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.

A recent post was entitled “How Austerity created Brexit, and the economic and political decline of the UK”, and it tried to argue that the UK economy and politics had started going seriously awry in 2010 rather than in 2016. Some people responded that the real date from which things started going wrong was 1979 i.e, the advent of neoliberalism.

In a sense they are right, and I have made this argument myself when I have talked about neoliberal overreach. By ‘overreach’ I meant that the continuing pursuit of neoliberal goals would transform neoliberalism into a kind plutocratic authoritarian populism we saw under Trump and we see in the UK under Johnson. (For why that represents a major change, see below.) In 2017, just after Jeremy Corbyn’s ‘glorious defeat’, I asked whether neoliberal overreach was inevitable, and in 2021 I tried to say more clearly why I thought it was.

However to say that the UK’s political and economic decline started in 1979 is both too simplistic and unconvincing. It is unconvincing because that decline was not evident to most for at least three decades after the onset of neoliberalism. In terms of GDP per capita, the UK at least matched growth in Germany and France in those 3+ decades. [1] It is only since the GFC, and I would argue in particular austerity and Brexit, that real wages have not grown at all over a 15 year period. It is simplistic because it treats neoliberalism in practice as a single entity, whereas in reality it comprises a number of separable aims.

The initial manifestation of neoliberalism under Thatcher and Reagan was not obviously doomed to failure in either economic or political terms. In the UK standards of living for most did not stagnate or decline, and political institutions continued largely unscathed. The power of trade unions declined, but so did inflation. UK poverty increased initially, but this was either arrested or partially reversed in the Blair/Brown years. North Sea Oil and the post-cold war peace dividend enabled Thatcher to cut taxes without drastically shrinking the state, and Blair/Brown raised taxes to increase the size of the state. Whatever you thought of the politics, neoliberalism didn’t at that stage appear doomed to end in authoritarian plutocracy.

While Thatcher and Reagan transformed what had begun before, in subsequent years it looked as if neoliberalism had become sustainable by being selective about what aspects were adopted and what aspects were not. In the UK unions remained less powerful and Thatcher’s privatisations were retained, but other neoliberal goals like a reduced state enabling lower taxation were ignored. Unemployment gradually declined compared to its high point under Thatcher.

There is a line of argument which says the economic success of the Blair/Brown years was an illusion built on deregulated banks that shattered in the Global Financial Crisis (GFC). I think the evidence for that is rather thin. Strong UK growth in earlier years was more broadly based than just financial services, and the UK banking sector survived the GFC with the help of the state. The reason the GFC seems to be such a breakpoint today is in large part because of austerity. Of course the GFC did illustrate the folly of the neoliberal goal of maximum deregulation, but the response of most governments was simply to increase those regulations (e.g. raising capital requirements).

Hypotheticals can be useful as another way of testing ideas. If I am right, then had Brown won a general election after the GFC, and if he had resisted pressure from the Treasury to embark on damaging austerity (which he probably would), then it seems clear to me that we would have seen a continuation of neoliberalism of the Blair/Brown type. That form of neoliberalism could have been sustained as long as the political right, that wanted to push neoliberalism further, did not gain power. But sustainability as long as the same party stays in power is not sustainability in anything but the short term.

I would also argue that the two main powers in Europe, France and Germany, are similar to Blair/Brown in adopting some aspects of neoliberalism but not others, and so have so far avoided neoliberal overreach. They both adopted austerity, of course, and this has increased the power of the far right in France, but they have retained a sufficiently robust welfare state to avoid the far right coming to power. (As I argue here, their voting system also helps. In addition, austerity didn’t have the same impact in Germany as in other European countries.)

So why do I think neoliberalism in the UK and US contained the seeds of its own demise? The first reason is that, for the believers on the right in both countries, the neoliberalism of Blair/Brown and Clinton represented an unfinished project. It was in their minds half-baked, and required more in terms of lower taxation and more deregulation.

The second reason, which reinforced the first, was inequality at the top. If you create a society where a small but significant minority gain incomes and wealth far beyond the majority, they will seek political power either to protect that wealth, or simply because money enables them to do so. The richer of the 1% could do this by funding political parties of the right directly (and thereby gaining influence on those parties), or by funding ‘think tanks’ that were really pressure groups, or by owning media companies not just for profit but to influence their editorial line and content.

Of course the authoritarian populist regimes of Trump and Johnson often pushed neoliberal ideas. The reason why they are a break from, rather than a continuation of, qneoliberalism can be seen by thinking about the interests of capital. Arguably you could define neoliberalism in practice as simply being whatever is in the interests of corporations as a whole (see this post). What Trump did and Johnson is doing is not that. Trade barriers are not in the interest of traded capital, and capital also rather likes the ability to freely employ those from abroad. What you had with Trump and have with Johnson is government in the interest of friends and donors, which is why it comes closer to a plutocracy.

So to return to the question in the title, a neoliberalism that is pursued relentlessly in all its aspects does contain the seeds of its own destruction, and the evidence so far suggests what follows after neoliberalism is far more dangerous and can easily transform into undemocratic authoritarianism. In that sense 1979 is correct. However that transformation may take some time to emerge, and will only occur if welfare states are either limited to start with or are cut right back, which suggests for the UK 2010 is the correct date.

More generally it may also be quite possible for governments to adopt some elements of neoliberalism and not others, and avoid the same fate. If my analysis is right, what is critical is to keep the political power of extreme wealth in check (through taxation, media regulation, limits on election funding etc), for the political right to retain a sceptical view of the ideology and to cushion the impact of economic change on those who lose out from it. One big advantage that other countries now have is that there are two major economies where the consequences of not doing these things has become all too evident.

I think most people understand that the inflation we are seeing at the moment across the developed world has very little if any to do with excess demand (the famous too much money chasing too few goods) but is about external shocks to the price of commodities, and supply problems that emerged because of the pandemic and the recovery from it. In addition both types of inflationary shock are likely to be temporary: commodity prices are unlikely to continue to rise and most supply problems caused by the pandemic will be resolved.

If this is the case, why do central banks need to raise interest rates, particularly as higher commodity prices will reduce real incomes which is deflationary? Given the normal lags in monetary policy, higher rates will have little impact on current inflation, so why reduce demand and inflation in the future when inflation has largely disappeared? The answer is fear of a wage-price spiral. If wages rise to some extent as a result of price inflation, this will raise costs which will raise future prices. The received wisdom in central banks (from the mid-2000s as well as the 1970s) is that some reduction in demand is required to stop a wage-price spiral developing.

The likely level of excess or insufficient demand in 2022 should be crucial in this respect. If there is already insufficient demand, and lower real incomes will only make that worse, then central banks have little or nothing to do. In contrast if the labour market is currently tight and likely to stay tight the dangers of a wage-price spiral are much higher. It therefore makes sense to start any assessment by looking at output levels.

In terms of the major economies, we did get a V shaped recovery from the pandemic, but where the V stands for vaccines. As soon as vaccines became widely available, the economy expanded rapidly, as I showed here. Vaccines removed the need to lockdown the economy, and gradually gave consumers confidence to engage in areas of social consumption.

However the recovery was not equally strong in the major economies. Here is an updated chart of one I showed in that earlier post, looking at GDP per capita (2019=100) rather than GDP.

The US not only had a less severe COVID recession than the UK and France, but it has also had a much stronger recovery than the other three economies. (You can also see how the last ten years have been a decade of relative decline for the UK, matched only by France because of Eurozone austerity around 2013.)

Matching this is a clear hierarchy in inflation rates. If we look at Core inflation in each country, the US is the highest at 6.5% for March, while Germany is at 3.4% for the same month and France 2.5%. However UK core inflation is surprisingly high, at 5.7%, even though it has had a similar recovery to France and Germany. One of the reasons is Brexit, which we discuss below.

It is of course possible that the pandemic has caused a permanent reduction in the supply of goods, either through lower technical progress, capital or labour. I find it difficult to believe that the pandemic has had a permanent impact on technical progress, or that lower investment during the pandemic cannot be rectified by high investment later as part of a sustained recovery. The experience of the UK and elsewhere before the GFC was that recessions did not lead to a permanent reduction in productive potential.

The pandemic does seem to have had, so far at least, a negative impact on labour supply in the UK and US among older workers, in what has been called the Great Retirement. There are lots of possible reasons for this, including less need to work for some as a result of additional savings over the pandemic. However another potential explanation is Covid itself, and in particular Long Covid, as this Brookings study outlines, or the indirect effect of Covid because other health problems have not been fixed as quickly as they should. (For the equivalent for the UK, this briefing note is a good place to start.) France has avoided similar problems, in part because of early retirement.

This might suggest that US growth since 2019 may have exceeded the growth in supply, but elsewhere it is completely implausible to suggest these problems are big enough to give you zero growth in potential since 2019. This suggests the following:

1. In the US, relatively high inflation and strong growth combined with a reduction in labour supply could indicate an economy above its ‘constant inflation’ position (i.e. has excess demand).
   
   

2. France and Germany, with weaker inflation and projected output per capita in 2022 at around 2019, indicate economies probably below their constant inflation position, suggesting excess supply in these economies.

3. In the UK we have a special case due to Brexit.

Here are a few thoughts on each in turn.

United States

With high vacancies and wage growth at around 5% in 2022Q1, high inflation in the US has become more broadly based than it once was. An important reason for this, which is shared by the UK, is a drop in labour supply after the pandemic. The Federal Reserve Bank of Atlanta has hourly or weekly earnings at 6% in March.

The IMF’s projected growth for 2022 implies annual increases in underlying output since 2019 of around 1,4%, which does not at first sight seem unreasonable. However if the pandemic has reduced the supply of labour or some other element of potential in a significant way, this growth would indicate excess demand. This is the IMF’s view, which suggests excess output of over 1.5% in 2022. This judgement seems to be shared by the Federal Reserve, which recently increased interest rates by 0.5% on top of an earlier 0.25% increase. However, there are two major risks in the monetary tightening which is currently underway.

The first is that this contraction in labour supply may be temporary. The second is that the economy is heading for a significant downturn or even recession of its own accord, without the help of policy. As higher prices squeeze real wages, consumption growth may decline significantly which will drag down GDP. (The fall in GDP in the first quarter of 2022 may be erratic, or it may indicate this is already happening.) If either happens, raising interest rates rapidly could turn self-correction into a period of serious insufficient demand.

If neither risk occurs, I think it is wrong to conclude that Biden’s fiscal stimulus was ill-judged, for three reasons. The first is that very little of current high headline inflation would have been avoided if that stimulus had not occurred. The second is that a long period where interest rates are close to their lower bound indicates an inappropriate monetary/fiscal mix, and some correction such that a fiscal stimulus leads to moderately higher interest rates will allow monetary policy to more effectively respond to any future downturns. [1] Third, that stimulus was probably the only politically feasible way to reduce poverty quickly.

France and Germany

Whereas the IMF expects the US to have excess demand, it projects both France and Germany to have insufficient demand in 2022. It would be quite wrong, therefore, to argue that ECB interest rates should rise. Indeed, with interest rates at their lower bound, and higher energy and other prices likely to cut personal incomes, there is a strong case for a significant fiscal stimulus to raise GDP.

United Kingdom

Is the UK more like the US (current excess demand) or France/Germany (current deficient demand)? The level of core inflation, and the actions of the Bank of England in raising rates, suggest the UK is more like the US. Both also have tight labour markets and nominal wage inflation that is inconsistent with a 2% target. But I would argue that is where the similarities end.

The first obvious point is that projected growth in output per head in the UK has been much weaker from 2019 to 2022 than in the US. As I have already noted, the UK looks much more like France and Germany in this respect. A major reason for that is fiscal policy. Instead of sending a cheque to every person (as in the US), the Chancellor has announced a freezing of tax thresholds and higher NICs. [2]

So why is UK core inflation nearly as high as the US, and much higher than in France and Germany? One important reason is Brexit, which has raised UK inflation through various routes. We already know that the immediate sterling depreciation after the referendum result increased inflation in earlier years. In addition this study estimated that the Brexit trade agreement has directly increased UK food prices by 6%. This is because additional barriers at the border (checks, waiting times, paperwork) are costly. Importers can switch to non-EU sources, but that will also mean higher prices. More generally the Brexit trade barriers may lead to the creation of new, but less efficient, supply chains, pushing up prices. Finally these trade barriers mean reduced competition, allowing domestic producers to increase markups.

One additional possible inflationary consequence of Brexit that has been talked about a lot is due to labour shortages in low paid jobs because of the ending of free movement. While those shortages are real enough (vacancies for low paid jobs have grown much more rapidly), up to the end of 2021 this does not seem to have led to higher pay growth according to this IFS study (see chart 3.2 in particular). As a separate briefing note from the IFS points out, there is one sector that has shown rapid earnings growth recently: finance. (For a good discussion of the UK labour market, see here.) If we look at earnings growth in the first two months of this year, however, we see quite rapid growth in earnings in the wholesale, retail, hotels and restaurants sector. [3]

Yet all these inflationary impulses due to Brexit are temporary, reflecting the one-off nature of the trade barriers, reduced competition, labour shortages etc. While the increase in wages in the US is broadly based, that is not the case in the UK, suggesting a relative wage effect rather than general inflationary pressure. As a result, I think there is a serious danger that the MPC are seeing misleading parallels between the UK and US, whereas in reality the UK’s situation is much more like France and Germany with a short term Brexit inflationary twist. If I am right, then monetary tightening coupled with fiscal tightening and higher prices for energy and food could spell recession. [4]

My view on likely interest rate moves is not shared by the markets, which are expecting many more rate increases from the MPC. The Bank’s arcane practice of using these market expectations in their main forecast has confused a lot of people. If you want an idea of what the majority of the MPC currently think will happen, it is better to look at their forecast using current interest rates. That shows inflation falling to just over 2% by mid-2025, and annual GDP growth of between zero and just over 1% in every quarter of 2023, 2024 and 2025H1. That is not exactly an exciting prospect, but it is not a serious recession either. The problem, as I noted here, is that forecasts are poor at predicting recessions.

The MPC may be right or wrong, but the outcome in either case is pretty dire for the UK economy. If they are right to raise rates, then the best the UK can do after the pandemic is return GDP per capita to 2019 levels. That will mean that the pandemic in the UK, and the policy reaction to it, has lost at least three years worth of growth. If the MPC is wrong, raising rates will cut short a recovery in output and risk a recession which once again [5] risks policy induced deficient demand choking off long run supply, making everyone in the UK permanently poorer.

[1] Some might argue that in an ideal world fiscal policy should always respond to excess demand or supply, and therefore interest rates can stay very low. However the US is perhaps the country which has a political system where this kind of fiscal activism is least likely to occur without prior fundamental reform.

[2] In judging the impact of any fiscal stimulus, looking at measures of cyclically adjusted (or ‘structural’ or ‘underlying’) budget deficits can be very misleading. To take a clear example, if a country announces a five year programme of buying fighter planes from another country, its deficit increases but this provides zero stimulus to the domestic economy. The Biden stimulus was like helicopter money, except the rich got nothing. Furlough on the other hand gave people money in proportion to their salary. A stylised fact is that the wealthier people are, the less of any government transfer they will spend, and the more they will save. As a result, giving a fixed amount to the non-wealthy is much more effective at boosting demand than a furlough type scheme.

[3] The Bank of England say “underlying wage growth is projected to pick up further in the next few months”, so perhaps they are expecting a delayed reaction to high vacancies.

[4] It is easy to blame the MPC, but these issues are complex and its remit limits how much the MPC can ignore a sharp rise in inflation. I certainly do not think governments are better placed to make these economic judgements. What I think can be done is change the MPC’s remit to place more emphasis on output while making the inflation target more long term, as I suggested here.

[5] I say again because that has to be part of the story that explains the lack of recovery after the Global Financial Crisis, although the blame then lies with fiscal policy (austerity).

For many people things started going very wrong in the UK the moment the Brexit referendum result was announced. There can be no doubt that Brexit has been a disaster on almost every level. In economic terms this disaster is well established: if you have any remaining doubts, listen to Adam Posen giving the first presentation at the recent UK and a changing EU conference on Brexit. He shows how we have become a more insular country in terms of trade, FDI and migration: this has already led to lower UK growth while the implications of lower trade, FDI and migration for future productivity growth have yet to be felt. In addition, Brexit has led to higher food prices (see this conference presentation), adding to the cost of living crisis. In addition less trade leads to reduced competition, which allows price mark-ups to rise. For more detail on all this see Chris Grey’s latest blog.

However, just as important have been the political costs of Brexit. In 2019 we saw the election of the most incompetent, dishonest, corrupt and authoritarian UK government in living memory because it would get Brexit done, a government that has become either a joke or an embarrassmentamong other democratic countries. This was hardly a surprise, in that Boris Johnson - a serial liar - is at its head and he demanded unequivocal devotion to a hard Brexit as necessary to be in that government. As I have said before, demanding devotion to a hard Brexit is an excellent way of selecting either those MPs who have little clue about how the world works, or those MPs who are inveterate liars (or both). Johnson has institutionalised the influence of wealthy donors within government (the ‘leaders group’ and ‘advisory board’), turning the UK into a plutocracy where power is retained by trying to set one group of voters against another. This government has been so focused on retaining power and shutting down criticism that it has passed legislation to make demonstrations illegal, to end the independence of the Electoral Commission, to make it much harder to vote and more.

It would be wrong, however, to see the Brexit referendum result as some rogue event without which normal service could have continued. The political and economic decline in the UK began not in 2016 but in 2010 with austerity. Brexit and austerity are alike in one crucial respect, which is that they both reversed established approaches to economic policy. While Brexit reversed the idea that lower trade barriers were good for trade and therefore consumer welfare and growth, austerity reversed the idea that the aim of macroeconomic policy in a recession was to support the recovery by all available monetary and fiscal tools. [1]

In this sense austerity was the first central policy move that ignored the wisdom of experts. Brexit was the second, and government actions throughout the pandemic have been the third. But the links between austerity and Brexit may be rather more causal than that. This is the thesis of an AER paper by Warwick economist Theimo Fetzer, which is one of a series of Brexit studies that he discusses in the UK and a changing EU conference mentioned above.

It is well known that the less educated people were (in terms of formal educational qualifications), the more likely they were to vote Leave. But this correlation does not provide a causal mechanism for why Brexit was so successful in 2016. Fetzer also shows that this correlation was absent from UKIP support before 2010. It is also very well known that the gap between the earnings of skilled and unskilled workers has been growing. However under the Labour government this trend was moderated to some extent by the welfare state. This moderating effect ended, and was put into reverse, under austerity.

What Fetzer suggests and shows is that the impact of austerity was strongest on those with few qualifications, and as a result support for UKIP grew. In other words support for UKIP started to grow in areas with significant exposure to specific benefit cuts. It was the threat from UKIP that led Cameron to promise a future referendum. More importantly, as support for UKIP is closely correlated with support for the Leave side in the referendum, then Fetzer uses his estimates of the impact of austerity to suggest Remain would have won in the absence of austerity. (He also argues in his conference presentation that this austerity induced UKIP vote also helped the Conservatives win outright in 2015, which made a referendum inevitable.)

What this does not show is why cuts in welfare and other support led the less skilled to vote for UKIP, rather than some other opposition party. However that gap is not hard to sketch in. First, in many voters’ minds, Labour were at least equally to blame for austerity as the Coalition government, in large part because of the highly successful (and largely uncontested) lie put out by the Coalition government and their press that the Coalition were clearing up the mess that the Labour government had left. Second, the Coalition and its press used immigration as a scapegoat for much of the impact austerity was having, yet the Coalition also failed to bring immigration under control. For many, therefore, UKIP was an obvious choice.

This is an example of a more general, and often made, point about the critical role of the welfare state, that I alluded to hereand which Fetzer mentions at the end of his conference talk. A dynamic economy is bound to create lower incomes and perhaps unemployment in sectors that become obsolete, or go out of fashion, or suffer from economic downturns. Globalisation is just like technical change in this respect. If the workers in those sectors are not protected and helped to a reasonable extent, then some in those sectors become fertile ground for right wing extremism.

How does this fit in with the strong correlation between support for Brexit and social conservatism? First, we have to distinguish between social conservatives who would have voted for Leave anyway (older voters in particular), and those at the margin that pushed support for Brexit over the line. Those inclined to believe that immigration is the reason why their pay, job prospects or access to public services have declined will be those who are newly attracted by right wing populists. In this sense the debate about the rise in right-wing populism between the those who emphasise the economic left behind on the one hand and those who look to the socially left behind (or, in the US, race) on the other hand as explanations may be misplaced, because the two factors may work together in the manner just described. [2]

This process is not unique to the UK. Austerity had a strong (perhaps stronger) effect on the Eurozone outside Germany, and happened in the US as well. Equally the rise of the populist extreme right occurred in many of these countries. It won 42% of the vote in the second round of the French presidential election. One big and obvious difference between the US and UK on the one hand, and France and Germany on the other, is the latter have stronger welfare states [3]. In my view another important difference is the voting system. In the UK and US this voting system meant it was very hard to displace the main party of the right [4], and so the way the more extreme right gained power in both countries was by taking over the established right wing party. Equally the voting systems meant it could subsequently win general elections without majority support. In France and Germany the extreme right could still imagine coming to power in its own name, but without cooperation from other parties this required majority support. [5]

Locating the origin of the UK’s economic and political decline in 2010 helps focus on how that decline can be brought to an end, or even reversed. A prerequisite has to be political change, and a government that does not involve the party and politicians that brought about this decline. But that alone will not be enough. Any new government has to abandon the obsession with government debt targets [6] that could both recreate austerity and foster populism, and end the demonisation of the EU that led to Brexit. International cooperation has to replace a desire for total sovereignty.

If these conditions are met, there is no reason why the UK could not recreate the economic success it enjoyed before 2010. The damage done by fifteen years of economic mismanagement is serious but not total. As the Resolution Foundation in a recent reportsets out, the UK’s specialisation in many services (education and culture in particular) and some goods production reflects an international comparative advantage that will still be there in 2025. However those, and perhaps some new, specialisations will only thrive if we have better access than we do today to the huge market on our doorstep.

[1] That orthodoxy had only been challenged once since WWII, and that was very briefly by Mrs Thatcher in 1981. Unlike 2010 austerity, her experiment was quickly abandoned and substantially reversed two years later.

[2] Thus we get one element of what I have called neoliberal overreach. An attempt to do away with protection for the economic left behind with the aim of cutting taxes under Cameron and Osborne created the conditions for Brexit, and the end of neoliberal hegemony.

[3] In addition, Germany did not suffer as much from austerity as other Eurozone countries, in large part because of strong export growth.

[4] UKIP never gained an MP directly through an election.

[5] The differential impact of UK austerity on different parts of society also helps explain why many see 2016, rather than 2010, as the start of UK economic and political decline. Those most affected by austerity were also those with little voice in politics or the media, allowing politicians and the media to declare that austerity had not had much impact because it hadn't affected them.

[6] The key word here is obsession. There may be a role for trends in government net wealth (not government debt) to help inform deficit targets for current spending in good times, but these targets must not constrain direct or indirect measures to tackle climate change, government investment must be free of macro controls and no constraint should be placed on deficit spending in an economic downturn. In addition geographical levelling-up requires local areas to have financial power, and it is an obsession with debt that is part of the reason the Treasury keeps opposing that.

My guess is probably, but what do I know? What I do know is that unconditional [1] macroeconomic forecasting is a mug’s game, and the only reason some people do these forecasts is that they are generally better than an informed guess, but only a little better. What I can do in this post is make some I hope helpful points about annual versus quarterly growth, look at some of the evidence and some key behaviour that will decide whether a UK recession is on the cards.

As Duncan Weldon reminds us, most established economic forecasters are terrible at forecasting recessions. One reason has little to do with economics, and a lot to do with human nature. I learnt this very early. My first job was helping to forecast the world economy in the Treasury, and it was after the first oil shock of 1973/4. Our initial forecast showed a collapse in world trade. Our boss was not happy - nothing like that had happened since WWII. As a result of his unhappiness we revised our forecast up, but our initial forecast was nearer what actually happened than our revised forecast. Established forecasters are always looking over their shoulder at other previous forecasts (by themselves and others) and hate being too extreme. As a result, they tend to miss booms and recessions.

A second reason that domestic forecasters miss recessions is that they fail to recognise that what they are seeing domestically is often also happening in the rest of the world. That is true today with a global cost of living crunch. Indeed that psychology of forecasting can allow non-forecasters or ex-forecasters like myself a slight advantage. In this post I tell the story of the 2009 recession, where in No.11 Downing Street I at least held my own among more professional forecasters simply because I applied these two observations about forecasting the extent of that recession.

It should not come as a surprise, therefore, that no major forecaster has predicted negative annual growth this year or next, despite what is expectedto be the biggest fall in living standards in any single financial year since ONS records began in 1956-57. Instead consumers are expected to dramatically reduce their savings, as this chart from the latest OBR forecast shows (look at blue line).

So, sticking with this OBR forecast, we have real household disposable income falling by 1.5% this year and 0.2% next year, but aggregate consumption is forecast to increase by 5.4% and 1.0% respectively. At first sight this looks very implausible.

It looks even more implausible if we look at surveys of consumer confidence. To quote from Duncan’s piece: “The GfK Consumer Confidence Index fell for the fourth month in a row to -31 from -26 in February, its lowest since November 2020, deep in the coronavirus pandemic. Readings of -30 and below have presaged recession on four out of five occasions since the survey started in 1974.” Since then the March data is available, and it’s at -38!

David Blanchflower talks about this data and similar for the US here, and is in little doubt that a recession is on the cards. So how would economic forecasters, and the OBR in particular, defend their forecast of strong growth in consumption this year, and positive growth next year, despite falling incomes? The answer also comes from the chart above. The pandemic led to unprecedented increases in household savings, because most maintained their incomes but the pandemic led to sharp falls in ‘social consumption’. So most consumers will have plenty of scope to run down their savings as their incomes fall.

Furthermore, standard theory suggests that consumers who have the ability to do so will try to smooth out fluctuations in real income, if they think the fall in their income is temporary. Indeed, after social consumption has been suppressed during the pandemic, there may be some bounce back as consumers try to partially recoup the spending they had missed out on. (For a similar reason, consumers switched spending from services to goods during the pandemic, which partly explains some of the supply side inflation we have seen). To set against that the pandemic is not over, despite what some politicians might say, so that will inhibit consumption.

Rapid consumption growth is what we saw at the end of last year during the vaccine led recovery from the pandemic. The level of consumption in the fourth quarter of 2021 was over 8% higher than a year earlier. Crucially, that means that even if quarterly consumption in 2022 was flat at the 2021Q4 level, annual growth this year would be very high. The lesson here is that for this year, look at quarterly growth through the year rather than year on year numbers.

Does the recent fall in retail sales also suggest a recession? Again we have to be careful. As many people are starting to behave as if the pandemic is over, we would expect to see a switch from goods you buy in shops or online to social consumption which are services like travel or eating out. As James Smith notes, online sales are also falling back to more normal levels. This doesn’t necessarily imply a fall in total consumption.

So where does that leave us? While many consumers are in a position to use savings to finance consumption growth, they will only do so if they are sure the cost of living crunch is temporary rather than permanent. Many will not be so sure, and together with those who can only maintain consumption through borrowing, it seems likely that the aggregate level of consumption will fall through this year. That in turn means it’s likely that we will see falls in the quarterly path of GDP through this year, and indeed that is something the OBR are expecting to happen (p.42). [2] In that sense the OBR is forecasting a recession during this year, but not in the annual figures that everyone focuses on.

For reasons already explained, that quarterly path could still leave a relatively healthy year on year growth rate for this year because of strong growth due to the vaccine based recovery through 2021. The big unknown is what happens in 2023. Looking at the OBR’s forecast savings ratio chart above, what looks implausible is the very slow recovery in savings from 2023 onwards. If annual growth is going to be negative at any point, it is likely to happen next year rather than this, because the inflation we are currently seeing keeps incomes low and consumers try and get back to more normal levels of saving.

[1] By unconditional, I mean forecasts of what will happen to a macroeconomic variable in a year or two’s time. In contrast a conditional forecast asks how that variable will change if policy changes, for example. Conditional forecasts are much more focused, and therefore more reliable. Politicians and some journalists often do not, or pretend to not, know the difference between these two types of forecast. For example Brexiters during the 2016 referendum used the unreliability of unconditional forecasts to cast doubt on conditional forecasts like Brexit will lower GDP, which was a simple error.

[2] That in turn makes a technical recession in the UK (two consecutive falls in quarter on quarter GDP) possible, but it’s wrong to get hung up on this technical definition. A quarterly path of GDP growth that goes +2.0, -0.1, -0.1, +2.4, +2.4 is a technical recession, while a path that goes +0.2, -1.0, +0.1, -2.0, +0.1 is not, but that latter is much worse than the former. I tend to use the term recession in a much less precise way, to mean an economic downturn that is particularly severe.

Boris Johnson is the first UK Prime Minister to be convicted of lawbreaking while in office. Not any old law, but a law he himself imposed on UK citizens, and a law which caused many of those citizens great hardship to uphold at some of the most stressful times in their life. Yet his MPs have collectively decided not to remove him from office on this account, and one minister has describedhis lawbreaking as ‘fluff’. In these circumstances it is totally understandable that many will wonder how the UK government got itself in such an unprincipled position. [1]

This despair is not helped when the same MPs claim we should overlook his partying during lockdowns because of the great things their leader has done, at a time when household incomes are being squeezed like never before because of government decisions, when more than a thousand die a week as a result of Covid in a NHS on its knees from a pandemic, a pandemic Johnson has declared at an end and over which he says he made all the right calls, where his signature policy has left this country poorer through trade and labour shortages, under an agreement that he previously signed which he now says is unworkable. Just this last week the government announced its answer to people traffickers sending asylum seekers across the channel in small boats is to traffic some of them by force to Rwanda. With all this, it is inevitable that many will wonder what planet our rulers are on.

In 2017 I wrote a post about what I called neoliberal overreach. The idea in that post was as follows. Neoliberalism, the ideological framework introduced by Thatcher and Reagan, has dominated the thinking parts of the political right ever since. A belief set that includes an aversion to state intervention in economic affairs, a desire for ever lower taxes, a ‘flexible’ labour force that isn’t unionised and so on. To the ideology’s devotees it appeared to bring mostly benefits in Thatcher and Reagan’s time, and they wanted to emulate and move forward that political project when their time to rule came.

Yet to do so was overreach, because neoliberalism as a project was only sustainable if it limited itself to a few well defined goals, like reducing union power and opening up markets. The truth was that a successful economy, with ongoing innovation and economic growth, was only possible with significant cooperation between the state and the private sector. (That is the message of Mariana Mazzucato’s The Entrepreneurial State.) In addition neoliberalism would only remain popular if citizens were adequately protected from the ups and downs of their health, of individual firms and the economy as a whole. This is Blair’s third way, or neoliberalism with a human face. To instead insist that neither state intervention or protection was required was overreach in the first instance because it would cause considerable harm, and in the second instance because it could end the dominance of neoliberalism.

While Conservative politicians in the 1950s were reconciled to running an economy with much more state intervention than this, the devotees of neoliberalism were not. They wanted more or what Thatcher had started, which meant a smaller state, less regulation and so on. So when the Global Financial Crisis (GFC) showed why deregulation could be disastrous, and a depression was only avoided by massive state intervention, one of neoliberalism’s devotees in the UK, George Osborne, only saw a chance to shrink the state. What I call deficit deceit was born in 2008, and implemented in 2010.

Other devotees, including crucially the owners of the right wing press, had another project in mind. They believed that their ideologically nirvana, which included not just deregulation but their ability to influence governments, was threatened by the European Union. They took their inspiration from Thatcher’s Bruges speech, and started to work towards bringing about Brexit. This group faced two problems. First, EU membership was not a salient issue for most voters, and second, MPs would never collectively choose to leave the EU because to do so would be harmful in both political and economic terms. As a result, their strategy was to link the EU in voters’ minds to uncontrolled immigration, and to bypass parliament using a referendum. The 2010 and 2015 Cameron governments through its actions gave this group their chance to implement their strategy: through the threat of UKIP, through failed immigration targets and through an economy depressed by austerity generating (as it generally does) resentment about immigration.

There was also a more indirect route through which austerity helped Brexit. Austerity was justified by two big lies: first that Labour profligacy rather than the GFC had led to record government deficits and second that these deficits had to be reduced quickly to avoid another financial crisis. Cameron and Osborne, with crucially the help of the right wing press, their coalition partners and a tame broadcast media, were able to convince enough of the population that these lies were true, such that more people blamed the last Labour government than the Coalition for austerity. That lesson was not lost on the Brexiters, who in the 2016 referendum lied about almost everything, and continued to do so when they took over the leadership of the ruling Conservative party in 2019. It helped that doing this came naturally to Boris Johnson.

Of course not all Brexiters were neoliberal devotees, including Johnson himself. For a fuller list just read the exquisite penultimate paragraph of this post from Chris Grey. In addition, and unlike austerity, Brexit has sacrificed some policies generally associated with neoliberalism in order to (maybe) achieve others. It is a policy of hedge fund managers or business owners disgruntled by EU regulations or billionaires fearful about EU tax rules, and was definitely not a policy favoured by a majority of UK business involved in overseas trade. It was overreach not just because it brought great harm to the country, but because it ended neoliberal hegemony in the UK. The neoliberal overreach of first Cameron/Osborne and then Johnson has changed the UK from a country dominated by Thatcher’s neoliberalism to a country governed by an authoritarian populist leading a selective plutocracy. As this regime shares some characteristics with a dictatorship, it soon takes on the character of its leader, which is why politics in the UK currently appears unprincipled.

Many of the ingredients of what made Brexit possible are involved in the Rwanda policy. It was announced while MPs were on holiday in a memorandum of understanding (bypassing parliament), it aims to shore up the anti-immigration vote, and it involved big lies. The first lie was that asylum seekers were just being sent to Rwanda for ‘processing’, rather than the reality that they will be applying for asylum in Rwanda. The second lie is that the policy would deter people trafficking, whereas not only does it involve the UK government administering forced trafficking, but also experience from Israel suggests it will open up a new trafficking route from Rwanda to Europe. A third big lie is that there is no alternative.

Ministers and MPs like to call asylum seekers who cross the Channel on small boats illegal, and disgracefully BBC News has sometimes parroted that language. Asylum seekers from most countries to the UK face a catch 22. There is no way they can apply for asylum unless they are in the UK, and the government has ensured asylum seekers cannot use official routes into the country, so they are forced to risk their lives travelling on small boats. The obvious solution, which the French government has suggested, is for the UK to set up its asylum processing in France, but the government refuses to do this because its ideal policy is to prevent entry for all asylum seekers.

It is also a very Brexit policy in another sense. Ministers and MPs often imply that because asylum seekers have come from another safe European country (most obviously France) they should have claimed asylum in that country. There is nothing in international law that says asylum seekers have to claim asylum in the first safe country they arrive at, let alone the one they were last in. There used to be the EU’s Dublin convention, but that just applied to EU countries, so it’s a classic case of Brexiters wanting their EU cake after leaving. It is also a classic case of English exceptionalism, in the sense that Bexiters believe other countries should be taking asylum seekers but not us.

The Rwanda deportation policy is in part designed to show that the government rather than the opposition are still on their side of the self-pitying “suburban curtain-twitchers who ‘aren’t allowed to say what we think’” and the “blue-blazered golf club bores who can’t forget the war they don’t actually remember”, to quote from the Chris Grey paragraph referenced above. The more ‘lefty-liberals’ like the Pope or the Archbishop protest the better from this point of view. [2]

Will these old tricks still work? The policy might lead some liberal well-off Tories to vote LibDem in by-elections, but how many will revert back to voting Tory in a general election? More critical is how salient immigration will be as an issue in the next general election. From the Conservatives' point of view it needs to be much more salient than it is right now. While migrants can always be blamed for putting pressure on scarce public services, after Brexit most voters are aware that our NHS and many other essential occupations depend in good part on migrants to keep them going. In addition the war in Ukraine has shown many the human face of asylum seekers. Overall it is possible that the obvious inhumanity of the scheme may galvanise more liberals to effectively oppose the government (by voting tactically in particular) than it does to turn out the xenophobic vote for the Tories.

What do I mean by Brexit overreach? After all, Brexit is hardly an ideology like neoliberalism. Here Brexit is UK-limited shorthand for a plutocratic regime headed by a populist leader that sustains itself in power within a democracy through authoritarian policies that appeal to social conservatives. Hungary's Orban is one example of this type of regime, and Johnson is another. Overreach is where that leader goes too far, and thereby brings about their own downfall in or outside of an election. Going too far can involve pursuing policies that are too authoritarian or inhumane for some social conservatives (as the Rwanda policy might be), actions that expose the regime’s plutocratic nature (corruption), or behaviour that robs the populist of their popularity (lockdown parties).

Which, if any, of these forms of Brexit overreach will bring about the downfall of Boris Johnson? Conservative MPs may have decided to sit on their letters for now, hoping that in time Johnson’s old magic can wipe away memories of overreach. Many MPs think that if the magic no longer works they still retain the option of changing leader before the General Election. However there are two big dangers in the option of waiting. The first is that, with good reason, the failings of Johnson and his government start being associated in voters’ minds with all Conservative MPs including Johnson’s successor. The more various MPs spend defending the unprincipled actions of their leader the more that will happen. The second is that Johnson preempts MPs by disposing of potential rivals before MPs can act, as they have already done with Sunak. A problem with having a Prime Minister whose only loyalty is to himself is that when his ship finally sinks he will think nothing of taking down all his crew with him.

[1] Johnson either intentionally misled parliament, which even one of his ministers agrees requires his resignation, or he is so incompetent that he had forgotten the law he had himself imposed, and announced to the public, that gatherings of more than two people inside werenot allowed unless that was necessary for work. If the latter he is hardly fit to be Prime Minister. If he still claims he was advised the parties that he went to were within the rules, he should tell us who advised him of this, because they too are clearly not fit to be at the top of government. Of course the ‘didn’t think it was against the rules’ defence is too incredible to believe, and the more obvious explanation is that he assumed no one would find out.

[2] Of course neither are lefty-liberals, but for some in the groups the policy appeals to, and increasingly government MPs and supporters, anyone who questions what the government is doing is a lefty liberal. Thus when the BBC in particular occasionally does its job in holding the government to account it is so described by this group. This is classic populism, where 'the people' are just those who agree with the government, and anyone else does not count or, to use another favourite phrase, 'hates Britain'. 

It’s a depressing time for democrats. Russia, run by dictator Putin, is attacking the fledgling democracy of Ukraine. Orban, who destroyed the pluralist democracy of Hungary, was reelected. In the UK the government is in the process of rigging elections in its favour, and giving itself powers to lock up anyone who demonstrates for up to 10 years. The mid-terms in the US seem set to see the advance of a Republican party that shows little respect for democracy when it loses. Those that chart these things (e.g. hereor here) find more countries moving in an authoritarian direction than in a democratic direction.

Alongside the global movement towards authoritarian regimes is a growing dissatisfaction with democracy by people in democratic states. This is clearly tracked in this reportfrom the Bennett Institute for Public Policy at Cambridge. As the charts in the report clearly show, globally this rise in dissatisfaction began during the Global Financial Crisis (GFC), and is clearest in established democracies rather than developing democracies. The United States shows this pattern clearly:

Perhaps surprisingly, the UK does not follow this pattern, in that satisfaction recovered from the dip during the GFC, but has increased substantially during the Brexit implementation period.

Of course there are many ways of interpreting these results. It could simply represent a reaction to bad times (as the rise since the GFC suggests), a reaction to the particular democratic system in place (e,g, first past the post), or a preference for some non-democratic alternative. Here a 2017 Pew survey is interesting.

The support for representative democracy is strong, and far outweighs rule by a strong leader or by the military. Reported dissatisfaction with democracy seems in part to be expressing a dislike or distrust of current politicians rather than democracy itself. For example a very recent YouGov poll showed that among every age group, when people responding to a question of whether “democracy in Britain as a whole addresses the interests of people like you” either well as badly, more thought badly rather than well, although it was close for the 65+ group.

Questions about how satisfied people are about democracy, or how they feel about politicians, may do little more than tell you how they feel about the political party in power, rather than the democratic system itself. Another 2019 Pew analysis found that in France, 85% of those who support President Emmanuel Macron’s En Marche party are satisfied with democracy, compared with 34% of those who do not support it. How people feel about the political party in power may in turn depend on major events, like the GFC.

Which brings us to the French presidential elections, and the rise in popularity of the far right. Latest results suggest Le Pen won 23.4% of the vote in the first round, compared to Macron’s 27.6%. That means that Macron and Le Pen will compete in the final poll on 24th April. Opinion polls conducted before the first round suggest that, unlike last time when Macron beat Le Pen easily, this time it will be a close race, although Macron’s first round showing is a little better than pollssuggested.

At first sight, Putin’s war against Ukraine should have dealt Le Pen a fatal blow. In the past she has been an admirer of Putin, and has taken money from Russian banks. She took Putin’s side over the annexation of Crimea and the fate of Russian opposition leader Alexei Navalny. Yet she was quick to condemn Russia over Ukraine, and has instead focused on bread and butter issues like the cost of living. She has effectively managed to detoxify her campaign.

In part this has been possible becausein the first round there was another candidate, Zemmour, who took up even more right wing positions on immigration and Islam. It is Zemmour who has taken most of the criticism over admiration of Putin’s Russia. This could play to Macron’s advantage in the final vote, and it may yet be the case that the polls change as the second round vote approaches. In 2017 in the first round Macron got 24% compared to 21.3% for Le Pen, while in the final round Macron won easily, 66% to 34%.

The more worrying alternative view is that the French electorate is now much more open to a far right populist candidate than it was five years ago, particularly if it pretends to be something else. The first important point is that Macron is no longer a novelty, but the incumbent who can get the blame for how things are. Second, in 2017 Le Pen was the only far right candidate. Putting the Le Pen and Zemmour vote together (assuming the exit poll above is correct) you get that over 30%. Finally, despite a different policy on fuel costs to the UK, France is not immune to cost of living pressures caused by the pandemic and Ukraine war. 

But the big story of the first round voting is the further collapse of what were once the established parties of left and right. The collapse of party loyalty in established democracies generally goes together with growing disenchantment with democracy, and reflects a steady fall in the number of voters who closely identify with a political party. Voting has become much more like consumer choice, where voters are often willing to try something new instead of established brands. (In two party systems, such as in the UK and US, that desire for change is frustrated, perhaps increasing disenchantment.) Choices are often based on low information. 

This is an environment that allows right wing populists to thrive. Someone like Le Pen is able to detoxify her brand in just five years, and gain more votes as a result.  In difficult times these populists can pitch themselves as outsiders against the existing political elite, and can promise the unattainable and be believed (as happened in the UK with Brexit). Most voters who vote for far right populists are not deliberately choosing authoritarian leaders who could, like Orban and perhaps Johnson, end up destroying pluralist democracy, but that is where their disenchantment with democracy in bad times can sometimes lead.    

“Former Tory cabinet minister David Davis said on Saturday that if the Conservatives were to become known as the party of high taxes, the damage to their economic reputation would be as deep and lasting as that inflicted on John Major’s government by the disaster of Black Wednesday in September 1992.” according to the Guardian. Is he right to be worried? As I pointed out after Sunak’s Spring Statement, for the average worker most of the fall in real wages after tax over the next two years is down to higher taxes. By next financial year compared to last year, the average pre-tax wage is expected to fall by 1%, but by 3% after tax as Sunak's tax rises take hold.

The reason is partly higher national insurance contributions, but also Sunak’s decision last Autumn to freeze income tax allowances over a number of years, which at a time of high inflation brings in a lot of money because it takes a lot of money off taxpayers. We can see the impact that both of these tax increases have on the government’s overall tax take by looking at the OBR’s series for national account taxes.

As many have pointed out, the share of total taxes in GDP is now expected to be higher than at any time since WWII.

It was partly Conservative MPs’ unhappiness with this prospect that led Sunak to focus on tax cutting in his Spring Statement rather than helping the poor cope with rising prices. Unfortunately, because of these numbers from the OBR, cutting taxes a bit after you had raised them a lot just six months earlierdidn’t really cut it with public opinion. Partly as a result, Sunak is reported to be furiouswith the OBR, making the OBR yet another part of the UK’s pluralist democracy (after the courts and the civil service) that Tory ministers are furious with. (In Hungary, whose government is so admired by some on the right, the independent fiscal institution was the first to go.)

Sunak’s political failure of a few weeks ago will not stop him trying the same trick again, shortly before the next general election. He has already pledged to cut the basic rate of income tax by 1 percentage cent point, and if things go to plan he has scope to do more than that yet still claim debt as a share of GDP is falling. However, unless he is very lucky, the share of taxes in GDP will remain higher than it has ever been.

So how did Sunak find himself raising taxes as Chancellor for a political party that likes to see itself as the tax cutting party? As I have argued on a number of occasions, it is not because either the Chancellor or Prime Minister is more left wing than earlier Conservative holders of that office. Instead it is the result of two factors: health spending and austerity.

The reality that is outlined in all the OBR’s long term fiscal projections is that, as the UK population grows older and for other reasons, the share of spending in GDP on health and social care is bound to rise over time, just as it has since WWII (see the third chart here, for example). As health care isprovided by the state in the UK, that means that taxes must rise (or borrowing must increase by more and more each year).

That is why there is an underlying upward trend in the share of taxes in national income, which is clear from the Chart above. The one sustained exception to this inevitability of higher taxes was over the Thatcher period, but that was both short-lived (reversed while the Conservatives were still in power) and the result of two one-off factors: North Sea Oil (see here) and privatisation. Of course good macroeconomics implies that neither should have been used to cut taxes, but that is another issue.

This upward trend in taxes would be even more evident if it wasn’t for two other things: falling defence spending after the end of the cold war (the ‘peace dividend’) and 2010 austerity. The former is over (and there is no obvious candidate to take its place), and the latter cannot be repeated because most areas of public spending have been cut back to levels that risk political costs for those in power. This includes the NHS, where waiting lists are now longerthan at any other time.

On NHS spending the Chancellor in particular, and this government more generally, have made two big mistakes which will mean the extra spending they have provided for the NHS and social care will do little to improve health services. The first mistake was to declare the pandemic over before it was, which intensified the pressure of Covid on the NHS and is likely to mean waiting lists will continue to rise for some time. The second was not to treat any ‘catching up’ from operations delayed by the pandemic as a cost to be paid for by higher borrowing (like the furlough scheme) rather than by higher taxes. Sunak was too quick to try and demonstrate his deficit cutting prowess, rather than accepting that the pandemic would have fiscal costs even after it had actually ended.

Another potential mistake may be to allow higher inflation to raise taxes, but to leave short term nominal spending plans unchanged. The immediate difficulty this will cause is to squeeze even further (relative to the private sector) public sector pay. Public sector workers will of course try and avoid this squeeze, and it’s unclear whether any disruption that follows will be more politically costly to the government or opposition. The longer term difficulty is that this represents a further squeeze to real levels of public spending, which austerity had already cut to the bone.  

As 2010-17 austerity has squeezed the public sector as far as politics will allow, and pressure from an ageing population means that public spending is bound to rise over time, that means that any Chancellor, of whatever colour, is likely to have to raise taxes as a share of GDP over their period of office, unless that period is very short. A Conservative Chancellor may raise taxes and public spending by less than a Labour Chancellor, but ‘raising taxes by less’ does not have the same electoral appeal as ‘tax cutting’ for Conservative MPs.

Is there any way out of this arithmetic for Conservative MPs? Ending the NHS, and replacing it by some kind of insurance scheme, is an alternative that has attracted some ministers in the past, but it faces a political obstacle that will be very hard to avoid. Beside the goodwill most voters have for the NHS, any insurance scheme will be particularly expensive for older voters, who of course tend to vote heavily Conservative.

Privatisation, which is ongoing, is not immediately costly in political terms (because it is hidden from most voters), but it is likely to make the NHS more rather than less expensive and therefore will increase the pressure to raise taxation. This is because the NHS, even though it is heavily under-resourced, is pretty efficient. Thus if it remains free at the point of use, provision in private hands will end up being more costly for the government to pay for, because private provision, even if it is equally efficient, needs to divert some profit to shareholders. So NHS privatisation, while it may be pursued for other reasons, does not get the Conservatives out of their need to raise taxes.

So Conservative MPs who think their party can once again become one that reduces the overall tax burden are living a fantasy. Of course the party and its Chancellor can, and will, raise taxes to cut them by less later and hope some people do not notice the trick being played. In addition the party and its Chancellor can, and will, raise some taxes so that others can be cut and hope some people do not notice the trick being played. But the wish to be a tax cutting party will mean that most public services including the NHS will, under a Conservative government, be permanently and chronically underfunded because the party, and its Chancellor, still has the dream of cutting taxes.

As I wrote over a month ago Boris Johnson, in an attempt to gain support among at least half of his MPs, the newspaper oligarchs and his party donors, threw science to the wind and all but declared the pandemic was over. No more compulsory masks in public spaces, no more free testing, no more having to self isolate, and a cut back in how we monitor Covid. It was a decision of utmost stupidity, and that stupidity has now become clear.

We knew about the BA.2 variant at the time Johnson made his decision, but he ignored it. The media, and the broadcasters are as much to blame here as the right wing press, translated Johnson’s politically motivated edict as a proclamation that the pandemic was over. Most people stopped wearing masks and actedas if the pandemic really was over. No doubt BA.2 would have led to another wave of infections anyway, but people acting on the signals the government and media gave them have undoubtedly made it more severe than it needed to be..

You don’t have to believe me or the experts to believe that. Our health minister has also saidthat recent increases were “primarily down to the increased social mixing we are seeing, as our country has opened up”. So cases and hospital admissions now look like they are similar to the previous Omicron peak. 1 in 16 is infected with Covid in the England, and it’s even higher in Scotland.

Some firms have tried to avoid the impact this is having on absences by requiring workers to ignore they have Covid and come in to work anyway, but many in the public eye have had to retract after adverse publicity. The more serious impact has been on schools and hospitals. 202,000 children were awayfrom state schools on 17th March because of Covid, a rise from 58,000 just two weeks earlier. 1 in 10 teachers are also absent from school. Does the government think 'living with Covid' means more periodic disruption in many children’s education?

Hospital admissions have now been rising steadily for over a month, and in England are close to the peak levels seen in the first Omicron wave. Every bed taken up by a Covid patient means one less bed that could be used to start reducing the backlog of other cases that has built up over earlier waves. That effect is amplified if staff become sick from Covid. Does the government think 'living with Covid' means more periodic crises for the NHS?

But don’t worry. Our Health Secretary, Sajid Javid, saysthere is no cause for concern. He says this was all expected. In other words, more kids off school with Covid and more strain on the NHS is all part of the plan. But what exactly is the benefit of allowing another Covid wave to go unchecked? Does having more people off work ‘open up the economy’? Does having more kids off school help their education? Does having hospital beds fill up with Covid patients, and doctors and nurses off sick, make us more free? With no good answers to these questions, he has become the first UK Secretary of State for Health to champion a health policy  deliberately designed to make groups in society more sick.

Such is the determination of this government to pretend that the pandemic is over that their policy will probably survive the current BA2 wave, which may be nearing its peak fairly soon. After that the warmer weather will also probably keep any new variants at low levels until next autumn. It is only then that we will see the true cost of the government’s indifference to our collective health. Allowing a high level of infection at home, and doing too little about cases in countries that cannot afford mass vaccination, is the best policy for encouraging the development of new variants.  

To be fair, this government is not alone in using the fact that Omicron is milder than Delta, coupled with repeated vaccination being fairly effective against it, as an excuse to relax Covid protections. Politicians around the world have jumped on the combination of a milder (but very infectious) dominant variant and vaccination to tell people what they want to hear, which is that life can begin to go back to something more like normal. The UK is just at the extreme end of this movement, doing things like charging nurses for Covid tests.

That people would like to go back to normal is not hard to understand. For the majority of the healthy, fully vaccinated population, Covid in the form of Omicron is not the major threat it once was. So measures like wearing a mask for most people is about protecting others rather than protecting themselves. Apart from a small minority (that appears to include most Tory MPs), most people are happy to make the small sacrifice that mask wearing involves to help the more vulnerable, especially when they have vulnerable relations themselves or hear about fatal cases in the media. Equally most people do not have the time or inclination to follow Covid data themselves. So when the government says in effect that the pandemic is over, and the media act as if this is true, then most people will happily stop doing things like wearing masks.

There are also plenty of myths that make people comfortable with not wearing a mask. Some say ‘we are all bound to get it’, whereas the real question is how often do people get it (the new variants are great at reinfection), with each infection damaging the brain and increasing the risk of heart attacks, as well as increasing the chances of getting Long Covid. Some say ‘as long as you are fully vaccinated you are safe’, whereas the truth is that you are safer but not safe, and you get less safe the longer ago your last vaccination was. Some say Covid is now less deadly than flu, because it said so in their newspaper. The reality is that Omicron has a similar intrinsic severity as the original strains of Covid, but what has changed is immunity and vaccination. (So much for the virus variants getting milder.) The reality is also that my chances of getting Covid in the UK today are higherthan my chances of getting flu.

These are myths propagated by parts of the press and not countered by a broadcast media divorced from expertise. The problem is not Covid fatigue. The problem is with both those who feed false information to the public and a broadcast media that no longer fulfils it’s public information role. While it may be an unusual experience for the medical community to find both government and media working against rather than with it, this is a pattern that has become increasingly common in recent years.

Most recently we had Brexit. We will become Global Britain, Brexiters told us, trading with fast growing nations rather than a moribund EU. The realityis that UK exports have stagnated while in the rest of the world they have grown, a reality that will come as no surprise to the experts on the economics of trade who predicted this result. It happened in 2010 when we were told that all the government needed to do was control its deficit and the economy would look after itself. The media went along with that, while most experts warned austerity would harm the economy and its growth that matters, not the deficit. The result of both fantasy-led policies is that GDP per head has grown on average by less than 0.4% a year since before the financial crisis. What is new with Covid is that the experts being ignored are doctors and medics rather than economists, but the government is the same colour and the BBC remains obsessed with providing balance rather than providing knowledge.

It is difficult to overstate the harm fantasy-based governments and a supine media can do. With Covid the cost can be measured in lives lost, in operations delayed, in lost education and (initially) delayed, more prolonged lockdowns. With Brexit the immediate costs are reduced trade and UK productivity, output and incomes, but that means less resources available to the NHS and other public services. Austerity hit both directly, and we just don’t know how many died as a result of those cuts.

It really isn’t hard to understand why in the years before the financial crisis we had a successful economy where productivity was growing at least as fast as other major economies, yet since that crisis we have had a moribund economy falling behind other major economies. Before 2010 we had a (mainly) evidence-based government that took seriously the role of the State in enhancing investment, productivity and innovation. Since 2010 we have had governments that thought the best thing to do with the State was to shrink it and get it out of the way of the private sector, and whose flagship policies have caused severe damage to the economy, discouraging private investment and innovation. Champions of the ideology that has failed us since 2010 may try to pretend otherwise, but a combination of austerity, Brexit and now an ego-libertarian approach to our health are easily enough to explain the UK’s lost decade and the prospect of another to come.

A comparison of the extent of energy price increases for consumers in the UK and France has attracted a lot of attention. The French government, in a presidential election year, has been quick to limit the extent of any increase for the consumer resulting from massive increases in wholesale prices following the recovery from the pandemic and, more recently, Putin’s invasion of Ukraine. In contrast in the UK the regulator, Ofgem, has set a very large increase in its price cap, which will be painful for all UK consumers from this Spring. (On the origins of the price cap see Giles Wilkes here.)

This in turn has reopened the debate between two different styles of relationship between the government and parts of the energy industry: nationalisation (EDF is largely owned by the French government) or regulation of privately owned companies (as in the UK). Many consumers will naturally see the ability of the government to directly limit energy prices as an advantage of the nationalisation model. In addition much has been made of the large increase in profits of many energy companies.

Any discussion on this issue can easily get bogged down in details. It is important to distinguish between energy supply (e.g. BP and Shell) and distribution (in the UK, dominated by the Big 6).The profits of the former are bound to rise when prices rise by far more than the cost of extracting energy. In the UK Ofgem regulates energy distribution, and when energy market prices rise this increases the costs these companies have to pay. This is the reason for the rise in Ofgem's price cap, although that seems to be consistent with a recent large increase in profitsof the Big 6.

I want to abstract from this detail by thinking about a single ('vertically integrated') energy company that both supplies and distributes. The reason is that I want to focus on the distinction between prices and profits (or who benefits from higher prices). It is possible for the government to allow higher prices, but to tax the profits those higher prices bring to companies, and use these ‘windfall taxes’ to transfer money to consumers or for some other socially useful purpose. I want to argue here that this is exactly what should be happening right now.

Prices send out signals to both consumers and firms. Higher prices imply a commodity has seen a reduction in supply or a rise in demand, which encourages consumers to economise on using the commodity where they can. Equally the higher profits that tend to come with higher prices encourage firms to invest more to produce more of the commodity. The price signal is doing a useful job on both accounts.

However with energy, which at the margin is produced by burning carbon, it is also vital that we think about climate change, which is proceeding largely unchecked in an alarming way. Global warming is sometimes described by economists as the world’s biggest externality, by which they mean that the need to reduce climate change by consuming less carbon is not reflected in prices.

From the point of view of reducing carbon usage the higher prices for gas and electricity are beneficial. It is good to encourage less use of energy because that helps reduce climate change. By widening the gap between carbon based energy production and renewables, higher prices also encourage green energy supply. However higher energy prices also encourage additional extraction of oil and gas, and national governments typically don't stop energy firms doing this (some may indeed encourage it).

It is in this context that we need to consider a recent proposalfrom the European Commission. They suggest member countries tax the profits energy companies made from recent energy price spikes and invest the revenue in renewable energy and energy-saving renovations. In doing this, the proposal suggests, EU governments would not be falling foul of EU rules.

The important point is that ‘excess’ profits are taxed, rather than what the money is spent on. Tax increases are not normally directly linked to how that money is spent (they are not hypothecated). In the UK more money is desperately needed by the poorest to help pay higher food and energy bills, and that is best provided by raising levels of Universal Credit. Whether the government does that from general taxation, some other means or from a windfall tax is incidental beyond media announcements.

The purpose of a windfall tax on energy companies is to ensure that the high profits made by these firms do not end up as paying for investment in non-green energy production, or as dividends or capital gains (from share buy-backs) to owners of the shares of those firms, but are directed to a more socially useful end.

What are the arguments against taxing the profits generated by high market prices? Let’s look at an FT editorialentitled “Windfall taxes on energy companies are a bad idea”. Among many paragraphs, the only substantive argument appears to be this:

“Stability is key to promoting both investment and spending — both of which drive economic growth. Predictable and constant regulations are identifiers of a society governed by the rule of law.”

Stability, the ultimate last resort of the conservative, is a non-argument in this case, as I would be quite happy to enshrine in the rule of law a tax schedule for these companies that taxes very high profits at a high marginal rate. Redirecting high profits to either green investment or higher benefits to the poor would also drive economic growth, with rather more drive than if the profits end up with shareholders. The editorial has all the hallmarks of some poor junior scribe being told to write something about why windfall taxes are a bad idea, and having to scrape the barrel to find any decent argument. I’m glad to see that Chris Giles, senior FT economics editor, has recently written in favour of windfall taxes on energy companies in the FT here.

One argument against nationalisation is that politicians come under huge pressure to keep prices low, as consumers (who are also voters) see the immediate benefit of lower prices, while the higher taxes, lower spending or whatever that is the counterpart of subsidizing energy is more opaque. A regulator is not under similar electoral pressure, and can ensure prices send appropriate signals. However such an argument against nationalisation can only be made if the government is prepared to implement windfall taxes on energy companies when their profits are very high, and that is something the UK government has not so far been prepared to do.

This argument is also central to the Chancellor's Spring Statement tomorrow. The Resolution Foundation sets out some of his options here. A cut in fuel duty, though widely expected, just subsidises CO2 emissions at a significant cost to the public. Hardly surprising from successive Conservative Chancellors who keep promising to put up fuel duty and keep failing to do so, making nonsense of claims this is a green government. On other measures, Sunak should focus on a large uprating in universal benefit which provides most help to those who need it, as the Resolution Foundation shows.

But there are few votes for him in helping the poor, so that outcome seems less likely to happen.

What makes Putin's invasion of Ukraine so unforgivable? The three most obvious factors that have led to popular revulsion against what Putin and the Russian army is doing seem to be the unprovoked use of lethal force, the subjugation of a nation with a clear national identity, and the fact that a tyranny is attacking a democracy. (International organisations classifyUkraine as a less-than-full—but aspiring—democracy.) [1]

One thing that seems to matter to Putin, but not at all to Western public opinion, is history. That Ukraine was once part of the USSR, or perhaps more relevantly a Russian empire, is discounted because most people outside Russia believe, rightly in my view, that it is what those in Ukraine currently think that matters. It also seems reasonable that it should matter not at all that some in the invading nation (in this case) think otherwise. Ethnic cleansing is often justified by selective appeals to history.

The same applies to 'provocations'. It should be the right of an independent nation to choose who to align itself with, although those already in that alignment obviously also have a say in who is part of that club. The idea that the expansion of NATO somehow justifies Putin's aggression is absurd, and belongs to an age of empires rather than today's world. Would-be empires run by tyrants require a certain realpolitik from other nations, like don’t use your fighters to shoot down theirs, but it does not justify invasions.

If the combination of the use of lethal force, subjugation of self-determination and a democracy makes the Ukraine case clear, is one more important than the others? NATO used lethal force in bombing Yugoslavia, in response to their ethnic cleansing of Albanians in Kosovo, killing around1,000 members of the Yugoslav security forces in addition to about 500 civilians. The argument would be that this action may have saved more Albanian lives, as well as protecting the national identity of Kosovo. It seems harder to justify the use of lethal force just to replace a tyrant by a democracy, although that argument was sometimes made for Iraq. This is partly because there are many shades of what counts as democracy, as well as doubts over it’s durability.

All this suggests that it is the denial of national self-determination that is crucial in thinking about the invasion of Ukraine. Imagine if opinion in Ukraine was equally divided, between those who wanted to be part of Russia and those that wanted independence. (Please note, this is not the casein reality.) I suspect Western opinion about the invasion, while still condemning the use of force, would be more complex. The right of people to choose who governs them seems to be critical, and a prerequisite for any democracy for those people. Equally if Ukraine had offered only peaceful resistance to Putin’s army, would we no longer care about the invasion? That seems very unlikely.

It is in this context that we should see the UK government’s current refusalto grant Scotland a second referendum on independence. The government line that it is too soon after the 2014 referendum is completely irrelevant, because it should not be the UK government’s choice to make but a choice for Scotland. The UK government denial overrides the right of Scottish people to self-determination. The argument also implicitly belittles the importance of Brexit, which Scotland voted against, which is a rather odd thing for the government that championed Brexit to do.

That is the first potentially controversial point I want to make. It is an important one, as I have no doubt the Conservatives will attempt to suggest during the next UK general election that any future Labour government would threaten to break up the Union by being ‘soft’ on Scottish independence. The reality is that it is their own policy of denial that is indefensible.

My second potentially controversial point is that any referendum to decide on Scottish independence should learn the lessons of Brexit. Brexit has been a disaster for England, Scotland and Wales. Pretty well every claim made by Brexiters has turned out to be false. Given the commonalities between Scottish independence and Brexit, it would be strange indeed, and completely foolish, if these lessons were not learnt.

Interestingly public opinion also tends to see the results of Brexit as largely bad, according to a recent poll analysed hereby John Curtice. A clear majority believe that Brexit has worsened the cost of living, made it more difficult for us to sell goods abroad, led to a deterioration in the NHS and the economy as a whole, and reduced our influence in the world. If Brexit has had any effect on wages, more people think it is negative rather than positive. Non-EU immigration is worse rather than better. There are only two Brexit positives in the poll: controlling our own affairs (which is just another name for less international cooperation), and our vaccination programme. The latter is hardly surprising given the number of times Johnson makes this, generally uncontested, claim. As our vaccination programme was formulated while we were still in the EU, you can decide yourself how valid that claim is (or read this).

So what does the Brexit disaster tell us about referendums like any future one on Scottish independence. The first lesson is that referendums, like all elections, are only as good as the information provided during them. A second, related point is that alternative outcomes need to be defined as clearly as possible, and if this is not possible it makes complete sense, and should be obligatory if practical, to hold a second referendum when those details are clear. (The first referendum in effect becomes a decision on whether to open negotiations.) A third lesson is that margins of victory need to be large to avoid decisions which do not survive an immediate test of time. The way so many politicians involved in the Brexit decision schemed to ensure that just 52% on the day, of an electorate that excluded key parties, could take us out of Brexit remains one of the more shocking aspects of the whole Brexit debacle.

The first point is relevant to non-partisan media organisations. Your job is not only to ensure equal time between two sides, but also to explain the, often complex, issues so voters can make an informed choice. That means often championing the truth over whatever mystification one side wants to confuse voters with. In other words, knowledge and facts should always win out over balance.

The key points are the second and third. Whether the majority needed to decide independence should be 55% or 60% is up for debate, but allowing 50.001% to decide on something that will last decades is at the very least just asking for trouble, instability and regret. As any independence referendum will take place before negotiations between the rUK and Scotland, any referendum is open to counter claims from either side about what the result of those negotiations will be. It therefore makes a great deal of sense if a second referendum is held after the negotiations where the actual agreed terms of separation are known.

Even if you are half persuaded this should happen, there is no chance that it will happen. As with Brexit, these fairly straightforward observations will get mired in partisanship. Partisanship from those who see that they make independence more unlikely on one side, or from Brexiters who resisted such common sense with their referendum on the other. But a key ingredient that made Brexit such a disaster is also present with independence: a desire to make your own decisions against an economic cost that while large and real is open to obscuration and wishful thinking. To those that think a referendum on Scottish independence should not learn these lessons, I ask how can you be sure that a narrow margin for independence based on the dubious claims of one side will not suffer the same fate as Brexit? Perhaps you don't care?

[1] That this is happening in Europe, to ‘people like us’, with widespread media coverage that does not attempt any kind of balance (see last weeks blog), helps a lot as well, as a simple contrast between the plight of Ukrainian and Afghan refugees shows. But this observation does not invalidate the justified anger over Putin's invasion.

Contrast public perception in the UK of Putin’s invasion of Ukraine with the US and UK invasion of Iraq. There is, rightly, no attempt to balance the reality of what is going on in Ukraine with Putin’s propaganda. National self-determination for Ukraine is being overridden by the use of lethal force based on the fantasies of empire by one man, or a small group of men around him. But the reality of the Iraq war was not so different. The invasion was the project of one man, George Bush, or a small group of men around him, with the UK following because our Prime Minister thought he should.

Yet with Iraq public perceptions were different, because the misinformation was coming from our own governments. We were told there were stocks of chemical weapons that could be used against us, or at least our allies, whereas in reality there were no chemical weapons. The bigger lie in the US was that Iraq was somehow linked to Al-Qaeda, whereas anyone with any knowledge knew that this was nonsense. We were freeing Iraq from a tyrant, whereas in reality we were undertaking a national rebuilding process with little idea of how to go about it, with what turned out to be disastrous consequences.

Information is crucial, and what information people are given, or choose to believe, can determine the outcomes of elections just as they can determine how wars are perceived. The influence of Russian money on the UK Conservative party, and on certain UK elections, has been public knowledge for many years for anyone who cares to look, but it has taken Putin’s war against Ukraine to make this knowledge more widely known.

We can start with our Prime Minister Boris Johnson. He overruledadvice from the security forces (e.g. MI6) and made Evgeny Lebedev a Lord of the realm. Lebedev’s father was the senior KGB spy in London in 1988 and is a pro-Kremlin oligarch with interests in Russia, supporting Vladimir Putin and his annexation of Crimea. Evgeny Lebedev is also one of the UK’s press oligarchs, owning the Independent and the Standard. Johnson even got involvedin where the government placed advertising contracts, to ensure his newspapers got a significant share. Johnson’s relationship with him goes back a long way. When he was Foreign Secretary, he slipped his Metropolitan Police protection officers to attend partiesat Evgeny Lebedev’s palazzo. Was he compromised in some way at these parties?

The Conservative party, and a number of government ministers, have acceptedlarge sums of money from Russian oligarchs. None of this money has been returned by the party as a result of Putin’s war. The party co-chair, Ben Elliot, runs a company providing a “concierge” service for the super-wealthy that has counted many Russians among its clients. He remains in post.

All this matters because we know that part of Putin’s war with the West has involved attempts to influence elections, including the Brexit referendum and Trump’s election as US president. An all-party report on Russian links (the ‘Russia report’) was delayedrepeatedlyby No.10 Downing Street. It concludedthat the government can only say there is no evidence that such attempts have been successful because it hasn’t looked for the evidence, presumably because it doesn’t want to.

If Johnson and the government wanted to show that all this money and influence would not compromise their actions in response to Putin’s war on Ukraine, they have failed miserably.

So far the UK, possibly the only country in Europe to insist on a visa for Ukrainian refugees, has acceptedonly 50 refugees, just 1% of those who have applied, out of a total of an estimated 1.5 million refugees in Europe as a whole. France accused the UK of a "lack of humanity", saying that 150 refugees were turned back at Calais for lacking a visa.

According to Chris Bryant on 4th March, “following the invasion of Ukraine, the UK has imposed targeted sanctions on 34 individuals or entities. The EU has imposed over 500 targeted sanctions; the US over 200. Of the “Navalny 35” list, UK 8, EU 19, US 15. UK has only imposed sanctions on 11 Putin oligarchs so far.” The EU has urgedthe UK to act faster before assets are spirited away, yet the UK measures seem designed to do the opposite. According to the Times, the government has cutthe budget of the anti-corruption unit tasked with investigating dirty Russian money in “Londongrad”. Finally it must not be forgotten how this government appears to be following Putin’s authoritarian example. Just as Russia jails those protesting about the war, soon our government will have the power to jail protesters for just making a noise.

All this suggests a direct link between the UK’s relatively slow response to the invasion of Ukraine, and the strong dependence of Conservative ministers and the party on Russian money. We should be targeting Putin, not the Russian people, Johnson claims. But is there any evidence that Johnson or others in government have put any effort into distinguishing between the two? When other bodies do flag misgivings on that account, Johnson overrules their advice. Everything the government does, once you look closely, allows them to continue to keep the Russian money flowing to them.

Yet ironically, the talk among Conservative MPs, which will be echoed in large parts of our oligarch’s press, is that the Prime Minister is having a good war. Wars where you are a bystander and do little but sound righteous make good copy, it seems. The reality is that, thanks to Brexit, the UK is at best a bit-player in international attempts to put pressure on Putin and those around him, and at worst an embarrassment because we have so much Russian oligarch money in London and have done so little about it. But those around the Conservative party think the war, and plenty of the usual lies and bluster from the Prime Minister, will put partygate behind them.

Among those MPs that are pushing to invoke Article 16 because they don’t like the border checks in the Irish Sea which they originally signed up to, there are those that see a new opportunity following the additional hike to energy prices created by the war. They want to roll back on our climate change commitments. Not content with damaging the country, they want to help destroy the planet as well. Johnson seemsto be sympathetic, in part for reasons discussed here.

If they get any kind of hearing in the broadcast media, you will know that the wrong side is winning the information war. The obvious way to reduce our dependence on the global price of oil and gas is to speed up the development of alternative sources of cheaper energy, precisely what this group wants to slow down. As long as you are using significant quantities of oil and gas, you will be dependent on their global price. The more renewables we use, the more the marginal cost of energy will diverge from its (lower) average cost, and the more scope there will be to recycle energy company profits back to help vulnerable consumers. Yet these same MPs are opposed to doing even that. They are using the same topsy turvy logic that created Brexit’s ‘Global Britain’, a country that now does less global trade with the rest of the world following Brexit, and doesn't like to mix with foreigners.

Most of us are powerless in information wars, just as we are powerless in Putin’s war on Ukraine. These information battles are not won on twitter or in blog posts, but in editorial decisions by broadcasters and, occasionally, by editors of right wing newspapers. We can only hope, that after partygate and with the obvious failures of Brexit, the broadcast media becomes rather less deferential towards the Prime Minister and the party he leads.

Next weeks blog is early because of topicality and grandchildren. It is probably a failed attempt at transforming raw anger into meaningful prose.

Both the Financial Times and Timeshave good accounts of what the former calls Boris Johnson’s money network, following earlier analysis in Open Democracy. (See Peter Geoghegan’s bookDemocracy for Sale in particular.) I have talked before about the ‘Leaders Group’, a longstanding club for Tory donors who enjoy monthly lunches with ministers, but there is also an even more select ‘Advisory Board’. This, according to the Times, “granted privileged access to the prime minister, ministers and advisers at the top of government.”

Before linking this to policy over Covid, it is important that we are clear about what is going on here. The official line is that this is just a group of people with money helping the Conservative cause. But as all the accounts above make perfectly clear, that is the half-truth that allows the myth of that official line to persist. What those who donate large sums are doing here is not just supporting the Conservative cause, but also buying direct access (and therefore inevitably influence) with whichever minister they choose.

Equally others might ask what is new here. The CEOs who run our large companies have always had the ability to contact ministers when they needed to. I have in the past talked about institutionalised links between finance and the Treasury, which gives banks in particular direct access to key areas of government decision making. But that is access based on power, not money. Who does and doesn’t have power matters hugely of course, but it is not what is going on with Johnson’s money networks.

What is giving those who are part of that network unrivalled access to ministers and the Prime Minister is money, pure and simple. Those with money may also be powerful, but their access through the leaders group and the Advisory board is based on financial donations to the Conservative party. Once again, that individuals have been able in the past to use party donations to buy influence is not new. What is new is its institutionalisation, which has happened gradually over the last decade and is now under Boris Johnson, it seems, complete.

It is no surprise that Johnson has given priority to completing his money network. He himself is not that wealthy compared to some other Conservative ministers and is also hopeless with money: he needs a lot of it and hates raising it. But he also knows the Conservative party today needs to spend so much more than its rivals because its message is so often dishonest (see herefor a clear example). This is what gives donors all the leverage they need with Conservative ministers.

This is partly why I have over the past few years describedthe UK under the Conservatives, and the US under Trump, as an elected plutocracy - government by the wealthy, for the wealthy. Once access and influence within a governing political party becomes institutionalised to the extent that it now is in the Conservative party, then it becomes legitimate to talk about an institutionalised plutocracy. That does not mean that those with money always have the final say - normal politics still functions to a degree - but critically it becomes almost impossible for us to say how big an influence those within the money network do have on government decisions. In normal democracies we would describe a plutocracy by another, equally valid, name: corruption.

Nor is this corruption confined to the party leader and his ministers. Many Conservative MPs are now in the market for becoming paid lobbyists for particular firms wanting favours from the government, as Open Democracy reports. Paterson was not one bad apple, but part of an increasing pattern in this Conservative party.

Covid policy has become, very unfortunately, a good example of this plutocracy in action. The Times report goes on: “According to a source, board members — whose investments spanned property, construction and big tobacco — were alarmed by the effect of Covid-19 on their businesses. A number of those present requested swift action, including the relaxation of measures designed to stop transmission.” How much influence does that have? We just do not know, but to pretend it has no influence on what the Prime Minister decides is no longer a tenable position.

More well known has been the constant pressure from the billionaires who own the right wing press, both directly and through their papers, to relax any protections from catching Covid, and to ‘get back to normal’. Of course this influence is plutocracy institutionalised as well, just a more familiar one mediated through money buying newspapers. But we also have perhaps a majority of his mask phobic MPs who are constantly pushing in the same direction. As MPs should take account of what the electorate thinks, the UK remains in theory an elected plutocracy, rather than just a pure plutocracy, but on Covid the majority of mask-phobic MPs in the Conservative party are certainly not representing their electorate. 

When Boris Johnson’s position as leader of his party was under serious threat as a result of him lying to parliament over partygate, he announced plans to end all of what he calls ‘restrictions on freedom’ associated with Covid, and which I would call protections against catching Covid. That included removing the legal requirement to self-isolate and free testing. The timing was no coincidence, but a survival tactic. He needed to get the large number of his mask-phobic MPs on his side, but he also needed to keep the support of the press and the party’s donors (the leaders group and advisor board). So, putting scientific advice in the bin, he did what they wanted.

This is perhaps the most blatant example of UK elected plutocracy in action since Brexit, and it is also likely to have the biggest effect on some people’s lives since Brexit. But it is far from the only example. As Russia started it invasion of Ukraine Boris Johnson, having talked big beforehand about what he would do, produced a set of sanctions that can only be described as pathetic, The Conservative party’s own considerable funding by Russian oligarchs remains untouched. Russian money has, despite what Johnson says, successfully destablised Western countries through support for Trump and the Leave campaign, and as the Russia report made clear Johnson's government pleads ignorance because it hasn't looked. It shouldn't just be people around Biden who are worrying about the extent to which Johnson is compromised by his and his party's Russian links.   

Countless health professionals have condemnedthe ending of Covid protections including mandatory self-isolation as rash and premature. Of course the media will find some health experts who agree with the government, but it’s the overall plurality of scientific opinion that matters here, just as it was with economists and Brexit. As with Brexit, it is clear where that plurality lies, and so the media has no excuse ignoring what health professionals are saying.

This government, whose Covid policy always had a very loose connection with science, has now severed the connection with scientific and medical advice completely. It and its supporters have chosen to bask in the (temporary?) glory of declaring victory over the virus instead, a glory that - when it comes to self-isolation at least - most people would rather not have. This is Covid policy for the unrepresentative donors, newspaper owners and MPs who have a phobia about masks, rather than those who elect our government.

Of course the virus will not be impressed by whatever victory Johnson declares, but it will relish the new contacts that his decisions allow. Infection levels remain at around the same high rate they were before Omicron hit, after the last time (we should not forget) Johnson declared victory over the virus on ‘freedom day’ last summer. Covid levels remain high in many schools. Nearly one thousand people died last week from Covid. If we are lucky, and no new variants start pushing UK cases up, we should have seen a steady decline under previous arrangements as we head into Spring. That might be the time to start relaxing some measures. Johnson is doing it now because it helps keep him remain Prime Minister: more people will die unnecessarily as a result, and more people will get Long Covid as a result.

However we may not be lucky with new variants. One may arise with the same infectiousness of Omicron (and, crucially, the ability to reinfect those who have had earlier variants). We already have BA.2. It is also quite possible that a future variant will involve greater vaccine escape, and it is also possible (despite widespread belief) that a future variant could be more life threatening than Omicron. Learning to live with Covid means investing in measures that reduce its impact, not pretending the disease doesn't exist. 

The government’s approach seems to be to ignore this threat, and by testing less hope that only those that catch a new variant will notice it. Whatever he may say, the message those pushing him to ignore Covid are putting out is that the pandemic is over, and people don’t need to wear masks in crowded spaces, don’t need to protect vulnerable people by paying for tests and wearing masks, and don’t even need to self isolate if they catch Covid. By pandering to this line, Johnson will be responsible for its consequences.

All Johnson’s talk of personal responsibility is designed to hide an uncomfortable truth: he is making it harderfor most people to behave responsibly, and he is allowingothers to be irresponsible. We ban smoking in certain public spaces rather than give smokers ‘individual responsibility’ not to smoke there, when it is obvious who is smoking, so why should individuals be personally responsible over who they do or do not give Covid to, when others cannot tell who has Covid?! He has made England a less safe place, and many will die as a result. He is ignoring scientific advice to be more cautious because his position is under threat, and so he is giving in to the ego-libertarian factions that now control the Conservative party: the right wing press, mask-phobic MPs and the donors to the party that make up the UK’s elected plutocracy.

This week, when compulsory self-isolation ends, has been a sad day for most people in England who would rather not catch Covid, but will now find that much harder to avoid doing so. It is a sad day for the influence of medical science, which has gone the same way as economics as a guide to what our government does. It is also a sad day for our democracy, when the survival of one man means that party donors, newspaper editors and anti-science MPs have become more important than the electorate.

Long time readers of this blog will be familiar with this chart, of UK real GDP per capita since just after WWII.

It shows a remarkably constant trend rise of output/income per head of 2.25% per annum since 1955. The booms of the mid-70s and end-80s, and the recessions of the early 80s are only just visible, but thankfully the trend in GDP per capita always reasserted itself. Until, of course, the period after the Global Financial Crisis, when it didn’t in a quite spectacular way.

Not only did we not bounce back in any way from that recession, but GDP per head started growing more slowly. (These observations are so much clearer when using GDP per head, rather than GDP which is strongly influenced by inward migration.) I watched and blogged in horror as the gap between the previous trend and what was actually happening to living standards [1] kept growing wider.

The little blip at the end is the pandemic of course, and once again using GDP per head shows clearly how we are yet to fully recover in terms of living standards. At the end of 2021 GDP per head was almost 4% lower than it was in 2019. (Once again, it shows how misleading using GDP data is if you are trying to gauge anything to do with welfare.) Remarkably GDP per head at the end of 2021 was only around 5.5% higher than it was at the end of 2007! (That is annual growth of less than 0.4%!).

However, using a constant trend rate of growth of 2.25% as a reference point was a convenience rather than a realistic aspiration. The main reason is that trend growth has for some time been slowing down across the world. What to use instead? In the chart below, I compare the UK to the global technological leader, the United States. I make no attempt to make a realistic comparison of levels of income per head, which is in any case distorted by factors like workers in the US have less holidays than we do in europe, for example. I’m just concerned with the trend rate of growth in GDP per capita.

I have scaled US GDP per capita (red line) so that it matches the level of UK GDP per capita from the mid-50s until the mid-80s. UK and US living standards were growing at a similar rate over that period. There was much angst in the UK at the time about economic decline, but that in part reflected a dynamic Europe, and also we were not catching up with what is generally agreed is a large level’s gap with the US. You can see by eye that US trend growth in GDP per capita starts to decline as we reach the middle of the period. 

The first interesting deviation from parity of growth rates starts in the mid-80s, and is clearer if I redraw the chart starting in 1979.

UK GDP per capita continued to grow at a constant rate in the 1980s and 1990s, while US GDP per capita growth started to decline from the late 1980s. This divergence grew wider during the period of the Labour government, such that by the end of 2007 we were ahead of the US trend by 6% compared to previous levels. You can tell many stories about this apparent success story, but it does correlate with more detailed studies of trends in growth over this period: the UK was more than holding its own, and catching up in level’s terms with the US and to some extent France and Germany.

But that is just the backdrop to the main point of this post. Since the GFC, the UK has been doing worse than the US consistently, reversing all of the post-mid 80s gains. Half of the 6% gain was lost during that crucial austerity period from 2010-12. Of course all countries around the world did badly through a common policy of austerity after 2010, with the important exception of China. Only in China was a substantial Keynesian expansion created that offset the impact of the GFC. But, compared to the US, the UK lost ground.

The next major period of UK decline began shortly after the Brexit referendum. By the end of 2019, that initial 2007 6% gain had fallen to little over 1%. The policy response in the pandemic made it worse still. By the end of 2021 the UK had fallen to just over 2% below the US line, reflecting a stronger (stimulus led) US recovery from the pandemic. If we take the period from the start of 2010 until the end of 2021 as a whole, UK GDP per capita appears to have grown by 6% less than US GDP per capita. That is, since 1955, an unprecedented period of economic decline for the UK.

To show this isn’t an artefact of my method, here is a small table

In the table I’ve included data for Germany (the only major EU country with data for 2021 on Eurostat). Germany is also falling behind the US, but by less than the UK. The reason is straightforward - Germany is also addicted to an austerity mindset.

This is the reality behind the government’s bluster of strong and steady growth. Macroeconomic success should be measured in terms of GDP per head, and not the size of some government deficit. Forget cherry picked statistics after the UK suffered the largest fall in GDP during the initial pandemic. This is the reality - an unprecedented decade of relative macroeconomic decline that started in 2010, and with Brexit still influencing growth there is no end in sight.

This analysis ties in the underlying growth in the economy, taking out the direct impact of migration, with the UK’s so called cost of living crisis. These are not separate problems, but as Rachel Reeves highlighted in a recent speech they have a common cause, which is weak UK growth. The government cannot at the same time appear fatalistic about falling living standards and yet try to talk up UK economic performance, because to do so is mutually contradictory. Advancing living standards, particularly those at the bottom of the income distribution, is what good management of the economy is all about.

It is always relatively easy to find reasons why this UK macroeconomic decline is all bad luck, and nothing to do with policy. It always is. But since the Conservatives came to power in 2010 they have had two big economic ideas which directly influence macroeconomic performance. The first was prioritising reducing the deficit over the recovery from the GFC recession and, more recently, the pandemic recession. The second was Brexit. Both have been disastrous for the economy, and predictably so as they went against basic economic principles.

There is a refusal among Conservative MPs and ministers to recognise the recent reality of UK macroeconomic decline we are now living through (and its contrast to  our earlier strong performance), let alone their responsibility for it. Instead they live in a fantasy world, and try to convince us their fantasy is real. Apart from the regular use of cherry picked and misleading statistics, we have a situation where the queues of lorries waiting to be checked at Dover are nothing to do with Brexit, they tell us, but because of EU red tape. You wouldn’t want such people in charge of the most trivial tasks, let alone managing the economy. It is time to recognise the reality of recent UK macroeconomic decline, and to assign responsibility for it in two huge failures of economic policy.

[1] GDP per head is equivalent to the average income generated by domestic output per head. Of course that average is hiding the gradual redistributionof income towards the 1% in the 1980s and 1990s, a redistribution which has had a significant impact on median wage growth during that period. Finally the purchasing power of median UK earnings has declinedbecause of two recent depreciations in sterling: the first during the GFC and the second after the Brexit referendum.

Two recent events, one in the US and one in the UK.

In the US the Republican National Committee, in its annual meeting in Salt Lake City, declaredthe riot where protesters invaded the Capitol, roaming almost at will as members of Congress were barricaded into rooms for their own protection, a “legitimate political discourse”. A resolutionapproved unanimously said two Republicans, Cheney and Kinzinger, were engaged in the “persecution of ordinary citizens engaged in legitimate political discourse” for taking part in a House investigation into the episode. 7 people died and 100 officers were hurt during the riots.

In the UK, the Prime Minister Boris Johnson, fighting for his political survival as a result of lying to MPs about his knowledge of numerous illegal parties held at No.10 Downing Street, picks up a far right meme suggesting Keir Starmer, leader of the opposition, personally failed to prosecute Jimmy Saville’s cases of child abuse. The claim was false, as the Prime Minister later admitted, but he has not apologised for making it. Last Monday Starmer had to be protected by police against a far right mob that shouted Savile’s name.

The far right often uses physical violence to intimidate opponents. What we are not used to in either the UK or US is one of the two main political parties resorting to far right tactics or trying to legitimise them. The reaction to these events will determine whether they become routine. In the UK, for now at least, the independent media has departed from type to frame Johnson's smear as false, illegitimate and something he should apologise for. This departure from normal two-sided impartiality is welcome, and helps illustrate what should be the reaction to threats to democracy and what should not.

In the US the Republican National Committee’s embrace of the Capitol Rioters met a muted response from Republican politicians. The most notable was Mitch McConnell, who said the decision was wrong and outside the committee’s jurisdiction, but he wasn’t going to make a big fuss about it. This and more muted responses meant the news story faded away, and we went back to the normal ‘two sides’ political discourse.

It is this last step that is the most worrying. Essentially you have an extremely influential part of the Republican party siding with a violent attempt to overturn the legitimate result of the last election, an attempt largely orchestrated by the President who lost that election and who intends to run again as the Republican candidate. We know that a majority of the Republican base believe the last election was stolen from them, and may therefore support attempts to steal any future election. Finally, as I have noted earlier, Trump himself has been busy making sure that his people are in positions of power to at least sow confusion about the validity of any general election result in key states, and perhaps do worse, something he failed to pressure Republican officials to do last time. Trump’s position, even among voters, is far from guaranteed, but it would be equally foolish to ignore the threat he poses, or just as importantly what he has revealed about too many Republican legislators.

If public discourse in the US ignores this most of the time, and conducts a normal two-sided political debate about other issues, then they are playing into Republican and Trump’s hands. The Republicans, with the help of substantial gerrymandering supported by a right wing Supreme Court, will win back control of one or both the Senate and House, ensuring Biden becomes a lame duck, vetoing president. Forget any chance of US progress on climate change, among other issues.

That gridlock will pave the way for a Republican President in 2024, who could well be Donald Trump again. He will have learnt his lessons from 2020. What might follow does not bear speculating about. This all stems from the normalisation of the Republican Party’s anti-democratic turn in public discourse, both by the media and to a large extent the Democratic party itself. In a recent post, John Quiggin describesthis normalisation as ‘the end of hope for US democracy’.

The situation in the UK is different in many ways. In particular the post-Brexit Conservative party or its leader has never disputed an election result. But assaults on democratic values take many forms, especially when we recognise our democracy has always had a plurality of centres of power and is not just about elections. It is in attacking these alternative centres of power to the government, like parliament, the courts, an independent media, that Johnson's government shows its anti-democratic zeal. In addition democracy requires that party leaders do not flaunt their own laws, do not leave themselves willingly open to moneyed interests and do not lie incessantly (without correction) to a sovereign parliament.

Sometimes these differences between the US and UK are less than they first appear. For example we do not hold primaries to decide who represents a political party in an election, with instead MPs chosen by local party members behind closed doors, with often a large steer (or more) from the centre. That would seem to limit the ability for private money and right wing media to quickly create an apparently bottom up movement to shift MPs to the right as the Tea Party so successfully did in the US. But the far right’s influence is still there in the UK, albeit more gradual and difficult to track. Many former UKIP members have joinedthe Conservative party. Furthermore I have arguedthat the influence of Brexit, widely pushed by right wing media and some private money, has allowed Conservative party members through their choice of MP to largely transform the Conservative party, both in terms of the quality and political position of a majority of MPs. That is why we often see common cause between positions taken up by the Republican Party and large groups of Conservative MPs (like being anti-mask during the pandemic).

Once he became Prime Minister Boris Johnson has not shied away from using the populist, right wing tabloid language of the far right to undermine our pluralist democracy. The impact on the far right has been predictable. Paul Mason describesthe Starmer intimidation as “the third iteration of a phenomenon Johnson introduced to British politics: a far-right mob, inspired by words he’s said, harassing politicians in the streets around Westminster.” He goes on: “Hannah Arendt once described fascism as the “temporary alliance of the elite and the mob”. Well, that’s what the Prime Minister has created.“

The good thing about the Savile affair (and what was missing in so much commentary around the prorogation of parliament for example) is that the broadcast media has not resorted to both-siding what Johnson has done. Instead they clearly describe Johnson’s allegation about Starmer as false, and have made the issue about whether Johnson should apologise, and his responsibility for the mob’s attack on Starmer. HereRos Atkins is typical.

Does the PM deliberately undermine UK democracy? Perhaps we can say he is naturally intolerant of it. You don’t prorogue parliament if you believe it is sovereign, and constantly pass legislation that seeks to avoid parliamentary discussion of ministerial decisions. Johnson behaves like a typical populist, believing it is only his view of what the people want that matters, and in any moment of accountability he can lie with abandon and without consequence.

His party is now little better. It has collectively decided to start gerrymandering, using the excuse of almost non-existent voter fraud and while at the same time railing against ID culture. Conservative MPs in their own wisdom seem for the moment to have decided to give Johnson another chance.  We can only conclude that they think breaking the law and lying to parliament are a price worth paying for their belief that Johnson can regain some magic with voters. (The evidence is that his 'magic' has a marginal impact, but this Conservative party tends to prefer convenient myths to evidence.) 

Behind all this, in both the US and UK, is rampant corruption by money (from corporations to Russian oligarchs), fed to politicians for a return. It is far from exclusive to the right, but it has become endemic in both right wing parties to an extent that, when they are in government, they act as plutocracies for the rich in general, and those who give them money in particular. This may continue with the formal apparatus of general elections in place, but private money wants a return more than it respects democracy, which means democracy is never safe in an elected plutocracy.

This is the threat that public discourse on both sides of the Atlantic should remorselessly focus on. It should never become normalised, by supposedly savvy journalists who convince themselves of the lie that this is nothing new and both sides do it. The events of the last few months should not be forgotten in favour of blind impartiality coloured by campaign money and personal charisma. The threat to democracy is one-sided and comes from the right alone.

The US media can champion the truth rather than remain impartial when it chooses to, as it did when Trump first started disputing the 2020 vote count during the election. As I noted above, the UK media is doing the same over the Savile slur. In addition, for better or worse, a non-partisan media is capable of constantly reminding people about a political party's flaws when it chooses to. In the US it did so when Sandersbecame the Democratic front runner. We saw the same relentlessness in the UK with the broadcast media over Labour and charges of antisemitism. Public discourse could be relentless in a more noble cause and serve as our collective memory, keeping past violations of democracy at the forefront of debate. If it fails to do so there is an acute danger that democracy as we know it in the US and UK will whither away.

Interest rates have increased twice in the UK and the Fed has signaled increases to come. To some the reason for this might seem obvious. Inflation is 7% in the US and expected to be over 7% in the UK by April. Surely the job of interest rate setting central banks is to use higher rates to control inflation? While it is not as simple as this, the fact that some people think it is can weigh heavily on monetary policy decision makers.

In reality that is not the central bank’s job for two reasons. First, sometimes the economy is hit by temporary shocks, like higher energy prices, which will only raise inflation for a year or two. Second, it takes time (2 years?) for the full effects of higher interest rates to impact inflation, and it works mainly by depressing output. Put the two together, and raising rates following temporary shocks would do little to reduce the size of those shocks, and instead would reduce inflation just as it was coming down anyway. More importantly, it would lead to pointless instability in output, incomes and unemployment.

Crudely, this was the view of central banks in 2021 as inflation began to rise. So what has changed in 2022 in the US and UK? The answer, for those in the US, was not fiscal stimulus, because the bounce in inflation has been pretty similar in character across the G7 [1]. Instead, I believe, it is earnings growth in the context of a tight labour market produced by the recovery from the pandemic that is worrying central bankers. Here are two charts, for the US and UK. Source US, UK.

How should we interpret these charts? If we are thinking about how domestic inflation is likely to develop, looking at real wages (the spending power of wages) as shown in the UK chart is the wrong measure. Instead we should look at nominal wage growth, subtract likely underlying productivity growth (because wages should get the benefit of productivity growth), and see if that is above or below the inflation target of 2%.

Unfortunately what underlying productivity growth will be after the pandemic is not known for certain. But in the UK the Bank of England is expecting productivity growth of about 1% a year. That means wage inflation of 3% a year is not inflationary, but pay increases at the end of last year were significantly higher than this, and the Bank’s agents suggest firms are planning wage increases in the 4+% range. That would be inconsistent with the Bank’s inflation target of 2%. US forecast productivity may be slightly higher than 1%, but very recent numbers for both the Atlanta Fed’s tracker above and the EPI wage tracker suggest wage increases are running at an inflation target busting level.

This was why the Governor of the Bank of England took the unusual step last week (as the MPC raised rates to 0.5%) of appealing for wage restraint (more below). The background behind higher wage increases is a tight labour market as output finishes its recovery from the pandemic. The reason for the tight labour market in the UK is not buoyant demand (the UK has only just reached pre-pandemic activity levels) but a withdrawal of a large number of workers from the labour market compared to pre-pandemic levels. Demand is higher in the US, but the same phenomenon is happening there. There are theories why this is happening, but little strong evidence.

The tight labour market is why this episode is so different from 2011, when the ECB raised rates following higher commodity prices but the Fed and BoE didn’t (just). Then there was widespread unemployment, so no risk that wage inflation would rise. In that episode the ECB ended up looking very foolish. Today is more like the period between 2004-7, when oil prices rose slowly but substantially, and UK and US interest rates rose significantly.

But, but, but, you might say, the purchasing power of wages are falling a lot! Surely it is reasonable for workers to have higher wage increases in these circumstances? Unfortunately, to the extent that the higher fuel and food prices are permanently higher, you have to first answer this question: who ultimately pays for higher food and energy prices? Replying “someone else” is not a good answer, because it leads to exactly what these central banks want to avoid, which is a wage price spiral as workers and firms try to pass on these higher costs to each other.

While the economic logic of this is sound, the politics are not, which is why the Governor’s remarks on wage settlements were badly judged. Telling people their living standards must fall by even more because of higher energy prices and ignoring what is happening to, for example, the profits of energy companies is just asking for trouble. The governor of the Bank of England should appear even handed on such sensitive issues, and not single out wages for special pleading.

There are two major reasons why raising rates rapidly might be a major mistake,  particularly in the UK where the recovery in the economy since the pandemic is much weaker than the US. The first risk is that the recent increase in earnings turns out to be short-lived of its own accord. The annualised three month wage inflation data (HT @BruceReuters) for the UK gives a hint of that. The Bank is placing a lot of weight on their agent surveys. Wage inflation could tail off because those who have withdrawn from the labour market could be enticed back in by the higher wages we have already seen. In addition, if the Omicron wave dies down (as seems likely as we move away from winter) will firms be able to utilise their existing workforce more effectively, negating the need for higher wages to attract staff?

The second risk is the impact on the economy. Again the UK is particularly vulnerable, as no fiscal major stimulus has or will take place during the pandemic recovery period. There are already plenty of forces dragging demand down, You can see the problem for the UK in the Bank’s own forecasts. In its central forecast, with rates continuing to rise and energy prices staying high, the Bank expects inflation to overshoot its target, falling to 1.5% in 2025Q1 (the end of their published forecast), with rising unemployment and demand less than supply. In contrast with rates staying at 0.5%, inflation comes down to target in 2025Q1. So why go further than 0.5%, as some MPC members wanted last week? In addition, if energy prices start falling as the market expects, inflation will be lower sooner.

To cut a long story short, if rates continue to rise we may find the Bank in a year or two’s time cutting rates as quickly as they are expected to raise rates this year, in the context of a very gloomy outlook for the UK economy. Activity is more bouyant in the US, but similar risks apply there, with the additional political costs of bringing an anti-democratic political party into power. Worse still, if central banks are slow to reduce rates, in the context of a huge hit to personal incomes, we could be talking about a new recession that UK and/or US that central banks have contributed to.

So what might at first appear to be an inevitable rise in interest rates following a large inflationary shock, in fact represents a big gamble by central banks that could backfire badly. 

[1] As I have suggested before, that fiscal stimulus may have raised US inflation earlier and slightly more than elsewhere, but as it is likely to be temporary if the pandemic unwinds, it seems a price well worth paying for a recovery that is up to 4% of GDP stronger in the US.

One of my (partially) unfulfilled quests is to understand why voters think the Conservatives are better at running the economy, when the objective data suggests they are hopelessat it. A part of the answer is that they use their (greater) airtime much better than Labour, by repeating a few generally misleading lines to take over and over again.

All this week the Prime Minister and ministers have deflected questions about partygate and instead trotted out the ‘real’ successes that Johnson has achieved. Often these are straight lies, but at other times they involve cherry picking statistics. The clearest example of the latter is that the IMF are forecasting the UK to have the most rapid growth among the G7 this year. This is sometimes linked to a claim that Johnson has made the right calls over the pandemic.

Here is the IMF’s latest projection for growth over the pandemic period, where I have made 2019=100. May contain rounding errors.

It is true that forecast UK growth for 2022 is higher than any of the other G7 countries. But as the chart shows, all that indicates is that we had the biggest recession of all the G7 during the pandemic, and so need faster growth to catch up with pre-pandemic trends. Claiming that faster growth as an indication that the UK made the right calls during the pandemic is clearly ludicrous.

However that is not the point. The point is that ministers and the Prime Minister get away with misleading the public, because these bogus or misleading claims are very rarely picked up in any interview. The technique is simple: make lots of positive claims in an interview about something other than what the interviewer wants to talk about and the interviewer will rarely dispute one, let alone them all. Johnson explains it here.

I first became aware of this technique in the early Cameron years. Conservative ministers when interviewed would always claim that they inherited a deficit at crisis proportions caused by Labour, and therefore they had no choice but to embark on austerity. Then Labour chose not to argue otherwise, and I never saw any interviewer question the claim (which was nonsense on stilts). Together with the right wing press pushing similar nonsense, the result was a large proportion of voters blame Labour for austerity.

Today, Labour politicians understandably talk about the cost of living crisis, but perhaps they are missing a trick here. Voters do not need to be told about the cost of living, but they have much less knowledge about ‘the economy’. They will not bother to check the accuracy of Tory lines to take, and may even think that because these lines go unchallenged they must be true. As a result, the Tory lead on the economy may remain intact. Labour needs to follow the example of the Shadow Chancellor, Rachel Reeves, who in her recent speech explicitly focused on how growth had deteriorated under successive Tory governments since 2010.

Returning to the Chart above, two points stand out. First, the success story among the G7 is the US. Only they appear to have got back to something like where trend growth would be if the pandemic hadn’t happened. The reason was a large fiscal stimulus, and whether that went too far I’ll discuss below. Second, everyone has had a (kind of) V shaped recovery. However with variants appearing just as cases were under control in many countries, I think the vaccines were crucial in getting a V shaped recovery.

Without vaccines, you need regular lockdowns. Even without lockdowns, each new variant spike will mean many consumers withdraw from social consumption (travel, recreation, shopping etc). Vaccines gave people the chance to partially continue social consumption, and largely avoided lockdowns. It therefore allowed an initial recovery to be sustained.

But is the US really the success story the chart above suggests, given current 7% inflation? Did the first Biden stimulus go to far, as some have suggested? The table below is helpful in this respect.

US Real Personal Consumption Expenditures by Type of Product, Quantity Indexes (source)

Note first that the total hides very different behaviour between consumption of goods and services. Social consumption is concentrated in services, like travel and recreation. Both types of consumption fell in the first COVID wave (2020Q2), but services by much more. From then on, goods consumption grew quickly, largely immune from the impact of later waves of the pandemic. (Durable consumption has grown even faster.) In contrast, service consumption was only just back to pre-pandemic levels at the end of last year, and it will be interesting to see what impact Omicron has in 2022.

In our studyof a flu type pandemic ten years before COVID, I assumed exactly this pattern would emerge. What I didn’t assume, which may also have happened, is some displacement of social consumption into durables. As this has been happening worldwide, it is perhaps not surprising that we might be seeing some inflation in specific goods sectors. One final assumption I made, which is not unreasonable, is that inflation would occur just after any pandemic ended as consumers not only increased social consumption to previous trends, but overshot these trends initially to partially make up what they had lost.

We don’t know how much Omicron will suppress social consumption, and whether any new variant waves will be milder or not. At least two scenarios are possible. In the first, COVID variants become more transmissible but milder (with the help of vaccines). If this is the case, expect a return to previous trends in social consumption, with probably a temporary boom as people try and make good a bit of what they lost. That might add additional but temporary pressure to inflation. However demand for goods may plateau or even fall at the same time, relieving some inflationary pressure from that source. The second scenario is that new threatening variants continue for a long time, with vaccines playing catch-up. In that case we may see a medium run shift in the structure of demand away from social consumption.

Rising world fuel and food costs have produced inflation in most advanced economies. US inflation may be the highest because demand there is strongest, revealing both auto supply problems and reflecting expected house prices. All of these things are temporary, and price increases over 2021 were unusually concentrated in particular areas, which does not indicate persistent inflation. The paragraph above suggests it is possible that new sources of inflationary pressure may arise if the pandemic largely ends, but these again are temporary, although temporary needn’t mean over in a few months.

Temporary inflation a bit above UK and European levels is a price well worth paying for output after the pandemic 4-5% higher than most other G7 countries, including the UK. The only reason not to try and emulate the US in enacting a strong fiscal stimulus is if you think temporary inflation becomes embedded in expectations i.e. real wage [1] increases in excess of productivity gains.

It would be a healthy sign if interest rates rise a little because Biden’s (now much more modest) infrastructure plan will maintain demand after all the pandemic effects are over (if they are ever over). The big danger for the Fed is if this doesn’t happen, they still raise rates because of temporary increases in inflation, and the economy dips in time for political gains for the (now anti-democratic) Republic party.

Just as current US inflation is unlikely to negate the achievement of having such a strong recovery from recession, relatively poor performances in most other G7 countries (UK included) are shown to be a policy choice, in most part because deficit concerns ruled out a large fiscal stimulus. Permanently losing a few percentage points of output to the pandemic is such a bigger cost than temporary inflation at 5% rather than 7%.

After 2010 everyone pivoted to austerity outside China, so it was difficult to find a country that showed its folly. It is a tribute to Biden and those around him that at least one country has now understood the folly of worrying about the government’s deficit in a recession. It is the example of the US that interviewers should mention the next time Conservative ministers trot out their line to take on the UK recovery.

[1] By real wages here I mean deflated by output prices, not consumer prices.

This post is not about the personality of Boris Johnson (for an excellent account of his rise and fall, see Peter Jukes here). Instead it is about whether things will change much with any successor. The general theme of this post is that the damage to the Conservative party caused by both Brexit and Johnson has been so great that any successor will be very restricted in the changes they can make even if they were minded to make changes.

In short, if Johnson goes, can the Conservative party mend itself? To assess this, we first need to outline the damage he has done, the damage Brexit has done and whether there are any silver linings. The next step is to speculate on whether any of the likely successors to Johnson might undo any or all of this damage.

Brexit has done obvious damage to the UK economy. Johnson’s attitude to Brexit has also damaged the Conservative party in a number of ways. To understand this, you first have to recognise that Brexit was always a foolhardy project. As such, it was good at sorting between those who were capable and sensible in the party, and those who were not. Johnson took the attitude of Brexit at any cost, and without compromise of any kind. That naturally alienated those in the party who were prepared to accept the referendum verdict, but not Johnson’s kind of Brexit.

His response to some of these more sensible party members was to throw them out of the party before the General Election, and suspend parliament. Candidates at the General Election had to take a Brexit loyalty oath to Johnson’s kind of Brexit. Once elected, it didn’t take long for Johnson to appoint a cabinet that was notable not for its political weight or good judgement, but to blind loyalty to Johnson, most perfectly willing to do as they were told.

To be fair to Johnson, this effect whereby Brexit acted as a selection device to find the worst candidate and give them the job, was also working at a constituency level, as constituency members tended to be very pro-Brexit. So the parliamentary party itself was gradually electing MPs whose views largely mirrored the right wing press, and who had little time for values like doing the best for the economy, respecting the truth, integrity or following the science.

The two taken together have produced a large group of MPs (perhaps half) that you can almost count on not to make sound judgements in many areas. How can I make such a sweeping statement? I’m afraid Covid has provided an excellent test of good judgement. Do you follow the science in trying to reduce the amount of hospitalisations, deaths and long covid, or do you fetishise not wearing a mask and wanting to get rid of social protections as quickly as possible, whatever the cost. The fact that half of Tory MPs appear to be in the second group gives me all the justification I need to write the first sentence of this paragraph.

Consider Johnson himself. Totally unsuited to becoming Prime Minister, as anyone could see given his past record and how he works. Yet Conservative MPs appointed him because he could win them an election, and now seem to find it hard to let him go. MPs who complain about an ID society when it comes to vaccine mandates, but are happy to make people require ID to vote because it helps them stay in power. Who laud liberalism for themselves while trying to criminalise demonstrations. Who think Lord Frost is an effective operator, and the Europeans will crumble in the face of obstinacy. Who seemed to adopt Johnson’s constant lying all too easily.

Elevation (to MP) and promotion based on a loyalty test (to an idea or to party leaders) rather than because of ability is a constant danger in any government. Unfortunately the Conservative party and this government have taken this to its extreme, because of both Brexit and Johnson. The result is that any new leader after Johnson, even if they had the will to do so, would find it hard to break with the Johnson/Brexit legacy.

If there is a silver lining under Johnson, it is the first hint of a break with the anti-public spending/low tax ethos of the post-Thatcher era of Conservatism. This has been only a hint. Extra money for the NHS paid for by, in effect, a tax hike was largely forced by the growing demand and need for health spending. There has been a partial reversal of earlier austerity in both education and police spending, but the squeeze on justice, local authorities and elsewhere has continued. Levelling up has not happened yet, and some would argue we have had levelling down so far.

Yet this silver lining has been achieved with much complaint for many Tory MPs, many of whom remain wedded to earlier ideas and a neoliberal ideology. Not only will any successor to Johnson have to promise to continue to ignore the science about the pandemic, they will also promise to return to tax cutting ways. This is particularly true if Sunak is Johnson’s successor. (Sunak's likely popularity as leader is considered by Ben Walker here.)

Even if an alternative new leader attempts to avoid returning to the Conservatives comfort zone of low taxes, getting the state (and unions) off the back of firms and so on, they have to contend with the huge obstacle of half the parliamentary party essentially embodying the political philosophy of the right wing press, as well as having to deal with that press directly. The two combined make it almost impossible for a Conservative government to rejuvenate an economy that has become increasingly moribund over time, and not only because of Brexit.

It is moribund because what firms involved in adding value to society rather than just rent seeking need is a partnership with the state, both directly and indirectly in providing the kind of society that allows individuals who might contribute to firm growth to have both the necessary knowledge and imagination to do that well. This is the opposite of what austerity achieves and what a low tax economy and diminished state accomplish. The initial economic dynamism of the Thatcher period (more apparent than real) was achievedby a one-off destruction of older ways of doing things, but also off the back of largely squandering North Sea Oil.

Johnson’s populism may have brought a partial and modest reversal of austerity, but it has also brought something new and extremely damaging to good government. This is the introduction of what is essentially rule by a plutocracy. The leaders group provide the funds for the party to win elections, and in return either help direct the overall political project or get large rewards for themselves or their businesses. The VIP lane for protection equipment for the pandemic was just one manifestation of this way of doing business and the business of government.

The emphasis on who you know rather than what you can do, of rent seeking rather than adding value, is entirely destructive to general prosperity or a fair society. It can only survive as a political force if the government creates and fosters divisions within society, either us versus them (where us are called ‘the people’ by the populist politicians and them are called woke), or ‘the people’ against various minorities or foreigners who are constantly denigrated.

I suspect all a successor to Johnson can achieve is to dismantle this plutocracy. No more regular meetings with the leaders group, and preferably no leaders group at all. An end to constant brinkmanship with Europe, and making some attempt to soften the edges of Johnson’s hard Brexit for the benefit of both our firms and consumers. Some movement towards true one nation Conservatism, and away from constant culture war.

This is, I think, the limit of what progress we can realistically hope for once Johnson has gone. The consequences of Brexit in terms of the quality of the parliamentary party, and the consequences of Johnson in the form of the current cabinet and its modus operandi, will make anything more than this very hard to do. Of course hoping does nothing to ensure that even this it will happen, but recognising the limits any new leader will face does make clear how damaging Brexit has been to the Conservative party.

The BBC is under attack, and there is no doubt we should support it with all the energy we can. Of course there have been many failings in its attempts to appease a threatening government, but that can change. It is watched by so many people as a vital means to present news unfiltered by a mainly right wing press in the UK, and in the rest of the world too. Just imagine if the BBC had not shown the PMs press secretary footage, so the right wing press could have also kept quiet. Like the NHS, it is a unique British institution that admired around the world. But our support cannot be uncritical.

David Jordan is head of editorial policy at the BBC. Last week he testified in front of the House of Lords Communications Committee. He said this:

“It’s critical to the BBC that we represent all points of view and give them due weight.”

He went on

“Flat-earthers are not going to get as much space as people who believe the Earth is round,” he said. “But very occasionally it might be appropriate to interview a flat-earther. And if a lot of people believed in flat Earth we’d need to address it more.”

The model is clearly that the amount of airtime a group should get should reflect the number of people who hold that view.

The consequences of such a policy are stark. Rather than flat-earthers, let’s look at anti-vaxxers. Under this policy we should regularly expect to see them occasionally putting their case on TV. Similarly for all kinds of quack medicine, some of which could also be harmful. Are we to hear from those who think the moon landings were faked, or you can get Covid from 5G? Those who deny the existence of man-made climate are another group. Scientists had worked very hard to convince the BBC not to hold debates containing climate deniers, or interview climate deniers, but that now seems to no avail. Climate deniers will get airtime, the amount depends on how many there are of them.

There are three fundamental problems with that approach. The first is how the BBC judges what proportion of the population hold a particular view and regulate the amount of airtime they get. Does all airtime count equally? To do this properly would require resources the BBC does not have and even when it does are better used elsewhere. Indeed the one job the BBC should be doing, which is to ensure the opposition gets reasonable coverage, the BBC fails to do (see Justin Lewis here). Nor was the policy followed when the issue of austerity was discussed.

A danger is that in practice ‘a lot of people’ will be replaced by either those who make the loudest noise, or more probably those people who have political connections or support. This is what happened in the 2016 referendum, where those who thought Brexit would improve the economy (often within years) were given equal airtime to those who thought otherwise. (the evidence is clear who turned out to be right.). Individual producers decide who will appear on their programmes, and that is invariably based on those who make the loudest noise, or more probably those people who have political connections or support.

A second problem is beliefs such as racism and prejudice generally. The proportion of the population that is racist is quite high, but you will not see them given proportionate coverage on the BBC. So why isn’t the BBC representing this part of the audience? I suspect it over compensates for this ‘failure’ (in their eyes) by giving excessive time to political parties that represent views that appeal to racists. They must implicitly be qualifying their idea that coverage should be proportional to what the audience believes to exclude racist ideas like holocaust denial , so why not qualify it to also generally exclude those whose ideas are untrue.

The third problem is that the truth doesn’t get a look in. As Patrick Howse points out, the BBC says that it is “committed to covering all subjects with due impartiality. This does not mean denying facts nor scientific consensus, and we will always make these clear to audiences. However, there are times when it’s editorially appropriate to hear from, examine, and challenge people who have dissenting voices”. As my last post showed, the ability of everyone who might interview ‘dissenting voices’ to know the science sufficiently well to combat everything an anti-vaxxer (say) states in argument or as fact in an interview is zero.

Even holding debates between scientists and ‘dissenters’ is problematic, and this is shown particularly with climate change. Deniers are snake-oil salesmen, with the emphasis on salesmen, while scientists are not. Invariably the climate deniers sound more impressive to those with no knowledge, partly because there is no uncertainty in their beliefs, while scientists are always questioning their own.. Whether people believe an idea should not depend on the personality of its proponents, but on the evidence that backs it up.

Eryn Newman et al in the Conversation raise a number of problems with the idea that as long as the interviewer mentions what is true (which they rarely do), that stays in the viewer’s mind. Experiments show people forget truth statements easily, while still remembering the untrue claim. To quote “Cognitive science research shows people are biased to believe a claim if they have seen it before. Even seeing it once or twice may be enough to make the claim more credible. People tend to believe simple things over complex things. This is why austerity was so appealing to people at the time they were reducing their borrowing - it made sense to them.

For this reason it is silly to say ‘let the viewer decide’ what to believe. Most people do not have the time or inclination to do their own research about what is right, and as cognitive science shows the truth of an idea is often forgotten when the idea itself is not. The duty of the BBC is to inform, and it is failing to do that by giving ‘dissenters’ airtime.

All this matters so much because in society there is a crisis over scientific fact, as the coronavirus pandemic has shown all too well. The BBC needs to be on the side of science, and at the moment their policy actively seeks to undermine scientific belief.