The next election is Starmer’s to lose

Chris McAndrew, CC BY 3.0 https://creativecommons.org/licenses/by/3.0, via Wikimedia Commons

It looks certain that Liz Truss will become British prime minister this week, and British politics will take a dramatic turn. It is surely an act of political suicide by her Conservative Party.

We are, of course, urged not to underestimate Ms Truss – as so many of us have in the past. And yet, Matthew Parris in The Times tells us that this is a mistaken sentiment – just as it was for Boris Johnson and for Donald Trump – also politicians who won the top job against huge scepticism of their fitness for the job. She really is as shallow and dangerous as she looks.

I agree. During her bid to persuade first Tory MPs and then ordinary Tory members to vote her into the job, she has backed herself into a difficult corner. Her fiscal policies are inflationary; her economic ideas delusional, and she has shown little aptitude for the negotiation and compromise that are essential to any successful political leadership. She is also a stiff and awkward communicator. She enters the job in the middle of an economic crisis – it is hard to see that she has much chance of a honeymoon period longer than a month.

It gets worse for the Conservatives. They have built their political appeal on the basis of being a safe pair of hands with the economy. Whether this claim has been justified is another matter: while the austerity policies with which the party was associated from 2010 until 2019 struck most voters as being careful and sensible, most economists regarded them as being inappropriate at best. Now that reputation for economic competence is under water. Recent polling shows a Labour lead on handling of the economy, as its does in overall voting intentions. This is very dangerous territory for the Conservatives – and Ms Truss is going to do nothing to improve it. The sort of tax-cutting fantasies that are popular on the American right do not play so well with floating voters here. And it is hard to see that inflation is going to improve much under her stewardship – not without a recession, which she is claiming that she can avoid.

Still, many observers think the Conservatives can pull things back. Ms Truss will hit the ground running, as she has had plenty of time to prepare. A new cabinet will be put in place quickly – and the current government lethargy will be replaced by energy and optimistic talk. There is bound to be a honeymoon bounce. Ms Truss might even go straight into a new general election. This would be perfectly justifiable, to give her a fresh mandate, rather than the flawed manifesto of 2019. The Conservatives have been planning for this possibility for some time, as new, and more advantageous constituency boundaries come into effect. They will likely be better prepared than they opponents. But the polling looks dire – and she and all her hangers-on will be dismayed at the idea of throwing away their coup so soon. Opposition is a dismal place to be for those used to government. Still there is a certain recklessness about Ms Truss, and I wouldn’t rule it out.

The main reason that people seem to think that the Conservatives might win the next election is a lack of belief in Sir Keir Starmer, the Labour leader. He is uncharismatic and cautious. It is hard to say what he stands for, and his polling is weak. But is this a Westminster bubble thing? Activists on the left like their leaders to be charismatic and radical – and so do the journalists and others who follow them. It is easy to see their disappointment. But FT columnist Janan Ganesh warns that this bias against the uncharismatic, also applicable to US President Joe Biden, leads us to underestimate them. Floating voters like their leaders to be reassuring and middle of the road – and, I would add, especially if those leaders are from the left. Radicalism is not a positive attribute. The Conservatives are walking into a trap.

The main equation for Labour is whether they will win the next election by themselves, or alongside the Liberal Democrats. The Lib Dem leader, Sir Ed Davey, is no more charismatic than Sir Keir, though he is more experienced. He has made a lot of the political running in the last few weeks on the energy crisis – a subject he knows well as a former Energy Secretary. Like Sir Keir, he is relentlessly un-ideoligical. He is not trying to move the debate to the areas that his activists want to talk about – such as Brexit – but focuses on the areas that are close to floating voters top concerns. The other issue that the Lib Dems have been able to run with is the water companies’ disposal of raw sewage into rivers and the seaside. The Lib Dems are doing well in many Tory heartland seats where Labour is weak. The public ground is being subtly prepared for a coalition – or cooperation at least – between the two parties – in a way that it wasn’t before the Lib Dem coalition with the Conservatives in 2010, which saw Lib Dem support collapse.

It is reported that the Conservatives are preparing a campaign based on defeating the “Coalition of Chaos”, compared with strong and stable one-party government. This follows the successful deployment of this line of attack in 2015, which nearly wiped out the Lib Dems – though it failed in 2017, to the extent that the Tories are likely to avoid the slogan “Strong and Stable”, the basis of the 2017 flop. This line might gain traction if it looks as if a Labour-Lib Dem alliance will not gain enough seats to prevent the Scottish Nationalist Party from holding the balance of power. The SNP will not want to let in a Conservative government, but they will demand another referendum on independence. Labour and the Lib Dems are going to need to think through their strategy on that front with care, and not just hope that the issue won’t come up. But will the prospect of another Scottish referendum scare English floating voters? Probably not enough.

Sir Keir’s strategy was a risky one. He has done nothing to motivate his own activists – and gone out his way to insult the socialist left, the source of Labour’s most energetic supporters. He is unable to project the flair of Tony Blair, who previously made a floating-voter strategy work for Labour. But the Conservatives are playing into his hands.

I am going to be offline for two or three weeks.

Russia’s endless war in Ukraine

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

It is now six months since Russia launched its full-sale war against Ukraine, though hostilities started all the way back in 2014, with the seizure of Crimea. Not much changes day to day on the ground, and it is hard to tell if either side has an advantage. All the talk is of a long war and stalemate. It looks as if this is now Russia’s strategy. Will it work?

I last commented on the war in July. I mentioned then that my two main sources were The Economist and the Institute for the Study of War. The former is by far the better for getting an overall perspective. In the last print edition it had three interesting articles, on Ukraine’s prospective counteroffensive in the south, on life in occupied Ukraine, and a more general one on urban warfare. As somebody who can’t quite let go of his boyish enthusiasm for for military things (I still play with model soldiers), I find its coverage of military thinking of interest. It is, of course, very journalistic. It reports a number of points of view without being clear about the conclusion. In previous blogs I have expressed my frustration with its frequent repetition of the “conventional wisdom” that attackers need a three-to-one numerical superiority. It is clear that this piece of nonsense is actually quite embedded amongst western military theorists. This is a demonstration that the money-machine of the defence industry has a large bullshit factory attached. I shouldn’t have been surprised. All that can be said is that things look even worse in Russia, but at least Ukraine has demonstrated a capacity for intelligent pragmatism in military matters. That is doubtless a reflection of the extreme pressure they are under. They can’t afford bullshit.

ISW provides a bit more detail around the edges, but its quality has fallen off. It has a strong pro-Ukrainian bias. I mentioned in my last article that it nevertheless reported interesting colour from Russian “milbloggers” – commentators with military connections that were often critical of the Russian military leadership, though not of the war itself. Alas this source is a lot less interesting these days. The Russian government seems to be curbing it.

What do I learn from these sources? Well, not very much seems to be happening on the ground at all. Russian attacks in Donbas are slowing down, now that the more obvious targets, such as Severodonetsk have fallen. They are shifting strength to the south, in anticipation of a Ukrainian counteroffensive there. This counteroffensive has been talked up for the last couple of months or so, but not much seems to be happening on the ground, beyond an intensifying artillery battle, with Ukraine using its new advanced munitions to attack Russian logistics. The Economist is suggesting that the whole thing might be a feint. They don’t think the Ukrainians are ready yet. It is hard to tell how much of this assessment is based on hard reality, and how much is from the same western bullshit factory that thought the Russians were going to secure a rapid victory, and who keep talking about the need for a 3 to 1 numerical superiority for an attacker. The critical factor is the morale of Russian forces – which seems to be weak, since they depend so much on hastily raised and poorly trained and led units. These are the raw materials of a spectacular military disaster. On the other hand, plentiful Russian artillery presents a major problem for the attackers. And the Ukrainian military would be right to be wary of sending in inadequately trained forces. They can’t repeat Russian tactics.

With the situation on the ground moving to stalemate, more emphasis is going on symbolic and propaganda attacks. Ukraine’s attacks on Crimea look to be such, the area having been considered safe enough for Russians to use as a holiday resort. and so do occasional Russian long-range attacks on targets in Ukraine’s interior.

Meanwhile the Russian leadership thinks time is on its side. It’s not hard to see why. Ukraine is becoming more dependent on advanced western equipment and munitions, but these are expensive and supply capacity is constrained. Meanwhile the economic war with the West seems to be going quite well for Russia. Its economy is bearing up to sanctions better than expected. Meanwhile high energy prices are causing a major economic crisis in both Europe and, to a lesser extent, in America. There are signs of stress in the West’s political pro-war political coalition. The far right look as if it will come out on top in Italy; Emmanuel Macron has lost his parliamentary majority; Donald Trump looks ascendant in the US. Russia’s President, Vladimir Putin, has a low opinion of the moral fibre of the West. He surely thinks that Western resolve will collapse.

But that is to underestimate the strength of the West – a bit like the many Brexiteers thought the European Union was on the verge of collapse. It is hard to appreciate the strength of something you despise. Germany is the bulwark. Britain has found it politically convenient to back Ukraine’s war, and that will not change, even as it changes prime minister. Donald Trump is two years away from re-entering the White House – and his campaign may well collapse before then. Germany had staked a lot on a cosy commercial relationship with Russia, and access to its gas. Russia has betrayed the trust Germans placed in it, and the country understands that there is no going back. And so before our eyes that country s accomplishing a major economic realignment. The cost is enormous but the country is ready for it.

And meanwhile Russia has weaknesses of its own. Its army was never as effective as many thought, and now it is short of trained manpower and leadership. The problem will take years to fix. The government may have the political will, but it lacks the technical competence. Mr Putin has developed a highly effective internal security apparatus and propaganda machine, but beyond that Russia is being hollowed out.

So where does it end? The world is getting another lesson in how modern wars are easy to start and hard to end. As the war goes on, the stakes rise. What starts as a matter of geopolitical manoeuvre is sold as a clash of civilisations. In the early part of the war (or this phase of it), I speculated on what sort of a settlement might result. Such a settlement, with territorial losses to Ukraine, may come about if American patience is exhausted, and it forces Ukraine’s hand. That looks a long way off. The rise of Mr Trump, and President Joe Biden’s weakness, ironically, makes such an end less likely. Mr Biden can’t afford another embarrassing retreat after Afghanistan. Otherwise it will take regime change in Russia to end the war. It is hard to tell what might precipitate that. Mr Putin looks as secure as ever.

So the world has to endure yet another lesson in the futility of war.

Targeting help to the neediest depends on knowing who they are

This week’s Bagehot column in The Economist suggests that Labour’s policy of freezing energy prices is bad policy (actually “silly”) but good politics. It says that Labour has been too tied to “wonkery” – the design of policies that are clever enough to solve problems without the need to confront awkward choices. Their new policy is a welcome break form the current Labour leader, Sir Keir Starmer. But I don’t think the policy is quite so silly – even if Labour’s suggestions about how the costs will be managed mainly are.

The challenge is huge. British energy prices, especially for gas, have shot up this year. But that is just a foretaste. Further steep rises are in the pipeline: the graphic above, showing annualised costs, culled from the New Statesman (featuring widely quoted projections from Cornwall Insight – who seem to be the only people making them) shows the problem. The median annual household income is estimated to be £31,400 after tax – so costs are rising from 4% to maybe nearly 14% of income for the median household, and it could be double this for the bottom quartile. Other costs are rising too, and, for most people, pay is not keeping up (many senior executives and our local refuse collectors excluded). The media has little difficulty in finding cases of extreme hardship – of people choosing between energy and food for example – and, apparently, not even being able to heat that food up. In one case publicised by BBC News, somebody was selling their furniture to pay their bills. And that is before the forecast price rises have gone through, and before winter brings in the need for heating. Overwhelmingly the public feel that the government should step in to relieve hardship – although how many Conservative Party members share this feeling, while they choose their next leader, is not clear. So far, so clear.

This is where The Economist‘s wonkery comes in. The view amongst Britain’s policy wonks is that help needs to be concentrated on those that need it most. Trying to cap the price for everybody, a policy widely favoured in other European countries, is regarded as a bad idea. For two reasons: first it wastes public funds on people that don’t need it, and second it blunts the market signal that people should reduce energy consumption, and so ease the imbalance between supply and demand that is causing the problem in the first place. This thinking has guided government policy to date. British energy prices have been allowed to shoot ahead of those in the rest of Europe – while the government is trying to target the bulk of its help to the neediest. But this bumps into a major problem. How can the government tell who to help, and who can get along without it? They have two main ways of trying to do this. The first is to help those already entitled to other help, such as Universal Credit – and the second is to ask people to apply for help, and then to assess whether they actually need it.

Both solutions are badly flawed. A problem on this scale is going to hit many people not entitled to benefits, which have become notably stingier over time. I have seen this problem in a different context: the supply of free school meals to struggling families. Many families need the help but are just above the threshold for entitlement. The problem with asking people to come forward is that many will refuse to as a matter of pride, while others who don’t need the help will try their luck, and need to be weeded out in some way, or else the system will subject to allegations of widespread abuse. This last has been the case with help for businesses in the pandemic. This problem is what I have called the Information Gap. The state does not know enough about individuals or businesses to tailor its policies to specific need. It either creates universal entitlements, helping those who are not in need, or resorts to a number of very blunt instruments, which often create political backwash.

The Information Gap is not just some technical problem that can be left to policy wonks to solve. It is one of the central problems of the modern state, and everybody in politics, wonk or not, should be aware of it. There are three general philosophical approaches to dealing with the Gap. One is to use the best efforts of the state to gather information and close the gap, compelling disclosure as required. This is the approach we associate with the Chinese Communist Party; it is highly paternalistic, and seamlessly moves into the state intruding into our private lives in unexpected ways. And the state never gets enough information to solve the problem properly. Its opposite is the libertarian approach. This suggests that the state should not involve itself in helping individuals at all. It should establish a system of security and property rights, and not much else. This thinking is popular n the political right, though not amongst populists. The third approach is solve the problem through a combination of universal entitlements and high taxes. This has recently been popularised through the advocacy of Universal Basic Income. Of course nobody, or almost nobody, advocates taking any of these three approaches to the extreme. Practical statecraft involves balancing all three approaches. Politically, though, we need to develop a sense of in which direction is the site needs to tilt at the current time.

Alas politicians rarely succeed by being honest about the difficult choices involved. Tory leadership contender Rishi Sunak seems to be suggesting that we take the more paternalist approach – but without being clear as to how the information gap is to be closed. His past behaviour in the pandemic suggests that we will accept a high degree of failure and try to shrug it off. His rival, Liz Truss, is suggesting a more libertarian approach – but without being honest about the widespread hardship and business failure that is likely to result. And now Labour is suggesting the use of universal entitlements – but without being honest that this will lead to higher taxes. All three are displaying a dependence on magical thinking. Labour’s “costing” of its new policy is laughable – but the economic illiteracy it is showing is the rule amongst serious politicians, not an aberration.

Personally I think Britain needs to move further along the universal entitlements and high tax route – an approach derided by Ms Truss, but one which the better-run European states favour. That does lead to further problems. Public services will require more discipline to improve their effectiveness, which I believe will have to come alongside decentralisation – with political accountability moving in parallel. That will require deep reforms that people may support in theory, but will resist in practice. Without reform, services will simply gobble up resources without becoming more effective. A further problem, shown in other European countries, is that tensions over immigration have to be managed. If entitlements are high, the public resents people it sees as freeloaders – and there is political mileage in stoking up that resentment, whether fair or not.

So that’s two cheers for Labour – and indeed the Lib Dems whose policies Labour seem to be copying. Alas I don’t see any sign that either party is going to be honest about taxes. But the public, surely, will start to see the need for hard choices. The careers of the two British politicians most egregious in suggesting that no hard choices are required – Boris Johnson and Jeremy Corbyn – have both ended ignominiously.

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.