Tackling the inflation crisis will require a change in the political narrative

The picture shows my rubbish bin last Thursday, our normal collection day. It had four weeks of rubbish in it, and was put out more in hope than expectation that it would be collected by the limited service in operation. It wasn’t. Our bin men have been on strike for a month, with no sign of a settlement in sight. It is just one facet of the inflation crisis that is engulfing Britain, and much of the rest of the world too. It has now reached the top of the political agenda. But just what can, and should, politicians do?

When I last posted on this, I contrasted two forms of inflation. One is a degradation in the value of the currency – the process of the prices of things generally going up, without relative prices between different things changing (and especially between consumer prices and wages). The other is a process of the economy reaching a new reality, typically because supply difficulties are reducing the standard of living. If the supply of oil, for example, is substantially reduced, and its price rises as a result, we have to consume less. Assuming that there are no cheap substitutes, then there is nothing that will stop society being poorer. How society should respond to either sort of inflation is different. In principle, the first can be stopped by processes of economic management (though whether it should be, or at what level, is another matter). Responding to the second sort is a question of distributing the pain – nothing will stop us being poorer, in the short term at least. Of course the second sort of inflation often leads to the first – if people respond by trying to avoid pain altogether by raising wages and benefits across the board. That is how the inflation crisis of the 1970s got going.

The inflation that is hitting Britain is mainly the second sort – prices rising as a matter of economic adjustment. This is driven mainly by three things: increased trading and labour costs as a result of Brexit (counting changed immigration patterns as part of that process, and the reduced availability of cheap labour – though some of that may well have happened without Brexit); the disruption of supply chains following the covid pandemic; and the war in Ukraine, and especially its impact on hydrocarbons, to be followed by its impact on foodstuffs. In the short term the question for public policy is how the pain can be shared equitably. Trying to escape the pain through increased wages and government handouts will simply stoke up the second sort of inflation.

This is not easy territory to pick through for public policy. The first question is whether inflation is an evil at all, or when. Many economists don’t feel that it should be, up to a point. Inflation makes it easier to make adjustments to relative prices (and especially reducing wages compared to consumer prices), and it also allows the possibility of negative real interest rates, reducing the possibility of a zero-bound trap. This idea weighs heavily on theoretical macroeconomists – the idea being that the lower limit on nominal interest rates is zero – which means that it is possible that interest rates can’t be eased when they should be – causing a recession. When I was an economics student in the mid-noughties I read lengthy discussions led by liberal economists such as Paul Krugman suggesting that Japan was caught in just such a trap and that it should implement radical policies to raise its inflation rate (some of mr Krugman’s ideas on how to do this were quite barmy). I have never been comfortable with this. The public does not share this equanimity with regard to inflation. To them the currency is a sacred bond of trust between the citizen and the government. The citizen trusts their savings to the financial system so that they can be used for investment; the government ensures that the currency maintains its value so that the citizen can spend the money later. Inflation is theft by complacent ruling elites – a transfer of wealth from honest savers to devious borrowers. Liberal economists tend to completely underestimate this sentiment, and the idea that inflation corrodes trust in the system of government. The popularity of the euro, for example, in France and Italy is reflection of this. Populist politicians who seek to take their countries out of the euro find that it is a sort of political third rail. Marine Le Pen and Matteo Salvini have both been frazzled on this. Liberal economists tend to think that the euro is an affront to sensible economic management, but to many it has restored their faith in money and civic governance.

So politicians need to take inflation seriously. But that leaves a conundrum. The two main methods of squeezing it out of the system are also unpopular. The first is holding back wages. That stops prices spiralling, allowing inflationary shocks to work their way through quickly. The second is raising interest rates. This should reduce borrowing and investment, deflating the economy and reducing the pressure on both consumer prices and wages. Raising interest rates can be popular with a certain class of conservative savers – but it also tends to dent property prices and cause unemployment, which give a sense of economic mismanagement. A third method of dealing with inflation is less talked of: increasing taxes to reduce the level of consumption. This faces some fairly obvious problems when used on consumption taxes such as VAT – as it just raises prices further; income taxes are more equitable, but hardly a popular alternative.

The British government has some things going for it when it comes to overcoming the inflation surge. The first is that wages are so far lagging consumer prices: by 7% compared to 9%. Moreover a lot of the 7% reflects one-off bonuses. The second thing is that tax rises are crimping people on middle and higher incomes, which in principle should reduce demand. National Insurance rates have gone up and the threshold for higher rate tax has been frozen, creating a fiscal drag effect. This should give the government some scope for alleviating hardship without raising demand excessively. There are three things the government needs to think about doing.

The first is raising benefits for the least well off. The inflation adjustments made to benefits was based on numbers prior to the main surge, and so are inadequate to meed the increased energy and food costs, never mind all the other costs that are going up. The most obvious thing to do is to raise Universal Credit, for which there is a precedent during the covid crisis. This would be costly, but it would also be the best targeted measure that they could devise. There are other benefits complementary to UC, which, apparently, are technically harder to increase. But it is hard to take this seriously as a reason not to act. The basic state pension is also another place to look. The government, however, is very reluctant to commit to serious increases here. The reason may be political – the recipients of these benefits are unlikely to be Conservative supporters (except the state pension). Instead the government has been looking at other benefits, and committing much less money than these measures would require. The rumours are that something is in the works.

The second issue is public sector pay. According to the ONS this has been increasing at the rate of only 1.2%. The government has raised the minimum wage by 6.6%, but otherwise is wants to keep public sector wages down. This would certainly serve to keep demand pegged – but just how realistic is it? My bin men aren’t the first to go on strike – and neighbouring local authorities have been forced to pay a lot more than they had planned. And they are still on strike after being offered an increase this year of “up to 17%” and parity with workers from neighbouring councils. Rail strikes are threatened. There is a staffing crisis in the NHS. If private sector pay is allowed to shoot ahead of that in public sector, there will be recruitment and retention issues. It is not hard to see serious trouble ahead.

The third issue is levying a windfall tax on oil and gas producers, who are making massive profits, and maybe other energy providers too. Economically this is something of a sideshow. A tax would not affect levels of consumption in the economy by much at all. Still, it is useful political theatre and reduces the pressure on national debt – though just how important this is remains hotly debated. The government is reluctant to do this, though the reasons offered look pretty weak – at least as far as the major public companies are concerned. Apparently the government is now trying to link such a tax to levels of investment. That is a theoretically sensible approach, but hard in practice.

Meanwhile the government, and many of its MPs, hope that they can cut income tax before the next general election, likely to in the autumn of 2023, or the following spring. This looks like a neoliberal delusion – a failure to understand the inevitable rise in the scale of government spending in the face of demographic and other pressures. Still, that delusion still seems to have powerful followers.

But the real hot potato is wages. Inflation the moment is primarily caused by supply disruptions that make us poorer. The more we try to keep levels of pay rising at the same pace as consumer prices, the longer the inflation crisis will persist. The biggest headache is in the private sector. The government has little influence over this, but the more pay rises there, the worse the pressure will be on the public sector. This is shaped by the zeitgeist. And here the narrative from the government – and other politicians – is muddled. There are no grave messages that the country is being hit hard by a number of things outside its control, and that we must grit our teeth to get through it. Instead the government wants to portray the economy as in fine fettle, and also that we should expect wages to rise as we move to high-wage high-productivity post-Brexit economy. Government politicians don’t want to admit that the economy is in fact in trouble. The opposition wants to suggest that it is all the result of incompetence that can be put right quickly with a transfer of power. They doubtless hope that the pressures will have eased by the time this transfer takes place.

So my guess is that inflation will persist. Public sector strikes will multiply, and interest rates will start to rise much more rapidly that the mainly token changes we have seen so far. Avoiding this will require strong political leadership of the type we are unlikely to get from anywhere.

Ukraine is not losing Russia’s war. That’s not the same as winning.

By Viewsridge – Own work, derivate of Russo-Ukraine Conflict (2014-2021).svg by Rr016Missile attacks source:BNO NewsTerritorial control sources:Template:Russo-Ukrainian War detailed map / Template:Russo-Ukrainian War detailed relief mapISW, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=115506141

Recently the British Chief of Defence Staff suggested that Ukraine was winning its war with Russia. I’ve only picked up reports of this on the BBC News, and I’m not sure what he actually meant. Ukraine should survive as an independent political entity. winning the war is another matter.

Clearly the war is not meeting Russia’s initial expectations. Their objectives seem to be diminishing. First they wanted to take political control of all of Ukraine. Then they simply wanted to sheer off the Donbas region and the country’s ports on the Black Sea. Now they seem to have let go of their attempts to secure Mykolaiv and Odesa, and the fighting is concentrated on the town of Sievierodonetsk, with Russians on the defensive elsewhere. A major effort to complete the conquest of the two Donbas oblasts has clearly stalled. Meanwhile Ukraine is recovering territory near Kharkiv.

All this is a huge achievement on the part of the Ukrainian people and their armed forces. But take a step back. Russia has still conquered large swathes of Ukrainian territory, especially in the south, including the important cities of Mariupol and Kherson. They have almost all of Luhansk oblast, and most of Donetsk. They are consolidating these gains by establishing administrative control and building defensive positions.

So what would victory actually be for Ukraine? Firstly, the war needs to end. Ukraine must be able to rebuild its infrastructure and start functioning again as a peacetime society, by, for example, freely exporting its agricultural products. That requires Russian consent – a formal ceasefire if nothing more. Then Ukraine must recover territory. There four distinct steps to this. First is recovering territory that is not within Russia’s main territorial ambitions. This is mainly the territory in Kharkiv oblast to the north of Donbas. Ukraine is slowly taking this back, but there remains much in Russian hands, notably around the town of Izyum. Next is recovering the other territory lost since the start of Russia’s attack in February. This is mainly in the south, and includes Kherson and Mariupol. Third is the rest of the Donbas, taken in 2014/15, but which hasn’t been incorporated into Russia itself. And finally there is Crimea, also taken in 2014, but now considered by Russia to be part of its own territory.

How realistic is the prospect of Ukraine taking back these lands by force? Except where Russia has decided to withdraw, Ukrainian counterattacks have so far reclaimed territory in only small steps. They have not shown an ability to concentrate large-scale forces sufficient to make major gains; if they did it would tend to play to Russia’s remaining military strengths. But there does seem to be widespread demoralisation in Russia’s armed forces, and Ukraine has demonstrated and increasing ability to project artillery and airpower. I think the first of my four steps is distinctly feasible. After that it looks a very big ask.

Meanwhile Russia is contemplating a long war. It may reckon that Western resolve has its limits. Extending sanctions to oil and gas is already creating disharmony within Europe. The economic costs to the West are mounting. While Russia is still able to sell large quantities of hydrocarbons, especially at inflated prices, it may find other sanctions quite bearable, especially since the rest of the world is loth to join in. As ever the ruling elites will suffer only relatively minor inconveniences. The Putin regime’s grip on Russia looks secure and it is being consolidated. Any major Ukrainian victory would require this to crack – which it shows no sign of doing. Most of the Russian political class seems to be investing in the war, and they will want to see some return on their losses. This is the sort of dynamic that makes wars so hard to stop.

And how long can Ukraine keep going? Russia’s blockade of the Black Sea, and destruction of rail infrastructure means that it is hard for Ukraine to export the agricultural products that are the core of its economy. It requires to be bankrolled by its allies. It is not hard to see that Vladimir Putin might think he has the advantage in the long game.

At some point Mr Putin might offer a ceasefire, conditional on the main Western sanctions being lifted, but with Russia holding on to most, if not all, of the second category of its gains, as well as all of the third and fourth. This would return the conflict to the frozen status prior to its February invasion. This is a dismal prospect, but it will be hard for Ukraine and its allies to resist. Russia may decide to incorporate its conquests into its own Federation, following Crimea. Whether it does so or not, it will have the major headache of consolidating its control over wrecked infrastructure and a largely resentful (or absent) population. There may even a continuing insurgency, though we must hope not. It would be hard to paint this as a Russian victory – but just as hard to paint it as a Ukrainian one either.

A lot depends on the next couple of months. If Ukraine starts making rapid progress in regaining territory, because the Russian forces are too demoralised to stand firm, then a new dynamic will take hold – although an unpredictable one, as we do not know how the Russian government would respond. But if the war settles into a stalemate, as seems most plausible, then both sides will have to consider a ceasefire.

This is probably the best outside observers can hope for. Russia would claim a famous victory, but the rest of the world will note its enormous cost. Vladimir Putin will consolidate his hold on his country, but internationally it will have been weakened. Ukraine would survive as a political entity, and would be free to engage fully with the West. But many refugees would be unable to return to their homes. The country will need to invest enormously in its defence.

At the start of this war I suggested that Russia lacked resources, and would not achieve the overwhelming victory that many assumed. It would be an equal mistake to exaggerate Ukraine’s ability to reverse the gains of Russia’s aggression.

An economic storm is coming – could this favour the Lib Dems?

Image: Whoisjohngalt, CC BY-SA 4.0 https://creativecommons.org/licenses/by-sa/4.0, via Wikimedia Commons

A bull market ends when the last bear has been beaten into submission. It felt that way last autumn. In 2020 I was astonished when, after an initial fall in response to the emerging covid crisis, financial markets bounced back and then became positively buoyant. How was this a rational response to the the catastrophe enveloping the world? But the bull market just went on.

Then last autumn I started to read articles suggesting that investors must fundamentally re-evaluate asset prices upwards. The argument was based on the idea that interest rates were fundamentally lower than historically, so we shouldn’t be using historical comparisons of yield and other such ratios, which were pointing to over-valuation. This felt a lot like the last bear caving in. There was certainly something crazy about financial markets at the time – shown not least by the craze for crypto-currencies. All this was reminiscent of the insane world of the tech bubble at the end of the 1990s. Loss is the new profit, and so on.

There is something very odd about the way the interest rate argument is used to justify high valuations. The logic is superficially soound. Anybody with a training in finance is familiar with valuation models based on a discount rate – which is the rate you should receive by investing your money in a zero-risk alternative. The lower the discount rate, the higher the valuation. But lower interest rates also suggest low rates of return on investing your money. So how is that investors get richer when returns fall? Common sense would suggest that a world in which the risk-free rate of return on investment is near zero (or negative after inflation) is one that is going to hell in a handcart. Something, somewhere is not making sense. In fact we should be expecting profits and rental incomes to stagnate or fall, and this should undermine valuations.

But asset prices are not set by the use of logically rigorous financial models. They are set by the laws of supply and demand. The modern economy is generating a lot of funds for investment, but there is an unwillingness for investors to use this for good old-fashioned projects that might generate a cash surplus at a future date. That leaves too much money sloshing around in bank accounts or low risk assets such as government bonds. That keeps low-risk returns down, and it also means that banks are willing to loan money at low rates of return. This generates demand for assets that might generate a return at expense of risk (though still not those boring real-economy projects, apparently). This does not necessarily lead to an asset-price bubble: investors could just be more patient. But it clearly has.

Central banks can do something to restore order by pushing commercial banks to raise interest rates, in their role as their regulator and the banker’s banker. For the last three decades they have chosen not to, using various arguments either to deny that there is a bubble, or to say that it isn’t their job to act against it – instead focusing on consumer price inflation and unemployment. It is difficult theoretical terrain, but it is hard not to see politics and the vested interests of the finance industry behind this.

What bursts bubbles? It is when the funds dry up and more people want to sell riskier assets than buy them, while demand often exceeds supply of less risky assets, causing a scramble. This is usually the result of chickens coming home to roost – high risk investments carry a high risk, after all. The great financial crisis (GFC) of 2007-09 was started by defaults in the US property market. It doesn’t help that in the modern world “funds” is a fluid thing and not the movement of fixed quantities of money as we might intuitively expect. This gives scope for chain reactions that can be global in reach. In the GFC this was truly spectacular and served to expand a minor crisis in US sub-prime real estate into a global banking catastrophe. That was the result of uncontrolled financial engineering across developed economies in the previous decade. There was something of a Ponzi scheme collapsing – but to this day supporters of Britain’s Labour government, which was an active supporter of the country’s role in building the Ponzi scheme (aka world-class financial innovation), insist it was nothing to do with them because it was all about US real estate.

The asset price bubble is clearly bursting now. The proximate cause is inflation, causde by widespread disruption to the supply side of the economy – which I discussed last week. Amongst other effects this is causing central banks to radically change course. Interest rates are starting to go up – though not by very much so far, given the levels of inflation. Perhaps more immediately threatening to markets is that Quantitive Easing (the central banks buying up bonds to keep long term interest rates low) is now moving into reverse. This upsets the balance of supply and demand in asset markets. Meanwhile the convergence of disasters affecting economic supply, from the war in Ukraine to covid in China, are clearly destined to make the world poorer, and this affects how people value assets.

The burning question is just how big will this financial crisis get, and what will its consequences be? I will focus on the UK – as we may find that things unfold quite differently in different countries. On the one hand the financial system is not as dangerously wound up on itself as it was during the GFC, limiting the chain reaction. The world banking system does not look in imminent danger. On the other hand, the outbreak of inflation knocks away one of the props upon which the financial system has been based for 30 years or so – the prospect of ever-lower nominal interest rates. This suggests that the crisis will be slower but longer-lasting. The most sensitive part of this is house prices. In the GFC prices dived rapidly as the financial system froze over and it became very hard to arrange mortgage finance. But conditions quickly eased, and prices bounded back. This time it looks as if nominal interest rates will rise steadily and may well stay up. This will impact new mortgages rather than existing ones, as most mortgages these days are fixed rate. So prices are likely to decline more slowly, but the effect could last longer. It is hard to tell about the wider economy. It depends n the state of business finances. If a harsher financial environment causes widespread bankruptcies, we could experience a significant recession. Otherwise things will be much slower moving and the economy will experience a long period of doldrums.

What will the political impact of these be? The accepted story of politics since the GFC is that the crisis provoked a backlash against metropolitan elites, which were seen as having caused the crisis and escaped its worst impact. It was the political right which managed to exploit this the best, with the rise of populist policies. In Britain this focused on Brexit. The Conservatives were the ultimate beneficiaries. Politically the old liberal elites have taken a pounding, though, and they are not such an obvious target for a backlash. An obvious culprit for the trouble is Brexit but the main opposition parties, Labour and the Lib Dems, are reluctant to invoke the B-word. Their sense is that Britons (especially the English) are reluctant to re-enter the polarisation and political warfare set off by the referendum in 2016. They were accused of trying to overturn a democratically fair decision, and many politicians in these parties have taken this message on board. Anyway, both parties want to win back voters who supported Brexit, as well as those who do not want to reopen the wounds.

But as yet I do not see a clear alternative line of attack. What should the government be doing to face the crisis that it is not? It is not obvious to the public whether the answer is more or less austerity. Swing voters tend not to been drawing non-pension benefits, which look inadequate. As yet there does not seem to be a tide of anger about the failure of the state pension to keep up with inflation. Immigration has failed to present as a burning concern to most. The opposition has to content itself with complaining that the government is incompetent and out of touch. But the public has to be convinced that they would do a better job.

But the point is that public anger is likely to gather pace, and it will attach itself to something – but we don’t know what yet. Where will angry, property-owning former Tory supporters go? Labour has not been positioning themselves for these voters since the departure of Tony Blair in 2007; it may forgotten how to. This could yet be a propitious moment for Lib Dems, who are increasingly focusing on this demographic. They have been courting these voters in by elections and local elections, with some spectacular successes. It is early days. No clear national narrative is emerging from the party. But it is too early for that. They need to understand how resentment at failing house prices and a stagnant economy translates into specific demands. But for the first time in a long time, the period the party spent in coalition with the Conservatives in 2010-15 might be an asset. From the vantage point of 2022, with some selective memory, many Tory voters might remember this as a golden age.

Boris Johnson survives another disaster

Image Petr Kratochvil, CC0, via Wikimedia Commons

Boris Johnson, Britain’s Prime Minister, was nicknamed “the greased piglet” by his predecessor and Oxford contemporary David Cameron, for his ability to get out of tight situations. He has demonstrated those skills yet again after last week’s very poor local election results for the Conservatives. Instead the pressure is on his Labour counterpart, Sir Keir Starmer.

The Conservatives lost about 500 council seats across Britain, against the low base of when these seats were last fought in 2018, in the midst of the floundering of his predecessor, Theresa May. Many Tory MPs had supposedly been waiting for these results to decide whether they would ask for a vote of confidence. And yet Mr Johnson looks confident and there is little talk of unseating him. Those Tory MPs will put off their decision until the next event, such as the publication of Sue Gray’s report into lockdown shenanigans. But if these MPs were going to do the dirty, they would have done it long ago. There will always be a reason why today is not the day, and mr Johnson’s supporters are adept at providing them.

Mr Johnson’s confidence is not faked. The party’s disasters in London and Scotland were “priced in” in the popular expression. Not too many Tory MPs seats are at stake in these areas. Meanwhile in the “Red Wall” of former Labour seats taken by the Conservatives they fared better; there is no sign of an impending Tory collapse. The Conservatives also lost a lot of seats in their rural heartlands across southern England. But mostly they lost these to the Liberal Democrats, with some to the Greens, as well as a few to Labour. Mr Johnson seems a lot less worried about these than about the Red Wall. A general election is very different to these local elections, and mostly the parliamentary seats are held with very comfortable majorities. The party knows how to sow doubt into voters’ minds, enough to limit any Lib Dem rise to a small number of seats. Meanwhile his line of attack on Labour, as having been taken over by an evil alliance of out-of-touch metropolitan middle classes and urban lefties, remains intact. There is work to do, but the next election looks quite winnable for Mr Johnson, albeit with a reduced majority. All he has to do is communicate this to his wavering backbench MPS. They seem ready to be convinced.

Which is one reason why the pressure is on Sir Keir. His supporters claim that the results show Labour has turned the corner in the Red Wall. But pulling back a bit from the low point in 2019 is not good enough for Labour. The results show that these seats are still in play – and pose the question of what would happen to Labour in a full strength general election campaign. Sir Keir has devoted all his energy to slaying the ghost of his predecessor, Jeremy Corbyn. This seems to be largely successful: Tory taunts that Labour is in the grip of extremists looks off the mark. That was a huge negative for the party in 2019, when many voters were put off by Mr Corbyn’s leadership. But Mr Corbyn’s leadership came with positives too – he was able to invoke enthusiasm amongst his supporters, and he managed to reach parts of the electorate that others did not. This was most evident in 2017 but was surely still there in 2019. But Sir Keir has lost this, and he isn’t able to rustle up much enthusiasm amongst people in the political centre either – in the way that Tony Blair and Gordon Brown were able to. The local elections have done nothing to allay those doubts.

The second reason Sir Keir is under pressure is a police investigation into an alleged breach of lockdown rules in 2021 while campaigning in a by election. This follows a persistent campaign by a tabloid newspaper, in an attempt to deflect pressure from the Prime Minister’s apparent serial breaches in Downing Street. Because Sir Keir has pursued Mr Johnson so aggressively on this issue, he is accused of hypocrisy, in the time-honoured manner of British politics. The truth is that the lockdown rules were unclear, especially with regard to work meetings, and many people pushed the boundaries without being challenged. The police have also levied fines when they shouldn’t. Sir Keir’s lapse, if that is what it was, does not compare to the goings on in Downing Street under Mr Johnson’s supervision. But in order to keep the pressure up on Mr Johnson, Sir Keir has now said that he will resign if he is fined. Which puts the local police in a very difficult situation. It also puts Sir Keir’s leadership in limbo.

What of the Lib Dems? They had an excellent set of elections, and, alongside the two spectacular by election victories last year, they have fought their way back into political relevance. They only did well where they had local strength, and even then, struggled against Labour in places like London. But they have now built a platform from which they can substantially build on their parliamentary representation – provided the voters are not scared that they might let in a Labour government, as they were in 2019. Lib Dems were quite happy with Labour being led by Sir Keir, as he is unlikely to scare off their floating voters. All this is a vindication of the leadership of Sir Ed Davey, and especially his decision, criticised within the party, of not mentioning Brexit. The party has shown an ability to come back in Brexit-supporting parts of the country, such as Somerset. But will they be able to do enough to stop the Conservatives from gaining a majority?

Mr Johnson’s strengths in political survival and campaigning are not matched by skills in government. His avowed radicalism has dissipated into gesture politics. Meanwhile an economic storm is gathering pace. This would be a tricky challenge for any government, let alone the current hapless one. Can the greased piglet survive that too?

The unravelling of neoliberalism brings economic hardship

The economic reforms in China led by Deng Xiaoping were central to the neoliberal project. Picture by Brücke-Osteuropa – Own work, Public Domain, https://commons.wikimedia.org/w/index.php?curid=8341309

Distracted by the war in Ukraine, and then a holiday, I have not commented on economics for quite a while. And yet economic developments over the last few months have been dramatic. Inflation, long dormant in the developed world, is rising after more than two decades of quiescence; growth is stalling. The expected bounce-back from the covid-19 pandemic is not happening. Given my longer period of silence on this, I am going to take a longer perspective than usual.

One of the most striking things about the politics of the last decade or so is the backlash against the global economic liberalisation of the 1990s and early 2000s. The left labels this liberalisation as “neoliberalism”, the right prefers “globalisation”. Both lay all society’s ills at its door (perhaps that’s not fair on the right, some of whom add “wokeism” to the world’s evils). The left emphasises rising inequality within countries, with the rise of a fabulously rich elite while many struggle to make ends meet. The right would rather emphasis the dislocation of working class communities and values as economic change takes it toll, and especially the movement of peoples and the consequent mixing of cultures. Both have a point. But they overlook the many benefits that global liberalisation has brought. There has been an unprecedented closing of the gap between rich and poor nations, as countries like China and India exploit the opportunities of global trade. Developed countries have experienced a flexibility of supply that has ensured the stability of prices, and eased the process of technological development which in turn has has brought the world mobile phones and much else that has transformed life in so many ways. Along with these came an assumption of perpetual economic growth.

But now the liberalisation is going into reverse. We can take Russia’s war on Ukraine an extreme result of this – it is part of Russia’s rejection of globalisation in a search for national identity, sovereignty and prestige. But the signs are everywhere: America’s trade wars with China and Britain’s rejection of the European Union are but two examples. Just to show that this is trend is global we can add China’s extreme policies to fight the pandemic, which involve its physical isolation, as another case in point. The inflation crisis is one result. Economic policy makers are dealing with unfamiliar problems. Flexibility of global supply chains had been hard-wired into the way they viewed the world. Interest rates were kept low; many countries exploited the ease with which government budget deficits could be maintained. There was almost no such thing as fiscal or monetary policy being too loose, as global supply could respond to almost any level of domestic demand, or so it seemed. Now this comfortable world is gone. Policymakers must now manage think about the sustainability of supply alongside the level of supply. Retrenchment of some sort, though higher interest rates or tighter fiscal policy, looks inevitable.

The first thing to understand about all this is that the ending of the era of globalisation is not just the result of a political backlash. It follows a change of global economic conditions. The most important, and yet least acknowledged, is global convergence. Behind the success of globalisation was a huge global opportunity. In Asia vast numbers of people were engaged in massively unproductive agricultural activity. As these people were moved to more productive activities, especially in manufacturing, world productivity advanced. Japan led the way, followed by South Korea, Taiwan and others, but China’s impact has dwarfed all of these – indeed Deng Xioaping’s application of neoliberalism with Chinese characteristics has been more transformative of the world economy than any single Western country’s policies. Global trade was essential to making all this happen, as the developing economies were able to export surplus production, and developed economies experienced the benefits of cheap imports as a result. But this is largely played out. The main population shifts in China and East Asia have happened, and these countries are experiencing a demographic transition too, as population growth goes into reverse. Other less developed economies have potential (notably South Asia and Africa), but the gains here are harder to unlock, and must be spread more widely, now that there are many more developed economies. The potential gains from global trade, at least for fully developed economies, as well as China’s, have diminished drastically.

Other trends can be added to this. Demographic change in the developed world and China is widely acknowledged, even if its full consequences are rarely given due weight. There are other factors, which I have talked about in this blog. The saturation effect of developed economies, as a growing proportion of spending moves from fulfilling physical needs to status goods, and the not unrelated Baumol effect as a growing share of economic activity moves into activities that are not susceptible to productivity gains. The overall conclusion is clear: economic growth, in the way that we have generally understood it, is over. That is not to say that wellbeing cannot be improved and poverty reduced – but doing so will require much more attention to the distributional effects of policies, and much of the achievement will be through “soft” quality of life effects, rather than increased individual consumption.

But we can’t abandon economic liberalism. Economic efficiency is still important. In fact it is more important than ever as we need to make the most out limited resources. In many contexts the efficiency of the market economy and private capital cannot be improved on. We still need capitalism, but it has to be better managed. Meanwhile the challenges posed by environmental change and demography mean that society must endure more disruption, of the sort that many on the right will resist. Immigration into developed countries remains necessary; we must reduce our carbon footprint by reducing car use and building wind farms in our backyards.

But liberals must face up to a number of challenges. Firstly monopoly capitalism and excessive corporate power must be confronted and managed. Second, excessive levels of wealth and income must be taxed and redistributed. This requires more international cooperation, especially around the closing of tax havens, and pushing the boundaries of privacy rights. Third, the pubic sector must be better managed, with solutions tailored to individual people rather than being the subject of organisational empires. This implies more devolved decision-taking in the public realm, but within a culture of openness and adherence to the rule of law to keep corruption at bay. And fourth we need more democracy – not just voting but meaningful public engagement and consultation – especially at a local level. All of these things run counter to the model of neoliberalism developed in the 1980s and dominant in the following decades in the West. There is a growing common ground between liberals and socialists, though movement is required by the latter too if this is to work.

The era of neoliberalism brought huge economic benefits, and the world is missing them now that era is over, even if neoliberalism brought many problems with it. But that is mainly because economic conditions have changed, and we have new economic priorities. We need a a new understanding of economic liberalism in order to take human society forward.

How does the Ukraine war end?

By Viewsridge – Own work, derivate of Russo-Ukraine Conflict (2014-2021).svg by Rr016Missile attacks source: BNO NewsTerritorial control source: ISW & Template:Russo-Ukrainian War detailed map, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=115506141

I’ve been offline for three weeks, but remarkably little has changed in Ukraine. The Western powers have followed my advice about the scale of assistance to Ukraine. I also suggested that the West place pressure on the Russian-controlled territory of Transnistria; tension there is indeed rising, but not as the result of Western actions. Meanwhile Liz Truss, the British Foreign Secretary has been upping the rhetoric about the scale of defeat she wants to inflict on Russia. This is fluff from somebody talking to Conservative Party grassroots before a potential leadership election. But it poses a more serious question: what is the endgame?

On the ground, meanwhile, little has changed. Russia continues its assault on Donbas, but has so far gained little territory, though it is making slow progress on one of it axes of advance. The battle for Mariupol seems to be nearly over, but further drama is assured with the fate of Ukrainians holed up in the Azovstal steelworks. Elsewhere Ukraine has nibbled some territory back, notably around Kharkiv. Once again the some of the expert military commentary in the media is well off the mark. It was suggested that the more open terrain in Donbas would lead to tank battles more reminiscent of the the Second World War (notably the great battle of Kursk in similar terrain nearby). That is nonsense – technology has changed the way war is fought. Instead the battles seem to be turning on artillery. The Russians do not want to press beyond the range of their low-tech artillery forces; the Ukrainians need to resist continuous bombardment, and strike to back at the enemy artillery if they can. This makes warfare slow-moving, unlike those battles of an earlier era.

Events in Transnistria (the thin sliver in the east of Moldova on the map) are a bit of a puzzle. Grenade attacks on Russian facilities there have been reported, without casualties. The Ukrainian government suggests that these are false-flag attacks designed to give Russia the pretext for involving its garrison in an attack on Ukraine (it is close to Odesa). This doesn’t make a great deal of sense. The Russian garrison is weak (reported as 1,500 men) and difficult to supply. It is surely more useful to the Russians as a source of signals intelligence and such without direct involvement. It is more likely that Ukraine is taking a leaf out Russia’s book and preparing the ground to carry out a “special military operation” to neutralise the Russian garrison. That would be a major humiliation for Russia, given the history of the place.

My earlier analysis was that a stalemate in Donbas would continue until something broke – by which I meant that physical or morale losses, and or logistical strains, cause a dramatic collapse on one or other side. That still seems to be true. Ukraine has longer supply lines than around Kyiv, and Russia is trying to attack them with air power and missiles. Russia’s army is badly mauled and shaken, and it is using prodigious amounts of munitions, though its supply lines are more secure than in the battle for Kyiv. It is hard to tell who will break first or when, or, indeed, if either will. Conflict at the current intensity is not sustainable in the long run though.

A Russian victory would see Ukrainian forces giving ground in Donbas, with the probability of a substantial number of troops being surrounded. Russia would take control of the two Donbas oblasts, plus the southern ones of Kherson and Zaporizhzhia (or most of the southern portion of the latter). This would fulfil one of its stated war aims of “liberating” Donbas, as well as securing Crimea, including its water resources. Russia would dearly like to add Odesa to this, but it might choose to stop there. It would then enter peace talks with the ever-present threat of continuing a low level war that might be escalated. Any peace would result in a formal partition of Ukraine, with effective Russian control of its new conquests. This would be enough for Russia to claim vindication, though in fact its main war aim of “den-nazifying” all of Ukraine would not be met in most of the country. Parts of the Ukraine that the Russian leader Vladimir Putin regards as core Russian territory would have been turned into hostile ground for the foreseeable future. And NATO would have been greatly strengthened, while Russia’s own forces would require many years of rebuilding.

I don’t think this outcome is very likely. Russia’s resources are not limitless, and the damage inflicted on its armed forces is very severe. While its strategy of attacking Ukrainian infrastructure is militarily sound, it lacks the precision munitions and air capability of doing it in the way the Americans managed in Iraq, for example. The West is providing more and more logistical support, and Russia has few good options of doing anything about this – just as America couldn’t stop Soviet and Chinese support in Korea and Vietnam, which went substantially further than the West is doing now.

What would a Ukrainian victory look like? A dramatic collapse of Russian logistics and morale is possible, but not very likely. More likely Russian efforts will slacken and resistance weaken, allowing Ukrainian forces to slowly start biting bits of tis territory back. But this is unlikely to take them any further than the post-2014 frontiers. After this the Russian defensive infrastructure will be too strong. At this point America might offer Russia sanctions relief if they agree to settle. But any substantive settlement, even based on these borders, would be very humiliating for Mr Putin, and it is hard to see him accepting it. He would have to be removed through a coup from the security establishment, unable to countenance the war continuing. But Mr Putin takes his personal security more than seriously.

Meanwhile the Russians are taking steps to consolidate their control of the territory they have acquired, with the “filtration” of the remaining population, the creation of local government structures and the adoption of the Russian rouble. They are trying to find ways through the Western sanctions for militarily useful supplies, using third nations. There is also speculation that they will escalate the conflict into a full war, allowing full mobilisation. The damage to Russian military capability runs deep, though, and large numbers of conscripts won’t help. But it would show that Russia is preparing for a long haul. This would require the West to extend sanctions, potentially upsetting neutral countries. And then winter would approach with Europe’s gas supplies under threat.

What happens next depends on what happens on the ground. If Russia can complete its conquest of Donbas, it is possible that Ukraine and its backers will reluctantly accept a tactical defeat. If Ukraine can recover Kherson and Mariupol, they, and their backers, may feel they have done enough to settle, and Russian political will might crack. Neither possibility looks at all likely in 2022. Which means a long haul. The military intensity of the conflict will reduce, as both sides seek to regroup. It then becomes a battle of political wills, in Russia, Ukraine and amongst the Western powers, especially America and Germany.

That is a grim prospect for the Ukrainian people, especially if they have homes in the east and south of the country. One reason that nobody should start a war is that they are so hard to stop. The world did not need another lesson the futility of war – but that is exactly what Russia has given it.