Stumbling and Mumbling

Inflation: the real problem

Everybody says we have an inflation problem. Everybody is wrong. What we have is a relative price problem.

The biggest reason for high inflation is that petrol prices and utility bills are soaring – up by 22.3% and 23.1% respectively in the last 12 months, contributing 1.5 percentage points to February’s 6.2% CPI inflation.

Imagine, though, that prices in the rest of the economy were flat, so that inflation were below its 2% target. Would everything be OK? No. We would still be handing over a bigger chunk of our incomes to monopolistic utility companies and to foreign despots.

What we have is a relative price problem. And this is a real problem in the sense that it’s a transfer of real resources.

This echoes an old phenomenon, described by David Ricardo in 1815. As the economy and population grow, he said, farmers would have to cultivate less and less fertile land to meet demand for food. That, he said, meant that food prices would rise over time. Which would squeeze real incomes and thus eventually kill off growth. It would also mean, he said, that owners of the best land could charge higher rents and prices, thus transferring income from renters to themselves.

Ricardo’s theory was wrong for food; thanks to trade and technical progress (two similar things) their prices fell after he wrote. But the gist of it was right. We are transferring a growing portion of our incomes to a different type of rentier – owners of utility companies and gas and oil reserves*. And this is not merely a short-term problem: in the last 20 years, gas and electricity bills have doubled relative to wages**.

This threatens to have the same effect that Ricardo predicted. If we are handing all our cash over to utility companies, we’ve nothing left to spend in more dynamic sectors. And so growth will slow. This is a version of Baumol’s cost disease.

The OBR thinks we’ll escape this fate this year because households will respond to the squeeze on incomes by saving less and borrowing more: it foresees the savings ratio dropping to a 60-year low. Even if this happens this year (which is questionable) it still leaves us with a longer-term problem. Stagnant productivity, a rising relative price of services (not least of which are government services) and the fading away of the effect of cheap imports from China all threaten to continue to squeeze real incomes. If fuel and utility costs continue their long-term uptrend, the squeeze will only be worse.

So, what’s the solution?

We should accelerate decarbonization. As Eric Lonergan and Corinne Sawers point out, this requires more than tax changes. It requires a greater availability of alternatives to carbon-based fuels and greater ease in switching to them.

There’s also a case for nationalizing utilities and oil companies so that their rents are socialized and could be recycled back to us. This would prevent the growth-depressing transfer of real resources that Ricardo feared.

Neither of these, however, fully solve the problem. As long as productivity is stagnant, so too will be real incomes. Which means that any big change in relative prices where demand is inelastic will cut someone’s real income.

Which brings us back to what all sensible economists have been saying for years – that our fundamental problem is a lack of productivity growth.

* And not just these: Ricardo's theory also applies to prime commercial and residential land. 

** The course of oil prices in is trickier. Although these are much higher now relative to consumer prices than they were at the start of the century, they are much lower than they were in 1980.  

 

The politics of abstraction

There’s a link between two of the more absurd events of the weekend: David Cameron’s boasting of volunteering at a food bank; and Natalie Elphicke’s attempt to join a protest against P&O’s mass sackings.

Both are trying to repair the damage they themselves have done. Acute poverty, and hence the need for food banks, is the direct result of Cameron’s own austerity policies. And P&O can only replace its staff with agency workers because Elphicke and her fellow Tory MPs voted against Barry Gardiner’s bill to outlaw the practice.

What we have, then, is an apparent absurdity – people objecting to the foreseeable consequences of their own actions. How can this happen?

Part of the story is that most people have a strong urge to feel they are doing the right thing. We do not smirk like Dick Dastardly as we take pleasure in our evil schemes but instead perform intellectual contortions to satisfy ourselves that we are in fact the goodies; this is one form of self-serving bias. It’s this instinct that has given rise to ESG (environmental, social and governance) investing with all its greenwashing and hypocrisies.

In itself, however, this instinct need not have led Cameron and Elphicke to act as they did. In many minds instead it leads only to arguments that austerity or voting for bad bosses was necessary for the greater good.

So why didn’t Cameron and Elphicke pursue this line instead? Here’s a theory: their ideology blinds them to the fact that policies hurt real people. Politics isn’t merely about finding positive-sum solutions; it’s about choosing who to throw under the bus.

But they don’t want to face this fact. Instead, for them, politics is about abstractions independent of real lived experience. It’s about what plays well in focus groups; what appeals to the media; what does well on “the grid” (to use a 90s metaphor). And politics goes no further than that.

So for example, “cutting red tape” is a sign that you oppose big government rather than are content to risk people burning to death in high-rise buildings. In the same way, austerity or voting against firing and rehiring are merely symbolic acts, signals that one is on the right side, rather than acts with consequences.

This echoes Joe Stalin. "If only one man dies of hunger, that is a tragedy. If millions die, that’s only statistics" he said. And by statistics he meant not the fact that statistics is the plural of anecdote but that they are just another abstract debating point to be manipulated on the Posh Twats Talk Shit shows that pass for politics programmes. Hence Elphicke’s discombobulation when confronted with the unavoidable fact that actions do have consequences, that politics hurts real people.

Johnson gave us a clear example of this politics of abstraction yesterday. His likening of Ukrainians to Brexit voters is of course too far beneath contempt to deserve comment. What’s also revealing, though, is this:

When the British people voted for Brexit, in such large, large numbers, I don’t believe it was because they were remotely hostile to foreigners. It’s because they wanted to be free to do things differently.

This misses two things. One is that Brexiters have so far failed to tell me what I am free to do now that I wasn’t in 2016. The other is that this government is actually suppressing freedom by seeking to criminalize protest and is reducing freedom even in the narrowest Thatcherite terms by raising taxes to their highest level in decades. Johnson’s love of freedom is a pure abstraction, divorced from his actual actions.

But here’s the thing. In treating politics as a reified activity separate from lived experience, the Tories are not alone. In their book Managing Britannia Robert Protherough and John Pick describe how modern management “deals largely in symbols and abstractions” – which is how oil companies can claim to be green.

And some critics of the Tories do a similar thing. Some are more agitated about Johnson’s possible receipt of a fixed penalty notice than they were about the mass social murder of austerity. The image of hypocrisy matters to them more than the reality of tens of thousands of deaths.

It’s tempting to see all this as vindication of T.S. Eliot’s claim that “humankind cannot bear very much reality.” But I’m not so sure this is all there is. Tories have not always tried to deny the consequences of their policies. Thatcher called miners “the enemy within”; she didn’t try to join them on the picket line as Elphicke would have. And Norman Lamont called unemployment a price “well worth paying” and never felt the need to do a stint in a Job Centre.

So what changed? A bit of me thinks the Tories retreat from reality is because the truths of capitalism – stagnation, corruption and inefficiency – are no longer ones that can be uttered in public. But it might instead simply be that they have become vacuous idiots.

The same old mistakes

War, wrote Carl von Clausewitz, “is merely the continuation of politics with other means.” Which implies that the mistakes made in thinking about war will be similar to those made when thinking about domestic policy. This is especially true of those, such as Dan Hodges, calling for a no-fly zone in Ukraine.

Of course, Mr Hodges is a squit who is best ignored. What’s significant is that his call reflects two widespread errors.

Error one is that you must base policy not upon what you hope will happen, nor even upon what you expect to happen, but upon the range of possible outcomes. For example, in the IC, I tell my readers to hold a decent proportion of cash to protect against the possibility not just of losses on equities, but of falls in equity and bond prices at the same time. Imposing a no-fly zone in Ukraine would require shooting down Russian planes which would risk triggering all-out war with Russia. There’s no point dismissing this risk: you don’t know enough about Putin’s mind to do so. What matters is avoiding it. And to their credit, Boris Johnson and Ben Wallace seem to be doing so.

You might think this principle is an obvious one. It’s not. Brexit was based in part upon wishful thinking to the neglect of the downside risk that the EU would prove a tough negotiator. A post-Brexit trade deal would be "one of the easiest in human history" said Liam Fox. “The day after we vote to leave, we hold all the cards and we can choose the path we want” said Michael Gove. Subsequent events have not necessarily vindicated such optimism.

Ditto fiscal austerity after 2010. There might have been a case for this if the world economy were strong and the UK sector sufficiently dynamic to take up the slack created by weak government demand. But they weren’t. Sensible fiscal policy would have heeded the risk of this. When in 2012 Vince Cable tried to excuse the UK’s weak growth by pointing to the euro crisis, he was actually drawing attention to how bad policy was, because it was not founded upon the distribution of probabilities.

Ditto Iraq. The lack of post-occupation planning was due in part to wishful thinking rather than to a consideration of probabilities, one of which was that the country would sink into chaos.

It’s not just government policy that can go terribly wrong by failing to consider probability distributions. So too can corporate policy. RBS’s takeover of ABN Amro – which contributed greatly to the financial crisis – owed much to Fred Goodwin thinking he could reap synergies to the neglect of evidence that takeovers have a high probability of poor returns for the bidder.

There is, though, a second error in calls for a no-fly zone which has a counterpart in domestic policy. It’s what I’ve called the pawn mistake – of regarding the objects of your policy as pawns who will do your bidding, rather than strategic actors with their own agency and objectives.

The first question to ask of a no-fly zone is: how would Putin react? The answer to which is: possibly not as we would wish him to.

Again, you might think this is obvious. But again, it’s not been obvious to our rulers. In 2019 Digby Jones tweeted:

Hey Mr Tusk. Those who pushed for Brexit did have a plan but it required your lot not to bully the UK, for Remoaners & the Establishment not to sabotage the wish of the majority & for Jezza’s mob not to play tribal party politics with a major National issue.

His discombobulation reflects the assumption of (some) Brexiteers that the EU would do the UK’s bidding, that they would defer to a posh English accent. But the EU wasn’t a mere pawn.

Brexiteers aren’t the only culprits here, though. One reason why target culture has not improved productivity (in the private as well as public sectors) as much as its advocates hoped is that workers are not mere pawns but strategic actors. So they meet targets not by doing more or better work but by teaching to the test; distorting clinical priorities; producing unreplicable academic research; or cooking the books.   

I suspect one reason why the Labour right has discovered an appetite for party unity – which it oddly didn’t have in 2015-19 – is an anger that the little people aren’t merely passive fund-raisers and door-knockers but have the temerity to have thoughts of their own. They don’t see, and still less appreciate, that people are agents not pawns.

Again, though, it’s not just in politics that we see this error. We see it too in stock markets. One of the best-attested anomalies is that of IPO underperformance: newly-floated stocks on average do badly in their first three years on the market. A big reason for this lies in investors’ failure to think strategically. They don’t ask: if this is such a great company why are its owners, who know more about it than anyone else, so keen to sell?

Calls for a no-fly zone are therefore indeed the continuation of politics in that they are the continuation of widespread errors.

But here’s the thing. These errors should be widely known by now: if a twat in Rutland knows them, so should anybody with political influence. The fact that they seem not to be tells us something significant – that a good portion of politics has become divorced from serious thinking about policy and unable to learn from past mistakes.