When he was re-elected in 2024, Trump promised to bring down prices; instead, he raised them with his tariffs and his ill-fated war in Iran. The inflation rate, which had been running at 3% when he took office, is now approaching 4%. No wonder Trump’s Republican Party suffered a crushing defeat in Tuesday’s mid-term elections, in large part due to the nation’s worsening cost-of-living crisis. This week, even his own past supporters turned on him.

But the cost-of-living crisis that is reshaping American politics is not confined to the US, nor is it likely to go away soon. The UK is facing similar inflationary pressures. The Office of Budget Responsibility (OBR) now expects this year’s inflation rate to average out at 3.1%, up from the March forecast of 2.3%. It expects inflation to peak next year at 3.8% before settling down for a year-long average of 3.4% — a full 1.4% above its March forecast. 

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By Justin H. Vassallo

Much of the discussion surrounding the current inflation spike focuses on the impact of Trump’s war on the price of energy. The assumption is therefore that the high prices are temporary. The OBR assumes that by 2028, the UK inflation rate will be close to the Bank of England’s 2% target once again, making this inflation shock transitory. Ahead of the mid-term elections, Trump made much the same argument: that the price surge will prove fleeting.

Unfortunately, we’ve heard this before. The word “transitory” doesn’t have great currency among economists these days. The original inflation surge of 2021 was initially waved off by central bankers as a brief aberration, but here we are, in the sixth year of above-target inflation that we keep hearing is about to come down. Other than during a brief period in 2024, inflation has not returned to the 2% target Western central banks have set for it. 

In fact, since last spring inflation has been on a steady upward march — a trend we cannot attribute merely to the energy shock caused by the Iran war. In Britain, the European Union, America, Canada and Japan alike, the core inflation rate — which strips out energy and food prices to try and capture underlying pressures — has been stubbornly above target. At some point, you have to ask: when does this stop being temporary?

It appears there is something more than just an energy shock driving up inflation. For a while now, some economists who study the economic impact of climate change have been predicting that the inflation rate will move permanently higher. We may now be in the foothills of what could turn out to be higher peaks.

It had long been assumed that a gradual alteration in climate would over time affect the global economy, with countries such as Canada actually benefiting (from longer growing seasons) and poor tropical countries losing out. But we’re now seeing that the increased incidence and severity of extreme weather events is having a greater impact. Such events hit countries such as Canada harder, since there is so much more infrastructure and hence capital to be damaged or destroyed. In 2023, a summer of wildfires in Canada made it impossible for people to work in agriculture, forestry and mining in affected regions, while rail transportation had to be suspended, further hindering economic activity. As a result of smoke forcing citizens across large swathes of the country to stay indoors, there was an economic contraction that knocked the country’s per capita income back 1.3% that year.

The problem isn’t limited to Canada. Since the Sixties, the average annual number of extreme weather events has risen sevenfold. In the past few years, they’ve begun to take an unprecedented toll: of the 10 costliest extreme-weather events on record in the US, six occurred in the last decade. In Europe, this was seven. In Canada, nine out of 10 of the most costly years insurance companies have ever had to bear have taken place since 2011. These events do the most economic harm in the nations with the most capital to destroy: in 2023, four-fifths of the economic damage due to extreme weather occurred in developed countries. Not only are these catastrophes damaging property and infrastructure, they are raising insurance costs, which ultimately works its way into prices. 

On top of this, rising food prices due to poor harvests resulting from drought, storms or flood damage are driving food inflation. The reason beef prices in America have risen so fast is that a persistent drought, attributed in large measure to higher temperatures, has depleted the US beef herd. President Trump may say climate change is a hoax but such declarations can’t stop prices rising. And the rising cost of food has an outsized influence on voters’ perception of inflation. 

Similarly, while the surge in electricity prices has been attributed to such things as Britain’s gas-dependent pricing system or the excessive demand of data centers in the US, the truth is that energy bills are rising largely because of the costs involved in strengthening infrastructure against harsher weather. One study estimates that electricity bills could rise by as much as 25% in the US to cover these impacts. In that vein, Avanti West Coast rail recently had to pay British customers £20 million in refunds for delays caused this summer, mainly because the current train tracks were not built for such temperatures. Higher running costs will, of course be passed on to customers.

Since December 2019, there has been a relentless pressure on climate-sensitive price categories. US consumer prices have risen by 29%, but home insurance has risen by 37%, electricity prices by 43%  and food prices by 35%. Similarly, in the UK over the same period, consumer prices have risen 33% but food prices have risen 38%. Such pressure raises the latent inflation rate. The result is that when exogenous shocks such as the recent oil spike occur, their effects are amplified. In his testimony to the Treasury Committee in September, Bank of England Governor Andrew Bailey and his colleagues said that climate change is causing greater volatility in supply shocks and that, over time, the subsequent pressure on inflation will be more upwards than downwards. 

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To make matters worse, higher inflation will be structural, not cyclical — which is to say the normal approach of central banks, of raising interest rates to reduce demand, won’t work. Assuming interest rates remain permanently higher, that will ultimately affect the pricing of other asset markets. 

Take the property market. Benjamin Keys, an expert on the financial risks of climate change at the University of Pennsylvania’s Wharton School, suggests that falling house prices are being obscured by countervailing cyclical trends. Though rising storm risks have sharply lowered prices in parts of Florida, the Covid real-estate boom and the trend of boomers retiring to warmer climates have helped to soften overall price declines. Keys argues that unlike earlier falls in asset prices — which were caused by cyclical bubbles that, once burst, eliminated excesses in the economy and put markets back on a sustainable path — such re-pricing will occur for as long as climate change progresses. This permanently higher inflation rate is a feature of something I call the “Icarus effect”: that economic growth triggers a set of ecological, social and political changes which raise the cost of further growth, ultimately slowing it down. 

Though the UK Chancellor John Healey may not be a climate denier like President Trump, he has joined many other Western governments in walking back some of Britain’s Net-Zero commitments in order to lower prices for consumers. Yet while this could reduce costs in the short term, it will aggravate the underlying problem. By trying to reduce inflation, Western governments could inadvertently entrench it.

Yet a rude awakening awaits those who imagine that ending the Iran war or booting the GOP from power will end the inflation crisis. For much of this decade, inflation has been a problem for consumers and firms, and a salient political issue for voters. And although policy choices like the Iran war have no doubt played a role, today’s structural inflation has a much deeper cause: it is the unintended price of voters’ choice to end the model of neoliberal globalization that defined the post-Cold War period.

The process of deglobalization began under Trump I, accelerated during Covid and Biden’s tenure, and has become more destabilizing since Trump’s return to the Oval Office. It is greater and more challenging than any one policy agenda. High costs of living are thus likely to remain impervious to changes in policy or shifts in party power. 

Inflation is baked into deglobalization. Major revisions to global trade — whether stemming from war and sanctions, protectionist concerns, or efforts to combat climate change — entail major changes to production and distribution. These changes are far from seamless, since they involve finding new suppliers, retraining workers, or rebuilding factories. At each step, there is a risk of bottlenecks, shortages, and price spikes. 

Sweeping programs to reduce immigration likewise reverberate throughout the labor market, creating disruptions in critical sectors like home construction, food production, and health care. “Choke points” — a term that became ubiquitous at the height of the pandemic lockdowns — will continue to multiply, self-inflicted or not. Consequently, rising prices show no sign of abating, despite optimistic forecasts by the Federal Reserve that interest-rate hikes will bring inflation close to its 2% target by 2028.

Of course, the main driver of inflation at present is the cost of energy, brought on by US foreign policy — another dark irony, given Trump’s disdain for fuel alternatives and pledge of $2 gas. The high cost of energy affects not just home utilities and the commute to work, but nearly every system that furnishes the basic comforts to which Americans are accustomed. It also exacerbates the nationwide housing shortage: building becomes more expensive, as does borrowing (the latter prompting current owners to hold on to their current homes purchased at lower rates).

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But the Fed’s main method for taming inflation, rate hikes, afflicts workers and small businesses who have weathered messy tariffs and exploding health bills. As household debt continues to reach historic levels, higher interest rates mean heftier borrowing costs. Mortgages, car payments, and credit-card bills — all get more expensive to carry, so more of each paycheck goes to interest. Simply treading water in today’s economy will become more expensive, further diminishing purchasing power.

Yet a Democratic Congress is unlikely to generate a different and workable approach. The simple dynamic of divided government and mutual enmity with the White House is certainly one factor, as is the Fed’s insulated control over monetary policy. But there are deeper political reasons at play that inhibit Democrats from offering more than vague promises to crack down on price gougers, reclaim Congress’s authority over trade policy, and curb immigration raids.

For starters, the “easiest” solutions to inflation are the very policies that gave rise to Trumpian populism in the first place. That naturally has created some hesitation in the Democratic coalition to do more than attack Trump’s overreach and corruption. A return to “free trade,” for instance, would probably ease price pressures. Yet the bipartisan embrace of trade during the 1990s and early 2000s devastated America’s industrial heartlands, creating the working-class grievances that made Trump appear attractive beginning in 2015. While many former Trump supporters now bemoan his tariffs, this frustration doesn’t amount to a wholesale rejection of all protectionism — at least, not in places like Michigan, Wisconsin, and Pennsylvania, where Democrats have suffered the most humbling setbacks.

The same predicament is true of immigration. Labor shortages are real, prompting mainstream economists and business lobbies to urge a more liberal approach. But it would be politically untenable to resume a laissez-faire border policy akin to Biden’s, which not only worsened Democrats’ standing with traditional blue-collar workers, but fueled defections to Trump in normally blue, immigrant-heavy cities and counties in 2024. A majority of voters may now recoil at the inhumane methods employed by Trump’s deportation regime. Yet the preference for a tighter border overall will prevail so long as immigration flows are associated not with lower costs and dynamic growth, but new burdens on housing, public services, the safety net, and social cohesion.

In both cases — trade and the border — Democrats are chary of defending the pre-Trump state of affairs. In an electoral environment that could see the first major upsets in red states in a generation, Democrats don’t want to alienate Right-leaning independents and other swing voters fed up with incumbent Republicans. Surprisingly competitive Farm Belt states, such as Iowa, Kansas, and Nebraska, are emblematic: their electorates are unhappy with ICE’s unaccountable conduct and the high prices generated by Trump’s tariffs, but they aren’t keen to return to globalization, either.

As if that weren’t complicated enough for Democrats, they also have their “Brahmin Left” base to worry about. Mainstream Democrats, after all, once loudly touted the benefits, cultural and economic, of globalization. They thus can’t afford to be seen by the liberal base as capitulating to any aspect of Trump’s restrictionist agenda. Democrats, accordingly, are reluctant to thread together a set of proposals that may irk “woke” progressives in the short-term, even if such policies would help set the stage for a commanding Democratic victory in 2028.

The Right, meanwhile, seems paralyzed by Trump’s succession of own goals on inflation. Retreating from either protectionism or hard-line immigration policies is a political no-go as long as Trump leads the party. That has forced vulnerable Republicans to defend his record, even though many privately regret shredding the neoliberal order that Reaganite Republicans had pursued before Trump. Republicans are also afraid to break from the White House’s accelerationist position on the AI build-out, the energy demands of which are inflationary and probably unconstrained by high interest rates.

Meanwhile, for all the fanfare over the past decade about the GOP becoming a vehicle for the “multiracial working class,” fealty to corporate profits remains an article of faith across the party. A few individual Republicans may gesture toward collaborating with Democrats to tackle the cost of living, but when push comes to shove, the legislation and congressional votes never actually materialize. Deviating from the conservative donor class on this point is punished severely.

Partisan myopia also forces both parties into positions that prolong inflation. Neither party, for example, is prepared to reform the immigration system in a manner that would promote non-inflationary growth while also prioritizing social stability. That would mean some combination of external and internal enforcement (anathema to many Democrats) and a willingness to grant citizenship to long-standing residents and welcome foreign workers to labor-starved sectors (a nonstarter for Republican hawks).

Nor can the two parties agree on which sectors warrant tailored industrial protection and which would benefit from integration with traditional allies in Europe and middle-income states in Asia and Latin America. Silicon Valley’s unrivaled political influence is another dilemma. Democrats increasingly talk tough about Big Tech but are hardly unanimous about how and to what extent it can and should be reined in.

In short: having largely spearheaded deglobalization, America is saddled with its inflationary consequences due to a party system that failed to anticipate them.

To be sure, the Democrats’ recently revived antitrust tradition is, in part, about lowering prices (on the theory that consolidation allows sellers to set the price). And there have also been more radical proposals for targeted price controls. But such reforms aren’t realistically in the offing for the remainder of Trump’s term. Thus, Democrats’ affordability agenda in 2026 is really a pledge to confront high prices if their party is also returned to the White House — in two years. 

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Yet even assuming Democrats take back the White House and put their backs into it, the affordability effort will still likely fall short of solving persistent, elevated inflation through the 2030s. Unstoppable structural changes in the world economy, even more than dysfunctional domestic politics, present the biggest challenge to an inflation-weary America. Multipolarity — the rise of multiple nodes of global power — all but assures more unpredictable alliances and more exposed supply chains, with corresponding impacts on prices. And although the dollar’s hegemony shows no sign of collapsing in the near term, the prospect of “de-dollarization” is no longer quite so remote. But even if that challenge to the world’s reserve currency is forestalled, the average American consumer may nevertheless lose his place atop a global food chain that assured him a “comfortable lifestyle” even as his wages flatlined.

The peak years of neoliberal globalization — from the fall of the Berlin Wall to the 2008 financial crisis — were predicated on a rosy formula that assumed ever-deepening economic integration between advanced economies and rapidly industrializing ones like China. Price stability could be achieved through anemic wage growth in the Global North and labor repression in the Global South; diversified supply chains with leaps in logistics that enabled “just-in-time” production and shipping; and unprecedented economies of scale that would seemingly keep essentials affordable even as massive conglomerates increased their market share (and thus their power to set prices as they saw fit).

That formula rested on many faulty assumptions, not least the notion that America would do everything possible to perpetuate the liberal international system it had constructed since World War II. Instead, Washington has instigated the system’s rupture. The arrangements that underpinned the unofficial bargain between America’s business elites and the rest of society — above all, the juggernaut trade relationship known as “Chimerica” — have been hammered and fractured by Trump without consideration of America’s underlying socioeconomic problems. Put another way: Trump gleefully broke Chimerica, without giving much thought to problems like infrastructure, workforce training, health costs, corporate power, and regional development.

Rapprochement with Beijing by either political party won’t inherently undo the damage. Worse, America’s image as a declining, volatile hegemon has led other countries to imagine a development path unyoked from the appetites and aspirations of American consumers. On top of more wars, more energy shocks, and more extreme weather events, that dynamic will make Trump’s inaugural boast of a “new golden age” all the more disconnected from the realities of the global economy and America’s fading stature within it.

Democrats are delighting in the possibility that Trump’s hubris may have finally caught up with him. Still, those who are alert to the broader fragmentation of the world economy should beware an empty triumphalism. Inflation is here to stay for the foreseeable future.

Yet when Asian markets opened later in the night, the search for oil and gas resumed and prices came back off their lows. With traffic through the Strait of Hormuz still at a virtual standstill — and the Islamic Republic warning “the end of the war is in Iran’s hands” — the President is learning that it’s easier to start wars than finish them. Trump may now have to confront an unpleasant dilemma: either stand down US forces and allow a murderous regime its victory parade, or save face and risk derailing the world economy. 

Yet despite chatter to the contrary, such a downturn wouldn’t reprise the Seventies. Then, an oil-price spike triggered by a Middle East war caused inflation to skyrocket. Now, the impacts will be considerably more muted, for several reasons. 

First off, the world economy is much less carbon-intensive than it was back then. On average, it takes half the energy to produce a dollar of output than it did when the Yom Kippur War began, with the productivity gains most pronounced in Western economies where the shift from manufacturing to services and more efficient technologies have greatly reduced dependence on imported energy. Second, the US has gone from being dependent on the Middle East for its energy to being a net exporter of oil and gas: making it less vulnerable to external shocks. Third, many countries are well into an energy transition towards renewable energy, and so are more able to withstand a surge in oil and gas prices.

All the same, while the world is more resilient to an energy shock than it was 50 years ago, in other ways it is actually more vulnerable to the impact of an oil shock right now. To begin with, the interruption of oil flow is bigger than it was then, with one prominent industry analyst arguing that the supply removed from the market has been twice the size of any previous shock. That’s unsurprising: this time, the entire Gulf supply has been cut, representing 30% of the world’s output.

This price shock hits the world economy at a delicate time. All three of the world’s biggest economies are already showing signs of weakness. China just downgraded its growth target, recognizing that its economy is slowing, and that boosting domestic consumption will be harder and more time-consuming than hoped. Europe, for its part, is still in a funk and is being hit hard by the price rises — especially when it’s so dependent on oil and gas imports.

As for America, there are already signs that its economy has also been softening. As last week’s employment report revealed, the job market is in bad shape – 90,000 jobs lost last month and revisions to previous reports that reveal the economy hasn’t created any new jobs since last spring. Meanwhile, the GDP report for the final quarter of 2025 came in much weaker than expected, and while most economists have anticipated a bounceback once new tax cuts kick in, higher oil prices would neutralize their effects. 

While the oil shock will be less severe in the US than in Europe, meanwhile, it will nonetheless encourage inflation if oil prices stay on their current path. Even though futures markets indicate traders expect oil prices to start falling soon, they also expect them to finish the year some 25% higher than was expected just a few months ago. In other words, even in the optimistic scenario, higher prices may be here for a while.

Nor is oil the only inflationary challenge here. Because such a large share of the world’s fertilizer supply comes from the Gulf, prices here have shot up too. This will feed straight through to food prices — and because the northern hemisphere has already begun its spring planting season, these increases are already informing production costs. Farmers could adjust by using less fertilizer, particularly in developing countries, but given the tight correlation between fertilizer input and crop yield, this pretty much guarantees production shortfalls and so higher food prices later in the year.

For their part, aluminum prices have shot up too, with shipping costs rising by about a fifth. If the war lasts for more than a few weeks, supply chains may take months to re-establish, and backlogs will persist for a while, just as they did after the Covid  lockdowns. Aluminum, for example, is widely used in construction and in the production of cars, consumer electronics and packaging. Its increased cost will ripple quickly through the economy.

All this is happening as inflationary pressures rise across the US economy. Last month’s Producer Price Index came in much hotter than expected, suggesting inflation was looming. That’s as a recent report from the Institute for Supply Management found that manufacturers are expecting substantial price increases this year. At worst, then, this oil shock will raise inflation; at best, inflation won’t come down, possibly for the rest of the year. 

Either way, it will now be harder for the Federal Reserve to cut interest rates, which will provide a headwind to the stock market. Wall Street has traded sideways for four months, and is now down slightly since the start of the war. So far there’s been little sign of panic, and stocks are far from bearish. Even so, that may not offer much solace to investors. With the job market now so weak, and American consumers having run down their savings, the so-called “k-shaped” economy has been kept afloat by rich Americans spending their stock market gains.

Any interruption could therefore slow consumption in the top half of the economy, contributing to a wider slowdown. But it could also store up some even bigger problems. In particular, private equity firms were looking to a positive 2026 to finally unclog the pipeline of IPOs they need to generate the cash for shareholders. A weak stock market may affect their cash flow negatively, which could in turn force their owners, including big institutional investors like pension funds, to sell other shares to generate income. Already, we’re seeing strains in the credit part of the private equity industry, where Goldman Sachs is now pitching funds that will short corporate loans, pointing to what could be a difficult year.

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All told, the US economy, like most of the world, can ill afford a protracted shock. And while global markets won’t follow the plotlines drawn in the Seventies, they’re still at risk of decelerating if Trump’s war doesn’t end soon. 

For the moment, we must see where oil prices go. If they keep falling through the week, it may suggest that traders genuinely see an end to the war. But if they keep rising, or even stay where they are, the global economy faces a grim 2026.

To be sure, a global downturn wouldn’t necessarily mean a global recession; many economies would continue growing, albeit more slowly than before. But for developed economies, the risk of outright recessions would be high. And, given the debt burdens already accumulated by Western governments, their space for fiscal stimulus could be constrained, meaning any recession could prove quite stubborn.

In short, we must hope for peace — and soon. Unfortunately, those prosecuting this war don’t appear to have a clear idea of how to end it. Part of Trump’s challenge now is that even if he cuts and runs, the Gulf will remain volatile, which could prevent normal traffic. Israel, for its part, may continue its strikes even if the Americans step back. Without a definitive defeat for Iran, the Islamic Republic may opt to keep the Strait closed in order to secure better peace terms.

Worse for Trump personally, meanwhile, is that he’d lined up several investment commitments from regional governments, which were to benefit both the US economy and his own family. With Gulf governments understandably distracted, these plans may be put on hold.  Already, governments which had pledged hundreds of billions of dollars of US investment and offered to fund Trump’s Gaza Board of Peace are reconsidering their plans. So even if Trump wants to believe he’s exempt from the old Pottery Barn Rule — if you break it, you own it — he may now be stuck with a hell of a bill: whatever he does next.

The most common explanation one hears for the continuing rally stateside is that investors are pricing in the phenomenal productivity growth being unleashed by the AI revolution. Those espousing this viewpoint to the regular ratcheting-up of earnings expectations among market analysts as evidence, arguing that rising optimism regarding future profits suggests investors are already seeing the benefits of the boom. With firms planning investments of some $3 trillion in AI over the next three years, they argue, the potential payout ahead should the technology live up to its hype could well be massive.

Except, there’s a minor flaw in that reasoning: if AI really explains the American market’s performance, that may be a bad omen. A gain since the start of the year of 13% for the S&P 500, or 17% for the tech-heavy NASDAQ, might sounds mighty good, but only until you see what’s happening in other markets. Investors are hedging their dollar holdings, which suggests they’re getting anxious about long-term exposure to the US. As a result, the dollar is 10% weaker than it was at the start of the year, canceling out most of the gains in US share prices.

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Meanwhile, over the same time period, Germany’s market gained nearly 20%, Italy’s even more, Spain’s more than 30%, and Greece’s over 40%. Meanwhile, the markets in Mexico, Brazil and Canada all appear to be shrugging off the effects of Trump’s tariff war, with all of them up more than 20%. Over in Hong Kong, the market is up a third since the year began. But none of these can hold a candle to what’s happening in Africa’s markets: Nigeria’s market is up 40%, Kenya’s nearly 50% and Ghana’s a dizzying 70%. That’s to say nothing of gold, up 50%, or silver, up 60%.

Throw a dart at a board with all the world’s markets today and you’ll probably land on one in rally mode. Which is strange, because almost everywhere growth is either anemic, or slowing quickly. So this isn’t about anticipated profits. In fact, outside a handful of tech giants which are making money hand over fist selling the hardware for the AI buildout, US profits have been flat this year. The same goes for investment: although the tech behemoths are pouring vast sums of money into what remains a speculative AI bet, overall corporate investment is down in the US this year. That would suggest expenses are rising just as sales are slowing — good news neither for the economy nor for share prices.

What, then, is behind these spectacular rallies? You can get a feel for what’s going on by looking at any of the star performers of the world economy this year, little stock markets such as Ghana or Kenya or Greece. While they may be small — you could probably fit the traders on the Accra and Nairobi stock exchanges into a large living room — such minnow stock markets aren’t for the faint of heart. Thinly capitalized and dominated by a small number of companies, they can swing wildly from low to high. An influx of new money is all it takes for share prices to surge.

And that’s essentially the story of our time: major central banks and governments are pumping money into the world economy, and it’s bidding up virtually all asset prices. Over the last five years, US real GDP grew about 14%; in the same period, the US money supply grew by 40% — nearly three times the pace of the growth of the economy. That helps to explain the surge in inflation, which knocked nearly 24% off the purchasing power of the dollar. But it also explains the explosion in asset values: the S&P 500 stock market index rose some 85% over the last three years.

Add to this the massive fiscal stimulus in which the US government has been engaged since 2020, first with the pandemic rescue packages, then with the Biden administration’s industrial policy, and latterly with the Trump administration’s Big Beautiful Bill of tax cuts. Over the last five years, the US government has thereby pumped over $13 trillion of borrowed money into the economy. Yet the economy has expanded by roughly half that much in that time, which means a lot of the money is being parked in savings, or just leaving the economy.

And therein lies the basic problem. Most of the money is flowing into an increasingly small number of hands, limiting the boost from consumption the stimulus can give the economy. At one time, Western governments responded to economic downturns with Keynesian fiscal stimulus, putting money directly into workers’ hands through public works programs or other employment-generating policies so as to boost consumption, which would then drag investment along. But ever since the neoliberal turn of the late-20th century, this strategy has been reversed: amid fiscal austerity, governments have left it largely to central banks to stimulate investment by injecting cheap money into the economy, the idea being that these investments would create jobs.

It hasn’t worked out that way, but that hasn’t stopped governments from repeatedly trying it. Prior to the Eighties, Western governments on average spent about 1% of GDP on fiscal stimulus during recessions; that figure rose steadily, and by the time of the 2008 crash it had reached 12% of GDP. Meanwhile, the flood of cheap money debases the currency: one way of looking at it is that expressed in gold, the US economy has not grown since 1990.

Of course, the US isn’t on the gold standard. Yet even when expressed in dollars, economic growth has been slowing for decades. Meanwhile, prices have kept rising, eroding the real value of wages while raising the share of total wealth held by the bulk of the population (since prices on assets have risen much faster than wages). In 1990, the wealthiest 1% owned 23% of the wealth while the richest 10% owned 60%; today, those figures are up to 31% and 67% respectively. Meanwhile, half the American population today own a mere 2.5% of their nation’s wealth.

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In effect, the neoliberal model has become one in which a minority of the population continue to enjoy rising living standards through the redistribution of wealth from the bottom to the top. That explains why today in the US, 10% of the population accounts for nearly 50% of the economy’s consumption — a fragile base on which to build a recovery: should asset prices begin to wobble for any reason, the reverse wealth-effect could make them pull in their horns, tipping the economy into recession and thereby creating a self-perpetuating downward spiral in markets. Now, the internal contradictions of this strategy appear to be driving it closer to a crunch point. Workers feeling the squeeze have begun turning on immigrants, and nativist sentiment is rising across America.

Although their anger may be misplaced, the effect of immigration restriction will be to tighten labor markets. Since the beginning of ICE raids in the US, for instance, the labor force has stopped growing. That tightened supply will keep wages from falling as fast in downturns as they previously did and will cause them to rise faster in any upturn, either squeezing profit margins or raising inflation, or both. If interest rates rise as a result, given that margin debt is at a record high, the need to liquidate holdings to pay debts could produce a harsh turnaround.

This makes for a fragile US market. Aware of this, foreign investors appear to be keeping their money at home rather than rushing into America as they were before. That raises an interesting possibility. The rule amid past global market crashes has been that in a storm, the whole world heads to the safe port of US assets. However, the old rules may no longer apply. While on the way up, money being pumped into the American market appears to be fueling booms across the world; on the way down, that money may not come back. America’s spending binge may end up leaving everyone else with the prize.

Trump has been unfazed by such warnings, glibly stating that children will “maybe” have fewer “dolls” than they used to. And for those who believe Trump is playing four-dimensional chess, fundamentally shifting the makeup of the American economy, decoupling from China, and reducing the overall trade deficit — all this is worth the pain. This, even as few of these cheerleaders have indications of what it is that Trump wants America to produce more of, and fewer still have realistic estimates of how long it will take to achieve all these ends.

The problem is that stagflation isn’t a blip or temporary “market correction” from which it will be easy for the US economy to emerge with greater dynamism. Rather, it is a series of mutually reinforcing negative trends that sap the willingness of firms to expand while progressively exhausting purchasing power for household essentials. That leaves less money in the economy for hiring and training, innovation, and the productive risk-taking Trump purportedly wants. Unless he imposes price controls and leans on the 1950 Defense Production Act and other emergency measures — “statist” decisions which even a MAGA-fied GOP is likely to denounce — Trump has no Plan B to simultaneously restrain costs and compel industries to reshore.

Many, then, have remarked that Trump’s main economic policies will have the opposite of their intended effect of reinvigorating the US industrial base. But there is another irony here. Despite his unflagging drive to browbeat firms and the Federal Reserve into supporting reindustrialization, this radical “conservative” President may soon encounter what all progressive and Left-wing governments have feared since the “great inflation” of the Seventies: a capital strike. In other words, the CEOs and financiers who rallied to Trump in 2024 may decide his whims are too disruptive to stay onboard — and that his apparent indifference to their profit margins, logistics, and ability to reasonably plan investments aren’t worth the candle.

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By Justin H. Vassallo

The darkening forecast for growth precipitated so single-handedly by Trump’s management and priorities certainly has no modern precedent in US politics. But the deep uncertainty at all levels of the economy also underscores how difficult it is to alter, much less dramatically reverse, globalization. It is much easier to transfer supply chains from high-wage countries to low-wage ones than the other way around.

During Trump’s first-term trade war, Vietnam, not the US Rust Belt, was the primary beneficiary of high tariffs on China’s exports. Unless Trump resumes some of the punitive rates he paused after his “Liberation Day” tariff formula was roundly maligned, capital expenditure will be rerouted to other emerging markets — some of which the Biden administration tried to cultivate as part of its own “friend-shoring” strategy of Chinese containment. Yet swinging back to a uniformly aggressive tariff regime could rock the global economy, needlessly punishing foreign workers in textiles, small appliances, toys, and other entry-level sectors while precipitating shortages for American consumers.

Trump’s isolationist tendencies — which aren’t congruent with a positive of vision of economic nationalism — are also impeding efforts to improve America’s global share of manufacturing. Trump needs the cooperation of allies he’s gravely alienated if he intends to effectively curb Chinese trans-shipment of inputs that he wants American firms to make. However, neither he nor his closest advisers appears temperamentally prepared to make that case. Likewise, it seems impossible for them to accept that “near-shoring” of key components with strict limits on Chinese content is preferable to China’s increasing command of critical supply chains.

In turn, Trump’s constant jaw-boning could result in fewer concessions of a strategic nature. Trade barriers without multilateral coordination that fosters “reciprocal” industrial policies and content standards among close allies will do more to isolate America than insulate it from practices which undercut its manufacturers. While some unfair trade practices can be addressed by eliminating loopholes like de minimis, which allowed Chinese producers to sell and ship goods valued $800 or less directly to American consumers, Trump still lacks a plan to persuade multinationals and mid-size firms to transition away from third-party suppliers that perpetuate dumping and other harmful practices.

The ostensible carrot in all of this is Trump’s insistence that lower corporate taxes and deregulation will lure foreign investors to build in America. On the face of it, the logic is quite simple: if major foreign competitors want to avoid tariffs, they should treat the US labor market as worthy of investment. But Trump has not pursued the types of industrial policies that Biden launched, which could convince more foreign firms of the benefits of doing just that. There are clear downsides to Trump’s approach, too. The risks posed to workplace safety and pollution standards are worrisome enough, but there is also the matter of business’s confidence in America’s domestic political stability and the skill-level of its workers.

Contrary to the libertarian notion that enterprise wants only a nightwatchman state, fanatical deregulation and slashing state capacity are not particularly encouraging for firms concerned with high-value-added manufacturing and standards compliance across the supply chain. In fact, the Left-wing school of thought which critiqued “corporate liberalism” delineated why a strong administrative state was integral to making and stabilizing modern American capitalism. While some government policies have made it onerous to build efficiently in America, new research indicates that DOGE’s actions and similar cuts to federal research and development are likely to retard growth and make Americans significantly poorer, compounding the near-term losses imposed by passed-on tariff costs.

All else being equal, that will have a chilling effect on long-term fixed investment. Many companies will doubt that the broader political economy, which already favors financial rents over productive investment, and which Trump seems unwilling to reform in this respect, will justify opening new plants and keeping them operational for decades.

Given the limited policy options the Trump administration is working with, there are few other levers to pull. Trump may create enough instability in the interim to significantly lower the dollar’s value, theoretically enhancing the competitiveness of American manufacturing. A possible analogue here is the 1985 Plaza Accord orchestrated by the Reagan administration, which temporarily boosted American exports, albeit at considerable cost to developing nations that had piled up debt to diversify their economies. However, America’s industrial capacity is far more diminished than it was after the 1981-1982 Volcker Shock and ensuing recession, again illustrating the “input” dilemma created by decades of offshoring. Trump wants to replace foreign inputs with American-made ones, but a weaker dollar would make plant investment more costly, since to some extent the country needs to temporarily increase imports of capital goods to efficiently rebuild domestic supply chains.

Some may counter that the dollar has long been overvalued, and that this has worsened inequality by rewarding short-term financial gains, favoring consumption of cheap imports, and eliminating the pathways to middle-class prosperity historically provided by American manufacturing. In fact, Sen. Elizabeth Warren (D-Mass.) and other prominent voices on the progressive Left made these arguments in the last decade. Yet Trump has not signalled how a weaker dollar in the current context would reduce, rather than exacerbate, international supply chokepoints. Nor has he indicated in the slightest how it would translate into a less financialized economy. Tanking global confidence in the dollar — and US Treasuries as a safe haven — is not a recipe on its own for curbing speculative finance, which Trump has otherwise encouraged through his alliance with the libertarian Tech Right and support for cryptocurrencies.

In the meantime, it is possible the early phase of stagflation is already unfolding. In anticipation of broad price hikes from tariffs, consumers binged on spending the last two months, likely masking the extent to which a slowdown has been set in motion by Trump’s capricious strategy to boost domestic industry. Unease over supply costs, meanwhile, has further reduced manufacturing orders and output, according to the Institute of Supply Management, a leading industry association. On the positive side, the hiring freeze detected last year appears to be gradual, unemployment remains low, and the last two job reports were better than expected. But the long-term jobless still number 1.7 million people, or nearly 1 of 4 unemployed workers; that level, reached last November, is a half million more than a year ago.

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As falling consumer confidence underscores, spending is based on fears of rising inflation, rather than optimism about wages and spending power, and that tariffs are cooling, not spurring, plant investment. Historic levels of household debt also suggest necessities are eating into disposable incomes. That is not an auspicious sign for manufacturers worried about whether new investments will be met with stronger demand. Another consecutive quarterly contraction would officially mark a recession, which is increasingly accepted as a fait accompli by many analysts.

Trump, of course, mounted his unexpected comeback in 2024 due to widespread disgruntlement with Biden’s economic performance. Despite a suite of policies that fueled an uptick in plant investment and construction, Biden and his anointed successor, Kamala Harris, couldn’t escape the ire over the drop in real incomes from 2021 through mid-2023. Thus far, Trump’s policies promise another decline in real wages without either the Biden-era regional investments or the tight labor markets that helped the economy rebound faster from the pandemic. Considering Team Trump still partly frames tariffs as a tool for negotiation, it is conceivable they will eventually retreat on the basis of some symbolic concessions by major firms and trade partners to support more balanced trade.

However, it is not beyond the realm of possibility that Trump will keep a stubbornly tough tariff regime in place and eventually force American firms and consumers to adjust. US Presidents, particularly Republicans, are caricatured as fearing experiments that spark market volatility and derail consumer sentiment. But the unfading populism of recent years has prompted leaders from both political parties to take protectionist risks considered irrational during an earlier, more painful stage of industrial decline in the late 20th century. That pattern is unlikely to change anytime soon, despite immense pressure from Wall Street to scrap radical changes to how America does business with the world.

That doesn’t mean Trump or his heirs will emerge victorious after the initial economic shock. Americans are paradoxically wary of major changes to the modern consumer economy and voting for politicians promising major disruptions to the status quo, and they may continue to punish incumbents for results that do little to improve their own sense of economic security. While Trump has taken an axe to globalization’s main pillars, it may be a Democrat who ultimately capitalizes on the outcome. The question, then, will be whether they try to turn back the clock or refine the unfocused autarky Trump has embraced.

Founded by the French, at the end of the 19th century, Belvedere Park feels like an appropriate spot to reflect on how much changes here — and how little. In 2009, after all, long-term dictator Zine El Abidine Ben Ali ran for his fifth term as president. A year later, he was gone, ousted in the Arab Spring’s first successful revolution. 

Yet soon enough, another despot would come and take his place. Today, Kais Saied is running for his second term as president, one of only two approved candidates. As in 2009, the results are largely a foregone conclusion, with Tunisians expected to vote for a man who’s tightened his grip on their lives. Between political clampdowns and the suppression of criticism, no wonder many Tunisians fear a repeat of Ben Ali’s iron rule. 

Not that the situation is completely hopeless. For as the Saied regime goes through the motions of democracy, and the economy wheezes on, Tunisians young and old fight to save something of their country’s Arab Spring, even if it may not be enough to banish the winter they now find themselves in. 

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Contemporary Tunisian politics can really be traced back to 14 July 2011. That Friday, Ben Ali dissolved his government and declared a state of emergency. A few hours later, he fled to Saudi Arabia, and the Tunisian people rejoiced. “We all bet our lives on 14 January!” is how Benabdallah puts it, recalling the massive street protests that forced Ben Ali into exile. 

Yet just like other risings in Syria and Egypt, these happy memories would be crushed. For Benabdallah, the root of Tunisia’s problems can be summarised in a single word: Ennahda. A moderate Islamist movement, it dominated Tunisian politics in the years after 2011, and was a leading party in every post-revolutionary government until 2019. But though its name means “renaissance” in Arabic, Benabdallah says Ennahda ruled “without a vision” for Tunisia’s future. 

That, Benabdallah continues, paved the way for Kais Saied’s landslide victory in the 2019 poll. “Ennahda produced the environment we’re in nowadays”, Benabdallah explains, arguing that while the Islamists claimed to be building Tunisian democracy, they in practice privileged short-term stability over proper reform in areas such as social justice and graft. Certainly, Saied’s remarkable rise reflects widespread disillusionment with the post-2011 political order, not least around the bread-and-butter economic issues that caused the revolution to start with.

But if Saied promised an anti-corruption drive before he entered office, under his rule the authorities have carried out waves of arrests, aimed at everyone from opposition groups to journalists. 

Even so, the President still benefits from public discontent with the political elite, widely perceived as corrupt and incompetent. Saied’s own background surely helps here. A former law professor, some Tunisians continue to see him as a man of integrity, even as others continue to admire his supposed status as a political outsider. “Tunisians were fed up with parties,” concedes Najla Kodia, a member of the socialist Al Qotb party. “Saied seized the opportunity to initiate his putsch, and now he doesn’t want to give up his power.”

This context has become especially urgent over recent years. In the summer of 2021, amid a deepening economic crisis, Saied suspended parliament and took executive control of the country. A year later, he pushed through a new constitution granting himself almost unlimited power to rule by decree. Over just three years, then, he’s built a new hyper-presidential system and dismantled the liberal institutions established back in 2011.

The dire state of Tunisian democracy is clear everywhere you look. Freedom of expression, for instance, has shrunk. Promulgated in January 2019, Decree 54 allows the state to curtail independent voices under the cover of combating cybercrime. More than 70 political activists, lawyers, journalists and human-rights defenders have been arrested or prosecuted this way since the end of 2022. 

As the election approaches, meanwhile, repression has become even more shameless. The media is gagged and judicial independence attacked, even as politicians are detained or prosecuted. Consider the case of Ayachi Zammel, a presidential candidate who nonetheless just received a hefty jail term for allegedly falsifying voter endorsements. That’s before you consider those 14 presidential contenders disqualified from running by Tunisia’s electoral commission, a body whose members are now nominated directly by President Saied.

In another unprecedented step, and just two weeks before Sunday’s presidential vote, Kais Saied even ordered parliament to amend the electoral law and strip the administrative court of its oversight authority. The tweak, which was adopted by the legislature last Friday, directly threatens the role of the judiciary in maintaining the integrity of an election process. 

If Saied had managed to improve Tunisia’s ailing economy, this looming dictatorship might have mattered less. As it is, the erstwhile academic has struggled to improve on Ennahda’s record. “The ruling elite in all these years has been responsible for not changing the economic model as it should have done”, explains Nafaa Laribi, a human rights lawyer, with Saied and his fellow politicians all failing to open Tunisia’s creaking state-run economy to private investment.  

In practice, these problems are clear across a range of metrics. For one thing, inflation remains high. For another, unemployment hovers at 15%. Growth, for its part, is stagnant, even as foreign debt hovered at about 90% of GDP in 2022. Food prices, already squeezed by the war in Ukraine, rose by almost 12% last year, while basic goods such as flour remain in short supply too. All told, half of public sector spending is now spent on the public payroll — leaving precious little for health, infrastructure and social services. No wonder Tunisia’s credit rating has slumped, making access to international markets even harder.

Squeezed between economic turmoil and a rising police state, what remains of Tunisia’s civil society has rallied. As politicians and activists caught wind of the amendment to the electoral law, the newly formed Tunisian Network for Rights and Freedoms staged a protest on 22 September, the sequel to another one the previous week. I watched as hundreds marched down Habib Bourguiba Avenue in central Tunis, chanting and shouting as they went. 

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But here too, history lies heavy. Beyond the usual anti-government banners, after all, the protesters equally tried to place their unhappiness within the broader revolutionary tradition, hardly surprising when Habib Bourguiba Avenue once served as the focal point of the 2011 protests. “The people want the fall of the regime!” protesters sang, evoking a cry made famous in Cairo and Damascus during those heady spring days in 2011. 

Kodia, for her part, makes a similar link between the past and the present. “This amendment is another attempt to remove an institution that has dared to challenge the authority,” she says of the new electoral law, raising her voice as the crowd cheers around her. “And these elections are a façade — Kais Saied will take power by force once more.” 

Beyond Leftists like Kodia, friends and relatives of political detainees attended the rally too. One journalist held a photo of Mourad Zeghidi, a legendary reporter arrested in May on vague speech charges. Nearby, I met Souhaieb Ferchichi, a campaigner for the I-Watch rights group, who dismissed a government that “scapegoats” food speculators and black migrants for its own failings. 

Ferchichi is clearly determined to keep fighting, something he shares with younger Tunisians too. “Kais Saied thinks he sits on a throne and wants to stay there for his life,” says a student called Ines, who attended the demonstration with a friend. “We want to encourage more people to stop falling into fear, and open their eyes to this situation.”

Clearly, then, not every Tunisian is resigned to Saied’s rule. But can chanting and marching hope to displace him? Aymen Zaghdoudi is sceptical. “Tunisia,” suggests the academic and human rights expert, “is on the brink of going back to the pre-2011 era.” Quite aside from the ominous similarities between Saied and Ben Ali, Zaghdoudi points out that the opposition is just too “scattered” to be effective. Benabdallah agrees. “The mobilisation is there,” he says, “but it’s a scattered minority of people coming from very different camps.” A fair point: between Islamists and secularists, socialists and liberals, Tunisian politics is riven by factionalism.

Beyond these ideological cleavages, other observers point to the relative weakness of the country’s civil society, yet another consequence of Tunisia’s past. “The democratic transition was left unfinished because it didn’t succeed in creating solid political and independent institutions that would resist any kind of drift”, says Romdhane Ben Amor of the Tunisian Forum for Economic and Social Rights, noting that terrorist attacks and political assassinations stymied mature institutions alongside roiling economic turmoil. 

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Yet if Zaghdoudi says the result of today’s election is “likely known” in advance, he does retain some optimism. With the official opposition split, he nonetheless believes the Tunisian Network for Rights and Freedoms has the potential to unite civil society, not merely in its hatred of the president but also in formulating a broader vision for Tunisia’s cultural and economic future. 

Change is surely needed. Tunisia, after all, is floundering. On a downtown street in Tunis, I watched unemployed young men sitting outside cafes, smoking and scrolling through their phones. Informal vendors were there too, waiting for buyers, as stinking bags of rubbish dotted the pavements. In two supermarkets I visited, supplies of sugar, semolina and coffee were all dwindling on the shelves. Milk and rice were nowhere to be found. 

For those with long enough memories, these conditions feel eerily similar to those in 2010, just before Tunisia was enveloped by revolution alongside the rest of the Arab world. To put it differently, then, and even if he does romp to victory tomorrow, President Saied should surely be careful. As Ferchichi warns: “We once revolted against a dictator. We’re ready to do it again today, tomorrow, in the years to come.” 

Not that Belvedere Park felt particularly revolutionary when I visited. At one point in our conversation, Benabdallah and I pass a pond, a place he remembers as a child. Back then, it teemed with ducks and fish. Now, though, the basin sits empty — and Benabdallah can’t help but joke. “Even they have had enough.”

Last week, to no fanfare whatsoever, the Treasury Committee released an extensive report on a set of policies the Bank of England has undertaken over the past few years. The report’s immediate focus was on the Bank’s recent Quantitative Tightening (QT) programme, which promotes higher interest rates. But read properly, it was an attempt to assess Britain’s central bank policy since 2008. QT, after all, was a direct attempt to unwind the Quantitative Easing (QE) programmes that were put in place in response to the financial crisis. To judge its effectiveness, the report had to look at the Bank’s monetary policies over the past 15 years. Suffice it to say it made for damning reading.

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In a capitalist economy, financial markets should have one job and one job only: the allocation of capital. They should look at various businesses and assess their viability. Those they assess as being viable should then access funding on good terms; those that are not viable should not.

But since the onset of QE, the City has largely become an arm of the Bank, constantly watching its every move for signals about what to do next. The reason for this is straightforward: the QE programmes have given the central bank almost total control over the government bond market, partial control over the corporate bond market, and a large degree of influence over stock prices. If you are an investor and you want to make money, the easiest way to do so is to guess what the Bank is going to do next.

There are, as a result, plenty of investment professionals consulted in the report, all of whom have firmly bought into the QE/QT framework. Each provides their own minor assessments: one will say QT is being undertaken too fast, another will say that it is being undertaken too slowly — and, at the end of the day, the Bank will fall somewhere in the middle. All very sensible, all very orderly. Until it isn’t.

In fact, what is so striking about these assessments is their lack of clarity. Beyond the fundamental virtue of the QE/QT framework, the only point that everyone agrees on is that they really have no way to know what is going on. The Bank, as the report makes clear, “is uncertain about the macroeconomic and money supply effects of QT”. Elsewhere, it notes that “the Bank is taking a ‘leap in the dark’ by embarking upon a major monetary operation without specifically and separately tracking its effects”. Indeed, at one point, the Governor himself admits this, explaining that such uncertainty is “why we keep QT under constant review”.

Of course, no policy undertaken by any government institution produces certain outcomes. But this, it’s worth spelling out, is the Bank of England, the very institution tasked with keeping the financial peace; indeed, its own independence rests on the pretence that they set monetary policy in line with scientific criteria. Instead, it’s been treating our economy like a roulette wheel — and one that will soon be stacked against us. As interest rates have risen, the value of gilts — government-issued bonds that are supposed to be low-risk — has fallen fast. You don’t need to be a finance whizz to understand what this gap represents: losses.

Indeed, these losses are shown clearly in the Committee’s report: “Annual losses in each of 2023 and 2024 will amount to £40 billion, eroding the cumulative £124 billion positive cashflow that was generated up until September 2022,” it states. Crucially, this doesn’t even take into account that these significant and rapid declines are dependent on optimistic forecasts of future inflation. If inflation remains stubbornly high or even rises again — say, on the back of ever-increasing geopolitical tensions — then the downturn will be even more significant. And who will pick up the bill? The Treasury and, via the Treasury, the taxpayer.

The Committee, understandably, were less than pleased with this: “Notwithstanding the operational independence of the monetary policy… it strikes us as highly anomalous that decisions have been and are being taken concerning huge sums of public money without any regard to the usual value-for-money requirements”. On the face of it, such an indictment surely calls for root and branch reform of the Bank of England. Its QE programmes of the past 15 years have been a disaster, turning would-be investors into dreary inflation-watchers. But beyond this, it has also wasted money — public money — and left the country effectively broke. The Bank of England knows this; it is, after all, what they told Liz Truss when she tried to force through tax cuts.

Yet while the Bank is more than happy to aim their budgetary fire at a sitting Prime Minister, they seem a lot more reluctant to address how much their own monetary policy experiments have cost the country. Amid today’s inflation news, politicians will gloat, the bankers will chatter, and the national press will lap it up. And missing from all this will be any mention of main driver of Britain’s economic woes: the Bank of England itself.

Obviously, after I wrote about her for the Guardian, the locals in our trendy Crouch End park soon got wind of it. They would stop us to ask if Maisie was the “Princess Diana dog” and we would joke about her being harassed by the paparazzi. One humourless reader didn’t really get the joke. He wrote to the newspaper: “Bindel has gone too far this time. That dog looks nothing like Princess Diana!”

But like Diana, Maisie was heartbreakingly beautiful, a Spaniel-Collie cross with a long coat and soulful eyes. Her legs were slightly too short for her body, which made her all the more lovable. But before she came to us, someone had abandoned her. According to her profile on a rescue charity’s website, it said she would be put to sleep the following day unless she was claimed. We did. And we were besotted.

Her reputation — and her bark — soon preceded her. Our local park has a tennis court attached, and Maisie would gallop in and grab a ball, mid-serve. The Crouch End tennis gang were rarely amused. She even made a name for herself in media circles: if ever my partner Harriet or I were doing interviews, Maisie would inevitably bark her head off. Producers would have to decide whether to rerecord the segment or broadcast her voice on Radio 4 or Sky News.

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Maisie brought us joy in private as well as in public. With us, she was sweet, cuddly and affectionate, though she barked at everyone else. And she was insecure. If Harriet and I were sitting together on the sofa, she would try to separate us with her paws. She had never got over whatever had happened to her in her former life. We supported her with her trauma, and she helped us when we needed comfort after a bad day. Harriet, a lawyer, and I both do work that takes us to very dark places, dealing with the detail of the worst excesses of men’s violence. It’s not uncommon for us to be talking about murder, prostitution and child sexual abuse before 8am. But having a creature who would greet us joyfully, blissfully unaware of the terrible things humans are capable of, was always incredibly therapeutic.

And we repaid that joy with love and attention and vast vast vets bills. I’ve never felt more middle-class than when I had to tell an editor that I couldn’t knock out a piece in the next hour because I had to take the dog to hydrotherapy. She had fortnightly appointments ever since she developed arthritis. She also had monthly vaccinations to keep the condition at bay, and check-ups for her kidney disease and pancreatitis. People without pets will howl at the expense, but I had always felt lucky we could afford this sort of care.

Never more so than when we decided we had to euthanise her. She could no longer bound on to the tennis courts to irritate the Wimbledon wannabes; she could no longer negotiate the four steps into the kitchen or out into the garden without help. She had gone off her food. Her kidney failure had progressed and the vet suggested a new course of treatment. “No,” I said. “It’s time for her to go”. My partner and I knew we would rather let her go a day too soon than a day too late. She was 16-and-a-half and it was just before Christmas.

I know people will call me a hypocrite for promoting the value of having a pet, particularly during a cost-of-living crisis. When people are using food banks to feed their children, isn’t it bad taste to be talking about pet food banks? I hear the criticism. And I have made similar arguments myself — railing against donkey sanctuaries getting more funding than domestic violence charities. And, yes, I do think we should prioritise humans. I spend a significant amount of my unpaid time and energy campaigning to keep women and children safe from male violence. But I also donate a fair bit every month to animal charities. I want women to live without male violence; I don’t want donkeys to suffer; I want people to be able to feed their pets. These things aren’t mutually exclusive.

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A couple of years ago, I wrote about about people who had to give up their pets because they couldn’t afford basic vet treatment or decent food. I wept with owners who recounted the pain of rehoming their beloved companions, feeling angry that there was little help for them. Things have only got worse since then. Figures released last week by the Dog’s Trust reveal that a record number of people are being forced to give up their pets: the charity received more than 45,000 requests from owners about giving up their animals in 2023.

If I could have kept Maisie alive, fit and healthy forever I would have. But when the time came, the vet came to the house so that Maisie could die in her own bed, with us close by. She was given a sedative, fell into a deep sleep, and then a final injection stopped her heart. She was wrapped up in her favourite blanket and carried out in a wicker basket, while we sat inconsolable, looking at her bowls, her toys, her collar.

I cry about her every day and I have barely slept since she died. Christmas was especially hard: even the cat looked bereft. I would go out for walks on my own, feeling completely weird without a dog by my side. It was so odd to not hear her incessant barking when the doorbell rang. The house has lost its soul. While researching that piece two years ago, I also spoke to experts in bereavement counselling for pet owners. Some might think going to a therapist to get through the loss of a pet is a ridiculous self-indulgence when there’s so much human suffering in the world. But I know now that such loss can bring with it terrible grief, particularly when they have been so therapeutic, as Maisie was for me

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Maybe it was the quietness of the holiday season, but I ended up looking at dogs on rescue centre websites — thinking that, in the future, we would probably get another. Yes, I felt guilt, but I figured there was no harm in looking. And then, of course, the inevitable happened. She was a cross between a springer spaniel and a French bulldog, nothing like Maisie. It was only a couple of days before I surreptitiously emailed the owner, asking for more details. It was a familiar story: family dog gets pregnant, six puppies are born, they all need rehoming.

We brought Ruby home on Sunday, a month after Maisie died. She is four-months-old, and full of energy. I can’t wait for her to start barking, demanding a walk first thing in the morning. I still feel Maisie’s loss like a hole in my heart. But I didn’t want to wait just for the sake of it. I’m a fairly anxious person, an insomniac, and the nature of my work leaves me with invasive thoughts. Being able to spend time with a furry bundle of happiness reduces my anxiety and makes me forget, albeit temporarily, the painful stories stored in my head. Maisie helped me keep doing the work that I do. Now, Ruby will take up the baton — and the tennis ball.

Over the past few years, violent crime in DC has been rising fast. Last year, the murder rate was the highest since 2003, and this year the death toll is slightly higher so far. Carjackings are up 36% and robberies are up 57%. Almost all this hideous violence is inflicted on African-Americans, including many children. It permeates outward, creating a deeper public sense of insecurity and out-of-control crime. Tent cities are now all over the city. People suffering from mental illness patrol the streets. You feel the decline in law and order, the slow fraying of the city, every day.

And yet, the Council has decided that now is the time to make it harder to prosecute and easier to defend violent criminals, partly in the name of “equity.”. Yes, it’s part of a longstanding “modernization” of the criminal code, but they had to include these provisions and now? And this isn’t new. Just before the crime explosion took off, the DC mayor had “Black Lives Matter” painted on the street in letters so large you could read them from a plane, and allowed “Defund the Police” to remain next to it. That summer, woke mobs were allowed to harass anyone in their vicinity, yelling slogans that vilified all police — and the MSM took the side of the bullies. After the summer of 2020, the DC police force dropped to its lowest level in two decades.

So guess what? I’m going to vote for the Republican and the most conservative Independent I can find tomorrow. And I can’t be the only Biden and Clinton and Obama voter who’s feeling something like this, after the past two years.

There was no choice in 2020, given Trump. I understand that. If he runs again, we’ll have no choice one more time. And, more than most, I am aware of the profound threat to democratic legitimacy that the election-denying GOP core now represents. But that’s precisely why we need to send the Dems a message this week, before it really is too late.

By “we”, I mean anyone not committed to the hard-Left agenda Biden has relentlessly pursued since taking office. In my view, he and his media mouthpieces have tragically enabled the far Right over the past two years far more than they’ve hurt them. I hoped in 2020 that after a clear but modest win, with simultaneous gains for the GOP in the House and a fluke tie in the Senate, Biden would grasp a chance to capture the sane middle, isolating the far Right. After the horror of January 6, the opportunity beckoned ever more directly.

And yet Biden instantly threw it away. In return for centrists’ and moderates’ support, Biden effectively told us to get lost. He championed the entire far-Left agenda: the biggest expansion in government since LBJ; a massive stimulus that, in a period of supply constraints, fueled durable inflation; a second welfare stimulus was also planned — which would have made inflation even worse; record rates of mass migration, and no end in sight; a policy of almost no legal restrictions on abortion (with public funding as well!); the replacement of biological sex with postmodern “genders”; the imposition of critical race theory in high schools and critical queer theory in kindergarten; an attack on welfare reform; “equity” hiring across the federal government; plans to regulate media “disinformation”; fast-track sex-changes for minors; next-to-no due process in college sex-harassment proceedings; and on and on it went. Even the policy most popular with the centre — the infrastructure bill — was instantly conditioned on an attempt to massively expand the welfare state. What on earth in this agenda was there for anyone in the centre?

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It therefore doesn’t surprise me that in his final pitch to voters this week, Biden barely mentioned his record. He didn’t talk about inflation, the looming recession, crime, immigration, Covid. He mentioned nothing that would motivate anyone beyond his own base.

He returned instead to his previous 2020 electoral blackmail: you have no choice but to vote for Democrats because the far Right is so hostile to democracy. To which my answer would be: well, I did that already. And I was treated like an easy mark by the Dems — who pocketed my vote and ignored all of my concerns. Voting for an actual election denier would remain a dealbreaker for me. But otherwise, when Trump is not on the ballot, why would I be suckered by the woke Left again?

Worse than this bait-and-switch is the condescension that came with it. Think of the absolute assertions by the Biden administration and their media flunkies: The border is secure. Covid vaccines prevent infection. There is no CRT in high schools. The lab-leak theory and Hunter Biden’s corruption were disinformation. There is no medical debate about fast-track, affirmation-only, sex changes for minors. Inflation is caused by corporate greed. Women in college always tell the truth; and men always lie. A president can forgive student loans by fiat. Debt doesn’t matter. A woman can have a penis. The people who attack Asian-Americans are all white supremacists. The idea of individual merit is racist. Can you think of any social issue where the Biden administration hasn’t taken the position of the illiberal “social justice” Left?

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And culture matters. David Brooks wrote last week: “Over the past few years, the Democrats have made heroic efforts to win back working-class voters and white as well as Black and Hispanic voters who have drifted rightward.”

What planet is he living on? He points to infrastructure spending and the child tax credit. The first was coupled, as I’ve noted, with a big increase in the welfare state, blunting its impact; the second is now gone. Brooks doesn’t mention inflation, crime, immigration, the border, abortion, race and affirmative action. In these areas, which will define the election, the Dems have, in fact, made heroic efforts to affront and insult working-class voters. On abortion post-Roe, they have adopted the most extreme position possible, making even Republicans look like moderates.

And look, we can debate all these questions. There are many nuances. But Biden precisely denies those nuances. He never even gives a hint that he respects his critics at all. He sees his moderate supporters not as people to be persuaded or engaged, let alone listened to, but as bigots or victims of disinformation he can simply dismiss. “C’mon, man!” used to be a verbal tic he deployed to engage with critics; now it’s deployed simply to dismiss them.

It doesn’t seem to occur to Biden, for example, that violent crime and uncontrolled immigration affect poor minorities more than wealthy whites, jeopardising their lives and wages, and making a mockery of those who have made the effort to immigrate legally. He repeats absurd jargon such as “Latinx” to please his nutty, MSNBC-addicted donor base. He tells blacks they have to vote Democrat because of their race. He invites the most hardcore trans extremists to the White House; and takes no responsibility for making inflation worse.

All of this — the Left policies and the veiled contempt for the average voter’s fears and criticisms — has been building since his election. The shameless deceptions and false narratives of the MSM have pissed a lot of people off as well. No one appreciates being called a bigot or a hysteric for wanting to have a say in their own child’s education; or a “white supremacist” for opposing “equity-based” race discrimination. Yet it happens every day, with CRT-based indoctrination mandatory in many workplaces, teachers openly indoctrinating kids in queer theory, and corporations adopting bald race discrimination to appease the woke. Biden is down with all of it, and is in such a bubble that I don’t think he even knows there is a real debate.

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By Andrew Sullivan

Obama sees why this dynamic is so toxic. He sees why it alienates so many people unnecessarily. But the Democrats are not the party of Obama anymore, are they? Many of us who supported Obama are now deemed “white supremacists” for agreeing with him.

Midterms are always a verdict on incumbents — and if the result next week is a close finish, we can duly see it as a routine, even banal, response to a tough economy, especially inflation. But if it is a real wave, as I suspect it may be, if the Democrats lose even more Latinos and Asians and working-class whites, and if suburban white women — freaked by the cost of living and the education system — flee to the GOP, it will be a clarion call to Democrats to move back to being the party of Obama.

I fear they cannot. And their media lackeys and propagandists will reinforce their worst instincts.

The Weimar dynamic is a simple one. The Left and Right polarise; the middle collapses; inflation takes off, unnerving everyone and discrediting government; and at some point, as liberal democracy breaks down, voters are asked to choose between the extreme Left or the extreme Right.

What Biden has done, by showing that even an alleged moderate like him is just a vehicle for the extreme Left, is accelerate the moment when we are faced with that horrible choice. And if that is the choice, I have little doubt that Americans will pick the far Right. We’ll have a premonition of this tomorrow.

The key for the survival of democracy is not another speech about democracy telling citizens they have no choice but to vote for one party. It is preventing the Weimar nightmare scenario ever happening. It is rebuilding the political centre. It is about taking action on inflation and immigration and crime. Biden has failed catastrophically so far — and with his current policies, he will continue to fail.

His party has two years to rescue itself. And the rest of us.

A version of this piece first appeared on Andrew Sullivan’s Substack.

As soon as it was made public, on September 23, Kwarteng’s “mini-budget” prompted a massive sell-off of “gilts” — UK government bonds — and also saw the pound fall to an all-time low against the dollar. Then, all hell broke loose: some analysts even went as far as saying that Britain was heading for a full-blown “currency crisis” and was starting to look like an “emerging market country”.

The reaction from international quarters was just as hysterical. The IMF launched a biting attack on the UK government, while Larry Summers, former US Treasury secretary, called the policy “utterly irresponsible”. Speaking for many, Jason Furman, former economic adviser to Barack Obama, wrote: “I can’t remember a more uniformly negative reaction to any policy announcement by both economists and financial markets than the UK’s policy.”

Was all the fuss justified? Is the UK really in danger of becoming the next Argentina or Zimbabwe? And was Kwarteng’s U-turn yesterday really necessary?

The mini-budget in question consists of a series of deficit-financed economic measures aimed at cushioning the effects of the energy crisis and boosting growth — namely a freeze on energy bills and various tax cuts, for a total cost of around £160 billion. Most of the criticism aimed at Kwarteng reflected the opinion of orthodox economists: that cutting taxes is the wrong policy when unemployment is low and there is little spare capacity in the economy for additional non-inflationary growth.

Yet for all the uproar, by far the biggest commitment in the mini-budget was found elsewhere: the energy price freeze, which is expected to cost around £60 billion. According to the Bruegel think tank, the UK is already the country that has allocated the most funding to shield households and businesses from the energy crisis — 7% of GDP. While more can and should be done, that’s more than double the EU average (only Germany has announced a measure of similar scope).

Now, one can debate whether capping the price of energy — which essentially amounts to a publicly funded subsidy for the profits of energy giants — is the best way to address the crisis, but if the alternative is hanging household and businesses out to dry, which is what most EU countries are likely to end up doing, the British approach is clearly far better.

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As for the revenue-side measure of the mini-budget, the biggest measures aren’t actual “tax cuts” but non-rises in National Insurance and corporation tax (for a total of £40 billion). Compared to these figures, the actual tax cuts, such as the scrapping of the higher rate of income tax, were rather trivial — just above £10 billion. All of which means that while the tax cuts were bad from a distributional perspective, since they would have mostly benefited the wealthy, from a macroeconomic perspective their impact would have been negligible, and the decision to reverse them will be just as negligible.

Even without the tax cuts, the energy price freeze will still entail a larger deficit. Rather than the tax cuts being at fault, then, it was probably the increase in the deficit itself that freaked everyone out. There seems to be a genuine concern among orthodox economists and financial institutions that the mini-budget will threaten Britain’s “fiscal sustainability” and possibly even cause the country to default.

But the notion that an increased deficit puts the British state at the risk of insolvency is ludicrous. Like all currency-issuing nations, the UK effectively spends by creating money out of thin air. This means that it can never “run out of money” or become insolvent. The fact that fiscal deficits are usually associated with the issuance of bonds, and that these are usually bought by the private financial sector, gives the impression that the latter are able to exercise control over government spending, by refusing to buy the bonds or demanding higher interest rates. However, this is not the case — because the central bank can always step in to buy the bonds itself, setting the yield at whatever level it wants.

Ever since the financial crisis, and especially throughout the pandemic, this has become standard practice. Indeed, virtually all the new bonds issued to support the economy throughout the pandemic were bought by the Bank of England itself. This is paradigmatic of the way in which modern states self-finance; and of the fact that “bond vigilantes” hold no power whatsoever over currency-issuing governments.

So overall, a widening deficit doesn’t represent a problem for the UK. In fact, it’s a good thing, insofar as it will help cushion the British economy from the effects of the energy and cost-of-living crisis. There’s also no reason to believe that larger deficits, even if “monetised” by the central bank, will further stoke inflation. Quite the opposite: if the government borrows money to cut domestic energy, that will likely reduce inflation. Injecting such large sums of money into the economy should also be expected to have a positive effect on growth.

The problem is that all this completely defies the economic orthodoxy, which is probably why mainstream economists are attacking the Government’s plan so vehemently. As Adam Tooze writes: “What the critics of the UK are performing is the role of gatekeepers, a function, which is at the heart of elite economic policy discourse.” This wouldn’t be so much of a problem if it weren’t for the fact that the flawed orthodox view is also shared by people who, unlike economists, have a direct impact on the economy — financial traders. And this can lead them to make some very bad decisions.

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The recent gilt sell-off is a perfect case in point. While some traders might have actually been motivated to unload their gilt holdings through fears of an imminent default, much of the sell-off was actually an attempt to profit from the panic through a practice known as short selling — which consists in selling a financial asset in the expectation that its price will fall, thus generating a profit to the seller.

This is ultimately what economics textbooks say should have happened: a higher deficit will automatically lead to higher yields (and therefore lower prices), and scaring the government through a sell-off will convince policymakers to raise interest rates even more. Unfortunately for the traders, this is not how things work in the real world. In the latter, betting against central banks is always a losing game. They know that very well in Japan, where it’s known as the “widow maker” trade.

Which is why traders were completely caught off-guard when, on September 28, the Bank of England announced that it would be buying up a potentially limitless number of government bonds in order to ease market tensions. This immediately caused yields to fall and stabilise at the level they were at before all the mini-budget hoo-ha — thus thwarting the speculators’ plans.

It’s been said that the BoE’s intervention “saved” the Government from the consequences of its reckless decisions. This is also nonsense. The BoE was simply fulfilling its mandate — acting as a lender of last resort. Moreover, in a democracy, it’s perfectly normal for the central bank to accommodate the budgetary decisions of government. The alternative is the situation in the Eurozone — where democratically elected governments are expected to do what unelected technocrats and central bankers tell them to.

There has been much talk of the fact that the BoE was forced to intervene to save pension funds that would otherwise have faced “mass defaults”. This all sounds rather scary, and has been weaponised to attack the mini-budget — by implying that the Government’s actions risked sending the savings of millions up in smoke. In fact, the pension funds’ quasi-meltdown is entirely a consequence of the way pension systems, like everything else, have become hyper-financialised.

Simply put, today pension funds use safe assets such as gilts to raise large amounts of cash through complex financial instruments, which they then use to pursue high-risk investment strategies. The problem is that if the value of the gilts falls too sharply, the pension funds risk going bust — which is what happened last week following the gilt panic. The problem’s not the mini-budget — the problem’s the way in which we’ve allowed pension funds to gamble with people’s savings.

A similarly doom-laden tone accompanied warnings about a “currency crisis” in which the pound will supposedly keep sliding further and further down until it becomes so worthless that the UK will be forced to go cap-in-hand to the IMF. But this was never likely to happen. Countries that float their exchange rate, such as the UK, cannot experience a currency crisis in the traditional understanding of the term — unless they have large external liabilities in a foreign currency. As Paul Krugman observed, that was the story for Asia in the Nineties, the Argentine crisis 2001, and is part of the problem in Turkey now. But this doesn’t apply to the UK, whose external liabilities are overwhelmingly sterling-denominated. And this is why, following the Bank of England’s intervention, the value of the pound has already bounced back to the level it was before the panic.

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Why did the pound fall in the first place? This was due to much the same reasons as the gilt sell-off: unfounded fears over the deficit, attempts to pressure the government into backtracking, and, first and foremost, speculators in the City and elsewhere hoping to profit by shorting the pound. As one trader said: “We were absolutely sure the pound was going to crash. Of course we are going to short the pound. This is what we do.”

The problem is that, unlike bond markets, the government’s options are more limited when it comes to quelling future currency speculation. One option would be for the Bank of England to prop up the pound by buying it on foreign-exchange markets, but that requires large amounts of foreign reserves, which the UK doesn’t have.

Another option would be to raise interest rates. After all, part of sterling’s weakness is simply the result of rising interest differentials vis-à-vis the US, which is hiking up interest rates in an irresponsible manner that is causing problems for the rest of the world, as central banks are forced to raise interest rates to stem the outflow of capital. However, raising interest rates won’t reduce inflation that is entirely driven by supply-side factors — namely the energy crisis and supply-chain bottlenecks — but will almost certainly cause huge pain to the economy, especially to the housing market, which is already in trouble. (Even the UN is now calling on central banks to halt interest rate increases.)

So, it’s a good thing that the Bank of England is still refusing to hike interest rates. After all, the pound has been sliding against the dollar for more than a year, indicating that this part of a longer-term adjustment which could actually help Britain move towards a less import-dependent and more self-reliant economy.

In the end, the best option for the UK’s authorities might to be accept there’s little they can do, in the short term, to rein in inflation that is largely supply side-driven, stop attempting to prevent the pound from falling in the name of some misconceived “strong pound” policy (which is what led to the government’s flawed response to the 1976 crisis) — and focus instead on protecting people and businesses through increased government spending.

This may or may not be inflationary. But the alternative — giving in to market pressure to raise interest rates and rein in the deficit — is almost certainly bound to be worse.

Macron’s centrist alliance no longer had enough seats in the National Assembly to impose its will. No other group, or likely alliance, was large enough to dictate policy to the President. The result: stalemate. Or so it seemed. Two months on, no grand coalition has been formed. But nor is there a complete deadlock. Fears of instant chaos and early snap elections have proved exaggerated. France, after more than half a century of presidential, top-down politics, has rediscovered the messy joys of parliamentary democracy and verbal brawling.

Despite having 39 seats fewer than an overall majority, Macron’s prime minister, Elisabeth Borne, has managed to push through a €44 billion package of measures to blunt the impact of inflation. She may lack political experience, but she has proved to be a more effective parliamentary operator than many had predicted.

However, nothing difficult or truly controversial has yet been attempted. Deputies have been asked, in effect, to give away goodies to their constituents, including extending the price ceilings on gas and electricity, and subsidies on petrol and diesel prices. The unpleasant, uphill part of Macron’s second term is about to begin. September will see street marches for higher wages, as well as strikes and protests against the President’s proposed extension of the French retirement age to 64 and tougher rules for employment pay.

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Macron's tormented second term

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France is not a patient country: politics goes to the street more rapidly than in any other democracy. Macron’s opponents on the extremes of Right and Left now tell their supporters that his government is “illegitimate”. They say that the President does not represent a majority in parliament, let alone the country.

France is weathering the threat of Ukraine-war-generated stagflation reasonably well. Inflation is running at 6.1%, which is substantially less than in the UK and most other EU countries. Domestic power bills have been capped at 2021 levels or just above. Unemployment is still falling. But how long can Macron shield his nation from international inflationary forces? And what will it cost? Both the far-Left and far-Right are already pushing for the removal of sanctions against Russia. If Moscow cuts off EU gas supplies, the real cost of gas and electricity in France — and the cost to the state of subsidising them — will explode.

So far, some of the cost of France’s energy price gap has been concealed by imposing record losses on the largely state-owned power company, EDF. That cannot continue forever, even if the government carries through its plan to buy the remaining 16% of the company.

All this comes during a Sahel-like summer in which French forests burned and farmland across the country turned yellow. Yet Macron will struggle to rectify his patchy record on climate change in such a fragile economic environment. His government is due to present a grand strategy for moving to renewable energy next month: it will be dismissed as by the Left as too timid and the Right as too painful.

Macron knows that he is facing a winter of discontent. In a would-be Churchillian speech last Friday, he asked the French people to view their coming difficulties as “the price of liberty”. “I am thinking of our people,” he said, “and the strength of spirit they will need to… confront uncertainties, misleadingly simple responses and adversity and unite to accept that they must pay the price for our liberty and values.”

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In other words, the President hopes to frame the autumn and winter protests as a narrow-minded refusal to accept that the West is in a prolonged state of economic war with Russia; and that the war is as much about protecting the future of France and other Western countries as it is about helping Ukraine. For this strategy to succeed, Macron needs to be consistent. It was foolish of him to be seen riding a fuel-guzzling jet ski on his summer break, while asking the French people to put up with energy shortages for the greater national good.

Macron and Borne face this tangled cat’s cradle of crises in the weakest position of any French government in half a century. Apart from a brief period in 1988-93, every president since 1965 has had a clear majority in the lower house of parliament.

Much depends on whether Macron and Borne can continue to form majorities in the National Assembly on an issue-by-issue basis. The signs are not encouraging: the centre-Right Les Républicains, who have propped up the Macron coalition so far, have already warned that they will vote symbolically against next year’s budget when the Assembly resumes in October. Borne could use emergency powers to push the budget through, but that would trigger a vote of confidence.

The present Assembly is split four ways, with fissures and tensions within each camp — including Macron’s own. Les Républicains, successors to the parties of Charles de Gaulle, Jacques Chirac and Nicolas Sarkozy, have been reduced to a rump of 62 seats out of 577. They have refused to join Macron’s centrist alliance — but have, however, supported the government in key votes, in return for Right-leaning shifts in policy, including a large, new breach in France’s 35-hour working week.

Members of the Left-wing alliance, Nupes (Nouvelle Union Populaire Ecologique et Sociale), the second-largest force in the assembly with 151 seats, have voted systematically against the government — albeit with one or two exceptions. They shout insults and wave their arms a great deal.

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Meanwhile, Marine Le Pen’s unprecedented 89 deputies are under strict orders to appear calm and respectable. Some of the new Rassemblement National deputies find this discipline irksome. If Le Pen herself is absent, they too take the opportunity to hurl insults at Macron’s government. The RN has attacked the government on all its proposals but abstained this summer for fear of being seen to vote against inflation relief. Le Pen’s troops will not abstain this autumn and winter.

It’s clear that Les Républicains are the pivotal force in the new assembly, wielding power beyond their numbers. But they face an existential conundrum. They could either support Macron’s crisis-management policies and proposed reforms, giving him an against-the-odds triumph, or they could refuse to work with him and ensure that his second term is a failure. Some senior voices in the President’s camp are still hopeful that all or part of the centre-Right will agree next year to join a broader coalition. That is probably wishful thinking. There is a group of Républicains deputies ready to act as a rudder steering the government to the Right, on the economy, migration, and security. But others believe that helping Macron would destroy all hope of resurrecting the once dominant centre-Right and winning the 2027 presidential election. If they condemn the President to five years of muddle and drift, they say, they could bury Macronism and its would-be successors forever.

Much depends on who wins an internal election for Républicains party president in December. At its grassroots, the party is riven between its Macron-compatible, pro-European wing and the Macron-detesting nationalist-populists. The latter are almost certainly in the majority. The three leading candidates are likely to be Eric Ciotti, the Macron-hating, hard-Right deputy for Nice; the former European Commission Vice President, Michel Barnier; and a young, pragmatic deputy, Aurélien Pradié.

If Ciotti becomes the Républicains president, any alliance or systematic cooperation with Macron will be impossible. The Républicains parliamentary party might then split but that would not yield the 40 or so seats needed to create a stable, governing coalition.

By the end of the year, we will know whether the majority of the Assembly will support Macron’s flagship pension and employment law reforms. It will also be clear whether Macron and Borne can command ad hoc majorities to manage the triple interlocked crises of inflation, global recession, and war on the European continent.

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If he cannot assemble the support, Macron will face a career-defining decision. In his first mandate, his reform agenda was overwhelmed by the Gilet Jaunes and Covid. Should he now accept a place in history as the young President who promised a great deal and achieved little? Or should he take the risk of dissolving the National Assembly and calling a new election?

Nothing in recent French politics suggests that Macron could expect a better result next year. French politicians rarely gain popularity while in office. One poll at the weekend showed the President sinking to 37% approval while his Prime Minister rose to 41%.

With an energy and inflation crisis, stretching into next spring, it is not the most obvious time to call an election. Asking French people to vote to work longer is unlikely to be a winning hand. Yet Macron is a young, energetic, and impulsive man. He will not easily settle for four years of posturing, drift and domestic and international firefighting.

His Blood, Sweat and Tears speech last week can be read in two ways. It could imply that he recognises that his only role in the next four years will be crisis-management — to prevent a deeply divided France from falling apart. Or it could suggest that he sees the coming multi-layered crises as an opportunity to assemble a broad, consensual centre against the extremes of Left and Right. Some senior Macron supporters believe that he will be tempted by next June to call an election in which he would campaign — to quote his speech — for “unity in adversity”. I can only say: good luck with that.

Why were their crystal balls so inaccurate? Was today’s inflation simply unforeseeable? The straightforward answer is: no. The initial inflation was caused by the disruptions brought on by the lockdowns and was perfectly foreseeable using basic macroeconomic models taught in undergraduate classes. Yet most economists seem to have missed this — largely because, starting in March 2020, they stopped focusing on economic problems and became armchair epidemiologists, offering opinions on how the virus spread and what might stop it.

There was no meaningful economic discussion during the pandemic; normal repairs and maintenance appear to have been neglected, leading to serious problems with supply chains. In 2021, for example, there were 1,946 factory fires — the most ever recorded in a single year and an increase of 129% over the previous year. And these problems have been supercharged by recent geopolitical developments, the most obvious being the war in Ukraine.

As with the lockdowns, economists and policymakers repeatedly misjudged the effect of imposing sanctions on Russia. Most commentators thought they would lead to a collapse in the rouble and the disintegration of the Russian economy. The sanctions would “reduce the rouble to rubble”, predicted Joe Biden. This has not happened. The rouble is currently 30% higher than it was pre-war and while Russia is facing down a recession, the Bank of Russia is slashing interest rates rapidly, signalling that the worst is over.

While the sanctions have not impacted Russia as many assumed they would, they have crippled the Western economies. Before the war, it was fashionable to say that Russia only had an economy the size of Italy’s. This was always misleading. When properly adjusted for relative prices, Russia has an economy substantially larger than the United Kingdom. And it is not simply the size of the Russian economy that was underestimated, but also its importance in the markets for core goods.

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For example, Russia produces large amounts of the world’s fertiliser. It accounts for 19%, 15% and 14% of the world’s potassium, nitrogen, and phosphorus exports respectively. Fertiliser is obviously key to growing foods, so disruptions to these markets tend to increase food inflation. Russia produces large amounts of basic foodstuffs too, and is the largest wheat exporter in the world. Put simply, the Russians punch above their weight in the production of the necessities for life. While they may not, say, have a world-leading social media industry, they produce a great deal of the goods that we simply cannot do without.

But Russia’s real economic trump card is energy exports, particularly energy exports to Europe. Prior to the war, 40% of gas and around 25% of oil consumed in Europe came from Russia. And as European countries have ramped up weapons shipments to Ukraine, Russia has started to close the taps, driving up prices and further exacerbating the inflation.

These are the most powerful short-term drivers of inflation, but if we look further down the track there are long-term trends that look even more ominous. It is, for instance, becoming increasingly clear that the war in Ukraine has driven Russia and China much closer together, with the two countries opening up important new trade links. This appears to be part of a broader shift in which the BRICs countries (Brazil, Russia, India and China), as well as Argentina, Iran, and Saudi Arabia, attempt to decouple from the Western-led global economic system. Recently, the BRICs announced that they would attempt to establish a new reserve currency to challenge the US dollar.

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Until now, the West has benefited from the cheap labour and raw materials provided by the developing world. But at a certain point it was inevitable that the developing world would decide it is done playing second fiddle to the West. That day appears to be here, with Russia and China ushering in this new age. Without easy access to cheap labour and raw materials, prices in the West will have to rise — and living standards will have to fall accordingly.

Amid all this, there is every chance the BoE will find it cannot control inflation. Normal or “cyclical” inflation occurs when the economy runs too hot, labour markets tighten up and workers demand higher wages, which are then passed on to consumers in the form of higher prices. Central banks then raise interest rates to slow the economy and the inflation is rung out of the system.

Yet while wages are certainly rising now, it is not clear that this is a core driver of inflation. More likely, the inflation is being driven by the after-effects of lockdowns and by the enormous and chaotic geopolitical shifts that we are witnessing. And if this is true then interest rate hikes by the BoE could make the situation even worse. It wouldn’t just cause a recession, but an inflationary recession — the worst of all possible outcomes, as it means rising unemployment and rising prices.

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The BoE does appear to be aware of this prospect. In their Monetary Policy Report in May, they stated that they “can’t do anything about the global supply problems or the energy prices that are currently pushing up inflation”. So why are they proceeding with the interest rate hikes? The most likely answer is that they realise that they need to try something. If inflation gets completely out of control, it will crush living standards and irreparably damage the economy. The BoE likely figures that they need to give tightening monetary policy a shot and see if it works. If it does, then they will have done their job; if it doesn’t, at least they know that they tried their best.

Either way, the stakes are enormously high. If the BoE fails to squeeze inflation out of the system and it turns out that price rises are reflective of a new global economic order, living standards in Western countries will decline at a rate never seen before in history. Since the Second World War, and especially in the last 40 or so years, we in the West have based our entire way of life around commerce and rising living standards. If it turns out that this era is now over, how will we choose to live? Will we be able to accept a lower standard of living? Or will modern society fragment? If the interest rate hikes by the BoE fail to tame inflation, we could soon be about to find out.

In other words, Biden claimed prophetic insight on inflation because he was advised by experts who had access to vast data sets unavailable to the public. We know how this story ended. The data turned out to be ambivalent. The experts were confused. The presidential prophecy failed by a wide margin — a year later, Biden was telling anyone willing to listen that inflation, which in June reached 9.1%, was his “top economic priority”.

We seem to live in an age of failure. Consider the trajectory of the current crop of leaders in the Western democracies. Less than two years after his election, Biden is a political corpse, with approval rates as low as 31%. Two and a half years after winning a smashing electoral victory, Britain’s Boris Johnson has resigned in disgrace. In France, Emmanuel Macron, though re-elected, now faces a hostile parliament. In Italy, unelected super-technocrat Mario Draghi has been forced to resign by his unhappy coalition partners. In Germany, a cats-and-dogs government is struggling with past policy failures in energy supply and military preparedness.

What are we to make of this? Are elected leaders today exceptionally dim or — as in the plot of a Greek tragedy — have they been raised to power only to be crushed by its impossible demands? The two possibilities aren’t mutually exclusive, of course, but those wishing to learn where to set expectations of government would do well to pick up Paul Ormerod’s subversive 2004 book, Why Most Things Fail: Evolution, Extinction, and Economics. If the central thesis of the book is correct, then the practice of democracy has for decades been stuck in a sterile space between fantasy and hubris.

Ormerod is a British economist blessed with an unusual combination of gifts. He can decode the obscure mathematical models that clutter present-day economics while writing in English that is easily understood and a pleasure to read.

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By Paul Kingsnorth

He begins his tale with a paradox. Economic theory, he informs us, has long been fixated on artificial balance (between supply and demand), structural success (the theory of the firm), and rational behaviour. Yet the economy is a chaotic transactional swirl, the chief feature of which is failure. Of the top 100 American companies between 1912 and 1995, 29 had gone bankrupt by the end date, 48 had ceased to exist as corporate entities, and 52 had survived but dropped out of the top 100 list. Only 19 companies managed to cling to the top over the entire 83-year period. If we look at all US companies with an annual turnover of more than $25,000 a year, we find that 600,000 of them, or more than 10%, go extinct every year.

We tend to lionise winners — but for companies to fail is the rule, not the exception. The same holds true for government policies. Joe Biden may be exceptionally successful at failing, but he should be considered the patron saint for a whole class of political elites who offer “solutions” and deliver failure.

Can government “solve” unemployment? Every candidate for office promises to do so. On this question, however, Ormerod delivers a devastating historical analysis of the British economy, which, uniquely, has kept good records stretching far into the past. Between 1870 and 1938, unemployment in Britain averaged 4.9%. After the Second World War, the size of the government doubled in proportion to the economy as a whole. One rationale behind this expansion was that, unlike an untamed free market, the state could deliver full unemployment. Yet the unemployment rate between 1946 and 2004 was 4.5%, only marginally lower than the earlier period. Government can spend and hire, and in this way inflate employment — but because unemployment is never structurally “solved”, it will inevitably return.

Can government “solve” economic inequality? Massive state investment in education has failed to induce the mobility required in a meritocratic society, Ormerod observes. According to the evidence, developed democracies tend to have lower rates of inequality than poor or authoritarian nations — but at the moment, for unknown reasons, inequality is climbing, and governments have no clue how to reverse the trend.

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Can governments “solve” segregated housing? Decades of anti-discrimination legislation and regulation have had little effect. Neighbourhoods across the West that have segregated along ethnic, racial, or religious lines have, if anything, multiplied. This may have nothing to do with systemic bias or racism — Ormerod can show through game theory how a very slight preference at the individual level for living near one’s group can deliver stark segregation at the level of the system.

This divergence between individual intent and systemic outcomes helps explain the astounding persistence of failure. Human societies aren’t mechanical contraptions that can be redesigned, in whole or in part, by the social engineers of the state. They are complex systems. Government policies seek linear outcomes, treating the citizenry as a passive mass. But we are human: we are causes as well as effects. Individuals will respond to government mandates by changing their behaviour in a range of unpredictable ways. That in turn will nullify the conditions on which the policy was planned. Government intent will get swallowed by complexity and result in failure.

Human systems are often arrayed in a power law distribution: a few power users at the top of the chart followed by a steeply declining long tail of less significant players. The power law describes many social and economic relationships, but Ormerod, in a brilliant tangent that illuminates the failure of Covid-19 preventive policies, applies it to viral infections. In networks determined by the power law, he writes, “if just one single component becomes a carrier of a virus… there is a risk that this will percolate across the entire population”. He continues:

“Policies which try to contain percolation across such networks are very hard to implement. Unless each one of the very small number of highly connected individuals is targeted effectively and immunised, the virus will persist. Immunisation at random of even a large proportion of the population will simply not succeed, unless purely by chance not just some but all of the highly connected are caught.”

Ormerod published these words in 2004. We can only wonder how much isolation and disruption would have been avoided over the last two years if the health authorities of the world, in their expert wisdom, had heeded them instead of chasing the shadow of Zero Covid.

“We do not want to adopt an almost nihilistic view that nothing can be done,” Ormerod warns — and of course he’s right. We can’t predict, but we can react swiftly to overcome our difficulties. Biden and his experts failed to see what was coming with inflation, but the Federal Reserve has slammed the brakes on the US economy and this will hopefully reduce inflationary pressures. We are not helpless cogs in a machine. The very quality that makes our actions so inscrutable in the aggregate — our agency — endows us with the motive power to tackle and fix our troubles.

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One need not be a nihilist, either, to accept that, in the world according to Ormerod, the limits of human knowledge press much tighter to the skin than presidents and prime ministers have been willing to admit. The explanation for the collapse of trust in democratic institutions is a simple one: politicians promise what they can’t possibly deliver, and, in the digital age, their ignorance is constantly exposed. Biden, Johnson, and company are only the latest in a long line of elected leaders who claimed to bring the fire down from the heavens and “solve” the human condition. They mostly failed. The public, having bought into the Promethean rhetoric, can only interpret failure as the consequence of corruption rather than incompetence.

There’s a great deal of vanity involved in all of this. Our political elites, encouraged by a priestly caste of experts, love to pose as miracle-workers. To them, and to us who elect them to office, I would every day recite Ormerod’s final dictum: “We may intend to achieve a particular outcome, but the complexity of the world, even in apparently simple situations, appears to be so great that it is not within our power to ordain the future.” Only when this lesson is internalised will we begin to emerge from the age of failure.

Then, in the Eighties, Right-wing politicians such as Margaret Thatcher and Ronald Reagan adopted this philosophy, taking aim at the “nanny state” that had supposedly led to the proliferation of “welfare queens”. They were followed by Third Way politicians like Bill Clinton and Tony Blair, who were convinced that the “era of big government is over” and the state’s power had to be reduced. Besides demolishing much of the welfare state, European state-owned enterprises that accounted for a significant chunk of national economies were also targeted. Companies such as British Gas, British Telecom, British Steel, and the railway sector were all privatised. But the aim of these policies was not merely a drive for efficiency; they were also designed to break the power of trade unions, while trying to turn Britain into a “shareholder society”.

Until a decade ago there was overwhelming support for this reining in of the power of the state, and in particular the privatisation of state-owned enterprises. But after the wave of repeated crises we have suffered since 2008, the public mood has changed considerably. According to YouGov, around 60% of British citizens now want to nationalise a UK rail sector infamous for its extortionate fares, and a similar number want to nationalise the energy sector. But it’s not only a matter of changing attitudes but also of political necessity. The current energy crisis is already forcing governments around Europe to consider bringing some energy companies under public ownership.

The Russian invasion of Ukraine has led to a severe rise in the price of oil and gas, with gas prices already increased by 52% by April 2022, and further hikes likely in the autumn. Now politicians are under heavy pressure to find rapid solutions that the market could not provide. Among the measures are releases of strategic reserves to increase supply by importing liquified natural gas from the US, striking gas deals with alternative suppliers from Algeria to Azerbaijan, and fast-tracking new Liquid Natural Gas (LNG) plants.

Governments were also forced to provide subsidies to families and companies to help with rising energy costs. In Britain, part of this was eventually covered through a windfall tax on corporate profits (totalling £5 billion): a common-sense policy given the profiteering going on in the energy sector. But even this intervention was met with disapproval by economists still convinced that the market should take its course, even if it destroys millions of jobs in the process. In preparation for the winter other measures are currently under discussion, including an EU-wide price cap.

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Some governments have also been offering free or low-cost public transport to help address rising energy costs. In Germany, the government has launched a nine-euro-a-month ticket to travel across the entire country on local or regional trains during the summer. The initiative has been immensely successful, with train trips increasing by 50% and may even be continued as a “Klimaticket” to fight against carbon emissions. A similar scheme has been adopted by the Spanish government, with 100% discounts on multi-trip ticket journeys on local and regional services from September to December. These measures are all good palliatives, but the war in Ukraine has unearthed systemic fragilities in our economy and highlighted how free-market extremism has put countries’ economic and geopolitical security at risk, while slowing post-carbon transition.

Desperate to reverse this, some policymakers are now turning to more direct forms of state intervention: nationalisations. In France, Emmanuel Macron has launched a plan to bring back the energy giant EDF (which was part-privatised in 2005) under public control, at a cost of around €8 billion. The immediate motivation is to save from bankruptcy a company already laden with debt, which has only grown since Macron forced it to sell energy below market price to avoid an explosion of social unrest. But the nationalisation is also part of a more long-term plan that aims at securing France’s energy independence while meeting its climate transition targets. This comprises the building of six new nuclear power stations over the coming decades.

France isn’t alone in falling back on the state-ownership of strategic companies. In fact, we may well be at the beginning of a wave of nationalisations around Europe, with policymakers forced to reverse Thatcherite policies, by dint of necessity rather than ideology. The UK government has announced that it will part-nationalise the National Grid to help reach the Net Zero targets. Even the German government has mulled the possible nationalisation of energy firms at risk of going bankrupt, including Nord Stream 2. The reason is straightforward: it’s far easier to radically transform the energy sector by owning companies directly than by regulating them.

The real sticking point, however, remains public investment, given the enormous resources needed for the transition to a post-carbon and more secure energy supply that may help reduce prices. In Europe, the 2010s were a “lost decade”, when austerity policies led to a severe drop in public investment in key sectors including energy. But since the pandemic struck, we’ve seen a partial inversion of this self-defeating bean-counter mentality. The European Union Recovery Fund, which totals €800 billion, for instance, was a partial move away from this austerity orthodoxy, and came after a longstanding confrontation with the so-called Frugal Four (Denmark, the Netherlands, Sweden, and Austria).

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But even still, it’s wholly insufficient to the challenge the continent faces. Worse, fiscal hawks such as Germany’s finance minister Christian Lindner are already calling for another bout of austerity, even while central banks are raising interest rates, which risks plunging our economies into deep recessions. In the US, even though Biden’s $1 billion Infrastructure Bill was passed, it still barely makes up for decades of public disinvestment, while more ambitious plans contained in the Build Back Better bill were scuppered because of opposition from centrist Democrats like Joe Manchin. Manchin, who is bankrolled by oil lobbies, insists that public investment would contribute to inflation, despite the fact that much of it is directed towards creating alternative streams of energy supply that may help reduce prices.

So while state interventionism is coming back, its return is far from complete. As economist Daniela Gabor has argued, what we’ve seen so far can be described as a “green derisking state”, in which governments attempt to guarantee financial markets against the liability of highly risky investments in the “green transition”.

What is instead required is a far more ambitious strategy — what Gabor calls a “green developmental state” — with governments heavily investing in energy transition and using state-owned companies as the driver of economic transformation. However, this requires moving beyond resorting to state interventionism as an emergency measure and safety net for market failure. It would mean rethinking our entire economic model, finally accepting that some sectors are best run by state-owned companies, and devising fruitful ways in which state and market can collaborate.

As the past decade has shown, there is no market solution to a problem that was created by prioritising the short-term convenience of the market over the long-term security of nations. If we want to avoid environmental disaster, economic decline and geopolitical blackmail, we need to move beyond the self-defeating fallacies of anti-statism.

This week’s rail strikes have revived all this, from Monday’s Sun headline (“We regret to announce that this country is returning to the Seventies”) to the appearance of an elderly Arthur Scargill on a picket line in Sheffield. Amid a backdrop of rocketing energy prices that echo the oil shock of 1973, and a Prime Minister who has never looked so vulnerable, there is much talk of a “summer of discontent”.

But if the issues are similar, we have arrived at them from the opposite direction. History is not just a gallery of taboos, laid out in a blank space like those coffins in Utopia, ready to be raised from the dead at will. The backstory of those Seventies images was a decade-long power struggle very different to today’s.

It is hard now to appreciate just how permanently powerful the trade unions once seemed — partly because that power was founded on a shared fear that has long since faded. In the Sixties, free-market economics was a Victorian relic, unsuited to an interconnected modern economy, forever damned by the mass unemployment it had produced before the war. That memory of Thirties dole queues was the nightmare to which Britain must never return: the founding taboo of the post-war consensus, which meant governments must strive for full employment. This hugely bolstered the unions’ position. Striking is less scary if jobs are plentiful.

The long, agonising journey to the Seventies began as strikes became more frequent, and less tolerated. Labour and Conservative governments took turns to try to rein in union power — but without breaking the taboo on mass unemployment. So it was not simply the annoyance of a cancelled train or an uncollected rubbish bin that turned the imagery of the Seventies strikes into a nightmare. It was the battle for power between the unions and governments they represented, and the creeping dread that the unions were winning.

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The single event that did most to sear this into ministers’ minds was a stand-off at a spectacularly tedious location: the gates of a coke depot in the Saltley district of Birmingham, at the height of the 1972 miners’ strike. On 10 February, thousands of pickets, marshalled by a young union official from Barnsley called Arthur Scargill, managed to compel the police to close the gates to the lorries queuing to collect coke — breaking the Chief Constable’s promise to the Home Secretary to keep them open.

When news reached Edward Heath’s cabinet meeting a few minutes later, the effect was devastating. The strike had already forced a state of emergency as power supplies dwindled. Heath later described Saltley as “the most vivid, direct and terrifying challenge to the rule of law that I could ever recall emerging within our own country”. A few days later, the miners forced him to surrender, and give them their pay rise. After a second miners’ strike in 1974, and the fall of Heath’s government, Labour gave the miners another raise — and to many, the country faced a choice of confrontation under the Conservatives, or capitulation under Labour.

Along with inflation, the prospect of civil war between the state and unions was becoming a nightmare to rival the old ghosts from the Thirties. This was held at bay for a while by the 1974 Labour government’s “social contract” with the unions — a last-ditch deal to keep wage demands down in return for government benevolence. But finally workers grew sick of prices outstripping their pay. It was this basic settlement that finally came apart in the Winter of Discontent. The sight of pickets outside hospitals and cemeteries allowed Margaret Thatcher to denounce the triumph of union power, and to win a mandate to reduce it. The spectres of the Thirties had finally lost the battle of nightmares.

The new settlement ushered in by the Thatcher government was based on constraining the unions — making what happened at Saltley illegal — and on liberating financial services. This produced a long period of prosperity. For some at least, that lasted all the way through to 2008, when those financial services nearly broke the economy, igniting the power struggle whose latest battle is being fought out this week.

The dominant power under attack was now not the unions but finance: in 2010, the Liberal Democrats’ Vince Cable pointedly branded bankers “pinstriped Scargills”. But just as the unions continued to hold sway through the Seventies, so has the City since the Crash. The impact of the Crash was absorbed by ordinary workers — not through mass unemployment, true, but through cuts to pay and hours, and the explosion of the gig economy and zero-hours contracts. Pay flat-lined for much of the decade that followed.

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Now, under the stress of inflation, discontent has brought the post-1979 economic model under renewed pressure, just as globalisation has gone into reverse. Covid has broken old taboos on high government borrowing. The IMF has called for more to be done about inequality; the chief of the CBI has castigated the legacy of Thatcherism in northern England. Yet so far, despite the promises of levelling up and the talk of a post-Brexit move to a higher-wage economy, labour’s share of wealth remains lower than it was in the Seventies.

So, if the fundamentals remain so different, why has there been such insistence this week that we are “going back to the Seventies”? The Treasury and the Bank of England might be deeply concerned about the development of a wage-price spiral — a phenomenon that can be devilishly difficult to stop — but as the former Conservative minister David Willetts wrote this week: “Overall, pay is rising less than inflation. This is not some inflationary spiral.”

History suggests there may be another reason for this week’s warnings: “going back to the Seventies” is the nightmare that has underpinned the free-market consensus ever since 1979.

In the 1983 election, Thatcher frequently asked for copies of Winter of Discontent newspaper headlines to help her warn against letting Labour back in. She was far from the last leader to deploy this nightmare. In March 1997, Tony Blair promised “there will be no return to the Seventies”. In 2015, Boris Johnson warned Ed Miliband would do just that; as Prime Minister, he has complained that his Cabinet are too young to remember it. He needn’t worry, however: in 2012, four of his ministers co-wrote a book called Britannia Unchained, which begins and ends with fearful visions of Seventies collapse.

But something similar happened in the Seventies, and it only worked for so long. As the post-war consensus came apart, its tribunes redoubled their efforts to shore up the potency of the old nightmares. Labour’s Michael Foot endlessly invoked “the mass unemployment of the Thirties”; so did Conservative leaders whose politics were forged by the Depression, such as Harold Macmillan and Edward Heath.

However, a new generation of historians started to argue that, for those in work, the Thirties had really not been so bad — and all the while, the turn of the generations was eroding the folk memory of the dole queues. As we’ve seen, the Thirties eventually stopped haunting British politics. Likewise, today, to remember the Winter of Discontent, you’d have to be at least 50.

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Yet for now, the Seventies nightmares remain tenacious. When Johnson won his 80-seat majority in 2019, it looked as though he might become a transformative prime minister, ushering in a permanently higher-spending state, focused on levelling up and securing its new bases in the Midlands and the north. Covid seemed to bolster that possibility.

For good or ill, the resurgence of inflation and strikes now appears to herald a return to Thatcherite orthodoxies. Yet paradoxically, this would make this government less like Thatcher — in terms of her determination to make a radical break from the past. Of course, the 12% swing to Labour in the Wakefield by-election may yet turbocharge the worries of Red Wall Conservative MPs with sufficient force to push levelling up up the government’s priority list. Even before his defeat, the Conservative candidate could be heard complaining the £25 million allocated to the constituency from the Towns Fund was not cutting through.

But all this presents Labour with a dilemma too — just witness the divisions between the Starmer leadership and those MPs who this week joined RMT picket lines. As John Curtice has pointed out, Labour’s share of the vote in Wakefield rose by only half as much as the Conservatives’ fell. Labour now has to decide how far it wants to risk a break with the post-1979 model of weak trade unions, and the job market that developed in the wake of the Crash. Unlike the Winter of Discontent, it is at least in Opposition, which worked so well for Thatcher. But Labour is always implicated by the actions of the trade union movement which played a huge part in the party’s creation.

Given the unions’ weakness compared with the Seventies, and government determination to face down the strikes, there is no obvious moment of transformation in sight. And yet it may be that the Seventies does offer a precedent here. Just as the remembered nightmare of mass unemployment was finally overridden, in part by the nightmare of mass picketing, it’s possible that very nightmare, now 40-years old, may now be overridden in its turn: by many ordinary people’s inability today to make ends meet, and their desperation for a pay rise. Unions are often dismissed as old-fashioned — but then so was the free market, and that went on to recover quite strongly. Perhaps, then, the most striking parallel between now and the late Seventies is the giddy, ominous feeling that something is coming to an end.

***

Phil Tinline’s most recent series, Pay Freezes, is available on BBC Sounds. His book The Death of Consensus: 100 Years of British Political Nightmares has just been published by Hurst.

This is, as Thomas Schelling wrote, “a conscious process of dirty bargaining”, whereby each side tries to inflict pain and suffering on the other side until one or both yield. Put simply, the West and Russia are playing a violent version of the schoolyard game Mercy. The centrepiece of the West’s effort to inflict pain on Russia is what the historian Nicholas Mulder has called “the economic weapon”, which has been deployed at unprecedented scale. The centrepiece of Russia’s effort to inflict pain on the West is the commodities weapon. In this competition in pain-tolerance, it is not immediate whether the West or Russia has the upper hand.

The West unleashed the economic weapon with considerable fanfare. Russia, with a GDP smaller than South Korea, was treated not as a great power adversary but as a rogue stake akin to Iran — a nuisance that could be rather effortlessly strangled through the unrestrained use of Western sanctions. Great hope was placed on the idea that these sanctions would inflict such catastrophic pain on Russia as to undermine the Putin regime.

These hopes and expectations were based on wishful thinking. Non-Western powers — China, India, Brazil, Mexico and South Africa — simply refused to play along with the West. They appeared more worried by the West’s weaponisation of the dollar system than by Russian aggression against Ukraine. Even more importantly, Western leaders were gravely mistaken in their idea that Russia was a second-rate power that could be simply crushed with the economic weapon.

This idea was inconsistent with any clear-eyed evaluation of the facts. The Red Army was the strongest land army in the world from the mid-Thirties to the late-Eighties, and by the early 2000s, Putin had revived the Russian army following a brief period of disinvestment and neglect. The Russian army has seen action in a series of small wars since Putin came to power, demonstrating operational and tactical competence.

Thanks to its nuclear arsenal, Russia has enjoyed strategic parity with the United States since the late Seventies, which has allowed it to deter more direct US intervention in the Ukraine war. President Biden has wisely ruled out sending US combat forces to directly engage Russian forces. And despite a botched invasion plan, the baseline scenario for the Ukraine war remains an outright Russian victory. If that happens, the Ukraine war will look in retrospect very much like the Winter War of 1939-1940, in which, despite many early reversals and heavy losses inflicted by the Finns, the Soviet steamroller ultimately prevailed through sheer material superiority.

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Russian GDP may be small, but Russia is, together with the United States, one of the only two states in the international system that can survive relatively unscathed in complete autarchy. Indeed, Russia is not dependent on the world for hard-to-replace stuff — the world is dependent on Russia. It supplies a significant fraction of the world’s energy, metals, fertilisers, and food.

The upshot is that the West’s economic war on Russia is generating tremendous blowback in the form of sky-high commodities prices and the mother of all inflationary shocks to the world economy. Just like imposing an economic blockade on Saudi Arabia is a recipe for self-harm, trying to economically strangulate Russia is a fool’s errand. The breakdown of Russo-Western relations has generated a food crisis, an energy crisis, and a broad-based inflationary shock the likes of which we haven’t seen since the oil price shocks of the Seventies. So, the Russo-Western confrontation is extremely costly for the world at large. Meanwhile, Russia’s coffers are overflowing from commodities exports. So much for the economic weapon.

It is not just that imposing costs on Russia is very costly to the West and the rest of the world. With Western opinion leaders fantasising about Russia after Putin, it pays to be clear-eyed about regime stability on both sides. Russia is what Jeffrey Winters calls a “Sultanistic oligarchy” — a political economy characterised, above all, by the need to temper conflict between oligarchs through the concentration of power in the hands of one man. China is also a Sultanistic oligarchy. The difference between Russia and China is that, while Putin faces a small and stable number of oligarchs, China’s oligarchy is constantly growing in size, wealth, and power. The stability of the Russian oligarchy endows the Putin regime with considerable stamina. No serious Russian analyst believes it to be at risk of collapse, no matter what the West dishes out.

The contrast with the West couldn’t be starker. The Biden administration and the Democrats look set to crash and burn on the shoals of inflation. The president’s approval rating has sunk below 40%. Democrats will almost surely lose control of Congress come November. Of course, other issues condition Democrat fortunes. But it can hardly be denied that the greatest threat to the Democrats is inflation. And inflation is at least partly under Putin’s control — he can turn the knob up and down to maximise the delivery of pain to the West.

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In fact, considerably more than the Democrat’s performance in November is at stake. Biden’s wager on Ukraine is running the risk that the Democrats could be locked out of power for the rest of the decade. That would, among other things, put the US energy transition at risk. No doubt Putin will do all he can to replace Biden with Trump. He may very well succeed. Instead of the West engineering a regime change in Russia, it is Russia that is likely to succeed in engineering a regime change in the United States. Is there any way to avoid this nightmare scenario?

Again, we must be clear-eyed: the source of the problem is Western misperception of Russian weakness. American Russia policy is based on the assumption that Russia is weak and the West strong. But, as we’ve seen, this assumption is unwarranted. In terms of what we can dish out to him and what he can dish out to us, it is Putin who has the upper hand.

The United States, and the West more generally, have committed to supporting Ukraine as it fights for its existence against Russia. It is not politically possible for Washington to throw the Ukrainians under the bus, even if doing so made sense from the perspective of cold-hearted realism.

Washington is gearing up for a protracted struggle intended to bleed Russia through proxy war in Ukraine and with the liberal use of the economic weapon. This policy is premised on the idea that time is on the West’s side. This assumption, like the assumption of Russian weakness, is wrong. If Putin has the upper hand in the competition in pain-tolerance, then time is on his side. With his current policy, Biden is running a significant risk that the US, instead of Russia, will be destabilised politically. The correlation of forces calls for a different foreign policy. What might that look like?

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The Ukrainian struggle has won the hearts and minds of the West. But Ukrainian interests are not necessarily congruent with American or Western interests. Moreover, as paymasters, armorers and tactical intelligence providers, the Americans enjoy considerable leverage over the Ukrainians. A hard-nosed policy would use this leverage to get the Ukrainians to the bargaining table sooner rather than later, and possibly much sooner than the Ukrainians would prefer.

A Western peace policy would seek to, first of all, get the warring parties to begin negotiating as soon as possible. Second, it would clearly set out what the US seeks from a negotiated diplomatic settlement. At a minimum, it should seek a Ukraine free from Russian coercion and free to seek non-military relations with the West. Third, the West must concede that Ukraine will never be part of the Western military alliance. Indeed, the point of departure for productive diplomacy is Ukrainian neutrality. The details should be left to the two warring parties.

Credibly backed by the West, the Ukrainians will not necessarily have the weaker hand in their negotiations with the Russians. The West has demonstrated that it can impose large costs on the Russians. But the Russians have also demonstrated their capacity to inflict pain on the West. With these demonstrations, the door is now open for a diplomatic resolution of the Ukraine war. The United States will find that there is considerable support at home and abroad for a principled peace policy that does right by the Ukrainians without destroying Western political economy in the process.

Think back to the early Eighties. We face many of the same pains, again under a Conservative-majority government: Moscow is in the news for all the wrong reasons; high inflation; low growth; widespread industrial action. Britain is a country ill-at-ease, uncertain of its next destination.

The surgeon back then had no uncertainty over what medicine needed to be administered, what operation was required. The 1979 election was a referendum over the direction of the country: more of the same pain, or an operation that, despite its risks, might just jolt the country back to life?

And while you could describe both Conservative prime ministers by their characterful hair alone — Margaret Thatcher: powerful, unyielding, strong; Boris Johnson: chaotic, untidy, silly — there the similarities quickly come to an end. This hasn’t stopped the Johnson cabinet claiming the Thatcher legacy as its own. Hear Rishi Sunak’s speeches and you would assume the Government was on a Lawsonian crusade against high taxes.

The reality is precisely the opposite: taxes are about to reach their highest level since the Second World War, 12 years after the tax-cutting Tories re-entered Number 10. In 1979, the party swept into government with a clear diagnosis and a comprehensive treatment plan, defined by its ambition to bring down inflation, get Britain back on track, and consign the “sick man of Europe” label to the dustbin.

Today, however, after three consecutive Tory prime ministers, the party seems tired and unsure of what the whole point of being in government is, beyond holding power for its own sake. The by-election results from Wakefield and Tiverton will all but confirm this, covering two completely different demographics and geographies. The likely defeats will be a symptom of the lack of a narrative that holds the Government together — unlike Thatcher’s crusade against inflation, excessive union power, and unfree markets delivering poor outcomes to consumers.

Ostensibly, Levelling Up is the Government’s mission. But with limited cash or ideological rigour underpinning the policy, claims of ambition, drive and determination ring hollow. It didn’t seem this way two-and-a-half years ago, when the party jettisoned austerity and set sail for new ideological waters. What was remarkable, and remarked upon heavily after the 2019 landslide win, was how far the Tories had reached into former Labour heartlands. Wakefield itself is a prime example of one of these “Red Wall” constituencies. For the first time in generations, it bought into a Tory aspirational narrative. These areas were going to get better, and the Conservatives were going to be the party to make that happen.

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But what wasn’t sufficiently remarked upon at the time was the extent to which this victory was achieved without the youth of Britain’s cities. Instead, it was achieved with a deep dependence on older voters, with over two-thirds of people in their seventies and over voting Tory.

It is easy to imagine that the cities, London in particular, have always been bastions of falafel-eating, Birkenstock-wearing liberals — impregnable Red fortresses owned by the Labour Party since time immemorial. Yet that is to forget that Thatcher’s majorities were achieved with the enthusiastic support of the cities. In London, a full two-thirds of the seats were won by the Conservative party in 1983, compared with only 29% in 2019. By contrast, the 2019 victory was underpinned not by a vision of growth and ambition, but by home-owning pensioners in ex-industrial and ex-mining regions who didn’t usually vote Conservative for cultural reasons, but finally snapped and voted for their own interests.

The traditional diagnosis for the cities turning against the Conservatives is that this split has happened over social and cultural values. Cities are predominantly young, and the young reject the current social and cultural values of the Conservative Party: values typified by the placement of Nadine Dorries as culture secretary, initiatives such as the Rwanda refugee resettlement policy led by home secretary, Priti Patel, and, of course, Brexit.

While this is certainly a significant part of the picture, what is rarely accounted for is the wholesale fiscal and monetary contempt the modern Tory Party has for anyone who isn’t a home-owning pensioner. Faced with the highest tax burden since the war, the highest inflation in decades, and ever-shifting student loan repayment terms — faced with plummeting rates of homeownership and sky-high house prices that have more than sextupled the time it takes for someone in their late-twenties to save a deposit — why should anyone under-40 vote for the Conservative Party?

And for retirees? As much jam as they want. Pensioner incomes now even exceed working incomes, after tax and housing costs, for the first time in history. The United Kingdom is choosing not to reward those who are building for the future. Instead, the spoils of the Treasury are being diverted to the mediocrity of the already satisfied, whose biggest ambition is driving their Honda Jazz to the local garden centre to buy a plastic lawn they won’t have to bother mowing.

This wasn’t always the case. Once upon a time, at an archetypal and electoral level, the urban yuppie seemed the core demographic of the Conservative Party: young chaps with floppy hair in pinstripe suits striding confidently through the City with ears glued to a mobile telephone the size of a small dog, shouting “Buy buy buy!” These aspirational workers could not have been more enthusiastic for the Thatcherite deregulation of the financial markets and the Lawson tax-cutting budgets.

What changed? Simply put, the core value of the Conservative Party is not deregulation, low taxation or free markets. The core value is power.

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By Jacob Furedi

This is not necessarily a bad thing. Being in government means weilding the ability to shape the country in your image and, just as important, prevent the opposition from shaping it in theirs. But what happens if access to power is shaped not by the distribution of “winners and losers” in society, where pressure builds up over time in living conditions to shift voting behaviour, but by the sheer size of a demographic cohort?

The clue is in the name — baby boomers. The huge increase in post-war births resulted in a great demographic bulge. There are millions more baby boomers than in the following and preceding population cohorts. This has granted baby boomers the advantage of a vast, unified voting bloc. This bloc of voters, owing to their similar age, wealth and health needs, are all likely to have comparable public spending and policy priorities.

With this voting power comes responsibility. But like a Labrador with access to an unlimited supply of sausages, the boomer cohort has not been able to help itself — and has gorged itself until it can barely walk. The triple lock on pensions; ring-fenced NHS and social care spending; low taxation on asset wealth owned by the old, combined with high taxation on income, predominantly earned by the young; avoidance of housing reform. And austerity? That was for the young only.

“The facts of life are Conservative,” said Thatcher. And broadly, it holds true. People like to limit the rate of change in their communities. And once people have built assets, they want to see them protected, and taxed lightly, if at all. But what if people can’t even build an asset base in the first place, because of a combination of planning gridlock and loose monetary policy shooting house prices into the stratosphere? What if they remain vagabonds, moving from rental flat to rental flat, not gaining a sense of community to care about, enrich and protect?

Think back to the ambition of the Right to Buy policy. The politics of enabling homeownership to a generation of striving workers wasn’t lost on the party then. It was a central policy of the government: an opportunity for the aspirant individual to buy into the national project. The party has since betrayed its own orthodoxies for political convenience and power. But through this it has set a potentially terminal trap for itself. If the facts of life are no longer conservative, how can the party build a winning coalition? As the boomer demographic declines, all the party will be left with is a generation of resentful, asset-poor millennials who haven’t seen income growth in decades.

The next election is already looming over this parliament, and the need for a radical policy agenda to challenge this inequality is glaring. Young people already overwhelmingly vote against the Conservative Party, which barely mustered a fifth of the 18-29 vote share in 2019, a year in which it won a landslide victory. Labour already can already rely on this demographic. All that’s left for Labour to go after — which means favourable policies, subsidy and controversy avoidance — is the predominantly Conservative boomer vote. Politics by traffic jam. Pork barrel politics divided by age, not by constituency.

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Despite this grim outlook, green shoots of ideological rebellion are emerging within Conservative circles. Innovative policy solutions such as Policy Exchange’s Street Votes proposal are being laid down. The party may also seek to focus on building in the cities over the more politically controversial areas with housing shortages in more rural areas. The political risk here is much diminished. What will the heavily Labour city constituencies do if they hate development — vote more heavily against the party that doesn’t hold their seat?

Others in the party are also questioning treasury orthodoxy on investment spending. Abandoned to the Brownites in the 2010s, a perfectly reasonable conservative case can be made for state-spending on infrastructure to lower taxes in the long run because of higher economic growth. The party of business cannot be blind to the fact that businesses require investment to grow and become profitable. If this idea was good enough for Ronald Reagan’s Right-leaning government, it can be good enough for the Tories today.

For now, however, these remain fringe ideas within the party. The discontent is there, and it’s growing, driven by high prices, a decade of stagnant growth and limited policy innovation. If it’s to move forward, the party needs to admit to itself the scale of the ideological tangle it’s got itself into. The national pallor of the late Seventies forced a brave, ideological character to emerge in the form of Thatcher.

Today, after 12 long, tiring years in power, no such figure has emerged. And that doesn’t look like changing. Whether the Wakefield and Tiverton by-elections will serve as a second trigger for leadership challenges is unclear, even with the year-long immunity from a confidence vote that is assured by the 1922 Committee rules. It would only take a rule change from the committee to see Johnson fall. Either way, today’s polls surely mark the beginning of the end of the Johnson era.

Who will follow is anyone’s guess, though it seems likely they will disappoint. After all, which Tory will be brave enough to challenge, let alone destroy, the boomer-led satisfaction with national mediocrity?

Nearly 50 years ago, the oil crisis of 1973 sent inflation skyrocketing across Western countries. It was a textbook case of imported inflation, which in a context of close-to-full employment and strong union bargaining power triggered self-reinforcing inflationary pressures, as companies raised prices to defend profit margins while workers in turn demanded wage increases. This price-wage (or wage-price) spiral was a response to the inflationary pressures coming from abroad — not their cause.

However, the Seventies crisis came at a time when the “compromise” between labour and capital that had provided the bedrock for the post-war economic-political settlement was already heavily strained, as each side attempted to claim a greater share of a shrinking cake. Economic and political elites realised that the inflationary crisis provided them with the perfect opportunity to deal a deadly blow to the post-war full employment regime, which in their view had led to the working masses becoming too powerful. They concluded that it was time to strike back — to break the back of organised labour and reassert the unfettered power of capital over society.

Inflation represented the perfect casus belli. With the theoretical backing of monetarist economists such as Milton Friedman, they crafted a narrative that blamed all economic problems — beginning with inflation — on excessive union power, unreasonable wage demands by workers and bloated welfare systems. The neoliberal counter-revolution had begun, a crucial aspect of which was the deliberate engineering of unemployment through a radical tightening of monetary and fiscal policies, in order to crush the bargaining power of unions. Combating inflation was not the end — it was the means.

As Alan Budd, economic advisor to the Thatcher government, would later admit: “There may have been people making the actual policy decisions… who never believed for a moment that this was the correct way to bring down inflation. They did, however, see that [monetarism] would be a very, very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes.”

In many ways, the same thing is happening today. As in the Seventies, inflation is surging, threatening the post-pandemic recovery and raising once again the prospect of stagflation — the simultaneous incidence of stagnant or negative growth and accelerating inflation. And as in the Seventies, establishment economists and commentators have been quick to blame the surging prices on excess demand (people having too much money to spend), fuelled by excessive wage increases and over-expansionary fiscal and monetary policies during the Covid crisis.

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Sanctioning Russia could topple the West

By Thomas Fazi

Their proposed solution is the same as that adopted in the Seventies: central banks must hike up interest rates and cut back on fiscal spending. In one word: austerity. And that’s what they’re doing. Not only the US Federal Reserve, but central banks all over the globe — including, most recently, the ECB — are raising rates rapidly in the most widespread tightening of monetary policy for more than two decades.

The problem with all this is that — again, just like in the Seventies — the recent inflation has relatively little to do with excess demand and excessive wage growth. In fact, it has mostly supply-side origins, triggered by the Covid crisis and now the Ukraine war, and rooted in the systemic deficiencies of neoliberal globalisation. From a Western perspective, the global lockdowns of 2020 and 2021 caused a collapse of global supply chains in durable goods and industrial components, as well as of cheap, flexible and abundant labour in low and middle-income countries. These foreign supply-side bottlenecks, which in turn were exacerbated in several countries by domestic supply-side bottlenecks — such as a shortage of long-haul truck drivers and dock workers in the US and UK — are the reason prices were on the rise well before the outbreak of the conflict in Ukraine.

In other words, lockdowns are to blame — not the fiscal measures adopted to dampen their effects. This is what we might call lockdown inflation, which is now flaring up once again due to the recent Chinese lockdowns.

In recent months, the Ukraine war and the sanctions on Russia have caused inflation, especially energy and food prices, to grow at an even faster pace. These price rises have several self-reinforcing causes. On the one hand, the conflict has directly disrupted exports of crude oil, natural gas, grains, fertiliser and metals, pushing up energy, food and commodity prices. These supply-side problems have been further exacerbated by the West’s utterly self-defeating sanctions against Russia, which have left European countries scrambling for more expensive alternatives to Russian oil from America and Africa — as well as by speculation in commodity (futures) markets.

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America has won Europe's war

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Indeed, notwithstanding the conflict in Ukraine, changes in supply and demand in themselves can’t justify the energy price increases. Global oil production, including from Russia, has actually increased compared to the same time last year (indeed, some Western countries, such as Italy, are importing more crude oil from Russia today than they have in past ten years, even though Russia’s recent decision to slash its gas supply to Europe suggests this is about to change). But energy traders, most of whom work for the world’s largest oil companies, saw the conflict in Ukraine as a perfect opportunity to hike up prices, knowing that most people would simply blame the rising prices on “the war” or even see it as “the price to pay to defeat Russia”.

This is why, as more and more people struggle to make ends meet, global energy giants such as Exxon Mobil, Shell, BP and Chevron have raked in record profits in the first quarter of 2022, far exceeding their revenue during the same quarter in 2021 — all because they are passing on ridiculous mark-up prices to consumers. As President Joe Biden recently put it, oil companies have “made more money than God this year”. Likewise, speculative activity by hedge funds, investment banks and pensions funds, fuelled by QE-induced cheap credit, rather than “supply and demand”, is also helping to drive up wheat prices, despite comfortably high global wheat stocks, raising the prospect of an unprecedented global wave of hunger. This is what we might call speculative inflation.

To make matters worse, certain mega-corporations that dominate entire sectors are able to use the (temporary) shortages, production cost increases and market chaos to raise their own profit mark-ups without losing customers — which is why corporate profit rates in the US and elsewhere have soared to their highest level since the Second World War. As even the Chair of the Federal Reserve, Jerome Powell, has said, large corporations with near-monopolistic market power are “raising prices because they can”. This is what we might call profit or market power inflation — or what some have termed “greedflation”.

Indeed, despite all the talk of the need to rein in wages to avoid wage-price spirals, the reality is exactly the opposite. As a result of the structural loss of workers’ bargaining power during the neoliberal era, workers in this new inflationary era are unable to protect their real wages, which are falling off a cliff in many countries as nominal wages grow much less than the general price level. Blaming workers for the current situation is a textbook example of victim blaming.

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In this context, raising interest rates and pursuing fiscal austerity will not only achieve little or nothing in terms of lowering price rises that are driven by primarily supply-side factors — but by depressing aggregate demand and economic activity and driving up unemployment, it will hurt wage-earners even more. Furthermore, it will “discourage investments that could ease some of the logistical bottlenecks that emerged during the pandemic crisis”, as a UN report reads — that is, long-term investments needed to increase domestic production (supply) and wean countries off their dependence on foreign imports, especially in the field of energy.

It would be naïve to assume that policymakers aren’t aware of this. So why are they pushing for such a solution? I would posit that once again, as in the Seventies, they are intent on exploiting the current inflation to engineer a recession and drive up unemployment in order to pre-empt a potential rise in labour bargaining power. After all, even if organised labour is still very weak, it is also true that labour markets — particularly in countries such as the US and UK — have been growing increasingly tight as a result of the post-lockdown surge in labour demand and Brexit in the UK. They are bound to remain relatively tight even in the future as the global economy undergoes a structural process of de-globalisation and reshoring.

In this context, recreating a reserve army of labour through austerity and engineered unemployment might be seen by capitalists as a way to ensure the balance of power between labour and capital doesn’t tilt too much towards the former, even at the cost of causing some creative destruction on stock markets — and of sabotaging the long-term shift towards a more environmentally and geopolitically sustainable model of greater economic self-sufficiency. Indeed, the Fed now predicts that unemployment will rise for the next three years as a result of its decision to hike interest rates.

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By Kathleen Stock

Moreover, in the EU, monetary tightening is seen by European techno-elites as a way to get countries back on the path of neoliberal “structural reforms” after the pandemic put these on the backburner. As Robin Brooks, chief economist at the Institute of International Finance (IIF), recently said: “Behind closed doors, there is a feeling that Italy’s spread has been too low for too long. That stymied needed reforms and drove away private investors who want a higher yield. So spread widening after [the recent] ECB meeting is partly by design. Back to more market discipline…” So much for the chattering classes’ talk about the EU’s post-pandemic “progressive turn” and abandoning of its neocolonial approach to economic policy.

So what might an alternative labour-driven rather than capital-driven response to the current inflationary crisis look like? There’s no shortage of tools that would shift the burden of the adjustment on the strong — the corporate pandemic and war profiteers — rather rather than on the weak: workers and low-income families. In the short term, as the Dutch economist Servaas Storm writes, “temporary strategic price controls, accompanied by supply-enhancing policy measures, can be used to eliminate corporate profiteering and prevent key prices (of energy and food) from shooting up”. These include price caps on fuel, energy and basic food items. This would force corporations to accept a reduction in their profit share, while allowing the labour share of income to rise.

Meanwhile, financial regulation cracking down on excessive speculation in energy and commodity markets would help lower inflationary pressures coming from financial markets. Redistributive fiscal policies, the opposite of austerity, are also needed to shield vulnerable groups from the higher costs of energy, fuel and other basic goods. And in the longer term, inflation control must be unconditionally subordinated to broader societal aims, such as boosting domestic supply and making economies more self-sufficient and less dependent on foreign imports. Ultimately, the debate about inflation is not really about inflation — it’s about the future of capitalism. And perhaps of the planet itself.

The conventional inflation narratives are both flawed, however, and are increasingly deployed to cover a retreat to the comfort of traditional ideological divides. Summers and Furman, for example, are aggressively pushing to eliminate tariffs to counter inflation, even though Trump’s 2018 tariffs cannot account for accelerating inflation in 2021, and their repeal would offer at best small and temporary relief. Likewise, Democratic rhetoric against “corporate greed” and “price gouging” mostly takes the form of moralistic posturing and only obscures more serious concerns about industry concentration and lack of competition.

Moreover, each side’s preferred explanations for inflation seem at odds with their perceptions of its severity and staying power. If, on the one hand, a one-time spending bill is the main culprit, then the Fed should easily be able to manage inflation through interest rate hikes (already underway), and there is little reason to fear an out-of-control inflationary spiral. In an April 2021 interview, Summers argued that a one-off stimulus would alter long-term expectations and lead to persistent inflation because it signaled the advent of  “a new era in progressive policy”. But a year later, any such progressive paradigm seems dead and buried, and unless Democrats pull off a miracle in the midterms, it is likely off the table through at least 2024.

On the other hand, if “corporate greed” — read charitably as underlying structural problems in the economy — is the main driver of inflation, then it seems unlikely that the Fed will be able to contain it, except perhaps at the cost of a severe recession. If that is the case, then any future progressive fiscal expansion would have to be ruled out, given its devastating inflationary consequences, unless those problems are addressed.

Indeed, the question going forward is whether there are structural issues — aside from idiosyncratic supply chain problems — that will cause inflation to remain elevated and lead to stagflation (high inflation and low growth). Here, there are reasons for concern, although they do not fit neatly into either conventional narrative and so have received relatively little attention.

The most intriguing and potentially alarming trends are visible in the oil market. In December 2019, before Covid, global oil consumption was about 100 million barrels per day, and the price of West Texas Intermediate (WTI) crude hovered around $50-$60 per barrel. At that time, the US operating rig count was around 800 (around 2,000 globally), according to Baker Hughes. After the pandemic hit, in 2020, global oil demand fell to about 90 million barrels per day, prices collapsed and briefly went negative, and the US rig count hit a low of around 250. Oil demand recovered about half the lost ground in 2021 and is expected to return to 2019 levels of 100 million barrels per day this year. In December of 2021, WTI spot prices were around $75, rose significantly after the Russian invasion of Ukraine, and currently sit around $110. Yet the US rig count is still around 700 (of 1,600 globally). The last time oil prices were above $100, before the crash of 2014, the rig count was over 1,800 (3,600 globally).

This trajectory is difficult to square with inflation accounts based on excessive demand. Oil demand has still not exceeded pre-pandemic levels; it is supply that has lagged. Meanwhile, far from being “too greedy”, companies seem to not be greedy enough — at least in the conventional sense of maximising profits. Instead of reinvesting their earnings in drilling new wells, even at profitable oil prices, companies have returned cash to shareholders.

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By Gary Gerstle

Some have argued that oil companies are not drilling because of the Biden administration’s environmental regulations. As a critic of those policies, I am sympathetic, but they cannot account for the larger phenomenon, including international drilling. Others have suggested that ESG investing requirements have prevented the oil and gas industry from accessing capital. While there is no question that ESG as presently constructed is a disaster, this does not explain why companies are not reinvesting their own earnings. There are some time-lag issues — wells cannot be drilled overnight — but prices have now been elevated for months. Oil futures are also over $80 through most of 2024, meaning companies can hedge future production.

The best explanation is, therefore, the simplest one: shareholders prefer that companies return cash rather than invest, a preference widely discussed among industry participants and observers. Oil companies, to quote Bloomberg’s reporting on this issue, have “responded to investors’ persistent insistence that they return cash to shareholders and not spend their cash flow on capex. . . . That means that we have under-invested in oil, which helps to lead to a higher oil price, but it also means that those companies do have much more free cash flow.”

Any serious analysis of today’s inflation must recognise the different dynamics at play across various sectors. The oil industry is not the same as the housing market, semiconductors, shipping, and so forth. Nevertheless, across industries, the trend of shareholders preferring cash returns over investment has been prevalent in recent decades. Corporate share buybacks, which dropped from previous highs during the pandemic, returned to record pace in 2021 and 2022, according to Goldman Sachs.

The oil industry is actually a late adopter of this cash-return model. Previously, exploration and production companies were typically managed to maximise their “net asset value”. This meant that, in the American shale boom of the early 2010s, companies were investing in drilling at levels far above their operating cash flow, using debt financing to fill the gap. After the crash of 2014, however, Wall Street gained additional influence over the sector. Ever since, the industry has maintained “capital discipline” and avoided negative cash flows.

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By Marshall Auerback

Economic theory assumes that companies are managed to maximise individual firm profits and, therefore, that they will invest to expand operations as long as expected returns exceed the cost of capital, and that they will compete with each other until profit margins approach zero. But economic theory has refused to grapple with the fact that maximising shareholder returns is not identical to maximising firm profits.

Financial market incentives may discourage competitive investment in favour of shareholder returns, as seen in the oil industry; indeed, the gap between firm hurdle rates and cost of capital is a distinguishing feature of recent economic history. In short, what economic theory presumes to be “rational” for a single firm may not be “rational” from the perspective of a diversified institutional portfolio manager. If anyone is too “greedy”, in other words, it is not corporations but shareholders. Or, more precisely, the incentives of financial managers may not be consistent with maximising overall output. This trend has led to an erosion of productive capacity and supply buffers, which has become painfully evident in recent years.

The same forces also encourage industry concentration through mergers and private equity “roll-ups” to preserve pricing power, as well as the separation of high-value intellectual property rents from capital and labour costs. The result is a bifurcated economy with high-margin “superstar” firms on one side and low-profit “commoditised” firms on the other. In an inflationary environment, this means that firms with large profit cushions, like superstar firms built on intellectual property rents, probably have the pricing power to maintain high margins. Firms without pricing power, like small-business restaurant franchisees, often have no profit cushions and must raise prices out of necessity.

Fears of stagflation have focused on a Seventies-style wage-price spiral, but the above considerations suggest that a greater concern today may be the threat of a “profit-price” spiral. In the Seventies, investment was discouraged by high taxes, strong unions (which directed profits to labour), and relatively robust antitrust enforcement. With low investment, increasing demand only led to more inflation rather than growth.

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Today, we have low taxes, weak unions (although tight labour markets), and high industry concentration. These conditions, combined with shifts in corporate governance and financial management, have also discouraged investment — by facilitating extractive financial engineering, as in the case of the oil industry example. A scenario in which companies maintain returns in a stagnant economy by preserving margins while avoiding competitive investment is also more consistent with recent empirical findings. Corporate profit margins achieved a record in 2021 (though they seem poised to retreat somewhat in the coming quarters), and studies have found that rising corporate profits have contributed significantly more to inflation than labour costs. Employees may be able to manage some concessions in a tight labour market, but the data hardly suggest that is the dominant factor.

This sort of firm behaviour has a telling precedent: the modern tobacco industry. Since cigarette consumption began dropping in the Eighties, the basic model of tobacco companies has been to offset sales volume declines with price increases. This strategy works because tobacco companies face little competition due to industry concentration and regulations prohibiting advertising. Thus cigarette price inflation has averaged about 7% per year since 1997, while overall inflation during that time has been slightly above 2%.

The example is revealing because tobacco companies’ high cash returns and low capex requirements have historically made them attractive to financial investors, despite modest growth or innovation. Because of its dividend, Philip Morris was the highest performing stock of the 20th century, beating out far more technologically significant rivals. Guided by the incentives of financial markets, it would not be especially surprising to see more industries adopt the “stagflationary” behaviours of Big Tobacco.

To the extent that is the case, monetary policy alone will not be sufficient to heal the economy. Low rates since the financial crisis have supported asset bubbles but not high investment. Nor will demand-side policies work. As the last several months have shown, further stimulus payments are likely to allow companies to take profits without supporting sufficient investment or wage growth.

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Given the immediate-term salience of monetary policy debates, it is often forgotten that escaping the stagflation of the Seventies required not only a sharp rise in interest rates but also the “supply-side” reforms of Ronald Reagan. In this respect, an overlooked element of Summers’s critique of the Biden stimulus bill — that it was not simply too large but too weighted toward transfer payments — is especially apt, as is his call for “a kind of progressive supply side economics that emphasizes . . . public investment.”

Conventional supply-side policies like tax cuts, typically associated with Republicans, fall prey to the same financial dynamics described above, and have led primarily to increased shareholder returns and asset bubbles rather than increased investment in recent years. New supply-side approaches are required, such as the proposed funding for manufacturing investment contemplated in the COMPETES/USICA conference bill. The administration has also proposed other supply-side measures in areas such as housing, but previous efforts along these lines were weighed down by unpopular progressive wish-list items. Rumours that the administration is considering a cancellation of some student debt — with no accompanying reforms to higher education policy — suggest progressives still remain trapped in old welfarist paradigms.

Contrary to neoliberal disdain for tariffs and “hipster antitrust”, however, prudent competition and trade policy reforms will be necessary to boost domestic investment in a highly concentrated economy whose industrial base has eroded. And although progressive proposals for a windfall tax on profits would do nothing to solve supply-side problems, a tax on “windfall buybacks” may make corporate earnings reinvestment more attractive.

Even if inflation subsides more rapidly than expected, a new policy focus on the supply side is necessary. Avoiding stagflation simply by returning to “secular stagnation”, as Summers would put it, would only lead to further decline and likely a repetition of the same cycle in the future. Also required is the recognition that fundamental assumptions of economic theory — and the ideological approaches they inspire — no longer match the realities of America’s financialised economy.

However, on the rare occasions Labor did win federally, it was when it offered a meaningful alternative to the Coalition. In the 1972, 1983, and 2007 elections, the ALP presented big ideas to an electorate ready for change — and won. By contrast, when the ALP tried to pass itself off as Coalition-lite, voters opted for the full-strength option.

The next federal elections, scheduled for 21 May, could break the mould. Despite some early hiccups, and an apparent lack of enthusiasm among voters for its leader, Anthony Albanese, Labor’s strong poll position has so far held. Labor comfortably leads the Coalition on a two-party-preferred basis 54% to 46%.

Remarkably, this is despite the fact that Labor’s election pitch can be boiled down to being nicer and more competent than the incumbents. Gone are its serious plans to reform the tax system, which increasingly favours high income earners and the asset-wealthy. Although Labor promises to increase the share of renewable energy, coal exports will not be touched. On foreign policy and national security, the major parties’ platforms are almost identical. So why is Labor still looking poised to win?

For one thing, the public has clearly tired of the government and its responsibility-shirking leader. Historically, though, this hasn’t been enough. Enthusiasm for the Coalition hit rock-bottom ahead of the 2019 elections, after successive internal coups removed two election-winning prime ministers in three years. Yet the Coalition still won. This time, however, circumstances may have conspired against another Morrison miracle.

The most difficult thing about governing, according to the British PM Harold Macmillan, was “events, dear boy, events”. And “events” may finally be on Labor’s side. All Albanese has to do is grab the popcorn and watch.

As a rule, Australian voters tend to see the ALP as stronger on health, education, and social services. The Coalition tends to poll better on national security and economic management. Unfortunately for Labor, while the former strengths win state elections, the latter issues appear more decisive in winning federal elections.

Coming into this election, the Coalition has again campaigned heavily on its national security and economic management record. It has sought to paint itself as the David that stood up to the Chinese Goliath — by, for example, introducing tough anti-interference laws, calling for an international inquiry into the origins of the coronavirus, signing up to the AUKUS alliance, and committing to substantial increases to defence spending. It also claims to have delivered strong economic results, such as historically low levels of unemployment, despite the ravages of the pandemic.

The Coalition’s election attack ads, under the slogan “It won’t be easy under Albanese”, routinely denigrate Labor’s national security and economic credentials. They claim that Albanese would be “soft on China”, extending earlier smears that sought to present Labor as “Beijing’s pick” in the election. Morrison even called ALP deputy leader, Richard Marles, a “Manchurian candidate” in February. The Coalition’s ads also highlight Albanese’s earlier support for unpopular tax reforms and his lack of economic experience in government.

How fortuitous for Labor, then, that two unrelated events, both occurring in the middle of the election campaign, have severely undermined the government’s national security and economic management narrative. The first is the 19 April security agreement between China and Solomon Islands, an archipelagic country of around 650,000 people located approximately 2,000km to Australia’s northeast. Although the agreement is secret and its final wording unknown, a draft version was leaked by local opponents and published on Twitter in March. It caused a political storm across the entire region, especially in Australia.

Under the draft agreement, Solomon Islands could request policing and military assistance from China. If the Solomon Islands government consents, China could also “make ship visits to, carry out logistical replenishment in, and have stopover and transition in Solomon Islands, and relevant forces of China can be used to protect the safety of Chinese personnel and major projects in Solomon Islands”. Although permanent bases are not mentioned, many analysts have suggested that the agreement opens the door to China establishing an operations base for its navy, allowing it to potentially block shipping routes between Australia and the US, and across the wider South Pacific.

While other observers, more familiar with the Solomon Islands context, strongly disputed the likelihood of a Chinese military base in the country, Australia’s election campaign was set alight. In a country already anxious about China’s growing power, the agreement seemed to confirm the most alarmist security predictions for a region politicians like to call Australia’s “patch” or “backyard”. Shadow Foreign Minister Penny Wong pounced, calling it “the worst failure of Australian foreign policy in the Pacific since the end of World War Two”. Albanese also called it a “massive foreign policy failure”. Both blamed the agreement on the Coalition’s mismanagement of the relationship with Solomon Islands and other Pacific countries. Wong pinpointed Australia’s declining aid disbursements to the country since the Coalition took over in 2013.

Wong’s claims are obviously hyperbolic. Experts argued that Australia’s influence in the region should not be exaggerated, and that the agreement was also motivated by domestic political considerations in Solomon Islands. Additionally, Wong’s claim that aid declined under the Coalition was also judged inaccurate.

Nonetheless, Labor’s punches had the government rattled, with Morrison struggling to defend his record in the Pacific. He was not helped by a fair bit of exaggeration from his own side, including Deputy PM Barnaby Joyce’s statement that the Solomon Islands could become Australia’s “little Cuba”, and Defence Minister Peter Dutton claiming he now expected “the Chinese to do all they can”. Worse, from the Coalition’s perspective, a survey has found that 72% of voters were “concerned” or “very concerned” about the agreement. The Coalition’s lead over Labor on national security narrowed dramatically from almost 30% in August 2021 to 14% in April 2022.

To make matters even worse for the Coalition, in early May, Australia’s independent central bank, the Reserve Bank of Australia, raised interest rates for the first time in 11 years to combat the growing problem of inflation. The RBA’s decision exposed the deep holes in the government’s economic management success story. Sure, unemployment is low, but underemployment has been worsening for decades, reflecting the fact that many of the jobs created in Australia are casual or part-time. Wage growth has also been stagnating for almost a decade, such that rapidly rising living costs have become a major political issue. Inflation has reared its head in Australia, as in many other countries, but the cause is not a wage-push, as in the Seventies; it is disruption to supply.

Rate rises are, therefore, only going to compound the cost-of-living crisis for many Australian families by making their mortgage and credit card repayments more expensive without an offsetting increase in pay. The problem for the Coalition is that many of the worst-affected are likely to live in the exact same outer-suburban seats it needs to hold in order to stay in government. Tellingly, the rate hike and rising inflation have sparked the first substantive fight between the major parties in this campaign, over how much wages should rise.

None of this is to say that Labor has a clear plan for addressing the cost-of-living crisis — but it’s clear that neither does the government. If Labor wins on 21 May, it should thank its good fortune, not its campaign managers.

Once wars united people, but not in modern America. Here, the vast majority of citizens share remarkably similar opinions about Russia’s invasion of Ukraine: that it should be condemned outright. Our politicians, however, seem blissfully unaware of this.

In Congress last week, despite strong pro-Kyiv sentiment among the vast majority of Republicans, pro-Trump acolytes constituted the largest faction of those who voted against supplying aid to Ukraine. Yet on this issue, there is little to distinguish them from the Democratic Socialists of America, who have called for America’s exit from the “imperialist” Nato. There are even some on the far-Left who believe the West’s sympathy for Ukrainians reflects our unredeemable racism.

And yet the past fortnight has revealed something more optimistic than the intellectual adolescence of America’s politicians. The key to repelling Putin’s campaign of division in the West has also become apparent: unifying around basic economic interests.

Much attention has been paid in recent years to Russian online interference in our elections. But it is tangible realities — such as oil, food, and the ability to build things — that will determine our ability to resist external autocratic forces. And it is here that energy policy becomes crucial.

Before Biden became President, America was well on its way to energy independence, and emerged as the world’s leading gas exporter. Far more than words or military threats, the US energy revival was a blow to Russia, Iran and Saudi Arabia. American production was a critical factor in weakening the price of the one commodity that keeps their economies alive.

Yet this weapon is being systematically dismantled. Since taking the White House, Biden has turned the Federal Reserve and other executive departments into enforcers of “net zero” policies. From the very beginning, Biden and his green allies have busily cancelled gas pipelines, ended new leases for offshore oil, and introduced new regulations that make it harder to build new fossil fuel plants. All of this was manna for Moscow.

Biden’s energy policies, so poorly timed amid the prospect of a looming Russian invasion, has also widened a deeper, more long-lasting schism that will reverberate for years to come. Perhaps more than anything else, it seems certain to expand both class and geographic divisions.

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Green hypocrisy hurts the poorest

By Joel Kotkin

The decision by his administration to double down on green policies, while blaming Putin for their hefty cost, has exacerbated the already-wide divide between the coast-hugging financial and tech oligarchs and the oil drillers, truck drivers, factory workers and farmers labouring outside the big cities, particularly in the country’s vast heartland. America’s coastal elites may express moral outrage about the Kremlin’s behaviour, but for those living and working in energy-producing states such as Texas — whose energy boom represents a far greater threat to Putin than elaborate virtue-signalling — this is not a matter of morals, but of livelihoods.

Oddly, American progressives even seem to lack the sense of realism that their German counterparts, once models for the Left, have adopted. Despite all evidence to the contrary, our greens cling to their fantasy that renewables can magically recast the laws of physics, the length of a day or the oscillations in the wind. Meanwhile, Germany’s greens now realise that such a boneheaded energy strategy essentially turned their country into a satrap of Sino-Russian neo-Eurasianism and helped embolden Putin’s aggression.

So far, no sense of this reality informs the Left-wing Congressional squad, whose pronouncements now constitute the leading edge of Democratic thinking. They generally oppose military aid to Ukraine, and their response to the energy shortage is to propose shutting down our entire fossil fuel production. When the mid-terms come around in November, this will likely help the Republicans in the leading gas and oil producing states. Almost all are in the heartlands, Alaska or the Intermountain West; California, the last blue energy giant, has committed itself to wiping out its large local energy industry while importing oil from Saudi Arabia and, at least until recently, Russia.

But it’s not just the government seeking to wipe out the energy sector. Big Business, through its cherished ESG investment standards, is making it increasingly difficult to start or expand energy production. Following Lenin’s supposed dictum about capitalists providing the rope with which they can be hanged, our corporate elite, perhaps unwittingly, also supports China, whose economy is fuelled increasingly by Russian oil and gas, a tie that has recently been consolidated by a plan to build a new gas pipeline between the countries.

But while such divides threaten the ability of America to lead in the current crisis, the news is not all inevitably bad. Americans can be deluded and stupid but are also capable of change. For generations, many in the West have celebrated the notion of inevitable American decline, particularly in Europe. Yet the country has a history of responding to challenges, albeit sometimes taking longer to respond than ideal.

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Is this the end of progressive America?

By Joel Kotkin

One has to remember that during the run-up to the Second World War, America was distinctly divided — but by the time it came to mobilise, even fascist sympathisers such as Henry Ford pitched in massively. Likewise, today, there is growing concern among Democrats that the party’s energy positions are untenable for the working and middle class. It’s not inconceivable that the Democrats, and the coastal enclaves, are forced into action by the reality of soaring food, car and energy prices.

When this happens, the party’s priorities must lie both in pumping more oil and gas, as well as learning how to manufacture goods outside China. Some Democrats, rather than tightening the relentless squeeze on the working and middle classes, might even consider introducing a modest carbon tax, expanding remote work, and restoring our nuclear power industry, as even some greens now support.

This is also good politics. Some 80% of voters, and an equal percentage of Democrats, favour the use of both fossil fuels and renewables, while support for the net zero Green New Deal hovers around 20%. “Climate catastrophism”, notes the liberal strategist Ruy Teixiera, is a political “loser”, particularly among working-class voters of all races.

For the Republicans, meanwhile, the war in Ukraine also poses a challenge due to the still considerable influence of Donald Trump, who views Putin as “a genius”. Although Trump’s views are out of step even with the bulk of his own supporters, Democrats see an opportunity to link the Republicans with Putinism, and make Biden the staunch defender of democracy.

Of course, moving America in one direction is a fraught enterprise in these times of extreme polarisation. But preventing a deepening civil war here is critical if the world is to stop the likes of Putin from returning us to the Middle Ages. Foreigners may find our political divides diverting, but only the US, if it can get its act somewhat together, has the resources, the human assets and military power to fend off the unrelenting assault of the autocratic powers.

Take perhaps the most extreme example: Weimar Germany. In the first half of the Twenties, the young republic was seeing its economy collapse due to hyperinflation caused by the punitive repayments imposed by the victors in the First World War. By lending in American capital markets and buttressing the currency, the hyperinflation cooled. But in 1929, as Wall Street went into meltdown, American capital markets seized up and Germany started to slide into a deflationary depression.

But German policymakers remained fixated by the prospect of hyperinflation. So when they saw turbulence ahead, their default position was to assume that trouble was inflationary, not deflationary. As a result, they slammed the brakes on government spending and led their country into a punishing depression. And we all know what happened next.

Sunak’s budget suffers the opposite problem. Since 2008, we have been experiencing a world of economic stagnation and low interests. Keynesian policy proposals — spending more money — have been in circulation in policy circles all throughout this period. I should know, I was one of the people circulating them. They are perfectly suited to an economy with relatively high unemployment and low inflation.

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The Tories will never change

By Tim Bale

But today we face exactly the opposite economic problem. Labour markets are so tight that employers are finding themselves being slowly strangled. And inflation is starting to tick up. Bank of England interest rate setters are putting on a brave face in public, telling us that inflation is transient — but seasoned watchers know that they are far more sceptical when they gather around the water cooler.

The problems are relatively straightforward. The lockdowns and the emerging vaccine mandates are unprecedented economic interventions. They cause chaos for businesses who are trying to provide goods and services to consumers. They also cause chaos in labour markets — just look how many workers simply left the UK in the first and second half of 2020. Crucially, these conditions imply a high probability that inflation is here to stay.

And this is where Rishi’s budget comes undone. Dumping spending and increasing taxes in an economy already under inflationary strain is akin to tossing a lit match into a barn full of dry hay. The spending increases will drive further demand for goods and services that businesses are already struggling to supply due to the onerous lockdown and vaccine-related regulations. Meanwhile, the tax rises will be passed on immediately as price rises by companies, as they attempt to defend their already thin margins.

Why is Sunak doing this? Because he is fighting the last war; focussing on what has happened rather than what will happen. His budget assumes that the main resistance on the field is overwhelming tank power — and as his soldiers march forward he will look on aghast as they are bombed mercilessly from overhead. Sunak is being fooled by a non-existent problem while a very real one festers.

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Is Boris taking us back to the Seventies?

By Dominic Sandbrook

It will work like this. The spending and tax rises will enter into the economic bloodstream, placing further pressure on prices. Inflation will accelerate. The Bank of England will take one look at their charter and realise that if they do not raise interest rates, they are going to take the heat for the inflation. So, they will raise those interest rates, the yield curve will invert — meaning short-term interest rates become higher than long-term rates — and the economy will slip into recession. That is how an expansionary budget produces contractionary results.

The worst part of all this is that, if the inflation is being driven by the lockdowns and vaccine policies, the recession will not stamp out the inflation. Instead, the British public will get a taste of both: stagflation — low growth, inflation and unemployment. Just like in the Seventies.

The entire economic debate today is topsy-turvy. Economists have been, for the most part, too cowardly to challenge the overarching public health measures. They recline in their seats, either becoming armchair epidemiologists or simply falling asleep. Poor Sunak looks on his desk and finds a plan written for a world that ceased to exist in March 2020. And the rest of us live with the consequences. La Comédie humaine.

“It doesn’t sound too bad at all, does it?” Brian mused “You’d think we would be really comfortable on that.”

But for poor Brian, a pay rise of 6.5% wasn’t good at all. It was disastrous. As his wife told the man from the Daily Express, the housekeeping bill had gone up by a third in just a year, while they were even spending £2 a week extra on their son’s clothes.

“Then the gas bill comes in, followed by the electricity, the rates, the phone bill, and a lot of others,” said Brian disconsolately. “I am just one of thousands, I suppose, but there is no comfort in company. And I’ve given up any notion of doing any better for my family.” Then Mrs B cut in: “We used to think we were really well off. Not any more.”

Such was life in the summer of 1975, the age of Showaddywaddy, 10cc and the Bay City Rollers. Harold Wilson was PM, Tom Baker was in his time-travelling pomp, Britain had just voted to remain in the Common Market and the Space Hopper was the fashion accessory du jour — and all the time, inflation just kept rising. 24%, 25%, 26%…

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Jeremy Corbyn's return to the Seventies

By David Kogan

Today, the prospect of prices soaring at such breakneck speed seems like something from some mad fantasy. Yet inflation is back in the news, and understandably so. The Bank of England’s target is 2%; the most recent figure, for the year to August, shows inflation at 3%, and most analysts expect it to hit 4% before the end of the year.

As always, the causes are very complicated. The explosive recovery of the world economy after Covid, the global supply chain crisis, the huge surge in demand for fossil fuels, the spike in wholesale gas prices (up 250%, incredibly, since the turn of the year), the rise in shipping costs because of container shortages, the worldwide scarcity of semi-conductors, the dearth of lorry drivers, Brexit, Boris — you pays your money and takes your choice, basically.

By the standards of the Seventies, inflation of 4% doesn’t sound like much. In the summer of 1975, Britain’s Chancellor, Denis Healey, would have sobbed with joy if you had offered him an inflation rate of 14%, let alone 4%. But as Healey would also have told you, 4% can become 6% very quickly. Then consumers’ expectations kick in, and 6% becomes 8%. Wages leap to follow prices: 8% becomes 10%. And with interest rates following suit, good luck paying your mortgage.

Today, you probably have to be in your mid-sixties to remember what inflation really meant. For everybody else it’s just a word, a vague economic term from a vanished age, like the gold standard or the balance of payments deficit. But if you were of working age in mid-1970s Britain, inflation mattered. It ate into your savings, your living standards, your pension. If you belonged to a powerful trade union, which could fight for an annual pay rise on your behalf, you might be all right. But what if you didn’t?

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Don't blame Brexit for shortages

By PHILIP PILKINGTON

Then as now, the causes were very complicated. Traumatised by memories of the Great Depression, desperate to avoid an economic slowdown that might revive the spectre of high unemployment, Britain’s politicians had tolerated a relatively high inflation rate for years. Slowly, inexorably it began to creep up: 6% in 1970, 9% in 1971, 7% in 1972, 9% again in 1973…

And then on 6 October 1973, the Jewish holiday of Yom Kippur, Egypt and Syria launched a sensational surprise attack on Israel. The Israelis fought back, boosted by more than 22,000 tons of American tanks, weapons and military supplies. Ten days after the start of the war, the Arab oil exporters unleashed their “oil weapon”, slashing production, raising prices by 17% and announcing an embargo on exports to the United States, the Netherlands, Portugal, South Africa and Rhodesia. And with that, energy prices went through the roof.

In Britain, where Ted Heath was already struggling to keep inflation down, the political consequences were catastrophic. When the nation’s miners walked out for the second time in two years, Heath instituted a three-day working week and called a snap election. But the result was a hung parliament, and in came Labour’s Harold Wilson to form a minority government and prime the pump for a second election.

Every other Western country tried to deflate its economy to deal with the oil shock, but not Harold Wilson’s Britain. By the spring of 1975, prices were rising five times (yes, five times) faster than in any other major European country. In 12 months, the price of sugar had gone up by 184%, carrots by 137%, electricity by 66%, tinned soup by 54%, orange squash by 51% and coal by 47%.

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Where it all went wrong for Labour

By Dominic Sandbrook

Today some of the details of that summer of 1975 seem almost deranged. To cut down on paper costs, publishers started producing shorter books with smaller typefaces. They gave up printing the prices on the back, using sticky labels instead. Meanwhile the trade union leaders were endlessly trooping into Downing Street, asking for new deals for their members. On 3 April the power workers won 31%; on 14 April the civil servants accepted 32%; on 18 April the doctors won 35%; on 29 April London’s dockers settled for 30%.

The extraordinary thing is that most of the union leaders themselves, who knew more about the world of work than many politicians, told Wilson’s ministers that the whole business was completely bonkers. Yet it was their job to keep asking for more. That was what their members expected. So they did.

Perhaps this makes inflation sound like a joke. It wasn’t. The costs fell most heavily on people who could ill afford it — the poorest, the elderly, those living alone — their incomes stagnant as prices rocketed. As Britain’s GDP fell two years in a row, living standards sank with it. By December 1977, the average couple took home less money, in real terms, than they had four years earlier.

It’s worth repeating that although every major Western country suffered from the ravages of inflation in the mid-Seventies, none suffered as badly as Britain. That was a political choice, not an act of God, and people knew it.

They knew it at home: Wilson’s Foreign Secretary, James Callaghan, told his colleagues he often thought that, if he were a younger man, he would emigrate. And more embarrassingly, they knew it abroad. “Britain is a tragedy,’ the US Secretary of State, Henry Kissinger, told President Gerald Ford in a conversation captured by White House transcribers. “It has sunk to begging, borrowing, stealing until North Sea oil comes in … That Britain has become such a scrounger is a disgrace.”

So how did they fix it? The short answer is: with great difficulty.

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The man who destroyed Labour

By James Kirkup

One of the poisonous things about inflation is that it corrodes the social fabric, driving a wedge between savers and borrowers, old and young, those represented by trade unions and those dependent on fixed incomes. Labour’s answer was the Social Contract: in very basic terms, a programme of rolling incentives (better pensions, bargaining rights and so on) to persuade the unions to accept progressively smaller pay increases.

On paper it was a pretty good idea. Slowly but surely, they would wring inflation out of the system, without the shock of harsher medicine. The only problem was that it didn’t work. By the end of 1978, Wilson’s replacement, Callaghan, had got inflation down to just under 10%. Now he demanded one more heave, a 5% pay limit that would push inflation down even further in time for the next election. But it was too much.

Instead of dampening wage pressures, the Social Contract had simply stoked the flames. Workers — especially the lowest-paid — were sick of stagnant living standards, and now their impatience boiled over. That winter, defying the government’s entreaties, millions walked out, unleashing the most devastating industrial unrest since the General Strike of 1926. Bin bags in the streets, the dead going unburied: you know the rest.

A few months later, Britain voted for Margaret Thatcher, and her answer was rather different. Gone was Mr Nice Guy, in came Nurse Ratched, determined to squeeze inflation out of the system by any means necessary. Interest rates went up, and up, and up, peaking at a truly excruciating 17% at the end of 1979.

The irony is that Mrs Thatcher loathed high interest rates, which penalised her beloved middle-class homeowners. But that’s the cruel thing about inflation: to tolerate it is bad enough, but to bring it down can feel even worse. To put it another way, lower prices — or at least, prices that are rising more slowly — come at a cost, and in the mid-Eighties the bill came to some 4 million jobs.

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The Tory conference that caused Brexit

By Alwyn Turner

Was there an alternative? Well, even many of Mrs Thatcher’s own confidants thought they should have squeezed more slowly. But would it have been pain-free? No. With inflation, there’s always pain. So what are the lessons? The obvious one is boringly simple: for God’s sake, don’t let inflation creep into your system. But as Boris Johnson’s government may well find, that’s easier said than done.

The global supply chain crisis, the growing pressure on limited energy resources, the extraordinary circumstances of post-pandemic recovery and even the unanticipated consequences of Brexit are probably beyond the direct control of any national government, even the most competent. And as Ted Heath learned in 1973, a globalised economy makes you vulnerable. A butterfly flaps its wings in the Amazon, and a woman in Wolverhampton sees another chunk disappear from her savings.

So if inflation does set in, then what? Again, I suspect the answer’s boringly simple. You can try to live with it — indeed, some economists argue that a period of high inflation might be a good way of driving down our post-pandemic debt — but the risk is that 5% becomes 10%, 10% becomes 20%, and then it’s 1975 all over again and the International Monetary Fund would like a word.

Or you can try to manage it with incomes policies. But does anybody think British workers in the 2020s will readily accept government-mandated pay curbs? I don’t much fancy seeing the pavement turned into a Winter of Discontent theme park, sorry.

So that just leaves the only likely solution: ever higher interest rates, a wave of house repossessions and a government-induced recession to deflate the economy. Harsh medicine from a determined doctor, basically. Years of pain.

And can you see Boris Johnson doing that? Me neither.

Unfortunately, we can’t do much about the recession. It would have happened without the lockdown; it may well have happened without the pandemic. Thanks to the virus, however, it’s going to be worse than anything we’ve seen in peacetime.

A common definition of a recession is two consecutive quarters of negative economic growth. The last time that happened in the UK was in 2008 and 2009, when the economy shrank over five consecutive quarters. It was the deepest recession since the war. The Covid recession will be much, much deeper. GDP will fall (is falling) by percentages never previously recorded. It’s hard to put an exact number on it. But if you look up the figures for previous recessions, they’ll give you a rough idea — as long as you add a nought on the end.

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Our government must learn to fail

By Peter Franklin

This may be the least of our concerns right now, but the economic historians of the future are going to have a real problem with their graphs. Whether it’s the long-term trend for GDP, productivity, unemployment, debt, bankruptcies, and so on, the figures for 2020 will be so extreme as to flatten all the peaks and troughs in the rest of the series. It’ll be like painting a watercolour of the Chilterns, then dropping in Mount Everest by way of contrast.

I’d imagine the charts drawn up for the 21st century will just leave a gap for what we’re going through right now. Instead of a straightforward reference to the year “2020” it’ll be “2020*” — the asterisk referring to some apologetic footnote. (*Sorry, we do have figures for this year, but they’d completely mess up the y-axis — and, quite frankly, you wouldn’t believe us anyway.)

Whether or not there’s also a 2021*, a 2022* and a 2023* depends on two things: firstly, beating the disease and getting out of lockdown, of which I’ll say no more; and secondly, stopping the recession from turning into a depression.

*

A depression is more than a long recession. If a recession is like a hangover, then a depression is like alcohol poisoning. Both have the same cause — but the latter involves an altogether more serious level of risk and requires active intervention to prevent serious harm or even death. In a depression it’s not just a case of one or more vital parts of the economy slowing down, but shutting down altogether.

Think about the last recession. A build-up of unsustainable debt could have caused the global financial system to collapse (together with everything that depends on it), but governments around the world intervened to bailout key institutions, deal with bad debts and provide emergency stimulus programmes. The global economy was kept conscious, had its stomach pumped and was gradually nursed back to a semblance of normality. Despite the depth of the recession, most countries avoided a depression (Greece being a notable exception).

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The permanent punishment of the Greek people

By Peter Franklin

So what should governments do now? For a start, they need to realise that this time is not like last time. There are no precedents to go on — we’ve never locked down the global economy before. And there’s lots that we still don’t know about the long-term economic consequences of doing that.

Most fundamentally, we don’t know whether the biggest hit will be to supply or demand. Both have been knocked flat, but a huge amount depends on which recovers fastest. The conventional wisdom is that the supply-side of the economy will be be the first to get off the ground. After all, we’re not actually at war. Our towns and cities haven’t been bombed, our transport infrastructure is intact, the factories are still standing, and the working age population is largely untouched. So, in theory, the productive capacity of the economy is still there — much of it forced into inactivity, but ready and waiting to roar back into life.

The demand-side of the economy appears to be in worse shape. Yes, there’s a degree of pent-up demand waiting to burst forth — shaggy-haired mobs will lay siege to every hairdresser as soon as they re-open. But on the other hand, household finances will be seriously depleted — which will have long-lasting consequences for consumer confidence. Add in the return of mass unemployment, the impact on business investment plans and, perhaps, a cultural shift against frivolous consumption, and we can expect demand to be deeply affected for years to come.

In such circumstances the job of government is to provide substitute demand — either directly through its own spending or indirectly by acting to put more money in our pockets (for instance, through tax cuts or by unconventional measures like helicopter money).

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Could free cash fix the economy?

By Peter Franklin

Managing to find the funds to provide this demand is going to be a challenge in itself — but that could be the least of our problems if it turns out that the supply-side of the economy isn’t, in fact, ready-and-waiting to bounce back.

In the wake of the last recession, government used very low rates of interest and measures like quantitative easing (QE) to defibrillate the economy. There were fears that they’d overdo it — unleashing inflation. In the event, those fears went unrealised — in part because of a globalised, just-in-time economy that’s really good at ramping up supply to meet the level of demand, while continually squeezing out costs. All governments had to do was restore the flow of cheap credit (which got disrupted in 2008) and those hyper-efficient supply chains did the rest. 

This time, however, it’s the supply chains themselves that have been disrupted. It’s not just that borders have been closed and national economies locked down: when the borders re-open and the lockdowns are lifted, we’ll find that the supply chains are missing essential links — key companies gone bankrupt, essential personnel laid-off. And so if a fractured supply-side turns out to be the main constraint, then the default recovery mechanism (i.e. stimulating demand) could do more harm than good by adding runaway inflation to our woes.

Governments can’t stimulate supply as easily as they can stimulate demand. But there are some temporary measures that can help — like the furlough scheme to enable companies to hold on to their employees. Not pushing businesses into bankruptcy through impatient tax demands is also a good idea.

On the international level, I’d recommend not starting a trade war with China — and definitely not a real war. Don’t get me wrong, there will need to be a reckoning — and we should avoid getting any more wrapped-up in the corporate tentacles of the Chinese state. But the longer-term aim of strategic de-globalisation, though necessary, is a dish best served cold.

In the immediate aftermath of the pandemic the last thing we need is to precipitate a global supply crunch. Avoid that, and the task of preventing a depression remains merely gargantuan instead of just plain impossible.

*

So assuming that we are in a position to take a mainly demand-side approach, how should we go about it? There is, of course, the question of where the money’s coming from. That’s something I wrote about last month — in particular, the idea of getting central banks to buy government debt so that the state can spend more. Yes, this is tantamount to turning on the printing presses, but as a one-off response to what we must hope is a one-off crisis, it’s the least worst option. It does, however, require international co-ordination. If, say, Britain goes it alone with the funny-money, then Sterling would collapse in value and then it’s hello hyper-inflation.

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Who will pay for this Covid catastrophe?

By Peter Franklin

In 2008, Britain played an important role on the international stage — catalysing a coherent global response to the financial crisis. It was the one thing that redeemed Gordon Brown’s otherwise miserable premiership. With America embroiled in its turbo-Trumped electoral politics and the EU wracked by another existential crisis, the UK needs to step up once again.

That, however, requires Boris Johnson to field a ministerial team capable of commanding national and international respect. And, right now, he’s not. This is how Tim Montgomerie (formerly of  UnHerd), a stalwart supporter of Boris Johnson, put it in a series of tweets last week:

“I’ve rarely had so much feedback from Tory MPs to a Tweet but my concern at the >>UNNECESSARY<< weakness of the govt frontbench and of the No10 operation seems to be widely shared…

” …while there is recognition that the PM has been ill and that the enormity of events would test event [sic] the most experienced of administrations, Boris should not mistake this goodwill and patience for satisfaction with govt performance…

“…the immediate crisis is only the start. The economic fallout will have greater consequences. Boris can’t continue to surround himself with yes men & women. An A-team of Brexiteers AND Remainers is needed to steer UK away from the rocks. TICK-TOCK, TICK-TOCK! Act soon Boris!”

The current Cabinet is a product of a recent, yet now defunct, era of British politics. Its purpose was to make a political point (i.e. get Brexit done), but the task before us now is to steer this country — and, to a non-negligible extent, the world — away from the rocks of depression.

There seems to be little appetite for a government of national unity, but at least we could have a government of the most experienced and capable people available in the Conservative ranks. Former Cabinet ministers like Penny Mordaunt, Greg Clark and Sajid Javid should not be on the backbenches. Indeed, we should bring back former Prime Ministers — specifically Theresa May and David Cameron — into government. If these individuals aren’t in Parliament, then ennoble them. If others, like David Gauke, aren’t now in the Conservative Party, then let bygones be bygones and readmit them.

Of course, the A-team would, for their part, have to toe the government line on Brexit. They’d also have to put aside any ideological hang-ups about government intervention; because, make no mistake, government will have to intervene left, right and centre — doing whatever it takes not only to beat the pandemic, but to save the economy.

*

There will be bail-outs again — and not just in the financial sector (though expect the build-up of bankruptcy and bad debt to have consequences there too). Government needs to be ready to own (and manage) more of the economy than it has done for decades. At this stage, we don’t know which industries are going to topple over — obviously it’s looking grim for the airlines, things can’t be good for the train companies, and, of course, it’s a calamity for the leisure and retail sectors.

Not only do ministers need to make extremely rapid, strategically sound decisions about what to save and what not to save — they must also act for the common good. Justice, not just efficiency, must be served. Corporate big-hitters who used share buy-backs and use other tricks to engineer their way to short-term financial gain should pay a heavy price. Private equity firms that bled their holdings dry should expect to lose everything. Landlords should be treated with as much — or as little — mercy as they’ve shown to their tenants. Oh, and companies registered in tax havens can be bailed out by those tax havens.

But, beware, not every corporate malefactor is on its knees. Look up, and you’ll see the vulture capitalists circling in the sky — hoping to gorge themselves on distressed assets. The recovery will be impeded if we allow the wealth extractors of the rentier class to eat themselves sick. National and local government must be primed to buy up property — especially high street property — before the scavengers swoop down. The Chancellor should take forward plans to shift the tax burden onto land speculation — that should put the vultures off their dinner. Tory Georgism, your time has come!

The Covid crisis is a shattering experience. Even if we avoid a depression, we’ll be living in its shadow for a generation. Yet it’s also a once-in-a-lifetime opportunity.

In the wake of the 2008 crisis, government just wanted to get things back to normal. They succeeded all too well — restoring good things like job creation, but also preserving the worst features of neoliberalism.

The effect of QE on asset prices gifted unearned wealth to speculators. Fat, lazy companies got even fatter and lazier thanks to the dynamics of market concentration — leaving the economy starved of the investment and competition on which real growth depends. The tech giants were allowed to privatise our data while turning tax avoidance into an art form. And, of course, the biggest corporate scam on the planet — China’s debt-generating, export-led economy — was all but unchallenged (as was the boutique version of much the same thing, i.e. Germany).

This time, the new normal needs to be different from the old normal. Right now, the economy’s on the operating table awaiting life-saving surgery — and, obviously, saving the patient’s life is the priority. But while we’re at it, let’s take the chance to remove buried shrapnel, reset badly-healed fractures and cut out the cancers that were slowly killing us anyway.

*

Of course, any doctor would tell you that elective surgery is generally best delayed until the recipient has recovered from the emergency operation. But this is an economic, not a medical, intervention. An economy doesn’t just run on things like money supply and investment (the equivalents of blood pressure and vital nutrients), it also depends on intangibles like hope and optimism.

After the crisis of 2008, which was the consequence of a self-inflicted debt-fuelled binge, people wanted a return to discipline (even if the worst offenders did get off too lightly). The current crisis, though, is of very different kind. We did not bring the catastrophe upon ourselves. This is something that was done to us — our economy broken and traumatised by an external cause.

Suggested reading

The things we do for growth

By Peter Franklin

Perhaps we did need to wake up to the multiplicative risks of our hyper-connected world. But now that we know that we can’t take stability for granted, we need something more than materialistic complacency to keep us going.

We need purpose and vision, and though these are things that should be drawn from many sources, government policy must play its part, including economic policy. As during the Second World War and in the immediate post-war period, we need a sense of mission — of building a better, fairer, safer world.

In short, to avoid depression we need inspiration. But one thing’s for sure: it won’t come from a second decade of austerity.

The Baumol effect has got to be in the running, because it explains one of the great economic mysteries of the modern age: in a world that is immensely richer and more productive than the one experienced by our ancestors, why are governments and individuals struggling to get by without debt?

In particular, why are certain essential services – like social care or higher education – getting less affordable? It seems odd when there’s such an extensive range of other things – from artificial lighting to basic foodstuffs to computer processing power – that have got hugely more affordable over time.

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The truth about inflation

By Peter Franklin

A big part of the answer is that while technology has enabled some occupations to become massively more productive – for instance, farming, mining and factory work – it’s made very little difference to others. To take just one example, a barber today takes roughly the same amount of time to cut a customer’s hair as his or her 18th century predecessor.

Yet despite being no more productive (on a hair cuts per hour basis), 21st-century crimpers are paid a multiple of their forebears – the service they provide therefore becoming correspondingly more expensive.

The Baumol effect, therefore, is the tendency of wages to rise in line with productivity improvements even in occupations that don’t become more productive.

That’s because if they didn’t, then workers would switch to occupations whose rising productivity did boost wages. As long as demand for, say, hair cuts remains steady (or increases), a diminishing supply of barbers would push up prices and therefore wages.

Governments tend to employ a lot of people doing things that technology hasn’t made massively more productive. Nevertheless, recruiting enough civil servants, police officers, soldiers, social workers, road sweepers, and so on requires that public sector wages remain competitive with the private sector. Hence the pressure on government budgets.

Much the same also applies to the public cost of supporting non-workers. To maintain minimum standards of social inclusion, things like pensions and welfare payment have to keep pace with wage levels. Obviously no amount of technology can improve the zero productivity of economically inactive individuals, so the Baumol effect applies to welfare budgets too.

Any politician who talks about cutting the size of the state or expanding access to public services needs to explain what they propose to do about the Baumol effect. If they don’t even know what the Baumol effect is then they’ve no business running our public finances.

But what about the escalating cost of things such as healthcare and higher education, where price increases have been running well ahead of general inflation, economic growth and wage levels, thus creating a crisis of affordability for governments and citizens alike?

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Is Amazon's attempt to disrupt the healthcare industry heroic or villainous?

By Peter Franklin

There are those who believe that these industries are abusing their market position to squeeze the rest of society. However, a new book by Alex Tabarrok and Eric Helland – Why Are The Prices So D*mn High? – puts the blame on the Baumol effect. Education and healthcare just happen to be labour-intensive industries where technology has not greatly increased the productivity of key workers like teachers and doctors; still, their salaries have to keep up with other skilled professions where productivity is increasing. Thus until the day we have robot teachers and AI doctors, education and healthcare is doomed to get more expensive.

On his Slate Star Codex blog, Scott Alexander says that this argument (if true) is oddly reassuring:

“It restores my faith in humanity. Rising costs in every sector don’t necessarily mean our society is getting less efficient, or more vulnerable to rent-seeking, or less-well-governed, or greedier, or anything like that. It’s just a natural consequence of high economic growth.”

Of course, not every affordability crisis can be explained by the Baumol effect. For instance, housing costs owe very little to wage levels. Though there is a problem with productivity in the construction sector, the overwhelming reason why the rent is so d*mn high is because of artificially constrained land supply and the unregulated greed of landlords and speculators.

One would prefer to believe that education and healthcare providers aren’t ripping us off in the same way – and are merely passing on unavoidable payroll costs.

However, Alexander uncovers evidence that there’s a lot more going on than the Baumol effect:

“…teacher salaries today are only 6% higher than teacher salaries in 1970. Meanwhile, per-pupil costs are more than twice as high. How is an increase of 6% in teacher salaries driving an increase of 100%+ in costs?”

Similarly, he finds that increases in doctors’ salaries appear insufficient to explain the rocketing expense of healthcare in recent decades.

Something else is driving up costs in these sectors – and ordinary Americans are paying the price:

“…in 1971, the average man would have had to work five months to earn a year’s tuition at a private college. In 2016, he would have had to work fourteen months… Student debt has increased 700% since 1990. College really does seem to be getting less affordable. So do health care, primary education, and all the other areas affected by cost disease.”

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How university re-establishes hierarchy

By Peter Franklin

As with the housing sector, the real problem is one of regulatory failure. Free marketeers blame regulators for creating unnecessary costs while state interventionists point to inaction against the exploitation of consumers.

The scary thing is that both sides are probably right.

To answer the second question first, MMT matters because it’s starting to trickle down from academia into serious politics. The theory is finding supporters on the ascendant Left-wing of the US Democratic Party. Indeed, some see it as the means by which a progressive administration might fund the Green New Deal (which carries a ten trillion dollar price tag).

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Just how mad is the Green New Deal?

By Peter Franklin

As for the first question, it might be helpful to draw a parallel between economics and physics. The theories of the two disciplines can be expressed in the form of complicated equations. Physics theory has a much firmer foundation in reality than economic theory, but in both cases one can rearrange the maths and re-chop the logic to arrive at bold new interpretations. MMT is to economics what general relativity, quantum mechanics and string theory are to physics – a fundamental reordering of the theoretical framework.

In conventional economic policy, governments raise money through taxation and borrowing (or by turning on the real and metaphorical printing presses). They then spend that money. However, Modern Monetary Theorists say that’s the wrong way of looking at it. Because a sovereign nation ultimately creates its own currency, it need never default on any debt denominated in that currency. It can, therefore, create all the money it needs – the only limit is the risk of inflation (caused by too much money chasing the finite productive capacity of the real world economy). The purpose of taxation in MMT is not to raise revenue, but to control inflation – i.e. by taking away the ability of individuals and organisations to place demands on the economy’s productive capacity.

This is how Matt Breunig sums it up in a piece for the People’s Policy Project:

“What MMT advocates do is assert that actually all government spending is funded by money creation. Taxes and borrowing may look like ways the government gets cash to spend, but in fact all they do is delete money.”

Though MMT supporters tend to be on the Left, so are the theory’s most vociferous opponents – of which Breunig is one:

“…it has become clear to me that the bulk of MMT discourse is not really about what the best policy instruments are for maintaining price stability and debt stability, but rather about using word games to make people believe that the US can have Northern European levels of government spending without Northern European levels of taxation…

“The real point of MMT seems to be to deploy misleading rhetoric with the goal of deceiving people about the necessity of taxes in a social democratic system.”

Of course, there’s always a distinction to be drawn between ideas in their pure form and the grubbier uses that they’re put to. In this respect, conventional Left-wing economics (or Right-wing economics, for that matter) is no less unsullied than MMT. For instance the most prominent calls for higher taxation to fund higher spending have focused on squeezing the super-wealthy. This conveniently distracts from the fact that Scandinavian-style welfare states depend on a heavily-taxed middle class.

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The irrelevant debate over the top rate of tax

By Peter Franklin

So let’s leave the politics aside, and ask whether MMT has any merit as a way of looking at economic policy. I believe that it might just do, since we live in a world where some goods and services are becoming ‘post-scarce‘. As an example of what this means, consider the case of software: once an app has been developed, the cost of producing more copies of it is negligible – it is demand that is constrained, not supply. Technologies like artificial intelligence and robotics have the potential to shift more and more of the economy into a state of effectively inexhaustible productive capacity.

As I’ve noted previously, a decade of extremely loose monetary policy has notably failed to unleash inflation, suggesting an increasingly flexible supply-side response to the demand we throw at it. Indeed, given demographic trends, it’s the demand-side we should be more worried about. In the most aged societies, like Japan, the struggle is to stop deflation, not inflation.

If this is the direction in which we’re headed, the rise of MMT, if nothing else, prompts us to reconsider some basic assumptions.

For instance, in all advanced economies there is a fiscal authority (typically a finance ministry) that controls the level of public debt through fiscal policy like taxation, borrowing and expenditure; then there is a monetary authority (typically a central bank) that controls the price level (i.e. inflation) through monetary policies like interest rates, quantitative easing and money creation in general.

The revolutionary implication of MMT is that this should be the other way round – the central bank providing the government with money it needs (simply by creating it), while the finance ministry manages inflation through its powers over taxation and expenditure.

Unlike the generalised impact of interest rates, tax and investment based interventions can be targeted at particular sources of inflationary pressure. For instance, if land prices are shooting up then an appropriate response might be the imposition of land value taxation to dissuade speculators (plus more funding for the regeneration of derelict sites).

In an economy where some forms of supply are becoming superabundant, but others remain constrained (and thus become opportunities for speculators and monopolists), using a scalpel, not a cosh, to tackle inflation makes evermore sense.

One doesn’t have to agree with where MMT came from, or its use and abuse in contemporary politics, to see its relevance to a changing future.

Suggested reading

Why 'enough' is the most dangerous word in economics

By Peter Franklin

The overall thrust of the piece is a critique of Modern Monetary Theory (MMT) – an ‘alternative’ school of economics currently in favour with American Left-wingers like Alexandria Ocasio-Cortez.

The authors quote Kevin Muir‘s definition of MMT:

“Modern Monetary Theory is a macroeconomic theory that contends that a country that operates with a sovereign currency has a degree of freedom in their fiscal and monetary policy which means government spending is never revenue constrained, but rather only limited by inflation.”

In other words, if you’re in a position to make your own money, you don’t need to worry about budgetary deficits or public debt, you only need to worry about prices. Given that inflation has been low for a generation and continues to stay low despite the return to growth and near full employment, government can afford to fund lavish spending programmes like the proposed ‘Green New Deal’.

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Do you know where money really comes from?

By Peter Franklin

But what if inflation is much higher that we’ve been led to believe?

Writing from an US perspective, Lebowitz and Roberts argue that we’ve been misled:

“…during the Clinton Administration, the Boskin Commission was brought in to recalculate how inflation was measured. Their objective was simple – lower the rate of inflation to reduce the amount of money being paid out in Social Security.

“Since then, inflation measures have been tortured, mangled, and abused to the point where it scarcely equates to the inflation that consumers deal with in reality.”

Here’s an example:

“…home prices were substituted for ‘homeowners equivalent rent,’ which was falling at the time, and lowered inflationary pressures, despite rising house prices.

“Since 1998, homeowners equivalent rent has risen 72% while house prices, as measured by the Shiller U.S. National Home Price Index has almost doubled the rate at 136%. Needless to say, house prices which currently comprise almost 25% of CPI has been grossly under-accounted for.”

‘Homeowners equivalent rent’ is a specific case of ‘imputed rent’ – which is what you’d have to pay for the use of your house or car if you didn’t own it (or, to put it another way, what you could earn by renting it to someone else). It’s a theoretically ‘pure’ and consistent way of assessing the value of assets, the sort of measurement that appeals to economists. In the real world, however, most people who buy a home don’t care about its imputed rent, but what they actually have to pay for it – which, surely is the only kind of price that matters.

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The truth about GDP figures

By Peter Franklin

This is not the only way in which the official inflation rate depends on theory rather than straightforward observation:

“There is also a measure called ‘hedonics’ which is used to account for the change of value of a particular good over time… an example [is the] additional power of modern computers [which] means consumers are getting more for their money than in prior years, hence paying less according to inflation calculations.

“Some hedonics make sense, like computers, but many do not. Can you apply the same logic to High-Def TVs? Unlike the computer, TV’s serve no economic benefit. Should inflation measures be reduced because you now have a 50-inch flat screen versus a 32-inch one? We say no.”

This is quite the rabbit hole. Take the example of cars: at any particular price point, these are more reliable and fuel efficient than they used to be. On the other hand, congestion means that driving is a much less rewarding experience than in the age of the open road. Or food: on the one hand it’s great that we can have fresh tomatoes all the year round, but on the other hand they don’t taste of anything.

How on Earth does one adjust for the positive and negative ‘hedonics’ of all of that? Depending on the value judgement one makes we could be much richer or much poorer than we’re officially purported to be.

The problem of subjectivity also applies to ‘the basket of goods’ use for the inflation calculation. Adjustments to the content are required from time to time (to take a trivial example, the price of lard is not as relevant today as it was a hundred years ago). But while genuine shifts in consumer preference should be reflected, other consumer trends could be distorting the picture. A shift in spending to some classes of increasingly affordable goods and services (e.g. electronic gadgets) may reflect an attempt to compensate for the fact that other, more important, items such as decent and conveniently located living space, are getting more expensive.

And whose experience of inflation are we talking about anyway? If, say, luxuries are getting cheaper while everyday necessities like rent, utility bills and childcare are getting more expensive, then averaging it all out conceals the fact that most people whose outgoings are dominated by the essentials are experiencing a higher rate of inflation than those with money to burn. (There’s a parallel here to GDP figures – if most of the proceeds of overall growth are going to the rich, then the rest of us are experiencing a stagnant economy not a growing one.)

So, inflation is a slippery concept. And what’s more, governments have every reason to use this lubrication to massage the figures down. The lower the official inflation rate, the lower the expenditure on index-linked payments like state pensions – and the higher the rate of ‘real’ economic growth.

Mainstream economists have every reason to go along with the official line, because it appears to validate the mainstream monetary policies of the neoliberal era. Left-wing economic theorists also have a reason not to rock the boat, because their borrow-and-spend policy ambitions depend on inflation not being a problem. Then there’s a huge commercial vested interest – comprised of all of all of those businesses whose speculations depend on an inexhaustible supply of cheap credit.

Of course, those who claim that the real inflation rate is much higher than everyone else admits can be written off as a fringe – in the same category as ‘goldbugs’, crypto currency enthusiasts and other heretics.

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The irrelevant debate over the top rate of tax

By Peter Franklin

But try this thought experiment: If there were an economy in which inflation definitely had been under-reported over a long period, what would it look like?

One might expect increasing levels of dissatisfaction among ordinary working people who don’t feel as rich as they’re told they are. Other likely symptoms might include: a long-term build-up of consumer and public sector debt in order to finance ‘normal’ levels of spending; the inflation of speculative asset bubbles; puzzling shortfalls in genuine productivity; a destabilising accumulation of bad risks in the financial system; and the collapse of public trust in conventional politics.

Remind you of anything?

Before the financial crash, excessively low interest rates, quantitive easing and the like would be punished with inflation. In the earlier part of this decade, the op-ed pages were full of rightwing economic pundits saying this would happen sure as clockwork (if we didn’t mend our ways in time). Yet, like their leftwing brethren (who warned that austerity would cause mass unemployment), they were proved wrong.

The post hoc rationalisation was that the financial crisis was much worse than previously realised – and that the shock of such a deep recession must have suppressed demand. This excuse is wearing thin. We’re now ten years on from the start of the crisis – and several years into the recovery (the precise number depending on location). So where’s that inflation then?

It’s a mystery that Nouriel Roubini tries to fathom in a piece for Project Syndicate:

“Since the summer of 2016, the global economy has been in a period of moderate expansion, with the growth rate accelerating gradually. What has not picked up, at least in the advanced economies, is inflation. The question is why.”

If we can’t blame lack of demand, then we ought to look on the supply-side of the economy:

“One possible explanation for the mysterious combination of stronger growth and low inflation is that, in addition to stronger aggregate demand, developed economies have been experiencing positive supply shocks.”

A ‘positive supply shock’ is basically a glut – an expected surge in production sufficient to soak up demand at the same (or lower) prices.

Roubini lists a number of examples, all of which are happening to the global economy right now:

“Such shocks may come in many forms. Globalization keeps cheap goods and services flowing from China and other emerging markets. Weaker unions and workers’ reduced bargaining power have flattened out the Phillips curve, with low structural unemployment producing little wage inflation. Oil and commodity prices are low or declining. And technological innovations, starting with a new Internet revolution, are reducing the costs of goods and services.

The conventional wisdom is that it won’t last. But, in this context, the conventional wisdom is circular – it assumes whatever it takes to stop conventional economic theory from blowing up. Roubini (who defied convention when he was one of the very few economists to predict the financial crisis) argues that we should be open to the possibility that the positive supply shocks are permanent (or at least persistent).

He is not alone:

“…the Bank for International Settlements…argues that it is time to lower the inflation target from 2% to 0% – the rate that can now be expected, given permanent supply shocks. Trying to achieve 2% inflation in a context of such shocks, the BIS warns, would lead to excessively easy monetary policies, which would put upward pressure on prices of risk assets, and, ultimately, inflate dangerous bubbles.”

Perhaps we should go even further and consider a truly radical possibility – which is that the long prophesied age of abundance is beginning to manifest itself.

The most fundamental assumption in conventional economic theory is scarcity. Indeed, the whole of economics is basically devoted to answering one question: how should we allocate scarce resources?

The concept of post-scarcity economics has been explored by science fiction writers, but policy makers need to catch-up. Though obviously not happening universally, there are more and more examples of once scarce resources that are now super-abundant in particular places and at particular times. Examples include information and entertainment (thanks to the internet); food (people in the developed world have access to far more calories than they can sensibly consume); energy (at times of peak production from renewables, the wholesale price of electricity in some markets has dropped to zero); and even money itself (i.e. when money is loaned at close to zero interest).

With further technological progress (especially in robotics and artificial intelligence) we can expect the once distant prospect of post-scarcity to breakthrough into more and more of our present reality.

I’d like to reiterate that this process, though underway, is clearly incomplete and extremely uneven. As a result it is helping to drive all kinds of distortions – like inequality, asset bubbles and, in some countries, the threat of deflation.

Above all, it is overturning old assumptions, which now provide a dangerously misleading guide for policy makers.

To save capitalism – or at least the practice of liberty in the economic sphere – we must remake our theoretical frameworks.

There’s nothing wrong with theory as long as it’s scientific theory; and economics, despite the number-work, is not a science. Its theories, not being scientifically constructed, cannot be scientifically tested. Which is how they can persist for so long in the face of evidence to contrary.

Assumptions that may or may not have been accurate at one time can become fossilised within economic theory; thereby exercising an influence over economic policy-making long after times have changed.

There’s an excellent example in an article by Gary Shilling for Bloomberg (the second part of which is here). His subject is the stubborn adherence of central bankers to the idea that high levels of employment carry the danger of inflation (through upward pressure on wages):

“Wages have been either stagnant or declining in the U.S. and other developed economies for more than a decade once inflation is taken into account. Yet, the Federal Reserve and other major central banks remain convinced labor markets are tight, and that a surge in employee costs and inflation are just around the corner. Hence, their recent shift toward credit restraint.

“But inexplicably, policy makers are failing to take into account the many significant economic changes in recent decades that are holding down wage growth.”

Shilling explores six main reasons why the relationship between employment and inflation has weakened so dramatically. The most obvious is the ease with which businesses can now draw upon a global supply of labour:

“Manufacturing employment in the West has seen a dramatic drop as production in the last three decades shifted from developed countries in Europe and North America to developing economies in Asia, where costs are much lower.

“There’s also downward pressure on jobs and compensation in the service sector due to legal, accounting, medical billing and other services being outsourced abroad.”

Even within national labour markets, we’re seeing an expansion of supply. Though the great historical shift of women into paid work is more or less complete, there are further sources of new supply – not least from groups that had previously exited the labour market such as young adults or retirees:

“Indeed, the labor force of those age 20 to 29 has been growing since 2012. At the same time, people over 65 who are employed or actively looking has been rising since the early 1990s. Many seniors are in good health and prefer active work to vegetating in front of the TV. Others, among them many postwar babies born in the 1946-1964 years, have been notoriously poor savers throughout their lives and need to keep working due to a lack of retirement assets.”

Various trends look set to underpin this return to the workplace – for instance, the trend towards less physically demanding work; the backlash against the scammier facets of higher education; and the continued pressure to reduce welfare bills.

Then there’s a much overlooked generational effect:

“…within industrial sectors, wages have been restrained as postwar babies at the top of their pay scales retire and are replaced by lower-paid new recruits.”

On the face of it, the retirement of the babyboomers suggests a tightening of the labour market, but in fact it is giving employers an opportunity to rethink their business models and reduce their reliance on expensive labour (not only through those fresh-faced new recruits, but also outsourcing, automation or simply doing without).

Taking all of this into account does not require new theories, but more careful observation – which is what the best of economics does already. Policy-makers need to catch-up.