Boris Johnson, escapologist and apologist for lawbreakers, is safe — at least for now. As long as there are no new revelations about his personal behavior, his MPs will not take action against him.
Whether voters are that confident is another question. We won’t know the final answer from voters until the next election, but the limited window of time until then raises another question. What is all this for? As inflation peaks rise, recessions loom and unions threaten to go on strike, there is talk of a return to the 1970s: the decade of the three-day week, the winter of discontent and a currency crisis that led to a bailout by the International Monetary Fund (IMF). While this may seem pessimistic, some economists believe we are headed for something even worse.
Then as now, Britain had insecure governments. Ted Heath hoped for economic reform and lost a battle of wills with the unions. Jim Callaghan eventually rejected Keynesian economics before Margaret Thatcher embraced her monetarist alternative.
But our current dissatisfaction can be explained by the apparent success of economic policies since Thatcher. Many of the drivers of inflation and instability are global. China, the factory of the world, is still in partial lockdown. Ukraine, breadbasket of Europe, cannot export its corn and wheat. Russia, a huge gas exporter, will be sanctioned. Western economies are still recovering from their own lockdowns and struggling with these inflationary forces.
But consider the following facts. Before the financial crash, Britain’s per capita GDP was only 75 percent of America’s, and it has fallen even further since the crash.
That’s partly because the American economy is simply more productive. According to the Office for National Statistics, productivity is up to 28 percent higher. And it’s not just with America that we’re doing badly: our productivity is estimated to be 18 percent lower than in France. What British workers produce in five days, French workers produce in four.
Since the crash, Britain has kept unemployment low. But wages have stagnated for more than a decade, and recent wage increases, fueled by a tighter labor market, are now being wiped out by inflation, which, including housing costs, is at nearly 8 percent, the highest in three decades. Inflation, the thief in the night, is a correction brutally telling us we’re not as rich as we thought we were.
Great Britain is in a particularly difficult situation. According to the IMF, our economy will grow less than that of all other G7 countries next year. Private debt is 133 percent of household income. We have become accustomed to and dependent on ultra-loose monetary policy, with incredibly low interest rates and quantitative easing artificially supporting asset prices. Amid arguments over whether the Bank of England should have raised rates sooner and more decisively, the elephant in the room was the effect even modest rate hikes could have on families with large mortgages.
We can argue about tax rates and regulatory regimes, but the truth of our predicament is more fundamental. We have a consumption-based economic model, but too many people have too little income to consume without credit. We have shut down our productive capacity and built a service economy that makes a small number of people very wealthy while creating many low-productivity, low-skill, and low-wage jobs. We have world-class financial services, a brilliant creative sector, and some powerful manufacturers. The problem is that we have far too little of the latter.
Manufacturing’s share of our total economic output has fallen from 27 percent in 1970 and 17.4 percent in 1990 to less than 10 percent today. As production shifted to Asia, manufacturing fell in all western economies, but nowhere as sharply as in the UK. In America, Germany, Italy and France, the manufacturing industry plays a larger role in the economy than here.
The result is fewer productive and well-paid jobs, particularly fewer such jobs in regions outside the south-east of England. But more importantly, moving from a balanced to an unbalanced economy means fewer exports and a sizeable trade deficit. That deficit, which totaled almost £60billion last year even during the pandemic, is having a series of perverse consequences.
To fund the deficit and protect the currency, Britain must attract foreign capital, further compounding the problem. British companies and other assets such as public utilities and housing stock are sold to foreign investors. This risks a vicious circle that increases the deficit, increases the need for more and more foreign capital, and distorts government policy. Utilities can benefit without investing in infrastructure. High asset prices – too high for many struggling Brits – must be sustained. Investments in technology and research and development are kept low. Young and successful companies are sold before they can grow.
We need a really radical change in this economic model. Without it, there will be no step ups, no big productivity or wage improvements, and we will not make the most of Brexit. Such a change will require us to smash shibboleths. Increasingly free trade with developing countries may not work as conventional wisdom assumes. Aggregate demand is important. And Brexit – said to be a threat to our well-being – could well help us. Supply chains are already reforming and European imports are declining.
It’s not about bringing back the industries of the past, it’s about building the industries of the present and the future. Nor is it about competing on price with lower-cost economies. With investment, the right tax system, and providing our employees with the right skills and training, we can compete on quality.
The strategic goal must be to achieve economic growth through a rebalanced economy. And everything from educational policies to immigration, fiscal, and monetary policies to energy policies, labor market regulation, and housing provision must be designed to achieve that goal. Our economy has many great strengths, but we cannot continue as before.