Tackling inflation means a recession

I remember Britain’s inflation crisis of the 1970s well. I was a teenager, just coming into political consciousness. I started subscribing to The Economist newspaper in mid 1974, between the two British general elections in that year. Back then I was a firm supporter of the Conservative Party, which then entailed being a Europhile. Disillusionment did not overcome me until the end of the decade. Inflation remained the dominant economic issue until well into the 1980s. But these days most people in political power, political or economic journalism, or with economic responsibility are from a younger generation, who have only read about those times. I don’t think they have quite understood what is happening.

A number of things jar. The first is that discussion often fails to take in the difference between real and nominal statistics. Nominal data is simply the raw figures expressed in currency. These become of limited use when inflation takes hold, if you wanted to compare prices and values over time. So the concept of “real” data, adjusted for inflation, was developed. GDP data is expressed this way now as standard – as is almost all material in standard economics courses. Still, there has been a fashion of advocating monetary authorities targeting nominal GDP, rather than inflation. The concern was that if both real growth and inflation were very low, then the economy should be stimulated, even though inflation might not appear to be a problem. For a developed country, I think, the suggestion was that the target should be in the region of 5% per annum – allowing for 2-3% inflation alongside a “normal” rate of growth of about the same rate. It is now running at about 12% in the UK, showing an extreme overshoot. That suggests a case for hard monetary tightening – though, to be fair, with inflation at 9% and projected to go higher, an inflation-only target does the same job.

And that, if you read most comment, is exactly what the Bank of England is doing now, with a 0.5% rate rise recently, the highest increase since it became independent in 1997, we are told. But the “real” concept applies to interest rates too. The real rate base rate, by my calculation is around minus 7%. I find myself asking how can that can be described as tight. More seriously, it suggests that cash savings are being eaten away at a rate of knots. Other investments, apart from residential property, don’t look a much better bet either. Wealth is being destroyed at a rate we haven’t seen since the Great Financial Crisis – though conservative investors would have done well out of that episode in a way that they are unlikely to today (unless they held substantial amounts of index-linked stocks). Of course, it is not hard to see why people seem so unconcerned. The political weight of borrowers, and especially those with mortgages on their homes, has always been greater than that of savers. And higher nominal rates imply more cash flow stress on mortgagees, when income may not be guaranteed to keep pace. Still, I find it a bit jarring that there is so little political pressure to raise interest rates. A backlash from savers may yet emerge.

A further jarring side to the current discussion is that so many seem to think that inflation and growth are variables that are more or less independent of each other. An extreme example comes from Liz Truss’s campaign for the Conservative leadership. She seems to think that policies to support growth, or stop a recession, are independent of policies to curb inflation. she was a bit shocked when Chairman of the Bank of England suggested that attacking inflation would affect growth. At the same time, one her supporters, Suella Braverman, suggested that the Bank is to blame for inflation getting out of hand, and should have raised rates earlier – apparently impervious to the idea that this would have dented the growth that ms truss seems to hold as a sacrosanct economic objective. But growth and inflation are two sides of the same coin. You can’t stop inflation without putting pressure on demand, which limits growth. That’s politics, I suppose, but such comments should be enough for Ms Truss, and especially Ms Braverman, to be laughed out of court. If you you are in favour of tackling inflation, you should accept the risk to growth, and even welcome it. If you think inflation will disappear of its own accord (because it comes from external sources such as oil prices), then you should say so outright. But if you do, you face a tricky question on pay. If pay does not keep up with inflation, then real incomes will shrink – which means recession. So, if you want to avoid that, you should be more supportive of public sector pay increases. No senior Tory is in favour of that. In fact a growing part of inflation now seems to come from a wage-price spiral. This is exactly what you would expect when unemployment is as low as it is, and many employers face problems with recruitment, not least in the public sector. That means that any policies that support growth will make inflation worse.

Still, this is not the 1970s. Then the main industries were heavily unionised, and the public sector was huge, including public utilities, the coal and steel industries and a big car manufacturer. The size of payrises were front and centre of economic management and political discourse; strikes were commonplace, and not subject to the heavy regulation of today. It was much easier for inflation to become entrenched. It was also hard for major businesses, and especially the public sector, to push through productivity-improving changes to working practices. Stagflation was the result. Today, inflation should be much easier to bring under control.

Today’s discourse on inflation is right about one thing: one of the critical issues is hardship inflicted on the less well off. Funnily enough, I don’t remember people talking about this in the 1970s. Perhaps there was less financial insecurity, and benefits were relatively more generous – that is certainly a popular narrative on the left, but I would like to see more evidence before accepting that to be the case. It may just be my tilted memory. It is certainly one of the biggest talking points now, though it is hard to know just how widespread the hardship is. There is certainly plenty of it, as we can see even here in leafy East Sussex.

What is clear to me is that a recession of some sort is required to bring the economy under control. That means a reduction in overall living standards – and public policy should ensure that this burden mainly falls on those on middle and upper incomes. And that points to higher taxes and more “handouts” – at least in the short term. Alas our probably next prime minister is saying the opposite.

The relentless rise of Liz Truss

Hardly for the first time in my life, I have got something wrong. In my recent post on the Conservative leadership contest I suggested that Rishi Sunak would prevail over Liz Truss. This was based on the thought that Conservative members were more sensible than they are usually portrayed to be, and that they would react against the apparent recklessness of Ms Truss – t and favour Mr Sunak’s better presentation skills. I have badly underestimated Ms Truss, as I now think she is unstoppable, but I’m hardly the first person to do so.

Monday night’s TV debate showed why. Mr Sunak badly needed to portray Ms Truss’s economic plans as reckless (an opinion which I share), and especially that they could send inflation and interest rates up. He got his point across pretty successfully. In the process we found him talking over his opponent repeatedly with the confident male assurance that far too many of us have seen senior men do with female colleagues. Would he have done that with a male opponent? You bet he would – he was desperate to convey his message. So it probably wasn’t sexism – it was the opposite, not making concessions to Ms Truss’s sex. But it was a very bad look, and looks matter. Ms Truss held her line firmly; the waves broke over a rock. She had ripostes prepared, and she used them. Mr Sunak’s plans were contractionary (er… that goes with taming inflation); it was all Project Fear (a clever reference to the Remain campaign’s warnings of the economic consequences of Brexit – which have largely been proved right, but which Mr Sunak could not point out); it was all Treasury conservatism and “bean-counting” (true enough – but not actually relevant in this context). She surely did enough to cast doubt in Conservative members’ minds about Mr Sunak’s plans. Meanwhile Mr Sunak’s behaviour neutralised his actually rather impressive confidence and command.

This is a race between the tortoise and the hare, that we have so often seen played out in politics. The patient plotter quietly and relentlessly pursuing their ambitions, while their flashier opponents fall apart one by one. John Major; Gordon Brown; Theresa May – (you can go back further – Jim Callaghan; Ted Heath; Clement Attlee). Like all of these, Ms Truss has endured massive amounts of sneering criticism on her journey upwards. Apart from Attlee, though, none of them were particularly successful once they achieved the summit of their ambitions.

I have in fact met Ms Truss. It was before she was an MP, when she was attending a Lib Dem conference in the later 2000s on behalf of Reform, a think thank devoted to new ideas for public services. We exchanged pleasantries, but I don’t remember much beyond that. Reform’s ideas were (and still are) definitely centre-right – and more to the right in those days of New Labour. They favoured the conversion of state schools to academies, for example – something of a red herring in policy terms. As I remember they had better ideas elsewhere – they had a god line of constructive criticism. This part of Ms Truss’s career tells us two things. First is that she is fluent in the world of think tanks and policy debate. She is repeatedly portrayed as being a bit dim: this is far from true – but it is harder to shake the accusation of shallowness. The second thing this tells is us is that she is a professional politician, and knows no other trade. She was in her late 20s at this stage – was elected to parliament in 2010 and quickly became a junior minister (in 2012), reaching the cabinet in 2014. To be fair, she did train as a management accountant (i.e. a qualified bean-counter, like me, though working in business rather than in the profession) – but she did not take up any serious professional or management role. Her whole life seems to have been political – with politically active parents, and active with the Liberal Democrats at university, before taking up with the Conservatives. She paints this as a political journey, rather than opportunism – and I’m happy to take her word on this. I’m told she was never a left-wing Lib Dem, and the Conservative Party is in the long run a happier place for economic liberals – though deeply out of fashion in the 1990s. But a political career was clearly always on her mind.

Where does this leave us? We have no reason to doubt her conviction to a particular political philosophy (unlike Boris Johnson, for example) – that of being an economic liberal. But her attachment to particular policies never seems to be very strong. She knows all about how to win power, but her ideas about how to exercise it have less “bottom”. This isn’t all bad – disaster can happen when a particular politician has an idée fixe, which they pursue obsessively regardless of evidence. A particular disaster was Andrew Lansley, the first Health Secretary in the coalition government of 2010, who implemented an over-engineered reform of the NHS when it was already suffering reform fatigue. Ms Truss might have the flexibility to change course when things go wrong. The danger is that her yardstick of success is less about actual achievement than the political mood. She is not a conviction politician like Margaret Thatcher. If she was, she would have been completely thrown by Brexit, which she energetically opposed, and now supports with equal energy.

Getting the top job, if she succeeds, is going to be a big shock for her. You can’t get away with sleight of hand. If the economy goes seriously wrong, for example, she can’t simple vanish and blame somebody else. She may be comfortable with rapid changes of course, but she would then find it harder to persuade people to trust her. She is a poor public speaker, verging on disastrous. This was one reason that many people, including me, never took her chances of rising to the top seriously. She simply did not look the part.

As my readers will know, I think her ideas for tax cuts will be disastrous. They will hinder the fight against inflation, which will lead to increasing interest rates. They are a gamble that you can fight inflation without damaging economic growth. Given the obstacles the country is experiencing international trade and labour markets, not least by Brexit, this looks unrealistic. She may well be forced into austerity policies, including public service cuts just as an election looms.

So if I was a Conservative member I would choose Mr Sunak. But Ms Truss has been running this race for much longer than him. And it shows.

NHS failure is hurting the economy. Only higher taxes will break the cycle.

Last Friday I read a rather shocking article in the FT by John Burn-Murdoch pointing out that, uniquely amongst major economies, the number of inactive people of working age in Britain is still rising even as covid subsides. In the EU the number of inactive people has already returned to below the pre-pandemic trend line; in the US the number of inactive people is still above this trend line, but it is falling. About 300,000 people are missing from the UK workforce. The author draws a connection with NHS waiting lists, where a similar number of people have been waiting for more than a year for an NHS operation to deal with a chronic condition. You don’t have to accept the exact causal link between between these figures to understand that a poorly functioning health system affects the size of the economy. The scale of pain implied by the backlogs in NHS care, and the difficulty people have in accessing it, including primary care and mental health services, should make this enough of political priority. But even those who say the economy trumps all else should be taking notice.

Two important insights about the current British economy seem to elude many commentators. The first is that the dominant factor affecting the size of the economy, and hence economic growth, is the number of people that are in work. As I discussed in my recent post on Dietrich Wallrath’s book Fully Grown, this factor trumps all others, and in particularlar changes in productivity. It follows that anybody who cares about growth should focus on this factor above all else. It is why childcare policies are so important, to say nothing of immigration and retirement. It follows that the persistent shrinkage in the UK workforce through the covid pandemic must be an important contributor to the country’s lack of economic performance. The second insight is that Britain is facing a supply side crunch, which is why unemployment is low at the same time as inflation is becoming widespread through the economy, and not just focused on things like energy costs. And following Brexit, international trade (and migration) is much less of a safety valve for imbalances between supply and demand. This means that anything reducing the size of the workforce really matters. And that makes the state of the nation’s health doubly important.

It is evident that Britain is experiencing a health crisis. The NHS is failing to deal with the pressures it is under, and as for policies to stop people getting ill in the first place, that gets scarcely any attention at all. The surge in demand, combined with pressure on supply, arising from the pandemic has broken a system that was already under stress. The direct effect of the pandemic – in terms people getting ill – does not seem to differ all that much from many other countries. The issue is that other country’s health systems seem to be more resilient.

Why should this be the case? The main reason is surely that the country does not spend as much on health care as other developed countries. In an ONS study on comparative health spending based on 2017 data, only Italy spent less per head among the G7 countries. This study also pointed out that the proportion of the spend that was publicly financed (about 80%) was amongst the highest – though in the Nordic countries and Japan it was higher. The two countries in the OECD with the highest overall health spend per capita, Switzerland (about 40% higher than the UK) and the US (about double) had amongst the lowest public contributions. This points to the central paradox of the NHS: the arrangement of care being free at the point of use, combined with an effective monopoly of state provision, causes the country to spend less on health rather than more – because it makes private contribution harder. Why would you pay for treatment that you can get free? You aren’t allowed to top up NHS care with your own money to get better treatment or priority. But if people are driven to use private care because the NHS is inadequate, private care infrastructure starts to undermine the public one – and the universal consent that is the basis of the NHS starts to break down. This has already happened to dentistry and optometry. A recent BBC study has shown that more and more people are going private out of frustration with NHS waiting times, in many cases causing significant financial hardship. So this is a growing threat.

Britain probably took a wrong turning with the design of its health system in the 1940s. Other countries have found a better balance between public and private finance, and deliver better health outcomes overall – though the US shows that you should not equate health spend with health outcomes. But that is a useless insight. It is inconceivable that the country moves to one of the public insurance-based systems (Netherlands and Australia are often spoken of as exemplars) that seem work better. There is only one way to solve the problem and that is to expand the public budget to take up a higher share of the national income. This was the solution hit upon by Tony Blair when he was prime minister in the early 2000s – which it must be said was one of his most successful insights, even though it went against political orthodoxy – he had to outmanoeuvre his chancellor Gordon Brown bring it about. The problem, of course, is how to fund it (or, if you are a follower of Modern Monetary Theory – how to prevent the policy being inflationary). When Mr Blair pushed the policy through, the country was going through a largely illusory period of economic growth, and no hard choices were required as tax revenues were buoyant. But a big problem arose when the bubble popped in the Great Financial Crisis, and much of the government’s tax revenues vanished. Since then governments have sought to protect the size of the NHS budget, but without letting it reflecting increased demand arising from the higher proportion of older people. Meanwhile other public services that affect demand for the NHS, like social care and public health, were squeezed. Meanwhile the country’s growth prospects were dented by those same demographics, to say nothing of the ending of cheap Chinese imports and Brexit, and various other headwinds. The inescapable conclusion is that core taxes (Income Tax, National Insurance, and VAT) must go up to provide health services with the resources they need to meet public demand.

Only shadows of this awkward political choice seem to be affecting the Conservative leadership debate. Rishi Sunak defends the recent rise in NI on the basis that it is needed to fund the NHS to help overcome its covid backlog, and then to improve social care. But this extra funding is inadequate. Liz Truss persists in suggesting that taxes should come down immediately, and stay down, as this will unleash growth and higher tax revenues overall. Though she doesn’t suggest cutting spending, it is not hard to see that this is where that path leads. Both place hope in productivity miracles in the health system to square the circle. Neither want to touch the idea of intrusive regulation to help the country avoid health hazards such as junk food. This position is not necessarily incoherent. Many conservatives think we should push health choices and their consequences out of the public realm and into that of individual responsibility. Such people would not be unhappy with the rise of a two-tier health system with the rise of private care increasingly dealing with the requirements of the better off. It is, of course, a policy that dare not speak its name.

And yet Labour, and the Lib Dems for that matter, are no better. They may accept the ethos of an effective and properly funded public health system, including preventative health interventions (though tastes for this vary) – but they will not say that this requires core taxes to go up. It is easy to blame devious politicians, right, left and centre for this failure to confront the hard choices about the national health. But the problem clearly goes deeper. Conservatives don’t talk about strangling the NHS in the name of individual agency, and Labour doesn’t talk about serious tax rises to boost health funding, because each of these policies would be politically suicidal. The political system crushes minority political views, which both of these are, in the all-or-nothing electoral system. The public has no apetite for political straight talking of this sort. It’s been hard enough to get people used to the idea that stopping climate change means changing our way of life. Health policy, or the awkward choices it entails, does not get anything like this attention. Initially leadership on this kind of issue is required from outside the main political parties. But I hear nothing.

And so we face the prospect of a vicious circle, with the health system and the economy bringing each other down.

No, tax cuts won’t deliver economic growth

Elizabeth Truss – UK Parliament official portraits 2017
Photo: Chris McAndrew, CC BY 3.0 https://creativecommons.org/licenses/by/3.0, via Wikimedia Commons

I’ve been away on holiday for the last week, near Bakewell in the beautiful Peak District of Derbyshire. So I haven’t commented on the race to succeed Boris Johnson as leader of the Conservative Party – which under the UK’s unwritten constitution means the automatic assumption of the office of Prime Minister. I did watch (most of) the two televised debates. You will have to take my word for it that I was predicting that the final two would be Rishi Sunak and Liz Truss even as Penny Maudaunt was the 58% betting favourite to win the whole thing.

As I write, Ms Maudaunt may yet make it to the final two, to be decided by party members, and even Mr Sunak’s place there is not guaranteed. But let’s assume that things turn out as I predicted. Which one is likely to win overall? This is hard to predict. YouGov have made a valiant attempt as polling Conservative members, but to get their sample they are fishing in a large lake for a rare fish. Their polling suggests that Ms Truss has a comfortable lead. This fits with most commentators’ prejudices of the Tory membership, as most think they will prefer Ms Truss’s more ideological pitch – or may even be worried by Mr Sunak’s ethnicity. Actually I’m not so sure, and I expect Mr Sunak to prevail in the end.

These two candidates were always the strongest in the field of seven candidates left after Jeremy Hunt was eliminated. They have both held one of the great offices of state (indeed Ms Truss is still Foreign Secretary), and they are both well grounded in the sorts of choices governments have to make. The other candidates have come up with interesting debating points but show little evidence of actual grasp. Meanwhile both Mr Sunak and Ms Truss have come closest to putting forward coherent policy positions – and they clash. Mr Sunak has taken the continuity position, of keeping taxes and spending much as they are, and defending the various measures put forward to relieve hardship as the cost of living crisis takes hold. This makes sense as he was Chancellor of the Exchequer until very recently. This has been heavily criticised by Ms Truss. She says that the tax rises (National Insurance is going up, alongside Corporation Tax rates) will cause recession. Instead tax should be cut in the short term, to generate economic growth. Inflation should be curbed by the Bank of England – whom she suggested were in large part responsible for inflation in the first place.

Three questions are posed by this challenge. First, will tax cuts generate growth? Second, can Britain afford more public debt? And third, is the fight against inflation best left to the central bank? The first question is in fact quite complex one – and politicians of left and right often try to hide in the complexity to justify populist policies of lower taxes or higher spending.

There are a number of ways that tax cuts can stimulate growth. The most direct is by allowing people to spend more (assuming that it isn’t accompanied by public spending cuts) – which helps take up economic slack. Donald Trump’s tax cuts worked like this, at least to some extent. But there is very little sign of slack in the UK economy. Indeed this is one of the causes of the inflation crisis. Tax cuts will either fuel inflation or suck in imports (and the country is running a current account deficit). A second mechanism for tax to affect growth is by drawing in more capital – fixed or human – by improving incentives. The case for this is strongest for Corporation Tax – as this is something multinational companies factor into their choice of where in the world to invest – but there is little evidence that it is a big factor in the UK. But Corporation Tax is a very efficient tax, and low interest rates are keeping costs of investment generally low. There is in any case a big time lag between any tax cut and any change to investment behaviour – it will have little effect on whether the country avoids recession this year or next. The question of incentives for income taxes is much less clear – it is a classic essay question for first-year economics students. Lower taxes make work more rewarding increasing the incentive to do more, but also the could reduce the need to work to fund your chosen standard of living. If tax rates are very high (for example, the top rate of 83% current when I was calculating payroll deductions in 1976) the chances are that the former predominates – but the case is much harder to make at current levels. Tax cuts won’t help growth, especially in the short to medium term.

Can Britain afford to borrow more, meaning that it is easier to cut taxes without cutting spending too? The Conservatives promised not to do this in their 2019 manifesto. But Ms Truss suggests that we can get round this by classifying a chunk of debt as “Covid debt” to be paid off over a longer time frame. Mr Sunak says this is nonsense. Running a budget deficit in a country that controls its own currency isn’t necessarily a bad thing – it does not work like a household budget. If there is slack in the rest of the economy it is almost a national duty. And there is the argument that if the markets can’t stomach it, you can simply create the shortfall as money. But this can be inflationary, and there comes a point when the providers of finance insist on lending in other currencies. Britain has not been in anything like this danger zone since the early 1980s, when deficits from nationalised industries caused havoc to government finances. Inflation has made the picture more complicated, and debt levels are historically high (in part thanks to the covid crisis). But Ms Truss is probably right on this one – if you can deal with the arguments on inflation.

And here Ms Truss says the Bank of England can take more of the strain in turning the tide. Indeed she has suggested that the bank is partly to blame for the inflation crisis in the first place. In one of the debates she suggested that the Bank’s mandate should be modelled on that of the Bank of Japan. It is hard to credit this. The only way that the bank can fight inflation is to raise interest rates. This restrains growth – indeed the policy makes no distinction between restraining growth and restraining inflation – it tackles one through the other. From somebody who is suggesting that the problem is a lack of growth this is an extraordinary line to take. Further, the inflation problem has largely been brought about by problems on the supply side of the economy (oil/gas problems, Brexit, covid and a spate of early retirements in the workforce). It is hard to see how higher interest rates would have helped. It is simply a shallow attempt at blame shifting.

But none of the leadership contenders have wanted to confront the economic reality of Britain’s position. Britain’s workforce relative to its total population is shrinking due to demographic changes. Those same changes are placing public services under greater pressure, especially in health and social care. There are no soft spots on public spending – squeezing local authorities and benefits merely puts other services, especially the NHS and police, under yet more pressure. We have cut too much on defence. There is no productivity bonanza that will make public spending more affordable – or to be more precise, improvements in productivity are affecting a shrinking share of the economy, and cannot be expected to provide a get-out-of-jail-free card. All that points to higher taxes, or taking the country down the route of high inflation and currency and debt crises. By suggesting that he will only look at tax cuts once inflation has been dealt with, at least Mr Sunak has one foot on the ground. In the land of the blind, the one-eyed is king.

Funnily enough I have more sympathy with the Tory position than most on the left. Public spending (and taxes) should be subject to continual challenge. It is lazy to shrug our shoulders and suggest that nothing can be done. it is better for people to make their own choices n expenditure. There is a huge challenge in making public services more effective and accountable. But fantasy economics does not help.

Why do people still support Boris Johnson?

Readers of this blog will know that I have never admired Boris Johnson, Britain’s outgoing prime Minister. There are many layers to my dislike. His embrace of Brexit is, of course, a starting point. But his laziness, undermining of trust, indifference to truth and the incoherence of his governing agenda can all be added to this, amongst many other things. He is everything I dislike in a leader. He is not nearly as evil as Vladimir Putin (Mr Johnson was careless with human life in the pandemic, but he did not set out to destroy it in the pursuit of imperialism), and somewhat less evil than Donald Trump (Mr Johnson is not a climate change denier or a racist – and he never quite got as far as wanting to subvert elections) – and there are worse people in British politics, such as Nigel Farage, and one or two of Mr Johnson’s choices for ministers: but nobody worse has made it to British Prime Minister before. And yet a sizeable number of people in Britain regret his passing. This phenomenon needs to be understood.

It is hard to tell how many people remain Johnson supporters. The BBC has taken to the use of vox pop as a journalistic technique – going to different parts of the country to assess how people are reacting to events. As journalism it is quite effective – but as a way of judging what people are really thinking it has little value. The samples of interviewees are not random, and those televised are subject to heavy editing. An opinion poll or focus group it is not. Still the BBC seem to have had little difficulty in finding Boris supporters wherever they go. They seem to be older, middle class and predominantly female (which may reflect who they could find on a high street in office hours…). Some newspapers, like the Daily Mail, think there are enough of them to provide material to bolster their views. But opinion polls and by elections (notably the one in the Tory heartland of Tiverton & Honiton in Devon) demonstrate that Boris supporters are heavily outnumbered by people that share at least some of my views of the man.

All commentators have a tendency to paint caricatures, or archetypes, of types of voter to simplify a complicated picture and provide narrative fluency. I am going to try the the same thing by painting a picture of the sort of person who took to Mr Johnson in 2019, and now feels let down after his ejection from power. It is the lower middle class voter. This person is much despised, by both those from the upper middle classes (like me) and working classes. But they are numerical substantial and often electorally critical. This was clearly understood by Margaret Thatcher and also by Tony Blair – the two most electorally successful politicians of the postwar era – although they used this insight in different ways.

What are the characteristics of this group? Middling educational attainment and a degree of financial security; self-employed in small businesses, or employed in supervisory or middle-management roles. They are important users of universal state services and benefits, and especially the NHS and the state pension – but not targeted interventions to help the more needy. They are anxious to maintain their social status, and worried that their limited financial security could be undermined by inflation, higher taxes or a collapsing property market. There is something of a paradox here: they are quite secure, but their political attitudes are dominated by insecurity. This naturally leads them to conservative views, but not the sort that seeks to cut back universal entitlements. Immigration and ethnic minorities are often a touchstone, though many of them belong to ethnic minorities and have immigrant heritage. They are deeply suspicious of smooth-talking liberal types – but very happy to follow higher class people who seem to share their values. The description “radical” is not rated as a recommendation, as it is for those on the political left.

This, of course, is an oversimplification. There are no hard edges with this group, which includes people who most would regard as working class and upper middle class. Many many who fit the socio-economic description have more liberal attitudes. But the shorthand suits my purpose.

This group was successfully brought on board by the Brexit campaign, though in truth they did not need much convincing. Theresa May saw the group as critical, both to secure heartland Conservative seats in better-off areas, and to switch a lot of Labour seats in the Midlands, north England, and Wales – the “Red Wall”. She failed in 2017, but the strategy was vindicated by Mr Johnson in 2019. Quite how the Red Wall seats switched is open to debate. The normal narrative is that conservative Labour supporters switched. An alternative narrative is that the working class voters stayed at home, giving the opportunity for more motivated middle class voters to carry the day. Another factor was that Mr Johnson did a better job of sweeping in Nigel Farage supporters from fringe parties, such as Ukip, who successfully exploited lower middle class voters.

Mr Johnson has not been universally popular with lower middle class voters since the 2019 election. By and large they were not covid lockdown sceptics, and many were scared of the disease – so the government’s often lacadaisical handling of the pandemic upset many. The misbehaviour of the prime minister’s office during the lockdown will also have been upsetting. On the other hand Mr Johnson has taken care to stay true to these voters – more care than with most things. He has delivered tougher immigration controls. It does not seem to matter that immigration numbers have stayed high – it is clear that tougher controls are inflicting pain on both travellers and businesses – and this shows that the government is serious. The Rwanda deportation scheme was tailor-made to appeal to these voters. Indeed, pretty much all government policies described as “divisive” by government critics are seen by them as their voice being heard for once. They are untroubled by Mr Johnson’s violation of conventions and legalities – which tend to be seen as a conspiracy to keep the liberal elite on top. And unlike Conservative MPs they do not have to live in close proximity to the Prime Minister, so they can be more indulgent of his misbehaviour, and more believing of the lies and denials.

Of course the problem for the Conservatives is that there are not enough Johnson loyalists left. They were never enough of them to win based on their votes alone, and Mr Johnson has badly alienated pretty much everybody else. Mr Johnson’s successor will have the tricky job of reassembling the electoral coalition. But if these lower middle class voters stay at home in numbers, or are tempted to vote for fringe parties again, the Conservative Party stands little chance of winning the next general election. Which is why liberal voters can expect little relief from the new regime.

Are the Russians winning the war in Ukraine?

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

As I was drafting this article, British politics went through an extraordinary period of turmoil, and Boris Johnson’s government started to collapse. The dust still hasn’t settled. I will not attempt to comment on developments just yet, though. The war in Ukraine grinds on, and this article is as relevant as ever.

BBC reporting on Ukraine is a faithful representation of the zeitgeist in journalistic circles. It reflects mood swings and momentum rather than a sober reflection of the facts. That mood has recently swung to pessimism (on Ukraine’s behalf) as Russia has completed its conquest of the Luhansk oblast. Is this a fair assessment of the facts?

Beyond the mainstream media reporting, I have found two sources particularly useful to try and get an understanding of what is happening. The first is The Economist (which manages to be both mainstream and fringe at the same time), and especially the weekly summaries in its print edition. The paper tries to get behind the headlines a bit – though it can repeat some silly tropes put about by military experts. One was that the fighting in the Donbas would start to resemble battles fought over the same area in the Second World War, with the use of mass tank formations across open country in particular (this one was repeated by a BBC correspondent). That was always going to be nonsense: the scale of the conflict is dramatically smaller, and modern technology has transformed warfare – not just in weapons, but in logistics. Instead we have seen battles with incremental gains based around towns and highways – with artillery playing a dominant role. Another trope was the repetition of the idea that “in theory” an attacker should have a 3:1 numerical superiority over the defender to succeed. Repetition of this idea (which dates back the General Montgomery in WW2) is sure sign of somebody talking well beyond their expertise. The odds needed by an attacker are completely dependent on context: sometimes 3:1 is not nearly enough, at others 1:3 is perfectly adequate. Still there is a lot of value in The Economist‘s reporting. This week it has a very good assessment of the two sides – concluding that it is too early to tell who is winning, and it will take a long time to tell.

My second source are the daily bulletins from the American think tank the Institute for the Study of War. This body is by no means impartial – littering its references to Russian activity with such adjectives as “illegal”. It has been quite dependent on briefings from the Ukrainian military – and it tends to talk up the idea of “false flag” attacks by the Russians. Its daily reports are a bit formulaic as well. But it tries to give a sober assessment of what is happening. It has improved its coverage significantly by reporting on what it calls Russian “milbloggers” – Russians with military connections reporting on their own assessments of what is going on. These are often very critical of the Russian leadership, while supporting the “Special Military Operation” overall. These sources are often the first to report Russian successes – and they help give the ISW reporting better balance.

So what do I glean from all this? Russian tactics have switched to something that plays much better to their strengths – with the use of heavy artillery bombardments and incremental territorial advances, trying to surround and then reduce Ukrainian strongpoints, tempting the enemy to reinforce a “cauldron” of partially surrounded troops into a killing field. This approach accounts for their recent success in Luhansk. But how successful have they actually been? Some suggest (including from the Russian side) that Ukraine has been playing a cleverer game here – forcing the Russian side to expend copious resources for marginal gains, and then retreating before it is too late. Well, maybe – but Ukrainian casualties have been heavy too. Most people expect the Russian military efforts to pause while they rebuild their forces after suffering heavy losses. Building new cauldrons will be harder as they push into Donetsk.

A second point to make, which you won’t hear on on the mainstream reporting, is that there has been significant action outside Donbas. In particular Ukraine has made some successful counterattacks in the south. It is very hard to know what is actually going on here. The Economist has an online article on this (which I haven’t read – you can get too obsessive…I wait for the weekly printed edition). The ISW reports are patchy. It seems that the Ukrainian military don’t particularly want to draw attention to it, and Russia’s milbloggers aren’t very interested.

Looking deeper, there two aspects on the battlefield that will prove critical. First is logistics. The Russians are burning through an enormous amount of materiel. This is clearly limiting when it comes to the more advanced equipment – precision munitions in particular – but they seem to have deep stocks of less advanced equipment, and plentiful supplies of of low-tech ammunition. I have speculated that China might be helping them with this. On the other hand the Ukrainians have used up most of their Warsaw Pact era supplies, and are now dependent on supplies from their Western allies. And here they are being supplied faster than the materiel is being manufactured. This means that the Ukrainians cannot copy Russian tactics of mass bombardment. They need to use the more sophisticated capabilities of this weaponry to their best effect. To listen to some Ukrainian officials appealing for more firepower, focusing on the disparity of quantity, is not reassuring. But The Economist suggests that Ukrainians do understand this dynamic and are not trying to match the Russians for volume of fire.

The second critical aspect is morale. Here it is the Russians who have the disadvantage. The quality of Russian troops and training was always exaggerated by Western experts (and their own, it seems) – but heavy casualties have made things worse, as well as a neglect for the welfare of frontline soldiers that goes back centuries in Russian military tradition. This could come to matter a lot if Russians are put on the defensive. Strong physical defences are all very well, but defence requires grit. If Ukraine can find tactics that exploit this weakness, while not burning up too much ammunition, they may be able to see the initiative, especially away from Donbas.

A further aspect to think about is support for the war both within Russia and amongst Ukraine’s Western allies. At first sight things seem to be going Russia’s way here. The Russian economy is apparently holding up well, and the government’s has a strong grip on the narrative. Support for the war remains widespread and dissent rare. The most conspicuous sign of Russian economic success is a trade surplus, and a Rouble that has recovered from its earlier troubles. And yet this is not the success it seems. Clearly Russia is having success at exporting raw materials. But a surplus (and even a high Rouble) is a sign that it is struggling to import it needs. Sanctions are clearly hurting. And the Russian regime is worried enough about the Russian public not to declare a proper war, which would unlock mobilisation. This is something that puzzles the milbloggers.

On the Western side, Russia’s stranglehold on natural gas looks scary, and high petrol prices are causing widespread hardship. Problems with a liquid natural gas terminal in Texas, amongst other mishaps, mean that plans to substitute for Russian gas are behind. Western leaders are staring at a bleak winter. Pro-Putin populists in some countries are recovering their poise. It is no wonder that the thoughts of some leaders remains on how to bring the war to an end. Russians, Chinese, jihadi terrorists and others sneer at the ability of Western democracies to withstand pain – but this is always a mistake. It helps that many of the panful adjustments required are this that are needed to combat climate change.

What next? We may soon be moving into a new phase of the conflict. Ukraine is likely to move onto the attack. But in order to turn the tide properly they will have to cause something of a panic amongst the Russian troops. That is possible. But come the winter exhaustion will set in – and thoughts will turn to a ceasefire. Before then the Ukrainians are not ready to contemplate such a thing, while advanced Western weapons flood in. Neither will Russia, who doubtless think that logistics are on their side, and that Western patience will not last. A grim summer awaits.

Fully Grown: why economic growth has slowed down

This book was one of The Economist‘s books of the year in 2020 – and I bought in time for Christmas. It has taken me until now to read it. It tackles the question of why economic growth in the US, along with the rest of the developed world, slowed in the 21st century compared to the last half of the 20th. It is a topic that has troubled many, but the usual response is to attribute it to whatever the commentator’s pet theory happens to be, throwing in a few pieces of circumstantial evidence in support. I am as guilty of this as anybody: using my theory that it is mainly the Baumol effect – a switch in the economy from manufacturing to services. The virtue of Dietrich Vollrath’s book is that he is led by the evidence – though restricted to the United States. He concludes that, mostly, the slowdown arises from the problems of success, rather than being any failure of economic management.

Interestingly, Professor Vollrath admits to starting his search with his own pet theory: that the slowdown resulted from the growing concentration of big business, their consequent market power, and the resultant higher profit margins. That is doubtless why he devotes three whole chapters to it compared to one on Baumol – but his conclusion is that it did not have a major impact on growth – and its effect is even ambiguous. His overall conclusion is that the growth rate (in GDP per capita) slowed by 1.25% per annum, from 2.25% to 1.00% on average, and that 0.8% of this is due to demographics (i.e., a smaller proportion of people working), 0.2% is due to the Baumol effect, 0.15% due to a slower turnover of staff and firms, and 0.1% is due to a decline in geographic mobility. Changes to tax and regulation, rising inequality and trade with China were all examined but had an overall effect of nil. Both the demographic effects (smaller families, retirement, etc.) and the Baumol effect arise from choices to be expected as societies grow more prosperous – so he calls these the results of success. This, of course, fits in with what I have been saying for some time – though in my commentary the Baumol effect figured larger than demographics. Professor Vollmer finds this effect to be real but slow-acting, and dwarfed by the effect of demographic changes.

How much does this apply to Britain? According to some statistics I have found on an internet search, the growth of GDP per head in the UK was 2.4% per annum from 1950 to 2000, and 1.1% from 2000 to 2016 (actually a bit more than the US – but this may an issue with the statistical series) – a very similar level of decline. I don’t have comparable figures on demographics, but the same sort of thing was going on in the UK, with a clear baby boom in the 1940s and 1950s, followed by shrinking family sizes. If anything family sizes were shrinking further – and we had a lower rate of immigration. This week The Economist has started a series on Britain’s productivity problem – but it is hard to tie in their data with this book. It is looking at a shorter time period, and comparing output per hour worked with other countries. And Britain does seem to be less productive than many other countries – and productivity has fallen since the great financial crisis in 2007-09, though it is not so different from other countries in that (it has a similar decline to the US). But productivity figures are notoriously difficult to calculate, and they are not necessarily fully comparable from country to country, even in the same OECD data set. The most important conclusion arising from Professor Vollmer’s calculations is that, so far as the overall economy is concerned, productivity is liable to be trumped by demographics. And here the position in Britain post covid is grim. A lot of people have dropped out of the work force, though it is unclear why (early retirement looks the most likely). Immigration remains high, but with extra bureaucratic hurdles since Brexit, imported workers aren’t necessarily going to the places of highest stress.

One conclusion of this book is that it is hard to detect any growth effects from deregulation or tax changes – so it is hard to see that the government’s hopes for increased productivity will have much effect. The partial exception, according to Prof. Vollmer, is changes that allow greater housing mobility. Allowing more homes to be built in areas of high productivity is the leading aspect of this, and the government shows no sign of wanting to deal with this. One policy not talked of in the book is the idea of “levelling up” – of improving the productivity of lagging regions to be closer to that o the leading ones. According to The Economist Britain has a particularly big regional gap – so there is the possibility of growth through catch up. This probably entails substantial devolution of tax-raising and spending powers, which Westminster is fond of talking of, but never actually does much about. So the outlook for GDP growth in the UK looks weak – even if, as the book suggests, a lot of this is actually a problem of success.

This book does have a couple of major defects, which arise from the way the problem has been framed. The first is that there is no investigation of the impact of status goods (or services). These are significant because their economic characteristics differ from normal goods – the point of them is that they are expensive and so not generally accessible. Low productivity is often a feature, not a problem. It is to be expected that as an economy becomes more successful, the demand for status goods rises. This would have a very similar effect to the one Baumol identified (and, indeed it doubtless contributes to the Baumol effect, as a lot of services are status symbols). But I have seen no attempt to prove this statistically – and Prof. Vollmer does not even mention it. It may also be a factor in the rise of market power he discusses. Apple’s high margins, for example, arise in part from the fact that their products have become status symbols. Modelling the effects of status goods on the economy at large is complex, however – and it is not well supported by established statistical categories. So it is not surprising that the book ignores them. But a reduction in economic growth as a result of a move to status goods would support its “problems of success” thesis.

The second disappointment is the narrow way it deals with the effects of globalisation. It solely looks at the effect of workers displaced by the move of production in America abroad, and in particular to China. It finds a mild negative effect on productivity. Prof.Vollmer keeps any benefit of lower prices to American consumers from increased trade out of the scope of his analysis. This is disappointing, because I believe that it could be significant. I’m sure it was in the UK, whose economy is more exposed to world trade, as price reductions on imported manufacturing goods had a significant impact on overall prices in the first part of the 21st century. I’m not sure how this would work through into the statistics though (the D in GDP stands for “domestic” after all). This should manifest as a positive effect on growth in the late 1990s and early 2000s, going into reverse afterwards. But it would make the story significantly less tidy, so it is easy to see why Prof. Vollmer left it out.

This remains an important book, however. Economic growth attracts an awful lot of commentary from economists and politicians. Given that, it is surprising how weakly understood the phenomenon is, even amongst people who should know better. Alas that includes the writers at The Economist, whose article on Britain’s economic growth only mentions the effect of demographics in passing, and superficially at that. And that from a journal that made the book recommended reading. This is yet another sign of just how stilted most public discussion of economics remains.

Can the monarchy cope with modern politics?

Bonfire consumes Isfield’s Jubilee beacon, 2 June 2022

The Queen’s Platinum Jubilee has been a happy event in our East Sussex village. On Thursday evening we lit a beacon, and then, this being East Sussex, we burnt it in a bonfire. On Friday afternoon we had a lovely street party. Today it was the village fete, where I won a bottle of whisky in the raffle. There is also a treasure hunt and a scarecrow competition.Everybody was in the mood for a celebration.

But what are we celebrating? Nominally it is Queen Elizabeth II’s remarkable achievement of reigning as monarch for 70 years. And she certainly commands a lot of respect and affection among the villagers here. Most of the bunting features patriotic union jacks. But for many it more of a question of “any excuse for a party”, especially after two years when local events and activities have been badly disrupted. In the grim days of 2020 (when we moved into the village), it was a common sentiment that we should have a big party when it was all over. It isn’t really all over, but for many this is the party. The theme of a number of the scarecrows (which are meant to reflect aspects of the Queen’s reign) were the heroes of the pandemic. Other than that it is mainly pop stars; the Yellow Submarine won.

We haven’t been watching the national events on television, beyond summaries on the news. But that, and the BBC radio coverage, was bad enough. The thing I most hate about monarchy is the obsequiousness that surrounds it. And the BBC, along with many others, is laying it on by the shovel load. This is an ancient tradition, though. The obsequiousness doubtless goes back to our Anglo-Saxon kings of the Dark Ages, and perhaps the Celtic chieftains that preceded them, and it unites them with Persian and Chinese Emperors, Russian Tsars and Thai kings. The strange thing about our monarchy is that the tradition of obsequiousness has outlasted the political power that the institution wields. It makes me yearn for a republic – though that does not always solve that particular problem.

It is a moment to reflect on the institution. The British seem to be quite pragmatic about it. The reason usually offered in the monarchy’s defence, given that few accept that it is divine will, is that it works. Britain has a long-standing and functioning democracy. The monarchy has been part of the web of institutions that has upheld it. It is not obvious to most that republics manage these things any better; the country’s one attempt at being a republic in the 17th century is usually regarded as a failure. Meanwhile all the pomp adds a certain dignity to proceedings. It is surprising how often people justify it on the basis that it is a tourist attraction.

But does it work really? The overwhelming impression of the institution’s standing is one of political weakness. Its actions are dictated by a series of written and unwritten conventions which are designed to keep the institution away from any kind of political controversy. According to Netflix’s highly engaging drama The Crown, the institution has an enduring horror of Edward VIII, the uncrowned monarch of 1936, and Elizabeth’s uncle, who nearly destroyed it. Edward saw a more dynamic leadership role for the monarchy, which included a distinct sympathy for fascism. This drama does suggest that the Queen was a bulwark against any kind of undemocratic coup, even if led by aristocracy and institutionally embedded types. Just how close the country has ever been to such a coup I don’t know, though.

There is something to be said for a weak titular head of any institution. The French and American model of combining the role with that of chief executive is not obviously better, as the role becomes too strong, reminding us of what we dislike about the old political monarchies. Then the obsequiousness was driven by real fear, along with ambition. But if the titular head becomes too weak, there is too little check on the chief executive role – which politically in Britain is that of the prime minister.

This matters more than it might in Britain because the other checks on the prime minister are so weak. Nominally he or she is the creature of a democratically elected parliament. And this is true up to a point. Right now our prime minster is running scared of his Conservative Party backbenchers, who may even be able to oust him from power. But this drama reveals something rather worrying. Constitutional checks on the executive can depend on the internal rules of political parties – which lack proper democratic validation. And there are times when the prime minister has complete mastery over their party. And then there are very few other checks on their power at all.

We had a rather scary reminder about this in the period from 2017 to 2019 when the Conservatives did not have a parliamentary majority. At first Theresa May cobbled together an agreement with the Democratic Unionist Party of Northern Ireland (the DUP), and secured a parliamentary majority – the country’s principal means of democratic validation. But, as relations with the DUP proved rocky, and rebellious factions emerged within the Conservatives, Mrs May’s government relied less and less on parliamentary validation. The parliamentary session was prolonged so as to avoid the necessity of a Queen’s Speech, and endorsement of the premiership. The government relied increasingly on executive powers without consulting parliament. Finally Mrs May’s position became untenable and she resigned as Conservative leader. She continued to be prime minister while the party chose a new leader, and then resigned from that office once Boris Johnson was chosen as her successor. She then advised the Queen to appoint Mr Johnson as prime minister, and the Queen complied. What is so wrong with that? Mr Johnson did not command a parliamentary majority, and he had only be chosen on the basis of his party’s internal leadership election process. Mr Johnson then assumed all the massive executive powers of the British state without ever asking parliament to validate his authority. In fact he went to extremes in order to avoid such a validation. In the end he asked for parliament to be suspended so that he could govern without democratic interference, based on the thinnest veneer of a pretext. It was not the Queen that stopped him. It was the Supreme Court. The Court has since been attacked for standing in the way of the will of the people – when its actions were actually based on the opposite notion – that of forcing the government to be accountable. And yet I have heard few people try to defend the Court. Mr Johnson’s version of history risks being accepted by default.

And then there is the elephant in the room. Parliament’s claim to represent the will of the people is a weak one. The electoral system means that governments are usually elected based on a minority of votes. Well perhaps what counts is whether the system used has broad popular consent, and people abide by the results. That is mostly true, with the important exception of Scotland. But how long will this continue? What puts the system at risk is political polarisation. Then parties want to win elections by any means necessary, and then use that power to implement an ideological programme – ignoring the idea of broad political consent, upon which a system such as Britain’s depends for democratic legitimacy. Once that happens there are few institutional checks on the executive – and certainly not the monarchy. And it does not even need a majority of voters to achieve such a result.

That is certainly true of the Conservatives under Mr Johnson. The party’s leaders actively seek “wedge issues” to divide the country and motivate its supporters. It was true of Labour too under the leadership of Jeremy Corbyn. Its new leader, Sir Keir Starmer, is taking it in the opposite direction, of being an un-ideological party of broad consent. The party that he leads is less sure that this is the right course, having 9in their eyes) come so close to success under Mr Corbyn. Polarisation has already deeply infected the politics of America. France seems dangerously close to it too. An elected head of state, separate from the executive, might act as a check on an overly divisive executive. In 2019 tan elected president might have been able to insist that the prime minister secure a parliamentary mandate or see if somebody else could, and failing that, call an election. That would have been the democratically proper way to proceed.

But then a small voice suggests something else to me. Perhaps the monarchy is helping the country avoid polarisation. The Jubilee celebrations are striking for for the way they are bringing Britons together. Diversity is celebrated. Perhaps the country is stepping back from polarisation after the nightmare of the Brexit years. The Labour Party has become more popular with the country at large after Sir Keir’s change of direction, even if few have enthusiasm for it. Mr Johnson’s wedge issues are failing to get traction. If the monarchy has a single message, it is that we should all get along together as a country (and also to get on better with other countries too).

In that perhaps the institution is a beacon of hope. Let us hope it is not consumed by the bonfire of party politics.

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.