The inflation trap

Governments and central banks across most advanced economies are battling to put a lid on consumer price inflation. When at the beginning of the year, UK prime minister Rishi Sunak outlined his five key priorities – halving inflation was at the top. With UK inflation still far above the Bank of England’s two per cent target, its Monetary Policy Committee (MPC) once again decided last week to increase short-term interest rates by a further quarter of a per cent.

The focus on tackling inflation makes sense on the surface. After all, high consumer inflation – say, above five per cent per year – is always a problem for people struggling to pay their bills. However, whatever the immediate trigger, higher inflation is invariably a symptom of deeper problems in the economy and in society. A narrow focus on inflation levels can be a distraction from the real cause of people’s hardships – namely, protracted and anaemic growth in the UK and much of the rest of the West.

The key factor behind today’s economic problems is the post-2008 productivity slump. This was the cause of the wage stagnation during the 2010s. It also underlies the economic fragility that has made it much harder for Britain to cope with the supply disruptions of the past three years, caused first by the pandemic lockdowns and then the war in Ukraine. Indeed, the lockdown-related interruptions to imported supplies were what initially set off the jump in consumer prices in Western countries.

Read the full article here.

This is a financial crisis waiting to happen

The collapse of Silicon Valley Bank and Credit Suisse this month ought to be a wake-up call. The fall of these two very different banks points to a deeper underlying malaise in the world’s advanced economies.

Some have blamed the West’s leading central banks, especially the US Fed, for SVB and Credit Suisse’s demise. They claim that central bankers’ decision to delay interest rate rises, only to rise them aggressively as inflation began to spiral last year, made things very tough for the likes of SVB. But blaming these banks’ collapse on an interest-rate hike ignores the deeper problem. The truth is that Western economies have been held afloat artificially since the 2008 financial crisis, courtesy of super-easy monetary policies. And now we’re starting to pay the price.

Read the full article here.

The problem with Hunt’s ‘back to work’ budget

In January, prime minister Rishi Sunak announced his five key priorities for 2023. Conveniently for him, his first priority was something that is very likely to happen regardless of what his government does. Sunak’s top pledge to ‘halve inflation’ came a few days after just about every new-year economic prediction said that inflation would fall by at least half during 2023. Chancellor Jeremy Hunt adopted a similar hollow ploy in his budget statement yesterday, setting himself up to take credit for something that is already happening anyway.

Alongside all the familiar, disingenuous boasts about promoting growth and business investment, Hunt also placed a distinct emphasis on this being a ‘back to work’ budget. He highlighted the importance of ‘tackling labour shortages that stop [businesses] recruiting… by breaking down barriers that stop people working’. Yet ever since the threat of further pandemic shutdowns lifted last year, people have already been returning to work, pretty much as normal. So why the focus on getting people back to work now?

Read the full article here.

How not to grow the economy

Despite the many legitimate criticisms of the short-lived Liz Truss administration, it did leave one exceptional legacy. It put the question of economic growth, and the importance of raising productivity, back on the mainstream political agenda.

It took an extraordinary triple whammy – the pandemic lockdowns, the post-lockdown disruptions to global supply chains, and the war in Ukraine – to finally force the British political class, in the shape of the Truss administration, to acknowledge the dire state of the economy.

Hence, over recent months, Conservative and Labour front benches have been talking about the importance of growing the economy. In January, prime minister Rishi Sunak announced five key pledges to address people’s ‘priorities’. The following month, Labour leader Keir Starmer countered with his ‘five missions for a better Britain’. A commitment to economic growth was at the centre of both parties’ five-point plans.

Both plans have been criticised for vagueness. But there is a deeper problem with Labour’s and the Tories’ approach to the productivity slump. While both parties have bought into the new economic consensus – that is, the belief that low business investment is at the root of lacklustre growth – they also share the belief that businesses need more state financial support. In today’s circumstances, though, this would mostly act to entrench the low-growth quagmire.

Read the full article here.

The myth of Britain’s missing workers

The discussion over labour shortages, especially in the UK, has been characterised by excessive fatalism. Bewildered commentaries have presented labour shortages as both the big economic problem of our age and the consequence of forces beyond our control. As if they were just the inevitable, irreversible consequence of the pandemic and subsequent lockdowns in 2020 and 2021. There is even talk of a ‘Great Resignation’ or a ‘Great Retirement’.

The evidence suggests otherwise. The impact on the labour force from the lockdowns and their lifting has been hugely disruptive. But it has not permanently diminished the size of the workforce. In fact, by the end of last year, total employment levels had already mostly recovered – to only 251,000 below pre-pandemic levels. Vacancies were also falling by the end of 2022, with 166,000 fewer vacancies reported than at its pandemic peak. In the second half of 2022, the working-age inactivity level had also fallen from its earlier peak (by 125,000). Towards the end of 2022, employment levels for over-49s had pretty much returned to pre-pandemic levels. And there were fewer retired people aged under 65 at the end of last year compared to before the pandemic. The ‘Great Retirement’ has become a small unretirement. So, despite the gloomy fatalism, the labour market has in fact been getting back to normal.

This doesn’t mean that everything is hunky dory in the employment world, of course. The pre-pandemic causes of our economic malaise and the problems in the labour market remain. Above all, investment levels remain as low as ever, meaning that there are way too many poor-quality, low-productivity and low-paying jobs on offer – and too few decent jobs for people who want them.

The numbers of ‘missing’ workers from the economic turmoil of lockdown are neither mysterious nor especially surprising. They are certainly not today’s top socio-economic problem. The unusual features of the current British labour market are primarily the consequence of lockdowns hitting an already anaemic economy. In future, policy discussions on the labour market, or other economic challenges, should address the causes of Britain’s protracted economic slump. That way, we might be able to start solving it.

Read the full article here.