Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday 26 July 2022

Sunak vs Truss: a battle between two failed economic policies


While the dividing lines between the two candidates on economic policy appear fairly clear, the division is more fundamental than the timing of tax cuts. It is the politics of one big lie, that we saw under Cameron and Osborne, against the politics of perpetual lying, that we saw with Brexit and Johnson. Both candidates share the same aim, which is to minimise the quality of public services and maximise tax cuts while still winning elections. They differ only on what the best political means of achieving that goal is.

The big lie under Cameron and Osborne was that reducing the deficit was an important, in fact the most important, goal of the government's macroeconomic policy, and that reducing the deficit meant cutting public spending across the board. It was a big lie because even at the best of times reducing the deficit is not a primary objective of policy, and in a recession when interest rates were stuck at their lower bound reducing the deficit is the macroeconomic equivalent of serious criminality.

To give some credit to Sunak, he recognised the need in the middle of the pandemic to support the economy, just as Labour had done after the Global Financial Crisis (GFC), support which Osborne attacked from opposition. But while Labour's 2009 fiscal stimulus was an intelligent response to the GFC recession, Sunak seemed to make no attempt to understand the pandemic in formulating his macroeconomic response. Instead all his decisions subsequent to introducing furlough both made the pandemic worse (eat out to help out, encouraging a delay in effective action to deal with the second wave etc) and failed to grasp the importance of controlling infections for the health of the economy. It is therefore Sunak as well as Johnson that we have to thank for the severity of the UK death toll from the pandemic and also the depth of the consequent UK recession. As they both found out but continue to deny, before vaccines were made available lockdowns delayed meant more deaths and longer lockdowns later.

The UK recovery from the pandemic recession was swift and more complete than the recovery was from the GFC recession, as it was in most countries. This reflected a combination of rapid vaccine development, the very different nature of the two recessions and the absence of austerity during the initial recovery period. It had very little to do with Sunak's one stimulus measure, a big investment incentive for firms, which has turned into a costly flop. But with the UK currently experiencing the combination of a relatively weak recovery and high inflation, it is clear that Sunak and Johnson's failures during the pandemic, coupled with the costs of Brexit, are depressing UK incomes just as Osborne's austerity did.

Sunak, like Osborne, likes to frame his job as Chancellor (and perhaps Prime Minister) as being responsible with the deficit, rather than improving the welfare of UK citizens. Osborne began the decline in the NHS, and Sunak has allowed that decline to reach critical levels, such that poor health is now producing a poorer economy. Even within the self imposed deficit straightjacket, he had the opportunity to use the higher deficits of the pandemic period as an excuse the put major resources into both the NHS and public investment, but instead he was too quick to set deficit targets so increases in both were far too modest. He also accepted a fiscal rule that imposed an arbitrary limit on public investment.

Under Sunak, like Osborne, arbitrary deficit targets limit public spending, and any better than expected news on the deficit is normally earmarked for tax cuts. Sunak, like Osborne, fails to see the essential role that public services play in producing a healthy and efficient economy. Instead the public sector is seen as a burden, and the private sector as always more efficient, an ideology that evidence provided by outsourcing failures like test and trace fails to dent. [1]

In this context the willingness of Truss to relax the deficit constraint might seem welcome. But she wants to relax the constraint to produce not better public services, but tax cuts today that are greater than Sunak's future tax cut plans. That their ultimate goal, tax cuts, is the same shows that the difference between the candidates involves strategy rather than objectives. The strategy Truss is adopting is taken from the Republican party, and is called 'starve the beast'. (See George Eaton on Sunak’s Thatcherism compared to the Reaganism of Truss.) Like Reagan's tax cuts, her policy is to raise borrowing to sufficiently high levels such that at some point a deficit crisis will be declared, the answer to which is of course spending cuts. This may not even be the initial plan, but with the ideology of her party and the dominant media narrative it is an inevitable outcome. So while Sunak aims to keep to deficit targets and cut taxes in good times, Truss plans to cut taxes now so spending is cut in a future manufactured deficit crisis.

Starving the beast involves not just one big lie, but a whole series of untruths. Voters are being told that tax cuts will not raise demand and therefore inflationary pressure, and will also pay for themselves. When both fail to happen after the next election voters will be told that the high interest rates that tax cuts have made inevitable and a larger deficit has nothing to do with tax cuts, but is all the fault of a bloated public sector. The Conservatives' favourite economist, Patrick Minford, will do overtime in TV studios to give this nonsense economics some spurious credibility, just as he did with Brexit.

A steady stream of lies about economics is what Brexit, and Johnson’s period of government, was all about. In that sense Truss promotes the Johnson continuity strategy, just as Truss in many ways represents the Johnson continuity candidate: often radical changes in political beliefs to satisfy personal ambition, a self-discribed “disruptor-in-chief”, with an ability to claim personal triumphs that is inversely proportional to actual achievement. Cutting taxes and spending more in the short term is what Johnson wanted to do but was prevented from doing so by his Chancellor and the Treasury.

Tax cuts now is a strategy that works in winning over Conservative party members, because they represent the small minority of voters who want tax cuts and lower public spending. These members are also the ultimate Brexit faithful, believing the lies constantly fed to them by the Brexit press. But both the ideas advocated by Truss and the policies proposed by Sunak are the opposite of what the UK economy needs right now. The twelve years of Conservative rule have put theUK economy in as bad a state as it has been since WWII, and all they are doing is advocating more of the same.

The Cameron/Osborne period, the years of the one big lie, turned what had been a vibrant economy into a depressed economy. Large percentages of economic output and incomes were lost, as austerity first delayed a recovery from the GFC for three years and then ensured that recovery was tepid. Lack of investment caused by weak demand and uncertainty meant productivity growth, which had been in relatively good health in the decades before 2010, became one of the weakest in the OECD. Johnson’s answer to that was to promote the continuous lies of Brexit, which ensured yet more percentage points in output and incomes would be lost. Yet the damage he and his Chancellor did was not limited to that. Criminal mishandling of Covid and inadequate funding for the NHS and social care meant poor health started producing macroeconomic harm, and their brand of crony capitalism encouraged rent seeking rather than innovation.

The macroeconomic priority of any new Prime Minister has to be two-fold: to deal with the current crisis and to deal with the problem of slow growth in productivity, output and incomes. The current crisis is about the distribution of income: those most hit by higher energy and food prices are those that can least afford it. Part of the solution is to transfer more income from those who have gained from the crisis, the energy producing firms, to those that need it most. It’s the solution that Sunak was reluctantly forced to introduce, after insisting for months that a windfall tax was a bad idea. Sunak’s scheme was temporary, involving a 25% tax with far too generous exemptions for investment. To fund further help for the poorest this winter, it could be made permanent, at a rate above 25% and with no exemptions for investment in fossil fuel extraction.

The first priority in solving the underlying problem of slow UK growth should be to begin the process of restoring the NHS to the position it was when Labour left government. Part of that process is reversing the privatisation of health provision, which while it might have saved money initially either costs more in the longer term or reduces the quality of care, and sometimes both. This is going to cost a lot of money, which is why tax cuts either now or in the near future are such a stupid idea.

Another priority is public investment, including investment to help green the economy. Public investment can be a spur to productivity enhancing private investment, which will promote growth by expanding the supply side of the economy. We also need to reverse direction on Brexit, start cooperating with the EU and begin the lengthy process back into their Customs Union and Single market. Public investment and health come together with Covid, where the government should be embarking on a massive programme to have effective ventilation in every school, workplace and other areas outside the home where Covid can spread.

The problem for most people living in the UK is that both candidates for PM find it impossible to do these things, both because of their Thatcherite ideology and Brexit obsession, and because their own MPs believe the public sector is bloated, inefficient and needs to get out of the way. This is hardly surprising for a party that is increasingly controlled by very wealthy donors and press barons, and that is dependent on them to outspend and misrepresent their political rivals before elections.

Both candidates pledge policies that pander to prejudice or press misinformation, like pledging no more on-shore wind farms (Sunak) or ending the green fuel levy (Truss), when green energy offers the only secure way to avoid a future energy crisis (as well as saving the planet!). So expect no progress on reversing the damage the Conservatives have done to the UK economy over the last twelve years whichever of the two candidates becomes Prime Minister. Instead the only relevant question is how much more damage each can do until the next general election.

[1] The waste of money produced by inappropriate outsourcing and corruption under Johson’s leadership is immense, yet as Chancellor Sunak was in an excellent position to stop it happening, yet he didn’t. His solution to the current NHS crisis seems to be only the power of his leadership, the same leadership he failed to show when Chancellor.

Tuesday 19 July 2022

The 1970s: myths of left and right about inflation and trade unions


With a global energy price hike generating high inflation in most countries, and central banks reacting by raising interest rates, comparisons with the 1970s are in fashion. The 1970s have for a long time been seen by the political right in the UK and US as the chaos before the calm, where the calm is the advent of neoliberalism. For much the same reasons, a common refrain on the left is that the 1970s were a lot better than what came later in many ways. A good example of the latter is a recent article by Adam Tooze in Foreign Policy. While taking the kind of holistic view he does there has its merits, it also frames the debate as an answer to the question ‘1970s: good or bad?’, while reality is more complex than that. In this post I just want to focus on just two issues: inflation and trade unions.

Tooze says that successfully controlling inflation (through independent central banks) was a victory for conservative politics. Historically inflation produces winners (borrowers) and losers (savers), and so controlling inflation was a victory for savers. In addition high inflation goes with unpredictable volatility. Inflation started at 5% in 1970, rose to over 25% in the mid-seventies, then fell to below 10% only to rise again in the early 1980s. So those who prefer stability, like most business owners, will also prefer low and stable inflation. But the constituency that enjoyed the high and variable inflation of the 1970s is both small and lacks political representation. 

The high and variable inflation of the 1970s was generally unpopular, and as a result no political party campaigned for it, just as no political groups today are arguing that the current increase in inflation should continue. I think it would be fairer to say that successfully controlling inflation is generally popular, rather than characterise it as a victory for conservative forces. There are many reasons why high and variable inflation is unpopular. While economists often focus on the costs of unwarranted relative price dispersion, what was far worse in the 1970s was heightened social disruption. Days lost in strikes reached a post-war peak in the 1970s and early 1980s. Strikes are costly because of lost pay and production, but also because of the social dislocation they can cause. 

The political right likes to slide from this observation to suggest that strikes are always the fault of workers, or even worse ‘trade union barons’. Their predictability on this makes their claim to be ‘the party of the working class’ risible.

Many on the left do the opposite. Strikes, after all, appear to be the archetypal battle between workers and capital. Unfortunately this overlooks one key point, which is that firms also set prices. As a result, when inflation is widespread strikes are not a battle between wages and profits for their share of any surplus, because employers can often recoup their share of the surplus by raising their prices. The reality is that strikes represent the breakdown of negotiations between two sides, where either workers, employers, both or none can be to blame. Such breakdowns tend to be bad for both the employers and employees involved, and often for many who use the products or services they create. High and volatile inflation goes together with a high number of days lost through strikes for obvious reasons. 

The unfortunate reality that is often missed on the left, but which is understood by most macroeconomists, is that a large increase in global energy prices have to lead at some point to a corresponding reduction in real wages (compared to what they otherwise would have been), for reasons I discussed here. Governments can and should act to cushion that effect for those on low incomes (and more widely if higher commodity prices don’t redistribute from consumers to those working to produce commodities but instead redistribute to the profits of commodity producing multinationals), but unless higher energy prices are known to be temporary there is no reason to permanently cushion that impact for all workers, and good reasons why they shouldn’t. 

In these circumstances, suggesting all workers should aim to get nominal wage rises that match the level of inflation is unrealistic, as most will not. Attempts to do so will just risk recreating what happened after the 1970s: very high interest rates and a recession. Equally now is not the time for firms to attempt to generate large increases in profits, because this too invites a reaction from central banks. But the first is not a cure for the second, except insofar as a recession hits profits as well as workers. [1] (As the postscript to this post points out, larger than average real wage cuts imposed by governments on public sector workers are a completely different issue.)

For some on the left, this refocuses the debate on technocratic and undemocratic independent central banks. After all, if it wasn’t for higher interest rates, we wouldn’t get a recession. Tooze writes: “Independent central banks were not truly above politics; they were the extension of conservative politics by technocratic and non democratic means.” But, for better or worse, independent central banks have a mandate to keep inflation near a target. If central banks were not independent, it is very likely that politicians of all stripes would set themselves similar inflation targets, and go about achieving those targets in similar (although probably more erratic) ways.

Some of the dislike on the left for independent central banks is because the cure to excess inflation often involves an increase in the number of people losing their jobs. But this has little to do with central banks per se, and represents a more general dislike of using demand management to control inflation, whether it’s through interest rates via an independent central bank or a government using fiscal or interest rate policy. The 1970s in the UK in particular represented a prolonged experiment in attempting to control inflation without imposing the costs of higher unemployment, and instead using a mixture of wage and price controls and deals between governments and trade unions. The result of this experiment was clear – it failed.

There is a more nuanced criticism of independent central banks with low inflation targets, which is that they replace the inflationary bias of the 1970s with a deflationary bias. This is the line Tooze takes, although I think it needs pinning down more precisely than he does in the article. We have no clear evidence of deflationary bias in the 1990s or early 2000s. In the UK, for example, underlying growth was steady at similar levels to the 1950s, 60s, 70s and 80s. There is no reason why, in normal times, controlling inflation should be deflationary, and no good evidence that it generally is.

However it may well be the case that central banks, given the history of the 1970s, overreact to similar external shocks to those that happened then. David Blanchflower has rightly argued that the Bank of England was too focused on raising rates following higher commodity prices in the second half of the 2000s to notice the impact the Global Financial Crisis was having. The ECB raised rates in 2011 when commodity prices started rising after crashing during the GFC, and the Bank of England nearly did the same. Some might argue that central banks are overreacting now because the dangers of a wage-price spiral are much less than in the 1970s.

However it’s far from clear to me that this shows some flaw in the idea of independent central banks. Politicians, like independent central banks, are just as prone to refight the last war. There are ways of dealing with this deflationary bias without returning to high and variable inflation, like raising the inflation target or changing the target in other ways. Independent central banks with inflation targets represented a positive response to the inflation of the 1970s, and there is no reason why these cannot be improved if it turns out that central banks are overreacting to inflation today. [2]

I noted earlier that one reason why the left wants to question the image of the 1970s pushed by the right is because the 1980s saw the beginning of the neoliberal hegemony. In particular, it saw the start of a decline in trade unionism in both the UK and US. In addition, and whether it was a factor behind decline is not obvious, these neoliberal governments substantially reduced trade union power.

But if it is the case that we are less likely to get a wage-price spiral leading to a severe recession today because unions are less powerful, isn’t that a good thing? There's an apparent dilemma here which many on the left are reluctant to face. The dilemma is that there is an inherent power imbalance between employee and employer in most workplaces and trade unions are important in redressing that imbalance. But is it possible to have strong unions without also generating wage price spirals following commodity price hikes?

International experience suggests the answer may be yes. While trade union density has declined in many countries in a similar fashion to the US and UK, in others it has not.

Will these countries suffer a worse wage price spiral, and therefore recession, than elsewhere because of greater union coverage? If not, then the link between widespread unionisation and the high inflation of the 1970s is less clear cut than many on the right (and some econmists) like to suggest. There is no dilemma if it is possible to have strong unions that also recognise when real wages have to fall following higher commodity prices.

[1] This is why central bankers who extol wage restraint without also pushing profit restraint should know better. In the current context both are inflationary, and the only cure central bankers have for either is the same: higher interest rates and a decline in economic activity. There may also be more medium term concerns about rising mark-ups that are possible because of monopoly or monopsony power in particular sectors, but there are plenty of medium term remedies available to governments to deal with those, like encouraging competition (in the UK’s case, reversing Brexit), better regulation and a stronger antitrust policy.

[2] There is a stronger case against separating monetary and fiscal policy, which is that it facilitates austerity. I make that case here, although as I argue here even that strong case ultimately fails.

Tuesday 12 July 2022

The King is Dead. Long Live the King.


In 2020 the US ended Trump’s presidency at the ballot box, and last week Conservative ministers and MPs finally forced Johnson to say he would go. It is natural that the fall of both should be celebrated, because both brought hitherto unimaginable degradation to their office. Trump and Johnson came from very different backgrounds, and operated within very different constitutional systems, but they had very similar character flaws that meant they were a disaster at leading their countries, and both did everything they could to avoid losing that leadership. Yet as the US is finding out, and as the UK surely soon will, their rule was a symptom of much deeper problems that are harder to remove.

I have described both the US and the UK under this Conservative government as elected plutocracies: regimes where some very wealthy people determine a large proportion of the policy agenda, but where elections still take place. [1] Such regimes still hold the possibility of a transition to more democratic rule through these elections. For example the US under Biden is less of a plutocracy than under Trump. In this sense elected plutocracies are best seen as a continuous struggle between the interests of some of the very rich and a majority of voters. [2]

Part of that struggle is about how fair elections are. One reason why the US and (currently) the UK are elected plutocracies, but most of Europe is not, is that both have electoral systems that favour the political right, which in turn is where the power of the wealthy is greatest. In both countries social conservatives have a more than proportional influence on elections, and as a result the political right focuses as far as it can on these social issues to win votes. This has been true for some time in the US, and as Tim Bale reminds us also in the UK.

The reason for this electoral bias to the right in the US is well described by Shaun Lawson here, and in the UK it is a result of a divided social liberal vote and the concentration of social liberals in the cities. This is one reason why most recent Republican presidents, like Trump, got a minority of votes when they were first elected (because the Electoral College that decides who is president overweights rural America), and the Conservatives win more elections in the UK than Labour.

However the two countries have very different political systems, and the importance and influence of money in US politics has been far greater for some time. While the current Conservative party apes the Republicans in many ways, it is way behind in terms of the erosion of democracy. For example gerrymandering in the US has been routine for some time, as have various measures to discourage black voters who tend to vote Democrat. In contrast the Conservative government has only just begun to do similar things.

Partly for this reason, the constitutional crisis that hit the UK last week was of an order of magnitude less important than the crisis faced by the US. In the US the Republican party under Trump took the fateful step of contesting the result of a presidential election they lost, and Trump even went as far as inciting an invasion of Congress to halt the confirmation of Biden as president. It remains an article of faith among many Republicans that this election was in some way rigged (although every objective examination of these claims has failed to find any evidence), and equally most are in denial about Trump’s attempted coup. Republicans like Liz Cheney, the daughter of a former Vice President and a solidly right wing conservative, was forced out of her position as Chair of the House Republican Conference because she supported a second impeachment of Trump following that coup.

Another related indication that the UK is well behind the US in the threat posed to democracy is the extent to which the political right ignores reality. In the US much of the right does not believe in man made climate change, whereas in the UK that is still a minority position among Conservatives. Gun control is impossible in the US, but effective in the UK. The UK does not have prominent Conservative politicians who flirt with an anti-vax agenda. Yet the UK does have a rabid right wing media that is at least as strong as in the US, and Johnson level lying has become routine among Tory politicians, so perhaps it will be just a matter of time before these things come to the Conservative party.

Disputing the results of an election your side lost based on no evidence whatsoever should mean most voters will never vote for you again. The reason is straightforward. If every time you lose an election you not only call the result rigged but also support attempts to overturn the result, voters can no longer trust democracy in your hands. If they vote you in, they may never get the chance to vote you out. Unfortunately it seems that voters are also in denial about what Trump’s coup and most Republicans failure to condemn it means for the United States. This denial is encouraged by much of the media, which raises impartiality between the two political parties above both reality and the future of US democracy.

The problem has been intensified by the inability of Biden and the apparent Democratic majorities in the House and Senate to do anything in response. It has long been the case that slim paper majorities in Congress for the Democrats do not translate to actual majorities in practice. Even before the energy cost crisis it seemed likely that the Republicans would take control of both the House and Senate in the midterm elections. Meanwhile Republican controlled States that are critical to winning the Electoral College have been dialling up the gerrymandering and vote exclusion.

If this situation didn’t seem bad enough, we also have a radicalised right wing Supreme Court using its majority to make overtly political decisions. While allowing Republican States to ban abortion has rightly got most attention, the court has also ended the Environmental Protection Agency’s (EPA) power to regulate carbon emissions. More worrying still for US democracy is what this unelected Court may do in the near future. The six Republicans on the Supreme Court have announced that one of the first cases they’ll decide next year is whether States can overrule the choice of voters in who makes up their share of the Electoral College. If they do, it means a Republican is sure to be selected as the President in 2024. If you still think this is all implausible, here are some headlines that might help, and please tell me which one cannot happen.

In the United States, therefore, the Republican party is very close to winning the war between the plutocrats that back them and democracy. If this happens the implications beyond the US itself are immense. How, for example, can the world fight global warming when the second biggest producer of CO2 emissions has a government in denial about man made climate change?

In this context our own problems in the United Kingdom seem minor, but they remain very similar. The boy who wanted to be world king may no longer be our Prime Minister, but the party that chose him in full knowledge of who he was and how poor a Prime Minister he would be remains the same. It is the Conservative party, not Johnson, that voted through the effective exclusion of poorer parts of the population from voting, voted to make demonstrations illegal and ended the independence from government of the body that runs elections. It was a majority of the Conservative party, not Johnson, who decided just over a month ago that someone who breaks his own laws can continue as a law maker. While Johnson may have institutionalised plutocracy by empowering bodies made up of major donors like the Leaders Group and the Advisory Board with direct access to ministers, the financial advantages of keeping them in place will almost certainly mean they survive his passing. Making Brexit an article of faith has divorced the Conservative party from reality, as the competition among leadership candidates about who can promise the biggest tax cuts clearly shows.

The reality is that even if more honest and democratic voices still existed within the Conservative party, their chances of becoming its leader would be virtually zero. Among MPs a combination of little-Englanders, ego-libertarians and neoliberal nutters form a majority. Furthermore it is party members that make the final choice of who will become our Prime Minister, and it is among those members that the influence of the plutocracy through the right wing press is at its strongest, a press that lauded Johnson to the end and beyond. [3] In addition (but not independently), it is among these members that you will find those that still keep the Brexit faith. The necessity of tax cuts has become an article of faith among Conservatives just as it has among Republicans. Tax cuts when the NHS is on its knees is the last thing we can afford in the UK.

Nor should the current state of the UK polls provide reassurance that things are bound to change after the next general election. Labour’s poll lead may reflect to a considerable extent the unpopularity of Johnson and the current cost of living crisis. Whoever the Conservatives chose to be Prime Minister, the media will give them a honeymoon, and a late 2024 election will almost certainly see better economic news than 2022/3, an improvement that they and their media backers will claim is down to their leadership. Although some form of cooperation between opposition parties is likely, it will be far from complete and there remain plenty of voters who don’t understand the need to vote tactically under a FPTP system.

Is there hope for democracy in the UK and the US? In the UK the immediate prospects are grim but a defeat for the right in the next general election is possible, although far from assured. [4] In the US the situation is bleaker, but it is worth noting that in the recent past it has often been the hubris of their leaders that has led the right to stumble. Trump’s attitude to Covid helped bring him down, particularly when he caught it himself. In the UK it was Johnson’s partying in No.10, illegal under his own anti-Covid rules, that turned many voters against him. The best hope we have is that the Supreme Court, by flexing its power before the midterms, will help mobilise liberal and uncommitted voters, and lift denial about the threat to democracy from their eyes.

[1] If you don’t believe me for the UK, consider the current complete absence of a policy on Covid.

[2] It might be objected that in most democracies corporations and businesses hold considerable political power. One way of describing neoliberalism is government in the interests of corporations and business in general. But this is very different from a plutocracy. In a plutocracy, a select number of particularly wealthy individuals hold considerable power, and this power may be exercised against the interests of corporations and business. Brexit is the clearest example of that happening.

[3] It is no coincidence that these papers like to show Penny Mordaunt, initially popular among Tory members, in a swimming costume.

[4] History suggests the Conservative tactic of replacing an unpopular leader before the next election is usually successful in terms of winning that election.

Tuesday 5 July 2022

Wealth dynamics and wealth inequality


The rapidly rising wealth we have seen over the last decade or more is not mainly a result of high income inequality or high savings, but of upward revaluations in wealth caused by the trend decline in real interest rates. Trends like this mean it makes little sense to talk about the old gaining at the expense of the young, and instead we should talk about the wealthy gaining at the expense of the asset poor.   

Here is the ONS measure of total UK wealth.

Notes: 2020 refers to a survey spanning April 2018 to March 2020 and so on. There is a break in the official data for 2016, and I have reduced data before that based on the 2016 comparison. Source data here.

The ONS data underestimates wealth, particularly at the top (see here), but as I want to focus on trends rather than levels I will not discuss the complex issue of wealth measurement in this post. The key point is that the total value of wealth in the UK almost doubled over a 12 year period, which is a much greater increase than nominal GDP or earned incomes. Yet this itself is not mainly the result of any dramatic accumulation of income by those earning a lot, but rather a revaluation of people’s existing wealth.

The most obvious example of this is housing, which made up just over 40% of total wealth at the beginning of this period and a little over a third at the end. The rise in housing wealth over this period is mainly a result of higher house prices rather than more houses. But the same point applies to another large category of total wealth, private pensions, which was just over a third of total wealth at the start of this period and over 40% at the end. Pensions are mainly made up of shares and fixed income assets like government debt, and their increase in value mainly reflects the upward revaluation of these assets rather than their accumulation. For more on this see this useful piece by Ian Mulheirn.

Why have valuations been going up? The main reason is the trend decline in real interest rates (see the Mulheirn piece again) - what macroeconomists call secular stagnation. I discuss why house prices rise when real interest rates fall here, but the reasons are the same for shares or government debt. In all three cases these assets provide a nominal income stream largely independent of short term interest rate changes (rent or housing services for housing, dividends for shares and a fixed interest rate for most government debt), but holding a short term variable interest rate asset is always an alternative. If short term interest rates fall, then if the price of these other assets did not rise they would become more attractive, so their price will rise. Lower short term interest rates leading to higher asset prices is financial arbitrage at work.

This is why the current debate over what will happen to interest rates once the current burst in inflation is over is so important. If secular stagnation is really over, then long term real interest rates will rise over time and the price of many assets (including houses) will fall. As a result, we will see the value of total wealth at least stabilising, and perhaps even falling. On the other hand if secular stagnation has not gone away, then these higher levels of wealth will persist or increase further.

Which turns out to be the case also influences how we think about higher wealth today. It is often said that for most home owners higher prices don’t really make them richer, because if they sell their house they are likely to buy another. It’s also often said that higher house prices benefit the old at the expense of the young. I think this way of looking at current levels of wealth only makes sense for erratic movements in real interest rates (and therefore the value of wealth) rather than sustained trends in real interest rates (and therefore wealth). To understand why we need to think intertemporarily.

Let’s take the case where secular stagnation persists, so higher wealth also persists. Consider two couples in the 40s, one of whom owns a house and the other of whom rents. The couple that own their own house know that at some point many years ahead they will no longer need their house, and they can convert its value into money to spend in their old age (on better care or more holidays), or perhaps as a gift to a child. In either case they are substantially better off than the couple that rents, who will not be able to do either. The case is analogous to a couple that has a private pension and another that does not. You don’t have to be old to feel better off when house prices rise or the value of your pension increases. Instead you just need to think ahead, and hope that higher house or asset prices last until you downsize or retire.

But what, you may ask, happens if all the pension or the money from downsizing goes to buy an annuity? Because of lower real interest rates, annuity rates will be low, so the income you receive from the pension or house sale will be lower. Is what you gain in higher wealth lost in a lower return from it? The answer is to some extent, but certainly not completely. In particular if real interest rates are very low, you will almost certainly be planning to spend some of your wealth in retirement, so you still benefit from its additional value.

Your benefit is someone else’s loss. As we should all know, higher house prices have made it much more difficult for first time buyers without wealthy parents to buy their own house. More generally, persistent upward revaluations in wealth relative to income reduces the possibility of social mobility, which benefits the wealthy at the expense of the not so wealthy. This is I think the basic reason why it’s wrong to think of higher wealth through long lasting revaluations as benefiting the old relative to the young. Instead it benefits the wealthy and disadvantages the not wealthy. It’s one of the reasons why I think those that advocate permanently low nominal interest rates as a policy goal on distributional grounds are very mistaken.

Only when such upward revaluations in wealth are short lived does it make sense to talk about the current old versus the current young. In that case the house owning couple in their 40s will never see the benefit of the current increase in house prices, because by the time they come to sell their house and move into a retirement home or whatever prices will have fallen again. Equally only would-be first time buyers right now will be disadvantaged by unaffordable housing, because house prices in 10 years time will be much more affordable.

Short lived movements in asset prices also influence pensions. Those taking their pension can either get lucky (if real interest rates are temporarily low, so asset prices are high) or unlucky (if the opposite is true). It is also why a pay as you go, government run pension scheme can be a lot fairer than private schemes because the value of pensions do not depend on short term fluctuations in real interest rates and asset prices. (A failure to think intertemporarily also bedevils discussion of the triple lock for the UK state pension. If the state pension was gradually reduced in value relative to the triple lock, those who would lose out most are those currently in work, not current pensioners.)

Whatever happens over the next decade, global real interest rates have been falling since the 1980s, and so house prices and the value of existing pensions have been rising. That counts as an upward shift in wealth that has persisted or increased over decades, making the wealthier more wealthy at the expense of those with no wealth at all. The last few decades have been a great time to be wealthy, and a correspondingly bad time for the asset poor.