might get lucky with three or six months of 2.5% annualised growth (or more) before the next election. The second reason we will not get anything like a Barber boom is that most of the tax cuts are going to the better off who save most of their extra money.

What has to be added is what was absent from this budget giveaway. There was only the smallestadditional help beyond the price cap for those struggling to make ends meet, and instead more use of sanctions for claimants, sanctions which the government’s own research says caused more harm than good so theyrefused to publish it. Alongside higher energy prices, we have sharply higher food prices which the government is ignoring. It is indicative of where this government’s priorities are that their first fiscal actions have focused on giving the most money not to those who need it most, but those who need it least.

Why was this a uniquely awful budget, that led to higher government borrowing costs and a falling currency. Tax cuts aimed at the wealthy at a time when many less wealthy are finding it hard to make ends meet is pretty bad, but it is not unique in recent times. George Osborne cut the top rate of tax in 2012 in the middle of a sustained period of austerity, and cut corporation tax too. Nor is justifying tax cuts aimed largely at the rich by pretending they will boost long term growth a new excuse. Trickle-down economics has been growing as part of Conservative DNA since Thatcher. The growing evidence that it doesn’t work and will probably reduce growth has little chance when set beside growing party donations from the very rich.

What made this budget stand out from any UK budget over the last 30 years was the absence of any attempt to match taxes to day to day spending over the medium term. I’m not talking about the deficit fetishism of Osborne, Hammond and Sunak: that had long passed its sell by date. However for the last thirty years Chancellors have attempted to put their decisions within some kind of overall fiscal framework. Kwarteng not only failed to do that, but he stopped the OBR making that clear. That matters not just because it raised borrowing costs and depreciated sterling, but because it almost certainly means, if this government remains in power, spending cuts on the horizon. Cuts in spending that will be far deeper than anything George Osborne did, because UK public service provision is already at rock bottom and in some cases close to collapse.

When the mainstream media and non-partisan think tanks talk about this budget being a big gamble, they are going as far as they feel they can in condemning it. What the country and the economy needs right now is reducing the record delays for standard NHS treatments, reducing appalling waiting times for ambulances and A&E, allowing schools to fill the gaps left by the pandemic rather than not replacing teachers to pay energy bills, and so on. An economy where the public sector no longer works is an economy that no longer works. What this budget showed is a Chancellor who not only doesn’t understand this, but intends to make it worse.

In my last post, I missed out one potential benefit from the switch in emphasis from the deficit to growth under Truss and Kwarteng. During the dark days of Osborne’s austerity, the idea that the ultimate goal of fiscal policy was to manage the deficit became firmly established in the media. This idea was always absurd, although I analyse the origin of this belief here. The primary aim of fiscal policy, along with economic policy more generally, should always be to increase social welfare. While it is up to politicians how they weigh the welfare of different parts of society, pretending the government’s deficit is a proxy for this welfare was always nonsense.

Economic growth is related to social welfare, but we should never forget that they are not the same thing. The most obvious example of that, which I will talk about below, is a demand led boom that leads to higher inflation. In addition aggregate growth figures ignore how income gains are distributed among different groups. Furthermore, additional growth achieved today at the cost of yet lower growth tomorrow is not worth having. An obvious example of this is extraction of oil or gas that would add to growth today, but because of global warming would reduce the social welfare of future generations.

Before discussing the merits of Truss/Kwarteng saying they are targeting growth, we should ask why they are doing this. After all, and with the caveats above in mind, all governments before 2010 tried to raise the growth rate in various ways, so this is hardly something new. So why are Truss/Kwarteng making a big deal of it?

Part of the answer comes from the first paragraph of this post. They want to signal a departure from policy that placed a high weight on deficit targets. But another reason is also important. As many have noted recently (see myself herein February), at some point after the Global Financial Crisis the UK economy went from being a success story in terms of growth relative to other G7 countries to being a failure. For a long time the government successfully (in terms of the mainstream media) hid this decline by talking about the deficit (see first paragraph again) and repeatedly pretending we had ‘strong economy’, but now the decline has become undeniable. In addition it is also clear that this decline has happened under Conservative (or Conservative led) governments.

The implication Truss/Kwarteng would like you to draw is that the Conservative governments of the recent past allowed this era of decline to happen because they didn’t prioritise growth, and this new Conservative government will be different because it is going to prioritise growth. While I think there is a lot of truth in the first part of that sentence, I see nothing to suggest the second part is true.

Take, for example, the two major policy mistakes that in my view played a large role in creating this recent era of UK decline. Austerity at the depth of the GFC recession both killed any chance of a normal recovery and probably also reduced the long run level of UK output, but implicitly Sunak had already acknowledged that mistake by not repeating it during the recession caused by the pandemic. In contrast the second major policy mistake, Brexit, continues and neither Kwarteng or Truss show any sign of acknowledging the negative impact of Brexit on growth.

So compared to the last 12 years of economic decline, this new administration is keeping one of the main reasons why it happened and is agreeing with the last government about not repeating the other. In addition, its big idea about how to raise growth, tax cuts including low corporation tax, had already been tried without success by Osborne during this period of UK economic decline.

Behind the unashamed promotion of fiscal measures that increase inequality (not just tax cuts but not imposing additional windfall taxes on energy producers and lifting the cap on bankers bonuses) is the idea that greater inequality encourages growth. The evidence suggests either no such association or the exact opposite. Here, for example, is a quote from one IMF study: “Thus the combined direct and indirect effects of redistribution - including the growth effects of the resulting lower inequality - are on average pro-growth.” More recently the IMFpoints to a robust result that higher inequality at the top of the income distribution reduces growth. There are many reasons why greater equality might promote growth.

Tax cuts aimed at the rich, therefore, are if anything a growth reducing measure, and almost certainly reduce social welfare. That is why removing the cap on bankers bonuses, or not imposing a windfall tax on energy companies, is more likely to reduce rather than increase growth. The idea that the last 12 years of economic decline under Conservative governments were because those governments prioritised redistribution over growth is nonsense, as Jonathan Portes shows. Once again, fiscal measures that favour the rich were tried by Osborne and it did nothing to stop, and may even have assisted, the last 12 years of UK economic decline.

Its other big idea is to reduce the ‘red tape’ that they believe is holding back UK business. First, we should note the huge increase in red tape for our exporters to the EU created by Brexit, which the current government intends to continue. Second, there is no general relationship between regulations and economic growth. For example, the government has ordered a review into anti-obesity measures. It is not obvious why these measures hold back economic growth, but it is clear that more obese people implies a greater burden on the NHS, requiring either higher taxes to fund it or a reduction in social welfare as other care is rationed. Or take the absence of regulations, since Brexit, to keep our beaches and rivers clean, which benefits monopolies and their shareholders but is likely to encourage imports and reduce exports (UK residents taking holidays to cleaner beaches overseas and less overseas tourists coming to the UK) implying less growth.

The idea that less regulation always increases growth, just like the idea that lower taxes always raise growth, is just right wing wishful thinking. However, like much right wing wishful thinking, there is a whole industry out there trying to manufacture evidence to support these ideas sponsored by those that benefit from such measures. It should be no surprise, therefore, that Conservative governments keep enacting measures that favour wealthy interests rather than favouring growth, when they are advised by newspapers and think tanks funded by those interests. It’s very important that we avoid right wing wishful thinking becoming received wisdom in the mainstream media, as the wisdom of austerity was allowed to do.

Where there is good evidence that fiscal measures can assist growth tend to be on the government spending side: investing in certain types of skill for example. Right now the UK appears to be suffering a negative labour supply shock caused by a rise in long term illness, due partly to Long Covid but also because of the growing waiting lists for other treatments in our overstretched and understaffed NHS. Improvements in these areas can be achieved from more public investment or targeted incentives for private investment (better ventilation for example) but they also require permanent increases in public spending and therefore higher, not lower, taxes.

An indication that nothing has really changed is empty gestures. Having a target for 2.5% growth is just nonsense for two reasons. First, it’s GDP per head that influences social welfare, not GDP, so the target is for the wrong thing! Second, setting a target does nothing to help you achieve higher growth. At best it is an attempt to pass off measures that are rightly unpopular, like removing the cap on bankers bonuses or not extending windfall taxes on energy producers, as necessary to achieve the growth target, but of course neither will have any positive impact on economic growth. Equal nonsense is removing the Treasury’s permanent secretary for no other reason than wanting to show things have changed. One empty gesture might be an accident, but two perhaps suggest there is in reality little substance to this proclaimed change in direction.

If a growth target makes no sense, and none of the measures advertised so far will help increase growth, how will this work politically? It is possible that Truss/Kwarteng may try to cut taxes and increase spending, producing a sufficiently big enough increase in effective demand such that output growth exceeds their target just before the next election, allowing them to proclaim their policies a success. Comparisons have been made with the Barber boom of the early 1970s, a boom that helped create the largest rise in inflation in UK post-war history.

Today, with an independent central bank, such a policy combination would create a rapid increase in UK interest rates. For this reason among others, manufacturing an unsustainable short term boom is likely to damage long term growth rather than improve it. However raising interest rates to counteract fiscal largesse is not a precise science, and it is possible that for a quarter or two annualised growth could exceed 2.5%. If it does, expect many proclamations of a new dawn from Conservative politicians and their press. But even if that does happen, and it may well not, it will be yet another deception. This decade or more of economic decline will not end by cutting taxes, deregulation, making exporting harder, and increasing inequality.

As expected, Truss has announced a freeze in energy prices. That means that inflation will not be as high as some recent forecasts, the cut in living standards will not be as great as in the most recent Bank of England forecast, and so therefore the Bank’s prediction of a prolonged recession with plummeting inflation is less likely to come to pass. All good news, but what about the government’s deficit, particularly if she keeps her promise to cut various taxes?

This is the question that many journalists, and I suspect opposition politicians, are currently asking. Despite furlough, much of the media continues with the ‘government as household’,’how will you pay for it’ version of macroeconomics. Partly for this reason, the Labour oppositions since 2010 have felt obliged to ‘be responsible’ by ensuring key spending announcements are accompanied by equal revenue raising plans. Does this all now need to change?

I have always argued that it should change. (On why debt targets are a bad idea, see here and here.) The emphasis given to the government deficit in the media is totally inappropriate, and can at times be extremely dangerous (as we saw after the Global Financial Crisis). However it is also true that the media takes very little notice of academic economics, and much more notice of what a government (particularly a Conservative government) is doing, so the media’s obsession with ‘the deficit’ would only have a chance of changing if the government changed its emphasis. It now has.

I suspect and hope we will see an end to two particularly silly aspects of deficit fetishism in the media. The first was monthly commentary on public borrowing, with associated ‘tax will go up/down’ headlines. That kind of commentary only makes sense when Chancellors have short term deficit targets, and I will be surprised if Kwarteng doesn’t ditch this aspect of Sunak’s policy. The second was around budget time, when annual movements in the deficit attracted far more attention than they deserved.

However those hoping that both the government and the media will completely ignore what happens to the government’s deficit will I suspect be disappointed. If I am right, at some point Conservatives will resume using an unsustainable government deficit to argue for spending cuts and a smaller state. The argument between Truss and Sunak was essentially political. Truss believed that, with two and a half years before the next election, playing the deficit responsibility card would reap few political dividends and might prevent the government from doing more popular things, like cutting taxes. Deficit obsession was never a fundamental part of neoliberalism, but just a useful tactic at certain times to achieve a smaller state.

So I would not be surprised to see Truss and Kwarteng still stressing the importance of fiscal ‘responsibility’. How will they square this with the fiscal largess implied by an expensive energy price cap and tax cuts (compared to previous plans)? It is actually easier than you might think.

The huge cost of the energy support package can be justified in the same way as furlough was: an exceptional response to exceptional events. After all, the main event that has had the biggest positive impact historically on government debt was a war, and the government could with some justification argue that the need for a large scale fiscal support package is the war in Ukraine.

The government is on trickier ground with any tax cuts, but even here they have an excuse within the spirit of some of the rules they themselves have set. A UK recession is still a strong possibility, and Conservative Chancellors since 2010 have generally recognised that fiscal rules can be set aside in recessions (or even milder economic downturns). So the new Prime Minister and Chancellor might try to justify any tax cuts as measures to prevent a recession, and still argue that they were being ‘responsible with the deficit’ in the medium term.

In macroeconomic terms this doesn’t wash for three reasons. First, if you were looking for a fiscal stimulus to prevent a recession, you would not choose cutting national insurance or corporation tax as effective measures to do that. The most effective and quick way of stopping a recession is to increase universal credit, because you can be reasonably sure most of that will be spent. In contrast, it’s not clear whether cutting corporation tax will have more than a tiny positive impact on aggregate demand during an economic downturn. The main influence on business investment is what is happening to output, not the corporate tax rate.

Second, and more importantly, effective fiscal stimulus during a recession is inevitably temporary. It is designed to either prevent a recession, or lift the economy out of one, and once that goal has been achieved you no longer need any stimulus. Truss, however, intends her tax cuts to be permanent, so the prospect of a recession is no answer to the ‘where is the money coming from’ question.

Third, outwith the lower bound for interest rates, it is monetary policy that should be worrying about inflation and recessions. In this light cutting taxes to avoid/moderate a recession looks very odd when the Bank of England is raising rates. Does the government think the Monetary Policy Committee of the Bank could be making a mistake? 

However all three points are unlikely to be made by most of those who will interview government ministers, so in political rather than economic terms the excuse of a possible recession is tenable. [1] What this means, I suspect, is that Truss and Kwarteng are not going to start saying the deficit doesn’t matter, implying everything Osborne and Sunak said about it was wrong. What it will mean is that the government can no longer use fears about the deficit under a Labour government as a political weapon. Instead they will just say that a Labour government will mean higher taxes.

Where I think the government is more vulnerable, and where I think the media will rightly continue to talk about the deficit, is following OBR or other reputable medium term forecasts. Absent unexpected good fortune, the OBR is likely to be forecasting in five years time government deficits which will imply either government debt or net wealth are unsustainable. This five year time horizon is important not because it is likely to happen, but because it’s a good assessment of the underlying level of taxes and spending, abstracting from short term shocks and the business cycle.

This will not imply any immediate crisis, and any impact on the exchange rate will have probably already happened. But it is important nevertheless, and it is why we should not ignore government deficits altogether. Persistent and large excess deficits (where excess means government debt is persistently rising or net wealth is persistently falling) generally indicate spending cuts or tax rises in the future as I suggested earlier. But if left unchecked, they can predict one of two things. The first is a persistent fiscal stimulus, which in absence of monetary policy would imply rising inflation. Of course with an independent central bank with a medium term inflation target persistent fiscal stimulus will imply higher interest rates to prevent higher inflation. While that upward pressure on interest rates was welcome when rates were stuck at the zero lower bound, that is not true today.

However persistent deficits need not imply that much inflationary pressure, if they take the form of tax cuts for businesses or the better off. The second possibility is that they signal a redistribution towards the most wealthy. If tax cuts directly benefit businesses or disproportionately those on high incomes, they will not add that much to effective demand in the economy because most of the tax cut will be saved. Instead they indicate a redistribution of income to the already rich.

In all cases projected persistent excess deficits are not a problem in themselves, but because of what they indicate could happen as a result of current fiscal plans: spending cuts or tax rises, or future higher interest rates, or future redistribution towards the wealthy.

In political terms this will be a problem for both the government and Labour. The government will claim that the OBR are underestimating the boost to growth that tax cuts will give, and higher growth will lead to higher taxes etc. Labour, along with the non-partisan media, should rightly describe this as wishful thinking not backed up with evidence. If it was backed up by the evidence the OBR would incorporate that in its forecast.

However Labour cannot say the same, so while they can blame the government for being fiscally irresponsible they will also be asked how they would deal with the problem if they win power. As Labour are likely to be repeatedly asked how they intend to close any funding gap, that should influence their stance when these tax cuts come into place. I suspect they will vote for tax cuts for ‘working people’ but against tax cuts for ‘big business’?.

So my answer to the question posed by this post’s title is to ignore any residual media interest in monthly borrowing numbers or the dynamic path of deficits in any budget, and instead focus on the medium term deficit implied by OBR (or other reputable) forecasts, where the inappropriateness of tax cuts will become clear. The increase in government debt implied by the short term energy price cap is not a problem and can be easilyjustified. Otherwise we should see a welcome change to an economic debate about what really matters: whether it is more important to cut taxes or instead provide sustained support to our underfunded public services and the less well off.

[1] Even if a journalist did make the points above, the government’s response would be that tax cuts lead to more growth and more revenue.

Support for energy users

When I wrote about higher energy prices back in March, I argued for what would become two months later the UK’s approach. I preferred that to the policy adopted in, say, France, where prices had been pegged to near pre-crisis levels.. I argued then it was best to let energy prices rise, tax away the resulting profits of domestic energy producers and give money to those who would have difficulty paying the higher prices. The alternative of keeping prices low was worse because you lost the incentive for consumers and businesses to economise on energy use.

For any country, including the UK, we can think of the impact of higher energy prices in terms of incentive effects and distributional effects. The incentives to economise on using carbon are good both in the short term (reducing Russia’s leverage on those countries supporting Ukraine defend itself) and the medium term (reducing man-made climate change). However there is no reason why energy producers (and their shareholders) should benefit from these higher prices, so it makes sense to tax away excess profits if you can. The only thing that prevents most countries redistributing all the benefits of higher energy prices from producers to consumers is that the energy producers (rather than suppliers) are taxed overseas.

Since then energy prices have continued to rise, and so policy makers once again have to make a choice. Do they let prices rise further and give cash to those who cannot afford those higher prices, or do they force suppliers to keep prices at their summer level and give money to these suppliers (as Labour are suggesting)?

As @TorstenBell points out, there are a number of distractions from this basic choice. One from the left is nationalisation. Nationalisation may be part of holding down prices, but it is not necessary for this, and nor does it make it any cheaper for a government to do. An argument against windfall taxes from the right is not 'interfering with markets'. Nothing in economics says that the owner of a finite resource (energy in the form of carbon) has to get richer when the price of that resource rises, and that becomes especially so when we don’t want that owner to be incentivised to extract more of the resource. (Unfortunately Sunak’s windfall tax does just that, illustrating how anti-green the government already was before Truss became its leader.) One final distraction is trying to relate the size of any government spending on support to the size of the increase in windfall (or any other) taxes. With future prices very unpredictable there is no reason why these two should be related in the short term.

There are two good reasons why a UK policymaker might want to switch from allowing prices to rise and supporting those who need it to a strategy of holding prices down at their current (higher) level. The first is that most of the incentive effect has already been obtained by the initial increase in prices, as there are limits to how much households can (or should) economise in the short term. The second is that with even higher prices, directing support to where it is needed gets much more difficult.

As Torsten Bell notes here, only around 45% of the poorest half of the population receive benefits. In addition there is a wide variation in energy use within different income groups, particularly among the poorest. Many disabled people are also intensive energy users. Designing a scheme that relates how much support each household receives to their income and energy use is difficult but not impossible. An easier route is just to cap prices at their summer level, continue with the May support scheme and compensate the energy suppliers, as Labour suggests. In either case, substantial windfall taxes on energy producers making massive profits are what any sensible UK policymaker would do.

Unfortunately, higher energy prices are not the only problem facing poorer households this winter. Food prices have also been rising rapidly, and rents may do the same. There remains a strong case for raising the level of universal credit, irrespective of and in addition to whatever is done about energy prices. In addition, the benefit cap for large families continues to lead to child poverty. Extending free school meals is also an obvious move for any government interested in the health and education of its children.

The longer term response to higher energy prices for any government interested in the future has to be massive investment in green energy and energy efficiency (like help with home insulation). This should be the case even if the current price increase proves short lived. Recent climate changes emphasise the need for urgent action to reduce carbon use, and recent events show how dangerous it is to be be dependent on energy produced in countries that are not democracies.

Macroeconomic consequences and interest rates

Higher energy prices are having dramatic macroeconomic consequences. Right now everyone is focusing on higher inflation, which in most countries is largely due (directly or indirectly) to higher energy prices. However this inflation is generating falls in real income in most countries, which are likely to lead to a recession in many. As energy prices stabilise or fall, the impact on inflation will unwind, and concern will shift to stagnant or falling output and rising unemployment. (For the impact of energy prices on the level of real incomes to be reversed, energy prices would of course have to fall back to the level they were before they started rising.)

It is really important to recognise that most of the increase in inflation and drop in real income as a consequence of higher energy prices, and not some failure in monetary policy. As Tony Yates points out, real incomes would be falling right now even if the monetary authorities had managed to keep inflation at target by anticipating higher energy prices and the Ukraine war. The difference would be that interest rates would be sky high, nominal wages would be falling and a recession would be certain and much deeper.

That so many people miss this basic point is partly a consequence of the centrality of inflation targets, and the natural but erroneous implication that central banks can or should always control inflation. What central banks really do is manage aggregate demand with the objective of hitting some level of inflation in the medium term. Why would central banks try to create substantial deficient aggregate demand following an energy price shock? The only good reason is if medium term inflation expectations had risen, and unsurprisingly there is little sign of that with a possible recession on the way.

This is important, because it looks to me (and Tomas Hirst) as if the European Central Bank, and perhaps the Bank of England, may be raising rates in part because of the high inflation generated by higher energy and food prices. Indeed it seems as if the higher inflation goes the more pressure there is to raise rates further. This would be a serious mistake, and will only increase the probability of a demand-deficient recession. We are not seeing a rerun of the 1970s. Instead real wages and real incomes are falling substantially which will itself reduce aggregate demand, and there is no need for central banks to add to that. Demand-deficient recessions are rarely inevitable, and often represent a failure of foresight or policy.

There is a widespread view that other central banks have to follow the US, where rates did have to rise to stabilise excess domestic demand. Some even say that without this ‘follow the US’ tactic, currencies would collapse against the dollar pushing inflation up further. I am very sceptical about this argument, which flies in the face of the standard logic for floating exchange rates. If US domestic demand is excessive, and European demand is deficient (which is what most estimates say), an appreciation in the dollar is how you correct both. In addition, the best theory we have about the relationship between interest rates and exchange rates does not imply currency collapse if European rate rises fail to match US rate increases. As any rate gap is likely to be temporary (say 2 years), the impact on European inflation in not following the US will be marginal compared to current levels. [1]

Truss economics

Incredibly, given the urgency, we still have no clear idea what the UK government will do to tackle the latest energy crisis. The contest to be the next PM has paralysed the government because under Johnson government has become far too dependent on its Prime Minister. Johnson, Truss and Sunak could have agreed something during the contest, leaving households and businesses facing less damaging uncertainty, but that was it seems beyond them.

What we do know is that Truss as Prime Minister will create a shift to the right on economic policy. Truss intends economic policy to follow a Tufton Street/Britannia Unchained path. Johnson when he became PM increased public spending in some areas (but not nearly enough), and Sunak’s concerns about the deficit meant that taxes were raised substantially. In contrast, Truss is intent on cutting taxes, despite the need for a great deal of government support following higher energy prices. Her justification for doing this is ‘trickle down economics’, an idea supported by the wealthy but not by the evidence. She even describes such policies as ‘fair’. What they are not, however, is an effective way of avoiding a recession, as the better off or corporations spend little of any tax cut, particularly a tax cut that looks very temporary because the deficit is rising fast.

This lack of concern about the impact of her policies on the deficit should not fool anyone into thinking this makes her policy stance less right wing. Deficit obsession on the right was always a device to achieve a smaller state: Osborne cut taxes as well as spending. An alternative tactic, used in the US, to achieve the same end is called ‘starve the beast’: cut taxes today, and later demand spending is reduced because of the higher deficit lower taxes create. For this reason, as I argued here, the Truss-Sunak contest was about the best tactics to achieve a smaller state rather than a contest about ideologies. It has to be said that in the current situation with multiple crises reflecting inadequate public spending, arguing for a yet smaller state is just crazy.

Yet the new Chancellor would like you to think it’s a new strategy. In his articlefor the Financial Times, the prospective Chancellor derides “the same old economic managerialism [that] has left us with a stagnating economy and anaemic growth, with labour productivity growing at just 0.4% a year since the financial crisis”. What is this ‘old economic managerialism’ that is to blame for what is indeed a woeful growth performance. He should know, as nearly all of it occurred when his government was in power?

Unfortunately the 2010 government also believed that tax cuts and deregulation would inspire more rapid economic growth. Osborne cut corporation tax substantially, raised income tax thresholds and cut its top rate, and since 2010 we have not had a government piling on new regulations. So this Chancellor’s criticisms of his previous Conservative Chancellors must be about the obsession with the deficit. Fair enough, and also pretty relevant as we may be heading for another recession where deficit obsession would be disastrous.

Yet 2010 austerity was a disaster mainly because it led to cuts in government spending at a time when the opposite was required. It was not a disaster because taxes were raised, as many taxes were cut. Yet Truss talks a lot about cutting taxes, and very little about the need to raise public spending. (In most cases the direct effect of a change in government spending is an equal increase in GDP, while a change in taxes will only directly increase GDP if it is spent.)

This means that there is no big change in government strategy. All Chancellors want higher growth - it’s what they do to try and achieve it that matters. The underlying strategy under Truss will be just more of the same as we had after 2010: cutting ‘red tape’ and taxes. In addition, given her backers in the ERG, she will find it hard to deviate from a path of confrontation with the EU. This new Conservative administration is doing nothing more than doubling down on an already failed economic strategy, hoping one last push will reverse the stagnation we have seen since that strategy was first applied. It seems that the Conservative party mean to carry on what they have done since 2010, which is to harm the economy by their actions or neglect.

[1] An expected 2 year gap of 1%, say, in interest rates between Europe/UK and the US would lead to a 2% depreciation in the Euro/Sterling exchange rate against the dollar. Model estimates suggest that in turn would raise inflation in Europe over time by around 0.2% directly, but activity would also be stronger.

Some of the criticisms I have seen of the MacTaggart Lecture given in Edinburgh by Emily Maitlis miss the whole point of the lecture. As Maitlis points out on a number of occasions, until recently she largely accepted the BBC view about impartiality. She recalls an interview she did with Robert De Niro, just after Trump had suggested taking bleach internally might be useful in treating Covid. De Niro accused Trump of not caring how many people died, and despite her best efforts she said afterwards that the interview couldn’t be broadcast because it was so anti-Trump. It was broadcast, just two weeks before her infamous Dominic Cummings goes to Barnard Castle intro for Newsnight.

Her lecture is about the impact of populism on non-partisan journalism, and the BBC’s reaction to that Newsnight intro can be seen as illustrating the point she wants to make. The journalist’s role is to ask questions, often critical questions, of politicians that their viewers would find the answers to interesting and informative. The journalist’s role is also to inform their viewers by pointing out facts and knowledge, like the fact that Cummings broke the rules on that occasion. But the populist undermines that role by claiming a more direct contact between themselves and ‘the people’, a direct line which then allows them to not only question what the journalist is doing (e.g. serving an out of touch elite rather than their viewers) but to dismiss what they say as ‘fake news’.

When journalism elevates their own balance or impartiality above all other values, then this attack immediately puts journalists on the defensive. [1] Maitlis argues that in response, there is a danger that journalists (or the institutions that employ them) signal their balance to those populists who are attacking them by themselves becoming biased. This form of strategic attack by populists who espouse socially conservative views may be particularly effective on journalists who tend to be socially liberal, because the journalists themselves tend to overcompensate for their own liberal views.

The primacy of balance, like the UK constitution, falls apart if one political side no longer plays by the rules and instead seeks to exploit them. It cannot cope when politicians start lying about easily verifiable facts. In response to the populist onslaught against the mainstream media, the desire by journalists to be balanced can ironically lead to them becoming biased in favour of the populist politician.

One of the problems with impartiality is how is it judged? If you use the opinions of viewers as a measure of impartiality, as the head of editorial policy at the BBC did here, you in effect become anti-science: giving the opinion of the person in the street as much weight as an expert in the field. In reality impartiality is normally judged by what politicians think, and inevitably those who shout loudest or those with power tilt the perceived impartiality scales of the journalist or institution in their favour. Within hours of the government’s complaint about the Maitlis newsnight intro, the BBC apologised for the intro without any investigation or due process.

The BBC under this government has gone too far down the road Maitlis describes to recognise the problems she points out. As she puts it provocatively, the government has “an active agent” on the BBC board who tries to be the arbiter of impartiality and also, according to reports, tries to veto BBC appointments that the government doesn’t approve of. Maitlis uses the metaphor of frogs in a slowly boiling pot for journalists responding to populist onslaught, and like the frogs too many in the BBC cannot see the pot is near boiling point.

Maitlis mentions the BBC’s attempts at impartiality during the Brexit referendum, when economic arguments for and against were always balanced even though the number of economists who feared Brexit far outweighed those promoting it. She describes this as “superficial balance concealing a deeper truth”, but I would describe it as political impartiality overriding facts, knowledge and the truth. Yet I have had discussions with well known BBC journalists who dismiss my argument that this was a mistake, and that it could have had any impact on the referendum result. Here is Johns Simpson more recently commenting on Maitlis:

“The BBC’s job isn’t to tell people what to think about the complex political issues of the day. It’s to lay the arguments in front of them honestly & let them make up their own minds. This isn’t timidity, @maitlis— it’s the essence of public service broadcasting.”

That such responses to criticisms by Maitlis and others are so weak, and would be knocked back in an instant by the same journalists if they were made by someone else in another context, is indicative of deep groupthink within the BBC. The idea that the format where two people from each side spend 5 minutes debating with each other about the economics of Brexit allows the audience to “make up their own mind” who is right is laughable, just as it would be laughable if the subject matter was how to control a pandemic or climate change. There are obvious reasons why it takes countless hours to become experts in trade economics, pandemics or climate change, and why a 5 minute debate is no substitute.

The “essence of public service broadcasting” is to inform and educate, as the BBC’s mission statement says. A 5 minute debate cannot do that for complex issues. Nor would it help much if journalists had reported (which they rarely did) what the majority of economists thought before each debate, for reasons I give here. What the BBC and other broadcasters should have done is tell viewers why trade economists were so united that Brexit would damage trade and therefore incomes, and that explanation could include the riposte of the Leave side. By failing to do that for fear of being unbalanced, broadcasters allow populists to discredit knowledge using labels like Project Fear. Economists didn’t ‘get lucky’ in predicting how Brexit would damage the UK economy but instead applied the knowledge gained from decades of analysis and evidence, and by treating that knowledge as opinion broadcasters actively failed to inform their viewers about what would happen. They took the side of the populist rather than serving their audience.

Impartiality can all too easily become a device where politicians control what journalists are allowed to say. As Maitlis also notes, because ‘both sides’ (Tory and Labour) prefer not to point out the consequences of Brexit, a broadcaster obsessed with impartiality feels they cannot do so either, and so viewers are misinformed about the reasons for empty shelves in supermarkets or delays in travelling abroad. Once again, broadcasters take the side of politicians rather than viewers.

Where I perhaps depart from Maitlis is seeing this as a problem created by populism, rather than a problem even without populism. After 2010, when Labour failed to challenge the Coalition claim that Labour had caused the recession, a broadcast media obsessed with impartiality didn’t challenge it either, even though the claim was such nonsense that Osborne later admittedit was false. When both political parties accepted that bringing the deficit down in the middle of a recession was a good thing, so did much of the broadcast media, even though the economics taught to undergraduates and graduates disagreed. Going even further back, when the Labour government stopped pointing out the benefits of immigration, broadcast media began to assume that immigration was a bad thing. It took the aftermath of Brexit for the public to hear contrary arguments, and public opinion shifted as a result.

As John Elledge points out, the BBC has a particular problem because the government regularly takes decisions about how much money it gets, which gives the government much greater power to shift the BBC’s own scales about what balanced reporting involves. Because the political right since Thatcher finds it much easier to threaten the BBC financially than the left, that means the BBC is more likely to follow the government line when the right holds power. The culture secretary is reported to have said that a particular interview with Johnson had cost the BBC a lot of money. If that was not bad enough, the right wing press are relentless in their criticism of the BBC, tipping the BBC’s own internal assessment of what impartiality means even further rightwards. Empirical evidence looking at the BBC’s coverage and use of think tanks backs up this view.

The argument that we should not criticise the BBC, or broadcasters more generally, because that helps those who wish to harm them ironically just makes things worse. Maitlis is absolutely right that by siding with populist politicians rather than informing viewers, the BBC is actively harming itself. The moment a public sector broadcaster seems to hold the interests of the government above those of its viewers, it is well on the path to just becoming a mouthpiece for the state. The idea that any criticism of an institution has to be an attempt to undermine it rather than improve it is again laughable, and is indicative of a defensive mentality that obsessing about impartiality helps generate.

A far better strategy for broadcasters and any non-partisan media is to make impartiality a secondary goal, and focus instead on the primacy of providing reliable information to viewers. Unlike impartiality, there are readily available objective criteria for assessing what is good information and what is not. Such a shift in priorities would have many benefits.

It would have avoided all the mistakes I have noted above that broadcasters have made in the past because they were focused on impartiality rather than being informative. True, it is easy to make programmes involving debates between politicians or their supporters, but it also produces very boring programmes for everyone except political obsessives. Emphasising the provision of information rather than balance would elevate journalists who are subject specialists compared to the political journalists who now dominate news coverage, and it would shift political coverage from a focus on personalities and horse races to talking more about policy. Crucially it would help make journalism more robust to populist attacks and therefore make society less tolerant of politicians pushing snake-oil policies.

[1] Making impartiality the primary goal invites a defensive mentality because there is no immediately available measure that tells the broadcaster whether it is being impartial or not on some particular occasion. Louder and more powerful voices are inevitably given more weight than they should have, and even then without objective measures a broadcasting institution will always feel as if it is on weak ground.

Our probable next Prime Minister has said that if another pandemic hit the UK, she would not authorise any lockdowns similar to those employed around the world against Covid before most people were vaccinated. She has also said that she argued for doing less around the cabinet table when lockdowns were discussed. If I could choose just one statement that exemplifies how far the current Conservative party and its leadership are living in a fantasy world, where things like science, truth and facts have been replaced by wish-fulfilment, I would choose this.

Both simple theory and state of the art analysis shows lockdowns imposed in the first year of the pandemic saved hundreds of thousands of lives in the UK. Covid spreads through social interaction, so the more you can reduce social interactions the smaller the number of people who will get the disease. Lockdowns, which involve telling everyone except essential workers to stay at home and supporting them to do so, obviously reduce social interactions. We also know that vaccines reduce both the chances of getting Covid and the chance of hospitalisation and death if you get it. It therefore follows that reducing the number of people getting Covid before vaccines are available by imposing lockdowns will save countless lives.

In the UK it was projectionsby Imperial College of half a million Covid deaths without lockdown measures, together with a breakdown in the NHS, that persuaded Johnson to abandon the policy of herd immunity. What is true in the UK is also true across the world, with researchers finding that millions more would have died if lockdowns had not been put in place. Epidemiological models also tell us that governments should lockdown quickly once TTI (test, trace and isolate) has failed to control a pandemic, and if they did that lockdowns could be shorter. Countries that were able to do that and impose tight border controls saw far less deaths and (because lockdowns lasted less time) economies were less affected by the pandemic.

This last point completely undercuts the typical excuse the government used to delay imposing lockdowns, which is that they didn’t want to hurt the economy. The idea that absent lockdowns an economy can carry on regardless during a pandemic was nonsense. As my own collaborative study on the economic costs of a pandemic showed more than 10 years before Covid, when infections and deaths are widespread people who are able to will lock themselves down, and consumption of most services drops like a stone. Much better for the state to intervene early to keep cases low.

Anti-lockdown, anti-mask Conservatives are not just ignoring the science on Covid [1], but they are ignoring the lessons on hundreds of years of human history about how you deal with pandemics. As Hilary Cooper and Simon Szreter show in a new book, the state has for the last five hundred years often intervened in drastic ways to try and stop the spread of pandemics. The authors point out that the Italian cities used quarantine measures, including detention of travellers, to help control against the plague: indeed the word quarantine comes from the Italian for forty days. Elizabethan England followed their example, raising local taxes for their equivalent of a furlough scheme.

As more began to be understood about how disease was transmitted, state authorities began to improve sanitation and hygiene. Costly large scale sanitation measures in English cities helped contain outbreaks of cholera. Hamburg, by contrast, decided this was all too costly, and as a result the city was the last significant casualty of cholera in 1892. When the misnamed Spanish Flu hit the US, different cities reacted in different ways. In Seattle there were meticulous restrictions on business activity, closing schools and churches and mask requirements, while little was done in Philadelphia. As a result, Seattle had one of the lowest death rates on the West Coast, while Philadelphia suffered one of the highest death rates in the US.

So why does Truss, along with many on the right in a number of countries, ignore all this? The amount of myth making about the pandemic, largely coming from the political right, has been incredible. Cooper and Szreter lay the blame at the door of the neoliberal project, although they do note that a similar retreat from collectivism occurred when Elizabethan Poor Laws were replaced by workhouses in the 19th century. Furthermore they persuasively argue that since 2010 there has been a concerted attempt to undermine the structure and principles of the NHS and social care by right wing politicians. The response of some of these politicians to the pandemic, with their ridiculous stress on ‘individual responsibility’, is symptomatic of their general attitude to collective health and care provision.

As regular readers will know, my own view is that we left the neoliberalism of Thatcher and Reagan behind with Brexit, and instead (under Conservative leadership) the UK now behaves as an authoritarian plutocracy with periodic elections. Brexit was not in the interests of most UK businesses, as the dire UK macroeconomic position and outlook testifies. It is why under Johnson we had endemic corruption from the top that became clear after the pandemic hit. But for the arguments of this book my distinction matters little, because our authoritarian plutocracy still subscribes to the anti-collectivism inherent in neoliberalism. What has changed is that anti-collectivism is no longer justified by saying corporations always know best, and instead it has become wealthy people who support the party (financially or through the media) know best.

Cooper and Szreter extend the argument that swift government action to control pandemics helps the economy to make a more general point. To quote: “British society - and its economy - has flourished most when it has embraced both universal social security and welfare as a legal entitlement of all citizens …” They argue that the UK has been most successful when it has embraced “collective individualism”: collectively funded support for all individuals so they can flourish as independent agents. But the book’s ambition goes well beyond documenting this and the problems that neoliberalism and recent Conservative led governments have caused. The second half of the book is a blueprint for a better future, covering ethical capitalism, progressive taxation, participatory politics, a sustainable future and more.

As UK society faces a perfect storm of crisis, mainly created by its political leaders who seem oblivious or indifferent to them, it’s great to read a thoughtful, well researched and clearly argued blueprint for a better future. I strongly recommend this book.

[1] A Daily Telegraph headlinerecently blamed current excess deaths on lockdowns! The right wing press and Conservative party exist in a mutually reinforcing fantasy world, where measures that saves lives are regarded as mistakes and as a result what is actually killing people goes unaddressed.

Many people have commented on the complete disconnect between the issues being debated as part of the Conservative leadership campaign and the many acute crises faced by the people of the UK who this leader will shortly govern. It’s easy to dismiss this disconnect as a peculiarity caused by the atypical composition of the Conservative party membership, and for the same reasons discount all the pledges the candidates are making as just more lies told to gain votes.

There are three reasons why such a dismissal would be a mistake. The first is that a majority of Conservative MPs (including likely cabinet ministers) hold similar views to party members. The differences between the two groups are important, but those differences only make things worse. Conservative MPs tend to be more right wing than the membership on economic issues, so they too believe tax cuts are what the Conservative party is all about, and that regulations are generally evil. In contrast these MPs in private are much more socially liberal than their party’s membership, but not in public because they see winning the socially conservative vote as their means to power.

The second reason not to dismiss what is happening in the leadership contest is the similarity between that contest and what you will find in the pages of the right wing press (The Mail, Sun, Express, Telegraph and Times). This is no coincidence of course. To believe that tax cuts are the answer, Brexit is a success and some of the biggest problems this country faces are due to a woke establishment, it greatly helps if what you read (in print or online) backs you up. In addition if you are Truss or Sunak, it greatly helps if what you say is selected by editors to appear in the pages of newspapers because it is congruent with the stories those papers regularly produce. The leadership contest may (eventually) end, but these newspapers will continue to influence the public debate.

The third reason is that the views of Conservative members and right wing newspapers are not very different to the views of those who finance the party. Not only does the Conservative party rely on these donors to heavily outspend its opponents in elections, it has under Johnson in particular given these individuals unprecedented access to and influence over policy. That situation is unlikely to change if either candidate wins, and these donors will still be there once the leadership contest ends.

Instead of being a short term irrelevance in policy terms, the leadership contest gives us in an unusually concentrated form a window on what the future Prime Minister will come under considerable pressure to actually do, or more probably what they actually want to do. The disconnect between the crises the country faces and what the candidates are talking about is both real and it matters, because it will play itself out from September until the next election. There is a simple reason for the disconnect: while the policies the leadership candidates espouse do nothing to help most people get through the coming crises, they have and will continue to benefit a small minority that controls the Conservative party.

Both candidates believe in tax cuts, and only differ on timing and perhaps which taxes are best to cut. As tax cuts are central to their leadership campaigns, and because they are also seen as essential to Conservative MPs, right wing newspapers and donors, tax cuts of some form will happen. Yet at a time when the NHS is in crisis during the summer, ambulance waiting times are horrendous, we are seeing excess deaths because conditions are going untreated, and our economy is suffering more than most because of growing long term sickness, tax cuts are an abomination.

The likely winner of the contest, Truss, will try and square this circle by both cutting taxes and spending more money. The combination, implying considerable fiscal largess, will be justified by the forthcoming recession. But the political reality that the leadership contest shows us is that the additional spending will be as little as the Prime Minister thinks they can get away with and so - like Johnson’s NHS cash boost - solves little while also constraining any successor government (if there is one) in what they can do.

We will be told constantly that tax cuts are what we need to get the economy moving again, because the myth that tax cuts help economic growth is deeply embedded on the right. Never mind that this was the policy Osborne implemented during the austerity period, where both income and corporation taxes were cut, and we got the weakest recovery from a recession this country has ever had. As Will Hutton reminds us: “The key propellant of investment is not the corporation tax rate but the confidence that any investment will pay back, and in strategy-free Britain in the grip of rightwing ideology, cut off from its major market, there is little or no long-term confidence.” Evidence like this just doesn’t matter to politicians whose success depends on them ignoring it. As a result, we can expect little that will actually reverse the 10/15 year decline in the UK’s relative macroeconomic performance, and plenty that will just make things worse.

Anyone wanting to do something to reverse this decade or more of income stagnation would begin to reverse Brexit. Yet for both candidates it is Brexit escalation that is their way forward. There is a good chance that Truss in particular will see confrontation with the EU over the Irish protocol as something they need to pursue to satisfy the MPs that supported her, and also something that can be used to fly the patriotic flag before an election. In economic terms that would be a disaster. In addition, to the extent that a ‘bonfire of EU regulations’ leads to greater divergence with the EU, it could make the already considerable problems businesses have in trading with the EU even greater.

I’m often asked why the last twelve years when the Conservatives have been in power have seen such a dramatic macroeconomic decline in UK growth compared to most other major economies. Austerity and Brexit explain a large part of that, but I think there is something more intangible as well. A period where the government becomes so open to lobbying and, under Johnson at least, corruption incentivises rent-seeking (increasing your income by decreasing someone else’s, where someone else often includes public money) rather than innovation. This government’s constant attacks on universities and culture because they do not share the Brexit faith does nothing to help either innovation or sectors where we actually are world leaders.

The biggest short term crisis many UK citizens face is rising energy prices. This is one area where Truss’s rhetoric will not survive her coronation, but just as with public spending her desire for tax cuts will mean the most vulnerable in particular will not get the size or speed of help they need. In the longer term both Truss and Sunak have appealed to member’s scepticism about renewable energy, which in turn partly comes from right wing newspapers. This is the exact opposite of what the UK needs not only to fight climate change, but also to get cheaper energy. All parts of the Conservative party seem stuck in a time when economists talked about the costs of reducing our dependence on carbon. Today, thanks to a combination of state action and private sector enterprise, renewable energy is much cheaper than carbon based energy, yet the policy of the next Prime Minister will be to ‘cut the green crap’, much as her predecessors did. As with tax cuts and a smaller state, Conservative policies are actively making our current problems worse.

The second biggest crisis (more accurately, far bigger for an unfortunate minority) is the state of both the NHS and social care, yet here too Conservative policies work against solutions. One of these policies is privatisation of provision, which generally either increases long run costs or reduces quality and/or access. Another is Covid: Truss’s remark that in any future pandemic she would not introduce lockdowns shows that she shares the party’s denial of science about pandemics, which will make any future problems the virus may cause worse. Of course tax cuts are not going to attract new doctors and nurses to stem growing staff shortages. Instead they will do the opposite by making it less likely that we will train more doctors and nurses, or that the pay of doctors and nurses will rise sufficiently to keep those we have.

To go on is both easy (there is so much, including lack of water, farming, public sector strikes, levelling-down, schools, child poverty, crime and more) and depressing. I hope I have done enough so far to allow me to make the following generalisations. What the leadership contest has shown us is that The Conservative party’s key ideas are their old ideas, ideas that the current multiple crises that the country faces have helped create. For the structural reasons mentioned at the start of this post, whoever wins the leadership contest will continue with those failed ideas. As a result the immediate future looks as grim as it did in December 2019. Our only hope is that more people understand this than they did nearly three years ago, and don’t get fooled again. Whoever becomes our next Prime Minister, the new boss will be the same as the old boss.

There is still a lot of confusion around about why UK real wage growth has been so low since the Global Financial Crisis and 2010 austerity. Many want to point to what economists call the functional distribution of income, which is the split between wages and profits. This was one of the issues I talked about this in a recent post, but perhaps a more direct approach is required.

The first point to note is that none of the decline in real wages over the last decade or so is about a shift from wages to profits. Here is the labour share of income from the 1970s until 2021.

The labour share has fallen since the 1970s, but all of that fall occurred before the recent period. Furthermore, the share of corporate income in GDP hasremained fairly flat during this century. There has been no sustained shift from wages to profits over the last ten to fifteen years according to the data. There are a lot of problems with UK corporations, but decreasing labour’s share of national income isn’t one of them.

As my earlier post makes clear, the main reason why real average labour compensation has grown so slowly over the last ten or fifteen years is that output growth and productivity growth have been so low. It’s not about the distribution of the cake, but the size of the overall cake. It is no coincidence that ever since Conservatives started talking about a ‘strong economy’, the UK economy has been anything but strong. (It is no coincidence because Conservative politicians calling things a success to distract from failure started with Cameron/Osborne and the economy.)

What about this year? In the first quarter of 2022 the picture is very similar to the above. Of course real wages in April were lower than in January, but that is because inflation has been pushed up by higher commodity prices. The only company profits to benefit from that are those of commodity producers, and in particular oil and gas producers. That is why high windfall profits taxes on those companies make perfect sense.

I think some of the confusion on this issue comes from the US, where the story is different. While real labour compensation in the US tracked productivity growth pretty closely in the 1980s and 1990s, this stopped happening at the beginning of this century, with labour compensation growing less rapidly than productivity. This in turn has produced a substantial fall in the US labour share, and a rise in the share of profits. But this has not been happening in the UK, and the picture overseas varies greatly from country to country. Note also that a falling labour share does not automatically imply a higher profit share, but may instead reflect increases in indirect taxation, lower subsidies or higher other income.

Another source of confusion is generated by comparison of productivity and real median wages. I first talked about the decoupling between these two measures in this post back in 2014, based on a study by Pessoa and Van Reenen. That study has recently been updated and extended by Teichgräber and Van Reenen (HT @centrist_phone), which gives me a good excuse to talk about its conclusions once again.

In terms of real median wages and productivity there has been uncoupling in the UK. As there is no decoupling between productivity and average real labour compensation, then why are things different for real median wages? As with the earlier study, Teichgräber and Van Reenen find two major causes. The first and most important is the difference between mean (average) and median due to growing inequality at the top, and the second reflects growth in employers’ non-wage compensation (basically pensions).

Here I want to focus on the inequality cause, which is in large part down to the increasing income share of the 1%. Earnings at the very top have risen more rapidly than the rest (see below), which gets into the mean or average compensation measure but is not part of the median measure. A lot, but by far from all (see also below), of these high and rapidly growing earnings are in the financial sector. If you think that was a thing of the past (pre the Global Financial Crisis), think again, with earnings in the financial sector growing over the last year more rapidly than most. This in turn should make us sceptical about seeing the Global Financial Crisis rather than 2010 austerity being the key turning in the UK economy's fortunes, but that issue is for another time.

The key point I wanted to make in my post 8 years ago was that the growing inequality of the 1% has a big impact on everyone else. Concern about inequality at the top need not be, as much of the media likes to suggest, about envy, but instead can be about there being less income for everyone else. The growing income share of the 1% has not paid for itself in terms of more rapid growth, so their extra income comes from the 99% i.e. other workers.

There is a lot more of interest in the Teichgräber and Van Reenen paper, particularly about the self-employed, but I want to stick to the theme of inequality at the top by moving to a recent IFS paper on top incomes. Here is a chart from the paper.

It shows total income for the 1% and 0.1% over the last hundred years. Their share fell almost continuously from WWI to around 1980 , and it then went back up over the 1980s and 1990s. Over the last decade and a half it has been erratic with no clear trend.

This is total pre-tax income, not just wage income, but income from employment accounts for most of the income of the top 1%. As Chart 3 from the paper shows, around ¾ of the income of the 1% comes from employment: it is only for the top 0.1% that falls to just over half. As the paper points out, only a tiny proportion of the 1% are CEOs. To quote (references to studies omitted)

“Instead, many of the top earners are working in highly profitable industries. 29% of wage earners within the top 1%, and 44% of those in the top 0.1%, work in financial services, compared with just 5% across the top half of the income distribution….This speaks to the increasingly well-documented international trend that increases in income inequality that have taken place since the 1980s have been primarily driven by increases in wage differences between firms rather than within them. That is, the top of the income distribution seems increasingly populated not by the most senior individuals from a wide range of firms, but by the employees of a narrower group of high-paying companies concentrated in, for example, the finance industry.”

The paper includes a lot of interesting detail, and at the end there is a very good discussion of possible ways to increase top tax rates. However I want to return to the theme of low real wage growth since the Global Financial Crisis and 2010 austerity. As the chart above shows, the income share of the top 1% has not been steadily increasing over this recent period. This implies that increasing top incomes do not account for much of the poor growth in median real wages over this recent period. The Teichgräber and Van Reenen paper confirms this (see Figure 3). Figure 5 shows that most of the decoupling for median wages occurred in the 1980s and the first half of the 1990s.

Thus not only has there been no decoupling between productivity and labour compensation in the UK, but the decoupling caused by higher income inequality at the top mostly occurred at the end of the last century, and does not therefore account for the slow growth in median earnings in the last decade and a half. So even for median real wages, the last dismal decade and a half is mainly the result of poor growth in output, rather than any shift to profits or growing inequality at the top. It has been a dismal period in itself, but also in comparison with most other G7 countries (for the US, see here).

This allows a nice characterisation of three political periods in terms of the overall economic cake and how it was distributed. Thatcherism, from 1979 until the mid-90s, was a period of growing inequality at the top as well as widespread unemployment, but because overall growth was reasonably good (compared to other G7 countries) real wages still increased. So under Thatcher we had a growing cake shared more unequally. Under the Labour government inequality at the top grew much less rapidly and unemployment fell, and until the Global Financial Crisis the economy continued to grow well. So under Blair/Brown we had a growing cake, as well as a major improvement in the NHS in particular. The big change under Conservative-led governments since 2010 has been poor growth in GDP and productivity, and a decline in public services. Since 2010 the cake failed to rise.

This is one reason why it makes sense for Labour to focus on the poor growth record since 2010. It also shifts the argument away from alleged (not actual) Labour fiscal profligacy onto what really matters for voters today, which is their stagnant or falling real incomes. When the cake fails to rise, it makes little sense to talk about how what is left is divided between wages and profits, but instead to talk about getting a better recipe. Even if Labour’s recipe for growth is not totally convincing, particularly when the Brexit ingredient is still in there, voters will think they have little to lose by changing the cook. But as this post also makes clear, if Labour gets into government it has to decide whether it wants to improve the post-tax incomes of the 99% by belatedly doing something about the shift in incomes away from most workers towards the 1% at the top.

The MPC has raised rates by 0.5%, and forecast both very high inflation and a recession. To many people this will come as no surprise. When inflation is high and expected to go higher, central banks raise interest rates to reduce inflation. It’s what they do. A recession is just an unfortunate consequence of that.

However the Bank of England has a mandate set by the Chancellor. Significantly, that mandate is set out in the eighth paragraph of their summary about today’s decision. It is worth quoting what it says in full:

“The MPC’s remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the UK monetary policy framework. The framework recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. The economy has continued to be subject to a succession of very large shocks, which will inevitably lead to volatility in output. Monetary policy will ensure that, as the adjustment to these shocks occurs, CPI inflation will return to the 2% target sustainably in the medium term.”

It is an odd paragraph, because its first sentence is (rightly) contradicted by what follows. Every economist knows it would be impossible to hit 2% inflation every quarter or year, and foolish to try, especially when energy prices are rising so fast and unpredictably. For that reason, the key mandate is given by the last sentence, and you could add that the Bank should try and make this return to medium term stability as painless (in terms of excess inflation and lost output) as possible.

The table below gives the path of inflation in the two forecasts published today that the Bank traditionally presents: one based on market predictions of future Bank decisions (yet more increases), and the other assuming interest rates remain unchanged at their new level.

Now if the Bank were setting rates so “inflation will return to the 2% target sustainably in the medium term” (see above) then that clearly does not happen in either of these forecasts. In 2025 inflation is well below 2% and falling. I’m used to seeing Bank forecasts after they increase rates where at least one of these forecasts shows inflation nicely settling to close to 2% by the end of the forecast period. Not this time.

While most people will understandably focus on the very high figures over the next year, a comparison of the two rows will tell you something Bank economists always stress, which is that it takes time for changes in interest rates to influence inflation. So raising rates now will have little impact on inflation over the next year, which as the Bank shows is substantially a direct consequence of higher energy prices. What raising rates by 0.5% today does is to prolong the recession the Bank is forecasting, and this is why we see a collapse in inflation in 2024 and 2025 in these forecasts. Unemployment is expected by the Bank to be around 6% in three years time, and rising.

So it looks as if the Bank, by raising rates by 0.5%, is helping the economy stagnate into a prolonged recession with collapsing inflation well below the target and with rising unemployment. In fact it’s worse. Both forecasts above assume that energy prices stay high. The general expectation, and the assumption in futures markets, is that energy prices will fall back considerably over this period. The Bank provides an alternative forecast based on market expectations of interest rates where energy prices follow expectations in future markets. The level of inflation expected in 3 years time is then not 0.8% as above, but 0.3%!

So has the Bank departed from their mandate? That is a very serious charge, so I have been trying to work out what the MPC might say if I put that question to them. The first and obvious point is that MPC members are not bound by the Bank’s forecast. However if MPC members think that the Bank is too pessimistic on the length of the recession and medium term inflation they should really speak out, given how awful the Bank’s forecast is. A second obvious point is that the Bank could cut interest rates over the next year or so, which could avoid the collapse of inflation below target expected in 2025. But do they really believe that kind of very fine tuning works, and shouldn't they be open about what they expect to do? 

I want to go back to that rather odd paragraph that I quoted at the beginning. Why was that first sentence included, given that it was then immediately contradicted? The political explanation for why the MPC might raise rates today, even though they expect that decision to have very negative consequences later, is that with inflation expected to hit double figures they felt they had to raise rates. Hence the first sentence in that paragraph. But I really hope that is not the reason, because one of the justifications of having an independent central bank is that it is not subject to these kinds of short term pressures, although on this occasion our expected next Prime Minister has not been helpful in that regard.

When policymakers make an expected recession deeper and more prolonged through their actions, they need to provide very good justifications for doing so. Current high inflation is not a justification, as there is little the Bank can do about that. Their own forecast suggests that they are either raising rates excessively today, or they expect to reverse course fairly soon. Someone should really ask which of these is the case, or whether there is something else that I have missed.

I hope this will not come as a shock to US readers, but one of the constants of UK culture is to laugh at the ability of so many in the US to believe nonsense. The number of Americans who believethe Moon landings were faked is a widely quoted example. More recently we have the QAnon conspiracy theory, where 17% of Americans believe “a group of Satan-worshiping elites who run a child sex ring are trying to control our politics and media”. We laugh because it’s assumed that the British are far too level headed to fall for such nonsense.

This illusion is often sustained by the lack of impact most conspiracy theories have on UK politics. The British don’t have an MP who is mad enough to promote conspiracy theories, as Republican Representative Marjorie Taylor Greene has done for QAnon ideas. Further evidence might be the acceptance from the Conservative party leadership, unlike Republican leadership, that man-made climate change is a real threat that requires policy action, although this is a difference in what is said more than what is done.

To see this is an illusion I suggest starting with this post from Chris Grey. It’s about the delays many UK tourists are experiencing trying to go to France. The evidence that Brexit is largely to blame for this is overwhelming, yet Chris notes “the speed with which patently nonsensical arguments about it have been spread, and the sheer bone-headed, brazen obtuseness with which they are clung to despite every effort to correct them.” [1]

This is not an isolated example. Just as the problems caused by Brexit are many, so the list of false claims promoted to make people believe that these problems have nothing to do with Brexit are numerous. These false claims often originate in Brexit supporting newspapers but they are invariably repeated by government ministers.

Most if not all of these problems caused by Brexit were foreseen and discussed by opponents of Brexit during the 2016 referendum, but at that time were rubbished by the Brexit side under the collective heading of ‘Project Fear’. In most cases what was then claimed as fear is now fact, and the general line taken by those on the Brexit side is that these facts are either not facts at all, or that these facts have some other cause that has nothing to do with Brexit. The most common generic claim is that Brexit problems are really just acts of revenge by EU governments who are spiteful that we left.

During the referendum campaign the use of the label ‘project fear’ was extremely successful as a way of dismissing expertise about what would happen after Brexit. But when these expert predictions largely turn out to be correct, continuing denial becomes something even more alarming. As Chris points out, it didn’t need to be this way. It would be quite possible to admit the existence of trade-offs. Brexiters could say ‘yes, Brexit has caused problems, but it also has advantages that outweigh those problems’. So why have most Brexiters decided not to talk about trade-offs, but instead pretend all of Brexit’s problems have nothing to do with Brexit (what I will call Brexit harm denial)?

One argument could be that project fear requires subsequent denial, given the number of Brexiters who denied these problems would occur during the referendum. This argument is unconvincing, because one of the surprising aspects of Brexit has been how little the mainstream media have used previous statements by Brexiters as evidence against what they say now. Being proved seriously wrong in the past seems to be no barrier to the broadcast media allowing the same people to pontificate about subsequent events. Right wing newspapers think nothing of publishing mutually contradictory headlines within weeks, let alone years.

A better explanation for Brexit harm denial is that using the trade-off argument will not cut much ice, once it becomes clear that the benefits of ‘taking back control’ are either close to an empty set, or instead involve doing things that are generally unpopular. In a period where many people are finding it difficult to pay their bills, abstract notions like sovereignty cut less ice.

However I suspect even this explanation does not get to the heart of why Brexiters continue to deny the reality of Brexit harm. Instead we need to recognise Brexit as primarily a populist project, and ask why populists tend to routinely lie. Populism aims to ascribe general feelings of discontent and powerlessness to one or a small number of causes (immigration, the EU, globalisation, liberal social norms etc), and in addition to assert that these causes persist because they benefit a ruling elite. Populists like to draw a dividing line between their supporters (who are true nationalists) and the rest of the population, who are alien in some way (e.g 'woke').

Generally that association between feelings of discontent and the claimed causes is either greatly exaggerated or incredible, and so the only way of convincing people otherwise is by lying. As long as there is a large enough proportion of the population that takes little interest in politics and understands it poorly, lying can be successful. We are programmed to overrate personal confidence, so the populist never shows any doubt, or weakness, or fallibility. Lying becomes bullshitting in the Frankfurt sense. The more confident the populist appears, the more they appear on the side of those to whom they are trying to appeal to.

Brexit appealed to those who felt left behind by advancing social liberalism (see the appendix here), and the locus of that discontent was immigration. EU immigration was blamed for reduced access to public services and low real wages, claims that were greatly exaggerated or incredible and so required the techniques of propaganda or populist bullshitters to successfully persuade enough people of their validity. As real wages continue to stagnate and access to public services has got worse since Brexit, the only hope Brexiters have is to continue in the same manner by denying reality and ascribing any Brexit problem to something other than Brexit. Brexit populists need to appear to be still on the side of their supporters.

Which prompts the question: what difference is there between the way Brexit is currently defended and conspiracy theories? Both deny reality, or ascribe events to incredible causes. Both stress the need to believe in their cause, and dismiss experts as involved in a self-interested conspiracy to dispel their belief. Every problem caused by Brexit is claimed to be part of a conspiracy by the EU to hurt the UK or by ‘Remoaners’ to smear Brexit. Both Brexit and many conspiracy theories have at their heart some emotional feeling, like lack of control or fear of the other (where other can include vaccines). Both are surprisingly resistant to evidence. (Surprising to anyone who understands how science works). In this light it is no coincidence that those who support Brexit are more likely to believe conspiracy theories, and that populists often attempt to appeal to common conspiracy beliefs. (For a more academic take on links between populism and conspiracy belief, see herefor example.)

Once we see Brexit as akin to something like QAnon, then any smugness the UK might feel about conspiracy theories in other countries evaporates. [2] Brexit as a reality-denying faith has captured the UK’s party of government. [3] Unfortunately, unlike some conspiracy theories like those about moon landings, Brexit has done great harm, and its proponents seem intent to increase that harm by breaking the treaty they recently signed.

Does seeing Brexit harm denial as similar to a conspiracy theory change anything? [4] Let’s start with those who supply the misinformation. They are not going to give up anytime soon, and their influence on public debate should not be underestimated. For that reason alone it remains important to combat the lies with the truth, because that is one way of preventing more becoming true believers.

But true believers in conspiracy theories are generally unpersuaded by evidence, which is one reason why so many accept Brexit harm denial. (As footnote [2] points out, over a third think Brexit has had a positive impact on the UK). Ridicule is counter-productive, and calling true believers stupid even more so. The starting point with combating conspiracy theories is empathy with the underlying concerns that motivate the false belief. If I’m right that a key underlying concern motivating support for Brexit was a reaction to liberal social change and in particular immigration, then this is very hard for social liberals to do, particularly in the face of policies like trafficking refugees to Rwanda. [5]

The end point is that it will be both hard and will take a long time to significantly reduce the proportion of the population that accept Brexit harm denial. Because of our FPTP voting system that proportion will have an oversized influence on at least the next election. This realisation may be one reason why a recent poll showed 51% believingStarmer was right to commit Labour not to rejoin the Single Market or Customs Union, and only 24% disagreeing. That should never mean Labour joining in Brexit harm denial, but when a combination of the government, much of the media and over a third of the population accept what is akin to a conspiracy theory, those of us who like evidence led policy have to be realistic about our current predicament and recognise the importance of getting back a government that deals with reality rather than its own fantasy.

[1] The main cause of these delays are the requirement that tourists entering the EU from third countries, which the UK is after Brexit, to have their passports stamped. Before Brexit tourists could just wave their EU passport at an official. Multiply that small extra time taken by the number of tourists crossing the Channel between England and France in summer at a few specific points and you get long delays. Chris outlines the spurious stories that Conservative newspapers and ministers (including the two candidates to succeed Johnson as Prime Minister) have promoted in an effort to suggest that these delays have nothing to do with Brexit.

[2] Like most other conspiracy theories, Brexit has a minority appeal, albeit a sizable and currently very powerful minority. In July this year, 48% thoughtthat Brexit had had a negative impact on the country, while 37% thought it had had a positive impact. (Less think the government is handling Brexit well, but this comparison shows that many ascribe Brexit problems to poor implementation rather than reflecting badly on their concept of Brexit.)

[3] If you suspect, following their leadership contest, that Brexit is not the only example where Conservatives are living in an imaginary world divorced from reality you may well be right.

[4] Looking retrospectively, it helps explain the strength of the second referendum movement. Arguing that this movement was very unlikely to succeed, or that its leaders had mixed motives, is really beside the point. Perhaps an analogy would help. Suppose Johnson had declared that Covid was a myth and refused to do anything about the pandemic. Would it have made sense to argue that he had the power and there was nothing people could do about it. Of course not. Suppose he had put that policy to a referendum and won it, would that make any difference. Of course not.

[5] This helps explain why Cameron was the worst possible person to defend EU membership. Not only did he find it difficult to empathise with low real wages or reduced access to public services because he had run the country for six years, not only had he participated in the lies that this was due to excessive immigration, but he had also made a point of ‘modernising’ the Tory image by championing issues like gay marriage.

While the dividing lines between the two candidates on economic policy appear fairly clear, the division is more fundamental than the timing of tax cuts. It is the politics of one big lie, that we saw under Cameron and Osborne, against the politics of perpetual lying, that we saw with Brexit and Johnson. Both candidates share the same aim, which is to minimise the quality of public services and maximise tax cuts while still winning elections. They differ only on what the best political means of achieving that goal is.

The big lie under Cameron and Osborne was that reducing the deficit was an important, in fact the most important, goal of the government's macroeconomic policy, and that reducing the deficit meant cutting public spending across the board. It was a big lie because even at the best of times reducing the deficit is not a primary objective of policy, and in a recession when interest rates were stuck at their lower bound reducing the deficit is the macroeconomic equivalent of serious criminality.

To give some credit to Sunak, he recognised the need in the middle of the pandemic to support the economy, just as Labour had done after the Global Financial Crisis (GFC), support which Osborne attacked from opposition. But while Labour's 2009 fiscal stimulus was an intelligent response to the GFC recession, Sunak seemed to make no attempt to understand the pandemic in formulating his macroeconomic response. Instead all his decisions subsequent to introducing furlough both made the pandemic worse (eat out to help out, encouraging a delay in effective action to deal with the second wave etc) and failed to grasp the importance of controlling infections for the health of the economy. It is therefore Sunak as well as Johnson that we have to thank for the severity of the UK death toll from the pandemic and also the depth of the consequent UK recession. As they both found out but continue to deny, before vaccines were made available lockdowns delayed meant more deaths and longer lockdowns later.

The UK recovery from the pandemic recession was swift and more complete than the recovery was from the GFC recession, as it was in most countries. This reflected a combination of rapid vaccine development, the very different nature of the two recessions and the absence of austerity during the initial recovery period. It had very little to do with Sunak's one stimulus measure, a big investment incentive for firms, which has turned into a costly flop. But with the UK currently experiencing the combination of a relatively weak recovery and high inflation, it is clear that Sunak and Johnson's failures during the pandemic, coupled with the costs of Brexit, are depressing UK incomes just as Osborne's austerity did.

Sunak, like Osborne, likes to frame his job as Chancellor (and perhaps Prime Minister) as being responsible with the deficit, rather than improving the welfare of UK citizens. Osborne began the decline in the NHS, and Sunak has allowed that decline to reach critical levels, such that poor health is now producing a poorer economy. Even within the self imposed deficit straightjacket, he had the opportunity to use the higher deficits of the pandemic period as an excuse the put major resources into both the NHS and public investment, but instead he was too quick to set deficit targets so increases in both were far too modest. He also accepted a fiscal rule that imposed an arbitrary limit on public investment.

Under Sunak, like Osborne, arbitrary deficit targets limit public spending, and any better than expected news on the deficit is normally earmarked for tax cuts. Sunak, like Osborne, fails to see the essential role that public services play in producing a healthy and efficient economy. Instead the public sector is seen as a burden, and the private sector as always more efficient, an ideology that evidence provided by outsourcing failures like test and trace fails to dent. [1]

In this context the willingness of Truss to relax the deficit constraint might seem welcome. But she wants to relax the constraint to produce not better public services, but tax cuts today that are greater than Sunak's future tax cut plans. That their ultimate goal, tax cuts, is the same shows that the difference between the candidates involves strategy rather than objectives. The strategy Truss is adopting is taken from the Republican party, and is called 'starve the beast'. (See George Eaton on Sunak’s Thatcherism compared to the Reaganism of Truss.) Like Reagan's tax cuts, her policy is to raise borrowing to sufficiently high levels such that at some point a deficit crisis will be declared, the answer to which is of course spending cuts. This may not even be the initial plan, but with the ideology of her party and the dominant media narrative it is an inevitable outcome. So while Sunak aims to keep to deficit targets and cut taxes in good times, Truss plans to cut taxes now so spending is cut in a future manufactured deficit crisis.

Starving the beast involves not just one big lie, but a whole series of untruths. Voters are being told that tax cuts will not raise demand and therefore inflationary pressure, and will also pay for themselves. When both fail to happen after the next election voters will be told that the high interest rates that tax cuts have made inevitable and a larger deficit has nothing to do with tax cuts, but is all the fault of a bloated public sector. The Conservatives' favourite economist, Patrick Minford, will do overtime in TV studios to give this nonsense economics some spurious credibility, just as he did with Brexit.

A steady stream of lies about economics is what Brexit, and Johnson’s period of government, was all about. In that sense Truss promotes the Johnson continuity strategy, just as Trussin many ways represents the Johnson continuity candidate: often radical changes in political beliefs to satisfy personal ambition, a self-discribed “disruptor-in-chief”, with an ability to claim personal triumphs that is inversely proportional to actual achievement. Cutting taxes and spending more in the short term is what Johnson wanted to do but was prevented from doing so by his Chancellor and the Treasury.

Tax cuts now is a strategy that works in winning over Conservative party members, because they represent the small minority of voters who want tax cuts and lower public spending. These members are also the ultimate Brexit faithful, believing the lies constantly fed to them by the Brexit press. But both the ideas advocated by Truss and the policies proposed by Sunak are the opposite of what the UK economy needs right now. The twelve years of Conservative rule have put theUK economy in as bad a state as it has been since WWII, and all they are doing is advocating more of the same.

The Cameron/Osborne period, the years of the one big lie, turned what had been a vibrant economy into a depressed economy. Large percentages of economic output and incomes were lost, as austerity first delayed a recovery from the GFC for three years and then ensured that recovery was tepid. Lack of investment caused by weak demand and uncertainty meant productivity growth, which had been in relatively good health in the decades before 2010, became one of the weakest in the OECD. Johnson’s answer to that was to promote the continuous lies of Brexit, which ensured yet more percentage points in output and incomes would be lost. Yet the damage he and his Chancellor did was not limited to that. Criminal mishandling of Covid and inadequate funding for the NHS and social care meant poor health started producing macroeconomic harm, and their brand of crony capitalism encouraged rent seeking rather than innovation.

The macroeconomic priority of any new Prime Minister has to be two-fold: to deal with the current crisis and to deal with the problem of slow growth in productivity, output and incomes. The current crisis is about the distribution of income: those most hit by higher energy and food prices are those that can least afford it. Part of the solution is to transfer more income from those who have gained from the crisis, the energy producing firms, to those that need it most. It’s the solution that Sunak was reluctantly forced to introduce, after insisting for months that a windfall tax was a bad idea. Sunak’s scheme was temporary, involving a 25% tax with far too generous exemptions for investment. To fund further help for the poorest this winter, it could be made permanent, at a rate above 25% and with no exemptions for investment in fossil fuel extraction.

The first priority in solving the underlying problem of slow UK growth should be to begin the process of restoring the NHS to the position it was when Labour left government. Part of that process is reversing the privatisation of health provision, which while it might have saved money initially either costs more in the longer term or reduces the quality of care, and sometimes both. This is going to cost a lot of money, which is why tax cuts either now or in the near future are such a stupid idea.

Another priority is public investment, including investment to help green the economy. Public investment can be a spur to productivity enhancing private investment, which will promote growth by expanding the supply side of the economy. We also need to reverse direction on Brexit, start cooperating with the EU and begin the lengthy process back into their Customs Union and Single market. Public investment and health come together with Covid, where the government should be embarking on a massive programme to have effective ventilation in every school, workplace and other areas outside the home where Covid can spread.

The problem for most people living in the UK is that both candidates for PM find it impossible to do these things, both because of their Thatcherite ideology and Brexit obsession, and because their own MPs believe the public sector is bloated, inefficient and needs to get out of the way. This is hardly surprising for a party that is increasingly controlled by very wealthy donors and press barons, and that is dependent on them to outspend and misrepresent their political rivals before elections.

Both candidates pledge policies that pander to prejudice or press misinformation, like pledging no more on-shore wind farms (Sunak) or ending the green fuel levy (Truss), when green energy offers the only secure way to avoid a future energy crisis (as well as saving the planet!). So expect no progress on reversing the damage the Conservatives have done to the UK economy over the last twelve years whichever of the two candidates becomes Prime Minister. Instead the only relevant question is how much more damage each can do until the next general election.

[1] The waste of money produced by inappropriate outsourcing and corruption under Johson’s leadership is immense, yet as Chancellor Sunak was in an excellent position to stop it happening, yet he didn’t. His solutionto the current NHS crisis seems to be only the power of his leadership, the same leadership he failed to show when Chancellor.

With a global energy price hike generating high inflation in most countries, and central banks reacting by raising interest rates, comparisons with the 1970s are in fashion. The 1970s have for a long time been seen by the political right in the UK and US as the chaos before the calm, where the calm is the advent of neoliberalism. For much the same reasons, a common refrain on the left is that the 1970s were a lot better than what came later in many ways. A good example of the latter is a recent articleby Adam Tooze in Foreign Policy. While taking the kind of holistic view he does there has its merits, it also frames the debate as an answer to the question ‘1970s: good or bad?’, while reality is more complex than that. In this post I just want to focus on just two issues: inflation and trade unions.

Tooze says that successfully controlling inflation (through independent central banks) was a victory for conservative politics. Historically inflation produces winners (borrowers) and losers (savers), and so controlling inflation was a victory for savers. In addition high inflation goes with unpredictable volatility. Inflation started at 5% in 1970, rose to over 25% in the mid-seventies, then fell to below 10% only to rise again in the early 1980s. So those who prefer stability, like most business owners, will also prefer low and stable inflation. But the constituency that enjoyed the high and variable inflation of the 1970s is both small and lacks political representation. 

The high and variable inflation of the 1970s was generally unpopular, and as a result no political party campaigned for it, just as no political groups today are arguing that the current increase in inflation should continue. I think it would be fairer to say that successfully controlling inflation is generally popular, rather than characterise it as a victory for conservative forces. There are many reasons why high and variable inflation is unpopular. While economists often focus on the costs of unwarranted relative price dispersion, what was far worse in the 1970s was heightened social disruption. Days lost in strikes reached a post-war peak in the 1970s and early 1980s. Strikes are costly because of lost pay and production, but also because of the social dislocation they can cause. 

The political right likes to slide from this observation to suggest that strikes are always the fault of workers, or even worse ‘trade union barons’. Their predictability on this makes their claimto be ‘the party of the working class’ risible.

Many on the left do the opposite. Strikes, after all, appear to be the archetypal battle between workers and capital. Unfortunately this overlooks one key point, which is that firms also set prices. As a result, when inflation is widespread strikes are not a battle between wages and profits for their share of any surplus, because employers can often recoup their share of the surplus by raising their prices. The reality is that strikes represent the breakdown of negotiations between two sides, where either workers, employers, both or none can be to blame. Such breakdowns tend to be bad for both the employers and employees involved, and often for many who use the products or services they create. High and volatile inflation goes together with a high number of days lost through strikes for obvious reasons. 

The unfortunate reality that is often missed on the left, but which is understood by most macroeconomists, is that a large increase in global energy prices have to lead at some point to a corresponding reduction in real wages (compared to what they otherwise would have been), for reasons I discussed here. Governments can and should act to cushion that effect for those on low incomes (and more widely if higher commodity prices don’t redistribute from consumers to those working to produce commodities but instead redistribute to the profits of commodity producing multinationals), but unless higher energy prices are known to be temporary there is no reason to permanently cushion that impact for all workers, and good reasons why they shouldn’t. 

In these circumstances, suggestingall workers should aim to get nominal wage rises that match the level of inflation is unrealistic, as most will not. Attempts to do so will just risk recreating what happened after the 1970s: very high interest rates and a recession. Equally now is not the time for firms to attempt to generate large increases in profits, because this too invites a reaction from central banks. But the first is not a cure for the second, except insofar as a recession hits profits as well as workers. [1] (As the postscript to this post points out, larger than average real wage cuts imposed by governments on public sector workers are a completely different issue.)

For some on the left, this refocuses the debate on technocratic and undemocratic independent central banks. After all, if it wasn’t for higher interest rates, we wouldn’t get a recession. Tooze writes: “Independent central banks were not truly above politics; they were the extension of conservative politics by technocratic and non democratic means.” But, for better or worse, independent central banks have a mandate to keep inflation near a target. If central banks were not independent, it is very likely that politicians of all stripes would set themselves similar inflation targets, and go about achieving those targets in similar (although probably more erratic) ways.

Some of the dislike on the left for independent central banks is because the cure to excess inflation often involves an increase in the number of people losing their jobs. But this has little to do with central banks per se, and represents a more general dislike of using demand management to control inflation, whether it’s through interest rates via an independent central bank or a government using fiscal or interest rate policy. The 1970s in the UK in particular represented a prolonged experiment in attempting to control inflation without imposing the costs of higher unemployment, and instead using a mixture of wage and price controls and deals between governments and trade unions. The result of this experiment was clear – it failed.

There is a more nuanced criticism of independent central banks with low inflation targets, which is that they replace the inflationary bias of the 1970s with a deflationary bias. This is the line Tooze takes, although I think it needs pinning down more precisely than he does in the article. We have no clear evidence of deflationary bias in the 1990s or early 2000s. In the UK, for example, underlying growth was steady at similar levels to the 1950s, 60s, 70s and 80s. There is no reason why, in normal times, controlling inflation should be deflationary, and no good evidence that it generally is.

However it may well be the case that central banks, given the history of the 1970s, overreact to similar external shocks to those that happened then. David Blanchflower has rightly arguedthat the Bank of England was too focused on raising rates following higher commodity prices in the second half of the 2000s to notice the impact the Global Financial Crisis was having. The ECB raised rates in 2011 when commodity prices started rising after crashing during the GFC, and the Bank of England nearly did the same. Some might argue that central banks are overreacting now because the dangers of a wage-price spiral are much less than in the 1970s.

However it’s far from clear to me that this shows some flaw in the idea of independent central banks. Politicians, like independent central banks, are just as prone to refight the last war. There are ways of dealing with this deflationary bias without returning to high and variable inflation, like raising the inflation target or changing the target in other ways. Independent central banks with inflation targets represented a positive response to the inflation of the 1970s, and there is no reason why these cannot be improved if it turns out that central banks are overreacting to inflation today. [2]

I noted earlier that one reason why the left wants to question the image of the 1970s pushed by the right is because the 1980s saw the beginning of the neoliberal hegemony. In particular, it saw the start of a decline in trade unionism in both the UK and US. In addition, and whether it was a factor behind decline is not obvious, these neoliberal governments substantially reduced trade union power.

But if it is the case that we are less likely to get a wage-price spiral leading to a severe recession today because unions are less powerful, isn’t that a good thing? There's an apparent dilemma here which many on the left are reluctant to face. The dilemma is that there is an inherent power imbalance between employee and employer in most workplaces and trade unions are important in redressing that imbalance. But is it possible to have strong unions without also generating wage price spirals following commodity price hikes?

International experience suggests the answer may be yes. While trade union density has declined in many countries in a similar fashion to the US and UK, in others it has not.

Will these countries suffer a worse wage price spiral, and therefore recession, than elsewhere because of greater union coverage? If not, then the link between widespread unionisation and the high inflation of the 1970s is less clear cut than many on the right (and some econmists) like to suggest. There is no dilemma if it is possible to have strong unions that also recognise when real wages have to fall following higher commodity prices.

[1] This is why central bankers who extol wage restraint without also pushing profit restraint should know better. In the current context both are inflationary, and the only cure central bankers have for either is the same: higher interest rates and a decline in economic activity. There may also be more medium term concerns about rising mark-ups that are possible because of monopoly or monopsony power in particular sectors, but there are plenty of medium term remedies available to governments to deal with those, like encouraging competition (in the UK’s case, reversing Brexit), better regulation and a stronger antitrust policy.

[2] There is a stronger case against separating monetary and fiscal policy, which is that it facilitates austerity. I make that case here, although as I argue hereeven that strong case ultimately fails.

In 2020 the US ended Trump’s presidency at the ballot box, and last week Conservative ministers and MPs finally forced Johnson to say he would go. It is naturalthat the fall of both should be celebrated, because both brought hitherto unimaginable degradation to their office.Trump and Johnson came from very different backgrounds, and operated within very different constitutional systems, but they had very similar character flaws that meant they were a disaster at leading their countries, and both did everything they could to avoid losing that leadership. Yet as the US is finding out, and as the UK surely soon will, their rule was a symptom of much deeper problems that are harder to remove.

I have described both the US and the UK under this Conservative government as elected plutocracies: regimes where some very wealthy people determine a large proportion of the policy agenda, but where elections still take place. [1] Such regimes still hold the possibility of a transition to more democratic rule through these elections. For example the US under Biden is less of a plutocracy than under Trump. In this sense elected plutocracies are best seen as a continuous struggle between the interests of some of the very rich and a majority of voters. [2]

Part of that struggle is about how fair elections are. One reason why the US and (currently) the UK are elected plutocracies, but most of Europe is not, is that both have electoral systems that favour the political right, which in turn is where the power of the wealthy is greatest. In both countries social conservatives have a more than proportional influence on elections, and as a result the political right focuses as far as it can on these social issues to win votes. This has been true for some time in the US, and as Tim Bale reminds us also in the UK.

The reason for this electoral bias to the right in the US is well described by Shaun Lawson here, and in the UK it is a result of a divided social liberal vote and the concentration of social liberals in the cities. This is one reason why most recent Republican presidents, like Trump, got a minority of votes when they were first elected (because the Electoral College that decides who is president overweights rural America), and the Conservatives win more elections in the UK than Labour.

However the two countries have very different political systems, and the importance and influence of money in US politics has been far greater for some time. While the current Conservative party apes the Republicans in many ways, it is way behind in terms of the erosion of democracy. For example gerrymandering in the US has been routine for some time, as have various measures to discourage black voters who tend to vote Democrat. In contrast the Conservative government has only just begun to do similar things.

Partly for this reason, the constitutional crisis that hit the UK last week was of an order of magnitude less important than the crisis faced by the US. In the US the Republican party under Trump took the fateful step of contesting the result of a presidential election they lost, and Trump even went as far as inciting an invasion of Congress to halt the confirmation of Biden as president. It remains an article of faith among many Republicans that this election was in some way rigged (although every objective examination of these claims has failed to find any evidence), and equally most are in denial about Trump’s attempted coup. Republicans like Liz Cheney, the daughter of a former Vice President and a solidly right wing conservative, was forced out of her position as Chair of the House Republican Conference because she supported a second impeachment of Trump following that coup.

Another related indication that the UK is well behind the US in the threat posed to democracy is the extent to which the political right ignores reality. In the US much of the right does not believe in man made climate change, whereas in the UK that is still a minority position among Conservatives. Gun control is impossible in the US, but effective in the UK. The UK does not have prominent Conservative politicians who flirt with an anti-vax agenda. Yet the UK does have a rabid right wing media that is at least as strong as in the US, and Johnson level lying has become routine among Tory politicians, so perhaps it will be just a matter of time before these things come to the Conservative party.

Disputing the results of an election your side lost based on no evidence whatsoever should mean most voters will never vote for you again. The reason is straightforward. If every time you lose an election you not only call the result rigged but also support attempts to overturn the result, voters can no longer trust democracy in your hands. If they vote you in, they may never get the chance to vote you out. Unfortunately it seems that voters are also in denial about what Trump’s coup and most Republicans failure to condemn it means for the United States. This denial is encouraged by much of the media, which raises impartiality between the two political parties above both reality and the future of US democracy.

The problem has been intensified by the inability of Biden and the apparent Democratic majorities in the House and Senate to do anything in response. It has long been the case that slim paper majorities in Congress for the Democrats do not translate to actual majorities in practice. Even before the energy cost crisis it seemed likely that the Republicans would take control of both the House and Senate in the midterm elections. Meanwhile Republican controlled States that are critical to winning the Electoral College have been dialling up the gerrymandering and vote exclusion.

If this situation didn’t seem bad enough, we also have a radicalised right wing Supreme Court using its majority to make overtly political decisions. While allowing Republican States to ban abortion has rightly got most attention, the court has also ended the Environmental Protection Agency’s (EPA) power to regulate carbon emissions. More worrying still for US democracy is what this unelected Court may do in the near future. The six Republicans on the Supreme Court have announced that one of the first cases they’ll decidenext year is whether States can overrule the choice of voters in who makes up their share of the Electoral College. If they do, it means a Republicanis sure to be selected as the President in 2024. If you still think this is all implausible, here are some headlines that might help, and please tell me which one cannot happen.

In the United States, therefore, the Republican party is very close to winning the war between the plutocrats that back them and democracy. If this happens the implications beyond the US itself are immense. How, for example, can the world fight global warming when the second biggest producer of CO2 emissions has a government in denial about man made climate change?

In this context our own problems in the United Kingdom seem minor, but they remain very similar. The boy who wanted to be world king may no longer be our Prime Minister, but the party that chose him in full knowledge of who he was and how poor a Prime Minister he would be remains the same. It is the Conservative party, not Johnson, that voted through the effective exclusion of poorer parts of the population from voting, voted to make demonstrations illegal and ended the independence from government of the body that runs elections. It was a majority of the Conservative party, not Johnson, who decidedjust over a month ago that someone who breaks his own laws can continue as a law maker. While Johnson may have institutionalised plutocracy by empowering bodies made up of major donors like the Leaders Group and the Advisory Board with direct access to ministers, the financial advantages of keeping them in place will almost certainly mean they survive his passing. Making Brexit an article of faith has divorced the Conservative party from reality, as the competition among leadership candidates about who can promise the biggest tax cuts clearly shows.

The reality is that even if more honest and democratic voices still existed within the Conservative party, their chances of becoming its leader would be virtually zero. Among MPs a combination of little-Englanders, ego-libertarians and neoliberal nutters form a majority. Furthermore it is party members that make the final choice of who will become our Prime Minister, and it is among those members that the influence of the plutocracy through the right wing press is at its strongest, a press that lauded Johnson to the end and beyond. [3] In addition (but not independently), it is among these members that you will find those that still keep the Brexit faith. The necessity of tax cuts has become an article of faith among Conservatives just as it has among Republicans. Tax cuts when the NHS is on its knees is the last thing we can afford in the UK.

Nor should the current state of the UK polls provide reassurance that things are bound to change after the next general election. Labour’s poll lead may reflect to a considerable extent the unpopularity of Johnson and the current cost of living crisis. Whoever the Conservatives chose to be Prime Minister, the media will give them a honeymoon, and a late 2024 election will almost certainly see better economic news than 2022/3, an improvement that they and their media backers will claim is down to their leadership. Although some form of cooperation between opposition parties is likely, it will be far from complete and there remain plenty of voters who don’t understand the need to vote tactically under a FPTP system.

Is there hope for democracy in the UK and the US? In the UK the immediate prospects are grim but a defeat for the right in the next general election is possible, although far from assured. [4] In the US the situation is bleaker, but it is worth noting that in the recent past it has often been the hubris of their leaders that has led the right to stumble. Trump’s attitude to Covid helped bring him down, particularly when he caught it himself. In the UK it was Johnson’s partying in No.10, illegal under his own anti-Covid rules, that turned many voters against him. The best hope we have is that the Supreme Court, by flexing its power before the midterms, will help mobilise liberal and uncommitted voters, and lift denial about the threat to democracy from their eyes.

[1] If you don’t believe me for the UK, considerthe current complete absence of a policy on Covid.

[2] It might be objected that in most democracies corporations and businesses hold considerable political power. One way of describing neoliberalism is government in the interests of corporations and business in general. But this is very different from a plutocracy. In a plutocracy, a select number of particularly wealthy individuals hold considerable power, and this power may be exercised against the interests of corporations and business. Brexit is the clearest example of that happening.

[3] It is no coincidence that these papers like to show Penny Mordaunt, initially popular among Tory members, in a swimming costume.

[4] History suggests the Conservative tactic of replacing an unpopular leader before the next election is usually successful in terms of winning that election.

The rapidly rising wealth we have seen over the last decade or more is not mainly a result of high income inequality or high savings, but of upward revaluations in wealth caused by the trend decline in real interest rates. Trends like this mean it makes little sense to talk about the old gaining at the expense of the young, and instead we should talk about the wealthy gaining at the expense of the asset poor.   

Here is the ONS measure of total UK wealth.

Notes: 2020 refers to a survey spanning April 2018 to March 2020 and so on. There is a break in the official data for 2016, and I have reduced data before that based on the 2016 comparison. Source data here.

The ONS data underestimates wealth, particularly at the top (see here), but as I want to focus on trends rather than levels I will not discuss the complex issue of wealth measurement in this post. The key point is that the total value of wealth in the UK almost doubled over a 12 year period, which is a much greater increase than nominal GDP or earned incomes. Yet this itself is not mainly the result of any dramatic accumulation of income by those earning a lot, but rather a revaluation of people’s existing wealth.

The most obvious example of this is housing, which made up just over 40% of total wealth at the beginning of this period and a little over a third at the end. The rise in housing wealth over this period is mainly a result of higher house prices rather than more houses. But the same point applies to another large category of total wealth, private pensions, which was just over a third of total wealth at the start of this period and over 40% at the end. Pensions are mainly made up of shares and fixed income assets like government debt, and their increase in value mainly reflects the upward revaluation of these assets rather than their accumulation. For more on this see this useful piece by Ian Mulheirn.

Why have valuations been going up? The main reason is the trend decline in real interest rates (see the Mulheirn piece again) - what macroeconomists call secular stagnation. I discuss why house prices rise when real interest rates fall here, but the reasons are the same for shares or government debt. In all three cases these assets provide a nominal income stream largely independent of short term interest rate changes (rent or housing services for housing, dividends for shares and a fixed interest rate for most government debt), but holding a short term variable interest rate asset is always an alternative. If short term interest rates fall, then if the price of these other assets did not rise they would become more attractive, so their price will rise. Lower short term interest rates leading to higher asset prices is financial arbitrage at work.

This is why the current debate over what will happen to interest rates once the current burst in inflation is over is so important. If secular stagnation is really over, then long term real interest rates will rise over time and the price of many assets (including houses) will fall. As a result, we will see the value of total wealth at least stabilising, and perhaps even falling. On the other hand if secular stagnation has not gone away, then these higher levels of wealth will persist or increase further.

Which turns out to be the case also influences how we think about higher wealth today. It is often said that for most home owners higher prices don’t really make them richer, because if they sell their house they are likely to buy another. It’s also often said that higher house prices benefit the old at the expense of the young. I think this way of looking at current levels of wealth only makes sense for erratic movements in real interest rates (and therefore the value of wealth) rather than sustained trends in real interest rates (and therefore wealth). To understand why we need to think intertemporarily.

Let’s take the case where secular stagnation persists, so higher wealth also persists. Consider two couples in the 40s, one of whom owns a house and the other of whom rents. The couple that own their own house know that at some point many years ahead they will no longer need their house, and they can convert its value into money to spend in their old age (on better care or more holidays), or perhaps as a gift to a child. In either case they are substantially better off than the couple that rents, who will not be able to do either. The case is analogous to a couple that has a private pension and another that does not. You don’t have to be old to feel better off when house prices rise or the value of your pension increases. Instead you just need to think ahead, and hope that higher house or asset prices last until you downsize or retire.

But what, you may ask, happens if all the pension or the money from downsizing goes to buy an annuity? Because of lower real interest rates, annuity rates will be low, so the income you receive from the pension or house sale will be lower. Is what you gain in higher wealth lost in a lower return from it? The answer is to some extent, but certainly not completely. In particular if real interest rates are very low, you will almost certainly be planning to spend some of your wealth in retirement, so you still benefit from its additional value.

Your benefit is someone else’s loss. As we should all know, higher house prices have made it much more difficult for first time buyers without wealthy parents to buy their own house. More generally, persistent upward revaluations in wealth relative to income reduces the possibility of social mobility, which benefits the wealthy at the expense of the not so wealthy. This is I think the basic reason why it’s wrong to think of higher wealth through long lasting revaluations as benefiting the old relative to the young. Instead it benefits the wealthy and disadvantages the not wealthy. It’s one of the reasons why I think those that advocate permanently low nominal interest rates as a policy goal on distributional grounds are very mistaken.

Only when such upward revaluations in wealth are short lived does it make sense to talk about the current old versus the current young. In that case the house owning couple in their 40s will never see the benefit of the current increase in house prices, because by the time they come to sell their house and move into a retirement home or whatever prices will have fallen again. Equally only would-be first time buyers right now will be disadvantaged by unaffordable housing, because house prices in 10 years time will be much more affordable.

Short lived movements in asset prices also influence pensions. Those taking their pension can either get lucky (if real interest rates are temporarily low, so asset prices are high) or unlucky (if the opposite is true). It is also why a pay as you go, government run pension scheme can be a lot fairer than private schemes because the value of pensions do not depend on short term fluctuations in real interest rates and asset prices. (A failure to think intertemporarily also bedevils discussion of the triple lock for the UK state pension. If the state pension was gradually reduced in value relative to the triple lock, those who would lose out most are those currently in work, not current pensioners.)

Whatever happens over the next decade, global real interest rates have been falling since the 1980s, and so house prices and the value of existing pensions have been rising. That counts as an upward shift in wealth that has persisted or increased over decades, making the wealthier more wealthy at the expense of those with no wealth at all. The last few decades have been a great time to be wealthy, and a correspondingly bad time for the asset poor.

“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”

For those new to this blog, mediamacro is a term I coined for how macroeconomics is generally talked about in the media, particularly when discussing the general direction of fiscal policy. By implication it is very different to what economics students are taught. What I mean by mediamacro will become clear in this discussion.

The famous quote from Keynes is relevant, because with mediamacro the practical men were the vast majority of journalists who were convinced after the Global Financial Crisis (GFC) that governments had to tighten their belt, and the madmen were of course the politicians who made this their policy. But mediamacro survived the demise of the Cameron government, and continues to dominate the way many political journalists talk about the budget and other fiscal issues. A big reason for this is that many politicians, in all parties, still think keeping government debt to GDP falling is synonymous with being responsible.

To understand mediamacro you have to recognise that its origins are, in part, the academic consensus that was dominant before the GFC. Governments have two ways they can attempt to manage the aggregate economy: by changing fiscal policy (tax and spend) and by changing interest rates. There are other means (some often called unconventional monetary policy), but none are as reliable and therefore as effective as these two methods. The academic consensus that preceded the GFC was that interest rate changes, delegated to an independent central bank with an inflation target, was a better way to manage the economy than the government changing fiscal policy.

So in this pre-GFC consensus view what should govern fiscal policy at the aggregate level? How big should government deficits be? The pre-GFC academic consensus said that over the long term government debt should be sustainable, which is a jargon word for the ratio of government debt to GDP being stable in the long run, rather than either steadily rising or falling. Of course government debt to GDP could be stable at high or low levels, but academic theory had no strong message on what the optimal level of this ratio should be. In the UK the 1997 Labour government devised fiscal rules to ensure this goal of long run stability was met.

From an academic point of view was there an equivalence in importance between the goals of interest rate policy and fiscal policy? Absolutely not. Academic macroeconomists wrote volumes about what interest rates should be and how central banks should make decisions, because macroeconomic stability was very important. In contrast, debt sustainability was nice to have but, except in rare cases where political failure led to uncontrolled large scale fiscal profligacy, failure to achieve it was no big deal as it could be subsequently rectified. After all, between the 1970s and the 2000s government debt to GDP had almost doubled in the OECD, but economists had no strong evidence that this had had any serious impact on macroeconomic performance. One prominent idea, that higher debt to GDP would raise real interest rates (interest rates less expected inflation), turned out to be a false alarm as global real interest rates fell over this period.

The very long run need for debt stability left journalists with a problem. How were they meant to talk about fiscal policy at the aggregate level if the only test of its appropriateness was some long term goal of sustainability which wasn’t that important anyway? The collective solution they devised was to turn a long term goal into a short term goal, and to overemphasize its importance by morphing sustainability into responsibility. This was so attractive because it made aggregate fiscal policy easily understandable for non-economists: the government became like a household. If its borrowing was too much, journalists could write articles about how taxes would have to rise if the government was to remain fiscally responsible, and if its borrowing fell they could write articles about tax cuts to come. Mediamacro was born, and it was very easy to write and understand.

As long as the pre-GFC academic consensus held, mediamacro was irritating but not wildly wrong. Of course no government is like a household (it is longer-lived, it can create money, and it large relative to the economy), but as long as central banks were doing the stabilisation job this analogy wasn’t doing serious harm. Journalists, it is important to remember, have a difficult job to do in explaining macroeconomics to non-economists.

The academic consensus was shattered by the GFC, although many macroeconomists had seen the writing on the wall well before this by looking at what had happened to Japan. As I have already noted, the global level of real interest rates seemed to be on a downward trend, something macroeconomists often call secular stagnation. With inflation targets at 2%, a real interest of 1% would imply central banks setting a nominal interest rate of 3%. However in a recession, inflation would often be below target, and the central bank needed to achieve real interest rates well below normal levels to generate an economic recovery.

This just wasn't possible, because central bankers also thought there was a lower bound to nominal interest rates at around zero. That meant that central bankers could only achieve at best slightly negative real interest rates, which proved totally inadequate to lift Japan out of its 1990s stagnation and to combat the deep recession that followed the GFC. The upshot was that interest rate changes could no longer be effective at fighting recessions.

As a result during the GFC interest rate policy stopped working, so fiscal stimulus was the only reliable policy in town for stopping the recession and generating a recovery. Any first year economics student would tell you that, and state of the art macro concurred. Macroeconomists whose field this was (like myself), and/or who had seen what had happened in Japan, understood this immediately, although it perhaps took a few years from other economists to get the message that the old consensus was dead.

The Prime Minister at the time of the GFC, Gordon Brown, understood this and used fiscal stimulus as a tool to limit the size of the 2009 recession. The Conservative opposition found it politically convenient not to understand, and instead focused on rising government debt as a sign of 'government irresponsibility' and pledged to introduce tough fiscal contraction (austerity) instead. There were now two different, and competing, stories about what fiscal policy should be doing: the old and much exaggerated story about long run sustainability, and the more relevant story about using fiscal policy to get out of recession. In academic terms the first was downright dangerous during a recovery from recession, while the second was correct.

I invented the term mediamacro because almost all journalists during the austerity period decided to stick with the old story. Mediamacro was now the opposite of the truth, and a deeply damaging message for the public to hear. I tried very hard, along with other more famous macroeconomic bloggers located mainly in the US, to both educate journalists about this error and work out why it persisted.

Unfortunately we faced an uphill struggle for three related reasons. The first was that some well known macroeconomists backed austerity, at least initially. It was clear to me from surveys and other evidence that they were in a clear minority, both in the UK and US, but from 2010 they were in tune with the political consensus so they got a lot of publicity. In the early stages we spent much time successfully debunking their ideas, such that by 2013 Paul Krugman could convincing argue that the intellectual case for austerity had crumbled.       

The second reason was that proponents of austerity claimed that without it chaos would occur because the markets would stop buying government debt. Our attempts to explain why this was highly unlikely were unpersuasive after the shock of the GFC. A better approach was to explain why, even if it did happen, it didn’t matter because the central bank would buy the debt under its Quantitative Easing Programme, a point I made in one of my first blog posts. 

The third reason this was an uphill struggle was the Eurozone Crisis, where particular EZ governments were having problems selling their debt. To many, including those who should have known better in the IMF, this seemed to validate the austerity narrative. In reality it didn’t, because the European Central Bank did not at the time have a Quantitative Easing programme, and was not providing unlimited support to member countries. The moment the ECB changed its policy in 2012 to do this, the Eurozone Crisis came to an end. (For more detail, see hereor here.)

The damage done by austerity, backed up by mediamacro, was huge in economic and political terms, and the mistake was not repeated during the Covid pandemic. Yet mediamacro lives on. Governments still have deficit targets that are too short term, and journalists still write up monthly (!) deficit outturns in terms of their implications for future taxes. Only policy makers in the US understood the need for a fiscal stimulus during the recovery from the pandemic, and as a result major European countries look like they will permanently lose percentages of GDP compared to the US, while still suffering from high inflation.

There are now some very good economic journalists in the media. But how do other journalists move beyond mediamacro, without having to explain everything I have written in this post so far? I think above all else they need to do two things. The first is to understand that the old academic consensus is dead. In simple terms the new academic consensus is that interest rates are still the favoured instrument to deal with inflation (as we are currently seeing), but it is fiscal policy that is the main weapon needed to fight recessions. As a result, if there is a risk of recession or during the recovery phase from recession, deficit targets reflecting debt sustainability go out of the window, and macroeconomic recovery becomes the only sensible goal of a government’s fiscal policy.

The second thing journalists need to do is to stop treating increases in government debt as bad, and falls in government debt as good. It’s just terrible macroeconomics, and will mislead your audience. Is it always bad if a government buys a financial or physical asset by issuing debt? Of course not. Is it bad that government debt rises in recessions? Quite the contrary: if it didn’t because the government stopped it happening the recession would be far worse. Is the high level of most government’s debt today a problem? Not obviously given how low long term interest rates remain. As there is no academic consensus about what the optimal level of government debt is, it would be just wrong for journalists to imply government debt is 'too high'.

Of course what I’m suggesting is not necessarily how policymakers talk about the world. It is also the case that a large part of the print media will persist with mediamacro because it serves a certain ideological perspective. However knowing what the academic consensus is can only improve the quality of impartial economic and political journalism. Good journalists should never just follow a political consensus when it goes against expert opinion without at least recognising what experts are saying. Ignoring knowledge is not being impartial. The austerity period represented, among other things, a major failure of mainstream journalism in the UK and elsewhere.

When there is a consensus among economists does that consensus deserve to be acknowledged? I think among some political journalists there is a cynical view about economics in general, and academic economists in particular. Do they deserve to be called experts when they are always disagreeing with each other and failed to predict the financial crisis (and so on). It would take another post to fully debunk that view. But all I need to say here is that on the two major economic policy issues in the UK over the last 12 years, first austerity and then Brexit, it is the consensus among academic economists that has been proved right, and those that dismissed this consensus as ‘out of touch with the markets’ or ‘project fear’ respectively that have been proved very wrong. 

Some people have expressed surprise that UK real wages have recently fallen during a period when the UK labour market was pretty tight. (That tight labour market may be coming to an end as unemployment has begun to rise). Here is the real (in terms of consumer prices) level of the monthly average earnings data for regular pay (excluding bonuses) ending in April this year.

Levels of this measure are a little messed up in 2020 because of the pandemic, but the recent fall in real wages is real enough, reflecting consumer price inflation rising more rapidly than regular pay. In April consumer price inflation was over 3% above the increase in regular pay.

That real wages should be falling even though the labour market is tight is no surprise when we recognise that a key reason why inflation is rising so rapidly is a huge hike in the price of energy. Higher energy prices represent a transfer from consumers of energy to producers of energy. Unless you can stop that transfer happening by some means (by, for example, taxing energy producers making unusually large profits), then consumers have to pick up the tab.

That in turn must mean a reduction in real consumer wages (nominal wages less consumer price inflation). That is likely to happen because in most cases firms set wages, and in looking at what they can afford to pay they will not look at consumer prices, but at the prices of the products they produce, which are rising less rapidly than consumer prices. They may be forced to raise wages above this and productivity growth in a tight labour market, but they have absolutely no reason to compensate workers for a rise in energy prices. Equally, to argue that workers on average do not have to take a real (consumer) wage cut in these circumstances is at best wishful thinking, which is why I didn’t sign this letter.

Does this reflect weak union power?

But why should workers shoulder all the higher costs of energy? What about those living off rents or dividends, or pensioners? Well landlords and shareholders consume energy as well, so they will pay, although as they tend to be richer than average they will feel it less. In the UK, however, the government has said that state pensions will be protected from higher energy prices (with a delay) because pensions are indexed to either earnings or consumer prices, whichever is the higher. This illustrates a more general point, which is that the government can (and indeed should) adjust who pays for higher energy prices among the population by altering taxes or benefits. [1]

What would happen if some or all workers did manage to persuade companies to keep nominal wages at the level of consumer price inflation? Consider the case where only some rather than all workers did this first. It is just possible that the companies they work for would absorb higher wages through lower profits, but the more likely outcome is that their prices would rise by more than other firms. Consumers would pay those higher prices, so this is another way besides government action of redistributing the cost of higher energy among consumers. (Workers who get a high pay rise gain, those that don’t lose.)

But belonging to a union is not the only way some workers can transfer real income falls due to higher energy prices to others. In terms of the current situation it also matters how much personal bargaining power they have, which in turn depends on how tight particular labour markets are, how much money their employers are making or whether their employer is the state. This last factor is particularly important at the moment, as the following chart shows (from here).

Currently it is public sector workers who are really being hit by higher energy prices, while workers in finance are (on average) getting wage rises that are at least keeping pace with inflation. The former is untenable if we want good public services, and the government can hardly argue that bringing public sector pay in line with the private sector will be inflationary (although that probably won’t stop them trying!). The latter raises a question over why financial firms think they can afford such pay rises, and whether recent fiscal transfers from the government to banks (e.g.) have been wise.

Now consider what would happen if all workers managed to emulate their comrades working in finance? Would all workers avoid an immediate fall in real wages? In this situation it is then even more likely that firms would raise their prices to protect profits, producing a wage price spiral. [2] The Bank of England would raise interest rates sufficiently high such that unemployment rose, and aggregate demand fell, substantially, persuading enough workers to accept lower real wages and some firms to accept lower profits. This 1970s scenario will not happen today, because unions are not nearly as strong now as they were then.

While the reduction in union power since the 1970s will help avoid the kind of wage-price spiral we saw then, it is also reasonable to suppose that a tight labour market will have some effect on nominal wage inflation. This in turn could lead to higher domestically generated excess inflation (threatening the inflation targets of central banks). In addition when inflation is high firms may find it easier to raise profit margins. Argumentsabout whether its wages or profits being too high that is risking persistent excess inflation are not very helpful when the only solution we currently have to reduce inflation from either source is to reduce the aggregate demand for goods and services. [3] Equally, arguments that generally higher wages or profits will have no consequence for the economy are simply false. [4]

This is why in the US and UK short term interest rates are rising. In general it is hard trying to decide how far interest rates need to rise (and economic activity to be correspondingly lower) to avoid a large temporary energy price shock and temporary supply side shock (and temporary Brexit inflationary shock in the UK) leading to permanently excess inflation. That also means it is possible to make big mistakes, allowing either inflation to persist or creating an unnecessary recession. Given the mandates of most central banks, the latter is more likely than the former.

So why have real wages grown so little over the last 15 years?

If we return to the first chart, we can see that basic real pay is now around where it was before the Global Financial Crisis. (Total pay, including bonuses, would be a little higher.) Does this reflect a general shift in GDP from labour to profits?

Here is the share of corporate income in GDP since 1970 (source ONS).

There has been no trend rise in the share of GDP going to profits since 1970, so rising profits are not why real wages have grown so little over the last decade and a half. Where there is a problem is that this steady profit share has been accompanied by a recent slump in business investment.

By far the most important reason for stagnant real wages can be seen by looking at an old favourite, real GDP per capita, over the same period as the first chart..

You can see from this that there just has not been much growth in national output per head after the GFC. GDP per head was about 6% higher in the first quarter of this year than at its pre-GFC peak, which is pretty pathetic over a 14 year period. The UK economy has been hit by one disaster after another: the GFC, then the austerity period that squashed growth during what should have been the recovery period 2010-2013, a certain vote in 2016, and then Brexit and the pandemic.

Why is GDP per capita 6% higher since the GFC compared to no growth for average real earnings? The most obvious reason is the decline in the terms of trade caused by higher energy prices at the end of the period, which reduces the real wage when deflated by consumer prices but does not reduce the amount produced in the UK to the same extent. Other reasons include a slight fall in the share of wages in income caused by a rise in indirect taxes (e.g. the 2010 increase in VAT). In addition I have already noted that there is some small positive growth in total real earnings once we include bonus payments.

The main message is that a lack of growth in real wages over the last 15 years reflects a lack of growth in the economy as a whole. The current cost of living crisis is all the more painful because of this lack of real growth over the last decade and a half. No one should be fooled by government ministers talking about ‘a strong economy’: on this like much else they are lying. Furthermore we know why the UK economy has been so weak since the GFC. First austerity severely limited our ability to recover from the GFC recession, and then Brexit has cut UK growth and increased UK inflation.

Declinism

David Edgerton wrote recently in the Observer about the dangers of declinism (in short, the UK economy has suffered because of deep longstanding and particular problems that we have never solved) and its opposite, revivalism (from cool Britannia to Brexiter hype). Both as generalities are nonsense, and as he points out there is a danger of looking at the UK independently of trends in other major economies, particularly those we trade a great deal with.

So, for example, our economic performance after the GFC crisis was terrible because of austerity, but austerity also happened in the US and was perhaps more severe in the Eurozone, where it generated a second recession. As I noted recently, since the pandemic the US has grown more rapidly than Europe (including the UK) in part because of a fiscal stimulus that spurred the post-vaccine recovery.

Declinism stems in part from not seeing the UK in an international context. Of course the UK has many deep seated problems, but the same is true in most other countries. This chart, from here, can perhaps make this point more clearly than any words.

Compared to the original EU countries, UK growth was lower before we joined the EU, but since we joined the EU it has at least kept pace with those countries. I suspect this overstates the beneficial impact of joining the EU, as the EU5 were recovering from a much lower base after WWII and therefore could grow faster. But what it does show is that from the 1980s onwards, for whatever reasons (and there were probably many) the UK was actually doing rather well compared to our European neighbours. As I noted here, the same was true relative to the US. So stories about some unique UK national economic decline that starts well before 2010 are simply wrong. It is why we should not regard accounts like this as applying to the UK alone.

But while this chart may exaggerate the beneficial impact of EU membership, those benefits are real enough, and what we may already be seeing since the GFC and particularly Brexit is the beginning of another period of relative UK decline. Italy may save us from being the sick man of Europe once again, but if we want to see reasonable real wage growth again we have to do something about improving trade with our neighbours, which means getting rid of a hard Brexit, which in turn inevitably means removing from power the political party that delivered Brexit.

[1] It could also shield all consumers by borrowing, transferring some of the cost of higher energy into the future, although that would make no sense if higher energy prices were permanent.

[2] The employment contract is not symmetric in terms of power between employee and employer, which is why trade unions are important in improving terms and conditions, preventing exploitation etc. However if union membership was widespread, the ability of unions to improve the real wages of workers as a whole is severely constrained by the fact that firms set prices.

[3] What about passing laws to prevent excessive increases in profits or wages? They were tried in the 1960s and 1970s, and they failed because they require the state to work out, product by product or worker by worker, what reasonable profits or wage increases are. Over the longer term it is better to ensure excessive profits are controlled through competition (enforced, if necessary, by breaking up monopolies) or, when competition is impossible, through forms of regulation.

[4] If the aim is to reduce the proportion of profits going to dividends, or share buy backs, high nominal wage demands is a very uncertain method of achieving this (as firms set prices). A more inevitable outcome is widespread unemployment as the central bank attempts to control inflation.

The wisdom or otherwise of the American Rescue Plan, which included $1,400 direct payments to individual Americans, has been a constant debate since it was enacted at the end of 2020 and the beginning of 2021. The main criticism has been that it overheated the US economy, and therefore added to inflation already high because of post-pandemic supply problems and energy price hikes. That increase in inflation has led the Fed to increase short term interest rates, and how high those interest rates will need to go to stabilise inflation, and/or whether they will lead to a US downturn, we are yet to see.

In much of Europe, by contrast, there has been no equivalent fiscal stimulus. Instead there was much more general fiscal support, in the form of the state paying a large proportion of many workers salaries to stay at home. Yet while the net effect on the public finances may have been broadly similar, the impact on GDP has been very different. As I noted here, for example, the US recovery from the pandemic has been much stronger than in Europe.

One reason involves the standard observation that the propensity to consume out of a temporary increase in income rises as incomes fall. Give the same amount to rich people rather than poor people and you will see a lot less consumption and a lot more saving among the rich. With the American Rescue Plan, the amount people received actually fell as their income levels rose. That is why it makes sense to talk about that plan as a fiscal stimulus (as well as being an effective anti-poverty measure) while the European style salary payments were more in the nature of general fiscal support.

So we might expect stronger post-vaccine growth in the US compared to Europe, but equally higher inflation in the US compared to Europe. We have seen much higher US post-vaccine growth in the US than in Germany, France and the UK. It is also true that inflation increased earlier in the US than in Europe, and the stimulus is one reason for that. But if (and I know it’s a big if) OECD forecasts released last week prove accurate, then the total amount of inflation experienced by US consumers in the three years after the pandemic will be no greater than in Germany, as the second column of the table below shows.

OECD Economic Outlook forecasts June 2022*

*Figures obtained from adding annual growth rates, so I have rounded to nearest 0.5.

If we think in terms of a relative growth/inflation trade-off, then these forecasts suggest the US is going to get considerably more growth than Germany or France with little cost in terms of higher inflation compared to those countries over the 2020 to 2023 period. One reason of course is that the Fed has raised interest rates, while so far they remain stuck at their lower bound in Europe. This superior growth performance means that workers in the US are going to be considerably better off than their counterparts in the major European economies.

Of course this is only a forecast. But it does allow me to make two points that are sometimes missing from a lot of the US debate. The first is that post-vaccine inflation has been a world-wide phenomenon, and whether inflation turns out to be worse or not in the US is at least open to question, as these forecasts show. (Latest data on US wage inflation suggeststhat it is past its peak and slowing.)

Second, fiscal stimulus to enable interest rates to rise above their lower bound is good macroeconomic policy if you believe (as most politicians in all these economies do) that interest rates should be the tool of choice in managing the economy. As long as interest rates are stuck at their lower bound, they are powerless at countering negative economic shocks. Quantitative Easing is a very poor substitute, simply because we have much less experience of its (probably non-linear) impact, and fiscal stimulus in some countries is often in practice a poor substitute because of politics. So ideally we would want interest rates well above their lower bound, and a fiscal stimulus is how you get there.

Will this argument prove incorrect if the US ends up in recession? It’s worth noting that while the OECD are expecting modest US GDP growth through the rest of this year (between 3% and 1,5% at an annual rate), they are expecting very low quarterly growth rates (less than 1% at an annual rate) through 2023. Based on the past reluctance of forecasters to predict recessions, this forecast is a flag that some more quarters of negative growth are quite possible. But for a prospective US recession to unwind the advantages of the Biden stimulus we have seen so far, it would need to be (a) very large, (b) be accompanied by good positive growth in the major European countries, and (c) US inflation would nevertheless have to be more persistent than in Europe. That combination of events is possible, but at this point seems rather unlikely.

In macroeconomic terms the best argument against Biden’s stimulus is that its timing was unfortunate, because it coincided with post-pandemic supply side and energy price inflation. However this largely supply side inflation was not widely predicted, and from a political perspective no other timing for such a fiscal stimulus may have been possible. So from the point of view of the major European economies, the US position at the moment looks a lot better than their own, and the Biden stimulus is the most obvious reason for this.

There may be a more general lesson here. When interest rates are stuck at their lower bound, economies that experience severe recessions (like that created by the pandemic or the GFC) may require a strong fiscal stimulus to successfully recover from those recessions. In the absence of such a stimulus (or worse austerity) the recovery will be weak, will certainly be slower, and may even result in a permanent loss of real income for most of those in the economy. This happened across the world after the GFC, and it seems to be happening in Europe following the pandemic.

If, as some are expecting, the ECB raises rates in a misguided attempt to reduce inflation, this will make the growth gulf between the US and major European economies greater still. Quite what the macroeconomic logic is for the ECB to raise rates following an energy and supply side shock, when the OECD expects demand in the Eurozone to be around 2% below potential this year and next, is difficult to fathom.

What about the UK? In growth terms it is stuck in the doldrums with Germany and France, yet it is expected to suffer the biggest increase in inflation. As I noted here, the UK is unusual because of Brexit, which has both reduced growth and increased inflation. For those who remain unconvinced that Brexit is a key factor, look at the performance of regions since before the pandemic. Besides London, Northern Ireland is the only area to show positive growth probably because it remains in the Single Market. Or look at CER analysis by John Springford that compared the UK to economies that had performed in a similar way in the past, and finds that since Brexit a gap of over 5% has opened up between GDP in these economies and the UK, with the gap in investment much wider.

As long as the UK government remains in denial about this, the UK is likely to stay in the position of having a worse combination of growth and inflation compared to either the US, Germany and France. Instead of modifying Brexit in order to reduce these economic costs, the government is instead starting a new dispute with the EU by breaking the Northern Ireland protocol it signed just two years ago. Unfortunately the main result of the confidence vote against Johnson is that he has become beholden to the largest cohesive group of Tory MPs, and those are the Brexit hardliners in the laughably named European Research Group. Before it entered the EU the UK was called the sick man of Europe, and after Brexit it is taking up that title once again.

It is common to talk about how UK Prime Ministers have become more presidential over time. Cabinet government, where the PM is first among equals, has gradually been replaced by a more presidential system where the PM is more influenced by those working in No.10 than those around the cabinet table. However, to describe the system as presidential, with an obvious comparison to the US, is misleading because Congress can severely limit the power of the President. A presidential PM with a large majority in parliament has much more political power over legislation than most US Presidents.

Is Johnson’s time at No.10 just another point on that steady progress away from cabinet government? In two important senses it represents more of a step change, a change which hopefully is reversible. The first is that Johnson has chosen a cabinet based on loyalty to him and an idea (a hard Brexit), both designed to elevate the less able to be ministers. That is the reason why there are no obvious candidates to replace Johnson in the cabinet. The second is that Johnson has very little time for a powerful parliament, as was very evident when he suspended it when he first became PM. He increasingly sees it not as a place where legislation gets initiated, amended and improved but as an audience for his Oxford Union style debating skills.

For this reason it makes more sense to describe Johnson’s period in office as an autocracy rather than as an example of presidential government. Unfortunately, autocracy comes naturally to Alexander Johnson. In his so far short term as leader he has passed legislation which requires evidence of identity before being able to vote, ended the independence of the body that runs elections and allowed the police to declare any demonstration illegal if they think it will be noisy. All these measures have been voted through by his MPs. He has installed friends or donors to countless positions of power, including running the BBC. As Robert Sauders writes: “The ballot box, the right to protest, and the equality of the vote are among the most powerful ramparts yet constructed against tyranny. We should not tamper with them lightly.”

Why does autocracy come naturally to Johnson? His ambition is driven by a belief in his own unique self-importance, yet in reality his performance in leadership roles is best described as incompetent. He masks this be being a congenital liar who gets away with lies because of a combination of privilege and charm. People who naturally tell you what you want to hear or what they want you to believe, when either may be the opposite of the truth, are always at risk of being exposed. Accountability is Johnson’s enemy, and his actions attempt to limit accountability as far as he can.

Alongside autocracy often comes corruption, and Johnson is no exception to this rule. Donors to the party who have deep pockets enjoy privileged access to ministers. Friends and donors also get fed contracts from the government, as became very evident with the VIP lane for PPE contracts at he start of the pandemic. MPs can, if they wish, get paid by companies to obtain access to ministers, or for lobbying ministers. For all these reasons Johnson’s government acts like a plutocracy, where influence comes from donations to either Johnson himself, ministers, MPs or the party. Money has always bought a degree of influence in the UK, but as with his own autocracy, Johnson has taken things to a different level.

The corruption that has come closest to threatening his position as Prime Minister is partygate. As Andrew Rawnsley points out, it is inconceivable that you would have had illegal party after illegal party in No.10 under any previous Prime Minister. To quote: “When that person is Mr Johnson, you get a culture of selfish, arrogant, entitled, amoral, narcissistic rule-breaking that combines, in the true spirit of the Bullingdon Club, snobbery with yobbery.” Cameron was also a Bullingdon member, but unlike Johnson Cameron chose his lies very carefully because he did not believe that he could avoid being found out or charm his way out of the consequences of doing so. That Johnson knew about the No.10 parties and knew they were illegal is beyond doubt whatever he or his ministers might say now, and the fact that he did nothing to stop them while the rest of the country followed his rules is quite shocking, and almost unbelievable. In addition, it was a terrible way to manage such an important part of government, as the many cases of COVID in No.10 or the Cabinet Office over the partygate period testify.

What is also unbelievable, if you hadn’t been closely following the Brexitification of the Conservative party, is that only a minority of Conservative MPs seem prepared to get rid of someone who could do such a shocking thing, let alone worry about the UK turning into an autocratic plutocracy. Yet Johnson ensured the Brexit campaign would be in his own image (almost nothing that was claimed for Brexit was actually true and was often the opposite of the truth) and he subsequently did his best to ensure that Conservative MPs bought into that culture of falsehood. For many MPs, therefore, if they get rid of Johnson they risk exposing the reality that their Brexit is responsible for many of the country’s current predicaments.

Ultimately, however, Conservative MPs are interested in retaining power, which is why so many decided electing Johnson in 2019 was a necessary evil. As Tim Bale wrote in April, for many Conservative MPs “Johnson has become what we might call a talismanic leader, one who, possessed by powers that sometimes seem superhuman, even supernatural, to his friends and foes alike will, whatever the current evidence to the contrary, supposedly see their party through the very worst of times and into the sunlit uplands.” They will also note that a combination of certain friendly newspapers and very rich donors remain steadfast defenders of Johnson (to such an extent that their copy could have been written in No.10) in part because Johnson has made a point of giving them exactly what they want in terms of policy and money.

Will enough Conservative MPs realise before the next election that the magic has gone, destroyed by a combination of partygate, Johnson’s own incompetence and the cost of living crisis? In any case the magic attributed to him in bringing down the red wall had rather more to do with longstanding but not immutable trends, a commitment to Brexit that has now faded, and the unpopularity of Corbyn. Or do they think that, despite Johnson's own unpopularity, a combination of their own money, media power and corruption will be enough to drag any opposition leader down to his level, enabling Johnson to still win an election? It is a testament to the current state of UK politics that we cannot be certain that this belief will prove incorrect. 

Unfortunately for this country, nothing that has happened or will happen under Johnson’s rule should have been a surprise. As I noted in 2016, a former boss of Johnson, Max Hastings, wrotethat if Boris Johnson is the answer, “there is something desperately wrong with the question.” The question to which Johnson became the answer was how the Conservative Party could implement a hard Brexit, and there was indeed something very wrong with that question. Indeed all those that supported Brexit, from whichever political direction, should have foreseen that Prime Minister Johnson was a very likely consequence.

His Trump-like traits of habitual lying, incompetence and ruthlessness were all noted in my short 1916 post. The similarities between Johnson and Trump are many, as I noted here three years later. Let me just add one more to that already long list. Trump was notorious for ignoring briefing provided by the machinery of government, and instead getting his information from Fox. Likewise Johnson is hopeless at reading his red box, and before partygate at least, would start the day with senior officials looking at the daily press and the issues they raised.

I ended my 2016 post with this sentence:

“Boris Johnson plays the cultured aristocratic fool, and many love him for that. But if he becomes Prime Minister, as now seems almost certain, it may be the British public that ends up feeling played and foolish.”

I suspect that after Brexit and partygate enough of the British public now feel played and foolish to have ever entrusted Alexander Boris de Pfeffel Johnson to such a powerful position. 

What I hope they don’t forget is that most Conservative MPs, who knew much more about him than voters did in 2019, seemed not only happy to have him as their leader, but have supported and enabled his autocratic style of government, and have now been remarkably reluctant to get rid of him after he knowingly broke a law he himself had imposed on others. Once upon a time the Conservative party used to worry about being seen as the nasty party. Today in flaunts its nastiness with pride, and a majority of its MPs have decided to turn our parliamentary democracy into a government in one person's image, a person who is way more corrupt, disorganised, authoritarian and dishonest than any previous post-war UK Prime Minister.  

When ministers, in response to demands for more public spending, declare there is no magic money tree they are in literal terms lying. One of the things that make governments that use their own national currency quite different from households is their unique ability to create money. This is no great economic revelation, as it has been taught to first year economics students for as long as there were first year economics students.

There is a very simple relationship between spending, taxation, borrowing and money creation. If we include paying the interest on its debt as part of government spending, then we can express that relationship in the form of an equation:

Government spending - taxes = new borrowing + new money creation

A great deal of confusion in popular writing about macroeconomics can be avoided if you just remember that equation. It is an identity, which means that no causation is involved. Governments are free to choose three of these four quantities, but not all four because the identity (the government’s budget identity) must hold. [1] 

When economists say that higher government spending is paid for (or funded by) higher taxes or more borrowing, they are simply talking about how this identity is satisfied. Equally when politicians say we cannot afford to spend more on the NHS, they mean they are not prepared to raise taxes, borrow more or create more money. 

Economists from the MMT school of economics are fond of pointing out that if the government chooses to increase spending but does nothing else, then this spending will be paid for by creating more money. However the practical relevance of this statement is zero, beyond confirming that the government can create money. This is because governments will generally respond to higher spending and that additional money creation by either increasing taxation or borrowing more.

Why is this? What stops UK governments making themselves very popular by increasing spending on the NHS, education and so on and paying for it by creating money? The short answer is that at some point this would become inflationary. Economists sometimes talk about this type of inflation being caused by too much money chasing too few goods. But my own view (and a monetarist might disagree) is that talking about too much money is again misleading. What causes the inflation is that the government has increased its demand for goods (produced domestically) or workers, the domestic private sector sees no reason to reduce their demand, and there is a limit on how many goods or workers can be provided (domestically). What really causes inflation in this case is not excess money creation but the aggregate demand for goods (or workers) exceeding the aggregate supply.

Why is this a better way of thinking about this type of inflation? [2] The most basic reason is that the problem would still arise if the government didn’t pay for the higher spending by creating money, but instead by borrowing from abroad. We would still at some point get excess aggregate demand for domestically produced goods or workers, and inflation would rise.

All this suggests that what limits aggregate government spending is the amount of goods the domestic economy is willing to supply, sometimes called productive capacity. [3] This is also a popular conclusion of the MMT school of thought. As Josh Ryan-Collins writesin the News Statesman: “The main constraint on public spending should be whether the economy has the productive resources and capacity to absorb such spending without it leading to excessive price rises.”

Thinking about things this way has its uses. It shows, for example, why in a recession there is every reason for governments to increase their spending, and finance this by raising borrowing or creating money. A recession is generally where there is an excess supply of goods and/or workers, so using those resources to produce stuff not only reduces unemployment (of machines and/or workers), but also makes everyone better off because they can benefit from higher government spending. Alternatively governments can keep spending unchanged but cut taxes in a recession, and this will not be inflationary.

This shows why deficit limits in a recession are a dangerous form of economic nonsense. Again this is no great economic revelation, but has been understood by economists for 80 odd years. If in the (very unlikely) event that governments cannot cover the extra spending or reduced taxation by borrowing, they can create money and this will not be inflationary, because there is an excess supply of goods and/or workers. That this basic macroeconomic truth was briefly ignored in many countries from 2010 onwards is a subject on which I once wrote a great deal.

Despite all this, it is not the case that productive resources and capacity are the main constraint on the amount government’s spend. Governments can spend more by persuading the private sector to spend less. In modern economies it can do this in two main ways. The first is by raising taxation. Suppose we start from a position where there is no excess aggregate supply or demand, so inflation is constant. The government can still spend more if it encourages the private sector to spend less by raising their taxes. [4]

The second way governments can reduce the private sector’s demand for goods is by raising interest rates. Higher interest rates encourage people to save more and spend less, making way for additional government spending without raising inflation. In countries with independent central banks targeting inflation this will happen because the central bank wants to keep inflation constant.

This second way of governments being able to raise spending (or cut taxes) raises a potential political problem in countries with independent central banks. Irresponsible governments may be tempted to raise their spending or cut taxes in popular ways (particularly before an election), pay for it by higher borrowing, and avoid the inflationary consequences because central banks raise interest rates. Higher interest rates might be unpopular with some (borrowers), but they will be popular with others (savers), and in any case it may be the central bank that gets the blame rather than the government.

Something along these lines seems to have happened in many countries from around the 1970s onwards, after the collapse of the Bretton Woods system of fixed exchange rates when interest rates began to be used routinely for controlling inflation. This is known as deficit bias, and is why some countries adopted either fiscal rules for the size of government deficits or debt, and or fiscal councils like the OBR. It is important to understand that these fiscal rules would be unnecessary if governments were responsible, and that the harm that deficit bias does is long term, minor (raising interest rates higher than they need be) and largely irrelevant in the current era of very low long term interest rates. The idea that deficit targets somehow limit the amount governments can spend or tax year to year is economic nonsense, but that doesn’t stop some governments and many in the media pretending otherwise.

This second way that governments might provide room for additional spending is hardly discussed by MMT economists, because they believe fiscal policy (or other measures) rather than interest rates should control inflation. If governments followed MMT and did this, then there would be no need for deficit targets. But nearly all governments nowadays do not do this, and have independent central banks controlling inflation (when they can) by varying interest rates. [5] As a result, as long as this is the case, appropriate deficit targets [6] have some place, but this place should never get in the way of fighting recessions or climate change.

In attacking the nonsense of analogies relating government finance to household budgets, MMT is on the side of the angels. But you do not need a new school of macroeconomics to do this, as the nonsense can, and was, easily exposed using either longstanding or more recent mainstream macroeconomic ideas and evidence.

In addition, when MMTers say that deficit targets are pointless, it is important to understand that this follows directly (and obviously) from their main departure from how most mainstream macroeconomists view demand management, which is a belief that fiscal policy rather than interest rate changes should manage aggregate demand in order to control inflation (outwith the lower bound for interest rates. At the interest rate lower bound, I think most mainstream macroeconomists would agree that fiscal policy has to take monetary policy’s place.)

Finally, MMT also favours combining fiscal stabilisation policy with keeping interest rates very low. If, as the evidence strongly suggests, higher interest rates reduce aggregate demand, then (outwith the lower bound) mainstream macroeconomic policy would allow more government spending for given levels of taxes or borrowing (or any other policy instruments) than an MMT policy would allow. This is because higher interest rates would reduce aggregate demand, making room for more government spending without increasing inflation. In this sense MMT’s choice of fiscal policy rather than interest rates for macroeconomic stabilisation lowers rather than increases the amount governments can spend.

[1] I now prefer to call this an ‘identity’ rather than a ‘constraint’ because it is not a constraint on spending, taxes or borrowing, precisely because governments can create money. Contrast this with a household’s budget constraint, where the money creation is not a legal option. But this is just language, not economics.

[2] Excess aggregate national demand is not the only reason national inflation can increase, of course. It can increase because of higher imported prices, such as the price of commodities like oil or gas.

[3] Productive capacity can also be a misleading term, because it suggests some kind of maximum for what the existing workforce and capital stock can produce. In reality most firms like to keep spare capacity in normal times to cope with unexpected but short term fluctuations in demand. The key measure is what firms are willing to supply at current rates of inflation.

[4] How much taxes need to rise depends on how permanent the tax increase is believed to be. If it is believed to be permanent, then taxes need to rise by about the same amount as the additional government spending. However if people believe the extra taxation is temporary, they may be tempted to pay some of the taxes from reduced savings. In this case the rise in taxation would have to be greater than the increase in spending to keep aggregate supply and demand in balance.

[5] For why most macroeconomists still think that, outwith the lower bound for interest rates, independent central banks using interest rate changes, rather than governments using fiscal policy, should control inflation see here.

[6] Unfortunately many deficit targets are badly formulated, and a bad fiscal rule can be worse than none at all. This is particularly true in the Eurozone, where national interest rates cannot control national inflation and so fiscal policy should, but this is made more difficult by deficit targets.

Renewables are now the cheapest form of energy generation. If all energy use in the UK was based on electricity, and all electricity was generated by renewables, our current cost of living crisis would be far less severe, and of course we would not be adding to climate change. Furthermore, there is huge potential in the UK (and most other countries) for far more renewable energy production than we currently have. So why isn’t this happening faster?

That is the question addressed in a new book by Eric Lonergan and Corinne Sawers. In many ways it is a very optimistic book, because it suggests the problem of climate change is mainly solvable with known technology, and there are no insurmountable barriers for doing this with sufficient speed to enable us to avoid severe global warming. They suggest that the reason this is not happening is, in part, because we are thinking about it in the wrong way.

Much of the discussion around avoiding climate change is framed in terms of costs. Economists are partly to blame for this, as the debate was originally framed by economists in terms of what current costs are we prepared to pay to avoid future costs (global warming). The book suggests that a better way of thinking about it is as an industrial revolution, such as the invention of telecommunications. Because renewable energy is cheaper, we are better off developing it and phasing out fossil fuels even without the problem of future global warming. When electricity was first invented, no one talked about the costs of installing electricity generation compared to future benefits, because it was obviously a better technology for everyone concerned.

An economist might retort that there is always an opportunity cost of investing in green energy and electrification, because that investment could be used for something else. In this sense it is always right to talk about costs and benefits. However in today’s world we have very low long term interest rates, and yet in many countries private and/or public investment levels are if anything lower than the past. The trade-off in many cases may not be between green investment and some other form of investment, but between green investment and the spending power of those who own shares in companies.

Another strand of thinking suggests radical change, like individually consuming less or eating different foods, or for economies to stop growing, or fundamentally changing capitalism. Again this makes stopping climate change seem rather unattractive or risky, and this puts both people and policymakers off. Framing the problem as a green industrial revolution to obtain cheaper and more stable energy is much more appealing.

In terms of doing this faster, the book suggests looking at what has worked so far, that has brought us to the point where renewable energy is also the cheapest energy: a combination of large positive incentives and hard regulations. Central to their argument are the use of “extreme positive incentives for change”. These have led to the rapid reduction in the cost of solar power, and the widespread adoption of electric vehicles in parts of China, Scandinavia and the US.

Extreme positive incentives (like providing large subsidies for electric cars or well insulated houses for example) combine three important pieces of psychology, politics and economics that are often ignored by economists. The first is that extreme incentives are much more effective than marginal incentives, because of the psychological fixed costs of changing behaviour. The second is that positive incentives (giving people money to do things) are more effective than negative incentives (like taxing carbon), because the latter generates resistance and as a result are unlikely to be pursued strongly by policymakers.

The third is that people do not ‘internalise the government’s budget constraint’, which is the idea behind Ricardian Equivalence. If they did. people would recognise that incentives had to be paid for by them one way or another, so positive incentives and taxes would work in the same way. This doesn’t happen not because people are irrational, but because it is very uncertain how governments fund incentives, and many of those methods of funding would not fall on those receiving the incentive. So people who receive an incentive really are better off, and those who are taxed are worse off, in terms of expected income. It is only the fiction of the representative agent (and various additional assumptions) that leads to the idea of internalising the government’s budget constraint. [1]

We can see all this in action when we compare the success of solar power to the many difficulties governments have had in raising appropriate carbon taxes (or permits that act like taxes). Carbon taxes make sense in many ways, because they are the economists’ standard response to an externality (i.e. a cost imposed on others that isn’t paid for by the people generating that cost). Climate change is the biggest externality of our lifetime. Yet in the case of climate change, when the costs are generated by everyone and the harm they create is in the future, the psychological, political and economic factors noted above mean positive extreme incentives are much more effective than carbon taxes.

All of which brings me to the title of this post. If extreme positive incentives are what is needed to speed up electrification and the use of renewables to generate that electricity, that will cost governments money. Ideally that should be paid for by higher general taxes rather than borrowing, because it’s better if the polluter pays. (Equally richer countries, that have already deposited a large amount of carbon in the atmosphere, should help pay poorer countries to go green.) But this ideal may not be feasible in political terms, because policymakers will resist the idea of tax increases and therefore will not provide the incentives.

The way to avoid this problem is to fund green incentives through borrowing. As I have often said, future generations suffering the effects of substantial global warming will not think that’s OK because we reduced their ‘burden’ of paying taxes on government debt. Instead they will positively welcome the borrowing required to reduce climate change in the past. [2] This is particularly so when that borrowing currently costs so little.

Which is where debt and deficit targets get in the way. To see how ridiculous it would be if they did get in the way, just compare why we need debt and deficit targets, and compare that to why we need to mitigate climate change. Deficit targets are useful to prevent irresponsible governments from buying elections or rewarding donors by tax or spending breaks funded by borrowing. We need to reduce global warming because otherwise we will see, for example, large-scale global starvation and migration, with all the political chaos that this will cause. If you had to choose between reducing the fiscal behaviour of irresponsible governments and reducing climate change, which would you choose?

There may be ways of not choosing between the two. Perhaps we could create two separate sets of government accounts: a normal account and a green account. Deficit targets could apply to the former but not the latter. If Germany can do this for military spending following Putin’s invasion of Ukraine, why not do it for spending required to reduce climate change? [3] Of course there will be many practical political problems, and it may require a fiscal council with teeth to avoid governments cheating, but it’s clear we should be at least discussing this possibility.

If we don’t do something like this, then we may be faced with a simple choice. Do we speed up greening the economy to reduce the extent of global warming using the ideas proposed by Lonergan and Sawers, or do we do what this government and the media are doing now, and obsess about deficit and debt targets? The fate of the planet may depend on what people and governments choose.

[1] In a simple model with a representative agent, a subsidy would automatically imply an equal tax today or tomorrow, which will leave the representative agent no better off, so they would be indifferent between positive incentives (subsidies) and negative incentives (like carbon taxes). In reality the tax increases required by any subsidies may fall on different people from those receiving a specific tax cut or incentive. In addition tax cuts today may be paid for by cuts in government spending, which again may not fall on those receiving a specific incentive, and so on. In other words people see positive incentives for them as redistribution to them, and taxes on them as redistribution from them.

[2] The classic case for funding by borrowing is an investment that doesn’t just benefit people today, but also benefits people tomorrow. This is why no macro restrictions should be put on public investment. However many activities that are not classed as public investment have these characteristics. A war, for example, is often an investment in the future, which is why wars are so often accompanied by public borrowing. Greening the economy also has those characteristics.

[3] Does it make sense to treat higher military expenditure as different from other forms of spending? If it represents a one-off increase in spending, reflecting for example an unusually aggressive ruler in a nearby country then yes, it is. However if it is seen as a permanent increase in spending, it is not clear why that shouldn’t be paid for by the current generation through higher taxes.