Ryan Bourne: Shape-shifting ‘Keynesians’ really just want more spending all the time

18 May

Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.

Are British Keynesians wedded to a macroeconomic theory, or just engaged in motivated reasoning to justify ever more government stimulus?

I ask, because last week the New Statesman’s George Eaton tweeted:

“The UK is on the brink of recession – entirely predictable given benefit cuts, tax rises and rate rises piled on top of falling real wages. Do we really have to do Keynesianism 101 again?”

As this line of thinking takes off, it’s worth exploring the merits of such claims.

Economists around the world recognize that supply-shocks resulting from the pandemic and Ukraine war have created inflationary pressures by constraining the output of our economies. That means that for any given growth in overall spending, we are seeing less real output growth and more inflation.

It takes pure denial, though, to ignore how genuine excess demand has added fuel to the fire of these problems. Overly expansionary macroeconomic policies have clearly driven up the price level further, exhibited by overall spending growth rising sharply above its pre-Covid trend.

For the decade prior to the pandemic, the UK’s nominal GDP (NGDP) – i.e. total spending in money terms, or aggregate demand – grew at an average rate of 3.7 per cent per year. When the pandemic hit, NGDP fell sharply as households hunkered down and were prevented from spending on things they’d usually enjoy.

The Government spent and transferred vast amounts in relief, borrowing £450 billion, to try to counteract the downturn. Combined with the enforced depression in spending from business closures, households have since scurried away £200 billion more than expected in savings.

Crucially, the Bank of England also cut its base rate to 0.1 percent and ploughed in £200 billion in quantitative easing. All fiscal and monetary levers were yanked to try to ensure a robust demand-side recovery when things reopened.

It’s now clear that there was too much stimulus for too long. Not only does the latest year’s worth of data show British NGDP 1.8 percent above the level we’d have seen if a pre-Covid trend had been maintained, but NGDP growth accelerated towards the back end of last year.

In 2022 Q2 it grew at an annualised rate of 10.5 percent, three times its pre-crisis trend. That sort of aggregate spending growth guarantees significantly above-target inflation.

Ultimately, the buck for this stops with the Bank of England. They have the mandate and tools to curb demand-driven inflationary pressure.

Andrew Bailey and co. can certainly throw their hands up and claim they are powerless to have prevented the oil price hikes or supply-chain disruption, but they are culpable for not having kept aggregate spending growth on an even keel (remember, monetary policy operates with a lag).

Contra Eaton, it’s therefore entirely appropriate to be hitting the macroeconomic brakes with rate hikes or, yes, spending cuts.

Monetary policy is king, and you can argue that certain tax hikes may worsen supply conditions in the economy or that providing certain targeted relief is worthy given the difficulties people face.

But given the macroeconomic conditions, it’s bizarre to be endorsing more fiscal and monetary stimulus as a general idea, at a time of very low unemployment and very high inflation.

Indeed, “falling real wages” are not a phenomenon that arises from nowhere. They are the result of a macroeconomic policy error that caused too much money chasing too little output, driving up the price level and short-changing people’s nominal pay.

More top-down government spending risks exacerbating these pressures, forcing the Bank into the choice of sharper rate rises or letting inflation embed itself in people’s expectations, making future policy tightening more damaging.

Self-declared advocates of “Keynesianism 101” should understand this. Their case for macroeconomic stabilisation policies was largely based on the concept of sticky wages.

When aggregate demand fell, they said, people’s unwillingness to take cash pay cuts would prevent wages falling to price people back into work. This would create unemployment, as more people would be supplying their labour at the old wages than what firms demand.

In the Keynesian view, printing and spending money to drive up inflation is therefore a feature of stimulus, not a bug, as it allows falling real wages to do the job of ensuring a faster return to full employment.

Yet, weirdly, a lot of today’s Neo-Keynesians want to simultaneously credit macroeconomic policy for us returning to very low unemployment levels, but overlook that real wages are falling partly because of the overexuberance of the policies they celebrate.

This doublethink is especially egregious in the US, where the Democratic left are dreaming up ever-more elaborate theories to explain away inflation as a distinct phenomenon.

The latest brainwave is that companies with monopoly power are responsible for rising prices.

How companies suddenly became more greedy or powerful in the past year is left unexplained, but this misdiagnosis has now entered the realm of policy. Just last week, progressives in Congress introduced new anti-price gouging laws that would empower the federal government to fine firms who significantly raise prices during emergencies.

No British politicos go that far, at least yet. But Eaton’s talk of a recession risk from policy tightening and the zombie idea of a clear trade-off between inflation and unemployment could soon turn into a political argument for keeping the macroeconomic taps on.

It’s important to be clear then that the aim of policy in trying to curb excess inflation should not be to reduce the overall level of aggregate demand. It should be to slow its growth to eliminate any demand-side pressures pushing inflation above two percent.

If the Bank of England slams the brakes way too hard, or tries to counteract any war-induced price pressures to get inflation right on target, we’d see wilder swings in output and employment.

The point is, there’s no iron law where monetary and fiscal tightening must result in recession or more unemployment. In the US the rate of demand growth has significantly decreased, but businesses continue to add plenty of jobs. Here, the number of vacancies exceeds the number of people unemployed for the first time since records began.

Even if one was convinced that macroeconomic tightening hampers hiring, it’s therefore not obvious it would cause much more unemployment, particularly if it helps quell worker’s inflation expectations before they manifest into higher pay demands.

For many, though, macroeconomic stimulus is simply “good” and so the opposite must be “bad.” When unemployment is high, more government spending is the answer. When inflation is eroding wage slips and unemployment is low, more government spending is the answer.

As Keynes famously did not say: “When the facts change, I find new reasons to advocate for stimulus packages.”

Aaron Jacob: History teaches us that there is no time to wait in tackling inflation

26 Apr

Cllr Aaron Jacob is a District Councillor in St Albans representing Stephen’s Ward. He used to work in the telecommunications industry and is now training to be a solicitor.

It’s back. The inflation beast from the 1970s, which policymakers long thought they had slain, is now the salient issue in economics and politics. The debate over whether this bout of inflation is ephemeral, or whether it heralds the ‘new normal’, is something that economists are grappling with.

Looking to recent history for guidance whenever macroeconomic problems rear their head is always tempting, and nowhere more so than here. Commentators continually return to the 1970s when analysing this problem: it was the period during which a supply shock arrived on top of difficult industrial relations, resulting in inflation hitting 24 percent in 1975. Yet, from the perspective of the policymaker trying to construct a solution, it is not the stagnant 1970s that one ought to look to, but the roaring 1920s.

Start with the facts, and with recent history. CPI Inflation has just hit 7 percent in the UK, and 8.5 percent in the US. The Bank of England expects CPI inflation to hit 8 percent in Spring 2022 in the UK. The causes are multiple. The global economy had begun to recover from its COVID-induced slumber, as increased demand from households collided with constrained supply. Oil prices were already rising when Russia decided to invade Ukraine, resulting in a jump in energy prices not seen since 2008. Food prices, too, have risen for the same reason: Russia and Ukraine account for 30 percent of the world’s wheat exports.

Inflation is a macroeconomic problem that desperately requires tackling. Inflation, particularly the sort which is persistently high, distorts economic incentives and has pervasive distributional consequences for both capital and labour. However, it is also true that the reason that inflation has become the problem that it is today because it remained quiescent for so long, following the financial crisis.

The problem of the 1920s was not inflation. The problem was unemployment that remained persistently high compared to previous periods. Official unemployment between 1921 and 1938 never fell below one million people, nearly reaching three million people in the winter of 1932. This problem was novel, as the Edwardian British economy had not suffered unemployment on the same scale, and the subsequent war effort ensured that labour was scarce.

Policymakers in the 1920s believed that Britain simply needed to return to the Gold Standard at the pre-war parity, and from that, prosperity would follow. John Maynard Keynes, however, was of the view that, rather than wait for the economy to right itself, active steps should be taken immediately to counteract the existing problem. It was at this time that Keynes began to challenge existing economic theory, which divided time into the short and long-term; the solution, according to Keynes, lay in a large-scale, public works programme.

The lessons of the 1920s are obvious in retrospect but they needed Keynes to articulate them at the time. If unemployment was high and persistent, and if there were multiple factors which caused it, then politicians should not to wait for the economy to find its ‘equilibrium’, in the hope that unemployment would fall. The policy approach was to be creative in order to solve the existing problem now. Theoretically segmenting time into separate periods is synthetic, and is an active policy of negation.

The difference as to the type of problem, and the solution required, is, really, besides the point. The lessons of the 1920s for today are important. It is clear that the Bank of England believes that inflation is transient, but the global economy will be faced with continued supply shocks for the foreseeable future. The world’s breadbasket has become a theatre for war and destruction, with The Economist suggesting that the cost of rebuilding Ukraine could be up to $500 billion. The longer the war lasts, the more disruptive it will be to energy and food supplies.

That is to say nothing of the supply chain issues that will continue to afflict the global economy, largely due to the zero-COVID policy pursued by President Xi of China. If significant parts of the world’s industrial base is continually subject to lockdowns, with the uncertainty this breeds, the global economy will continually be subject to supply constraints. We in the UK can do little about that. However, monetary policy can be used to dampen inflation, so that it does not get out of control. Quantitative easing must give way to quantitative tightening.

The lessons of the interwar period are twofold. Firstly, the time for policy action is now. Secondly, public policy must be bold. Keynes destroyed the artificial distinction between the short and long-run that classical economics had erected, and elevated the role of the policymaker in the process. These lessons were significant in the 1920s and 1930s, and they remain significant today.

Interview with Kwasi Kwarteng: “My job is to make us not lose sight of the fact that we are Conservatives”

1 Oct

Eloquent, ebullient and frequently bursting into laughter, Kwasi Kwarteng did not look as he gave this interview yesterday morning like a minister in the middle of a crisis.

He is confident the petrol supply situation is “getting better”. Britain, he says, is making the transition from a low-wage economy with high immigration to a high-wage economy, which is what people wanted when they voted for Brexit, and although various business associations are resisting this change, it will happen quite rapidly.

As Business Secretary, Kwarteng is opposed to tax rises: “I don’t believe we can tax our way to wealth.” He calls himself “a pragmatic Thatcherite”, outlines how that philosophy can meet present-day challenges, and expresses no sympathy for gas suppliers who have got into difficulties: “Why on earth did they enter the market?”

Kwarteng communicated the genial toughness which is evidently intended to characterise the Johnson Government’s approach to business, with those who merely want to preserve the status quo granted no sympathy.

The Department for Business, Energy and Industrial Strategy (BEIS, pronounced “Bays”) is housed in a dreary modern building at the end of Victoria Street, but from Kwarteng’s office on the eighth floor enjoys a spectacular view of Westminster Abbey.

He said that unlike Angela Rayner, he would never use the word “scum” to describe political opponents, and neither would Boris Johnson. In Kwarteng’s view, it is sometimes best just to stand back and let the Labour Party argue with itself about subjects which are of no interest to most people:

“I think the best approach is for us just to simply allow the Left to have these incredible navel-gazing debates on identity politics, because actually Critical Race Theory is not something that comes up on the doorstep, it’s not something that’s going to put food on anyone’s table.”

Kwarteng, profiled on ConHome after his appointment in January, said his department is not there to act as “a cash dispenser”, but to enable private investment. He is heartened to have confounded the head of Goldman Sachs, who predicted that after Brexit no one would invest in Britain.

The Business Secretary began by discussing what should happen in the coming days in Manchester:

ConHome: “What’s the conference all about?”

Kwarteng: “The conference is about focussing us to win the next election. It’s only two and a half years, tops, until May ’24, and we’ve got to focus obviously on trying to consolidate our coalition, and that’s all about economic opportunity, that’s all about the Prime Minister’s phrase talent is everywhere but opportunity is still focussed in a few areas.

“And that’s the intuition behind the levelling up, that phrase, if you like.

“My job is to make us not lose sight of the fact that we are Conservatives. We believe in markets, we believe in individual responsibility, we believe in the ingenuity of the individual to come up with ideas that can transform society.

“It’s very difficult sometimes to make that voice heard, when we’ve had all the interventions that we’ve seen with respect to the Covid response.

“And just to illustrate that, I was elected in 2010 and the deficit then was £160 billion, something like that, and it seemed like a huge amount of money, we were talking about Greece, we were talking about bankruptcy.

“We’ve just spent in one year, ’20-’21, £350 billion on Covid support, well over twice what the deficit was. And no one batted an eyelid.

“And there’s that great phrase in one of my favourite books, The Economic Consequences of the Peace, John Maynard Keynes, and he says that before the war we spent millions, after the war we spent hundreds of millions, and we discovered we were all so much richer, so [laughing] it was a completely different order of spending and nothing bad happened.

“And our job I think is to try to get back to some kind of – and I know the Chancellor’s very much on this – to try to get back to some sort of fiscal discipline.

“But it’s hard. There are lots of competing pressures. You saw David Davis say with the foreign aid cuts, their argument was we’ve spent hundreds of billions, what’s a few more million?

“The way I see BEIS, and I’ve talked about this a lot, we can’t see BEIS as a cash dispenser. Officials think of BEIS sometimes as if it’s DWP, or as if it’s the Health Service.

“But it’s an enabler. We should think about the money we spend as enabling private capital investment. If you speak to Michael Heseltine, he’s quite good on this stuff, he talks about his career and he says he was never in a big spending department, he always saw himself in departments which were driving private economic growth and investment.

“So he was Defence Secretary, he was sort of equivalent to Michael Gove, I mean he wouldn’t want me to say…”

ConHome: “Is it too late for you to bring Michael Heseltine back in some form, by the way?”

Kwarteng: “Look, I mean, we have differences over Brexit, I’m not going to bring him back in tomorrow. But he was a great minister, and I enjoy talking to him.”

ConHome: “Brexit was a vote for many things. It was in part a vote for lower migration of a sort, higher wages, a different economic model.

“Isn’t what’s going on with this difficulty with the petrol fundamentally about the sort of economy we want. The road haulage people, like some of the fruit pickers, like some meat processors, basically want to go back to the old ways.

“They want Government to issue hundreds of thousands of visas, and they’re trying to use public pressure to get you to change course.”

Kwarteng: “That’s absolutely right, and I’ve said this a number of times, certainly privately. The reason why constituencies like mine [Spelthorne] voted decisively for Brexit, 60 per cent to 40 per cent, was precisely this issue.

“I remember three weeks before the referendum in 2016, I came out of Staines station and someone came up to me and said ‘I’m voting for Brexit.’

“And I said, ‘Oh, why are you doing that?’

“And he said, ‘Well I haven’t had a wage increase in 15 years,’ and he was someone who worked in the building trade, lots of people do work, certainly in my constituency, in that kind of self-employed, small business, logistics, construction world.

“And that was in his mind what this was all about. And so, having rejected the low-wage, high-immigration model, we were always going to try to transition to something else.

“What we’re seeing now is part of that transition. You’re quite right to say people are resisting that, particularly employers that were benefiting from an influx of labour that could keep wages low.”

ConHome: “Aren’t you therefore in a very difficult political position, because they have a kind of weapon, which is the queue, the shortage.

“All you can do, other than take various emergency measures, is tough it out.”

Kwarteng: “I think this is a transition period. As economists would describe, between Equilibrium A and Equilibrium B there’s always going to be a transition period.

“I think it could be quite short. I think what we’re seeing already is quite a lot of investment in the UK. I’ve got a list on my board of lots of things we’ve announced, of investments.

“The head of Goldman Sachs said to me three years ago, ‘No one’s going to invest in the UK because of Brexit.’

“And then about three months ago I said to him, ‘Look at all the investment.’

“He said, ‘Ah, that’s because your assets are cheap [laughter].’ They can hop on the left foot and then hop on the right.

“And we’re seeing investment, we’re seeing success. You speak to investors around the world, they’re all very interested in Britain.

“Not just because of the success they saw with things like the vaccine rollout, great science base, great intellectual capital, but also they see us as a less highly regulated, if you can believe it, jurisdiction than many others around the world.”

ConHome: “How long will this transition take? Because a counter-argument would be it would take a few years to scale up…”

Kwarteng: “No, no, the whole issue of immigration into the UK was something that happened, this particular issue of immigration from the EU, was something that started in 2004, and completely transformed the way we did our economy.

“In fact, the Romanian extension was in 2013, I remember Mark Reckless and Keith Vaz, they were on the Home Affairs Select Committee, they went down to Luton and welcomed these people.

“And that was only eight years ago, and then three years after that we voted for Brexit. I think in terms of the global economy, I think you can see very rapid shifts.

“I think in a year we could be in a totally different place to where we are today.

“I’ve just been speaking to people in the steel industry and they’re saying there are high steel prices, they think they are going to sell lots of product, Liberty are going to do a financing deal that I’ve read about in the newspaper.

“Three months ago, these people were saying this is a disastrous situation.

“So in terms of the economy, I think things can turn round very very quickly, and in five years’ time I don’t think we’ll be talking about this. We’ll be talking about other things.”

ConHome: “Will petrol stations be back to normal by the…”

Kwarteng: “Yes, they are. I’ve got some data here.” [Cameron Brown, Kwarteng’s special adviser, quickly removed two sheets of paper bearing what look like coloured graphs.]

ConHome: “Is that the hand-out? Is that for us?”

Kwarteng: “I think things are stabilising, is the word we use. And I think it’s getting better. There’s been an intense period of anxiety and a lot of pressure.

“That was an extraordinary thing about the power of the media. If I look back on Monday 20th September, my two issues there were carbon dioxide, and the shortage of it, and the gap with the energy suppliers.

“Those were the two issues. This petrol forecourt thing literally flared up I think on the Thursday, there was a leaked conversation, the thing was splashed in the paper on the Thursday.

“There was a full-blown crisis by the weekend, which is now stabilising, and I am hopeful that it will recede, but let’s see.”

ConHome: “Are there any circumstances in which you could conceivably imagine referring to your political opponents as ‘scum’?”

Kwarteng: “No, never. I don’t know whether she was as they say under the influence, or tired and emotional. I don’t know what that was all about.

“Famously it was Aneurin Bevan who said ‘they are lower than vermin’, but he was sober and that was a deliberate piece of insult.

“I don’t think it’s helpful, talking about scum. I think she’s trying to speak to that visceral tribal anti-Tory thing, to shore up the base, but in terms of the wider electorate, I think that doesn’t really work in Britain, that kind of name-calling.

“I don’t think it’s very prime ministerial. The funny thing is, she tried to say the Prime Minister says these things.

“Boris never says things in anger. All of those phrases, they’re either dressed up in the fancy-dress costume of metaphor, or there’s an ironic thing.

“I can’t remember him at any time in 30 years saying ‘So and so is scum’. There’s no venom in the way he uses words. So I think equating that with the Prime Minister is completely inaccurate. He never abuses people in the way that Angela Rayner did.”

ConHome: “No, he doesn’t. Nor does he say, as you quote Margaret Thatcher saying on page four of your book, Thatcher’s Trial: ‘Moral qualities were the secret of our economic success.’ That’s another thing you can’t imagine Boris Johnson saying.”

Kwarteng: “The whole first part of that book is rooting her philosophy in a kind of Manichean Methodism. That’s intellectual history.”

ConHome: “So what are you? Are you a Thatcherite or a pragmatist?”

Kwarteng: “I’m a pragmatic Thatcherite.”

ConHome: “She was a pragmatic Thatcherite, actually.”

Kwarteng: “She sort of was. The thing that fascinated me about doing research about her is she did have this Manichean, you’re either with us or against us, good/bad, black/white, very binary way of thinking.

“But within that, you’re right, she was pragmatic, and she picked her battles when she could. I’m struck by the way in her first term, everyone says they only got going in the second term, in the first term they did some pretty radical things, like get rid of price controls, get rid of exchange controls – I mean, that was a big deal – and some of the privatisations.

“I think to be a Thatcherite in 1985, and to be a Thatcherite in 2021, are always going to be slightly different things. The context – and this is what I love about history – there’s always a context to these things.

“In 1985, you’re trying, essentially, to denationalise, because you’ve had 40 years of quite sclerotic, unimpressive growth, and a huge expansion of the public sector, that can’t respond to innovation.

“In 2021 we’ve got a triple whammy of Brexit, where we have to think about how we’re going to reorder our legal subsidy control, that sort of stuff; you’ve got Covid, which was an unprecedented situation in which the whole world reacted to a global pandemic in a way it never has done; and then you’ve got the whole Net Zero agenda, which whether I like or not, whether you like it or not, is part of the law of the land, we have a legal obligation to try to decarbonise our economy by 2050.

“So these three things frankly didn’t exist in 1985, and we’ve got to navigate them, and we’ve got to use our ideas, our brains, our philosophy if you like to deal with that situation.”

ConHome: “One of the issues that keeps coming back is tax. In the run-up to the Health and Care package you said ‘I don’t see how we could increase National Insurance’, though to be fair you then made some qualifying remarks after that, to suggest it might be possible.

“The point is, very plainly you really didn’t like it very much.”

“Do you think we’re near the point, with a pretty high tax burden as a percentage of GDP, that we’re basically running out of room to raise taxes?”

Kwarteng: “I will frame my answer to your question, or your thoughts, very broadly.

“I’ve never understood how we incentivise economic activity by increasing tax. I always come back to that. We can talk about raising taxes in the short term to deal with a short-term crisis.

“But broadly, higher tax is basically a tax on economic activity.”

ConHome: “What’s the first thought that comes into your mind when you hear the Chancellor say, ‘We’re going to put up corporation tax?”

Kwarteng: “He is I think doing a fantastic job. It was only just a little bit more than a year ago that people were saying there’s going to be massive unemployment, there’s going to be a huge kind of catastrophe.

“And I think he’s navigated that really nimbly. And that’s all I would say on that.

“But broadly, do I believe in higher taxes? No. I don’t believe we can tax our way to wealth.”

ConHome: “And you don’t think we’re near a point where having put up a number of taxes…”

Kwarteng: “You’re doing a really good job of getting me to stray outside my portfolio [laughter]. But I’m not going to go there. I am a low-tax, small-state, what’s the Gladstonian phrase, let…”

ConHome: “…money fructify in the pockets of the people.”

Kwarteng: “That was very clumsy.”

ConHome: “It’s memorable.”

Kwarteng: “Fructify in the pockets of the people. I’m a great believer in all of that. But you know, he didn’t have to deal with Covid. And actually he probably wouldn’t have bothered. I mean he would just have let the thing rip.”

ConHome: “The present Prime Minister is much more Disraelian, actually.”

Kwarteng: “He’s more like Disraeli arguably on public spending as well.”

ConHome: “Disraeli would have said Gladstone was worse than Covid.”

Kwarteng: “Absolutely.”

ConHome: “The wind sometimes doesn’t blow, though it does today, as we can see from the flag on the top of Westminster Abbey. And sometimes the sun don’t shine. Is there a risk that this drive to Net Zero will compromise security of supply?”

Kwarteng: “I think that’s a perfectly legitimate question, and when I answer these questions I pivot back to the Prime Minister’s ten-point plan, The New Decalogue as he calls it.”

ConHome: “That was a satire.”

Kwarteng: “He said it ironically and I’m saying it ironically. And in that, there’s a clear commitment to nuclear power.

“Now I think our nuclear power story has been a shame, because we had early advantage, we were very good on nuclear power, but we simply haven’t invested in it enough in my view over the last 40 years.

“And I think that’s a key missing piece of the puzzle, in terms of energy security.”

ConHome: “But what about security of supply, is that going to be all right?”

Kwarteng: “I saw Iain Martin today in the paper. This is not a supply issue, OK, it’s a distribution issue.”

ConHome: “At the moment, yes.”

Kwarteng: “It has never been a supply issue.”

ConHome: “And will not become a supply issue?”

Kwarteng: “I do not believe it will become a supply issue. It’s like an old-fashioned bank run. But actually, in terms of security of supply, that has never been an issue.

“The point is getting the supply distributed properly, and of course with the HGV driver issue that’s been more challenging.

“In terms of the energy issue, the gas suppliers essentially came into the market with a price cap and then they failed to see that if wholesale prices were significantly above the price cap they’d be out of pocket, and some of them didn’t even hedge for that.”

ConHome: “The price cap stops it being a proper market, doesn’t it?”

Kwarteng: “Yes, but why did they enter it?”

ConHome: “Why did the Government impose the price cap?”

Kwarteng: “That’s a very good question, but once it’s there, why on earth did they enter the market? They still thought they could make money.

“And then when the wholesale price was much higher than the price cap they complained, but I said, ‘The price cap was there when you entered the market, you should have sold oranges or something, or entered another business.’

“They knew what the situation was, and then some of them expected government bailouts, and thankfully that hasn’t really had any resonance, because people could see that they entered the market, they’ve been caught, the tide has revealed that they were wearing nothing, and I’m afraid some of them are going to have to exit the market.

“Having said all that, some of the smaller companies have really driven innovation in the market, so the price cap has allowed for greater competition, has allowed for new entrants, and now, some of those entrants who haven’t been as well-managed are having to leave the market.”

ConHome: “This is probably the moment to sneak in the fracking question. It comes up a lot. People on the Right say look, we have this shortage, why haven’t we fracked?”

Kwarteng: “So I was very pro-fracking. My first summer as Energy Minister, we had Cuadrilla fracking in Lancashire, and I remember speaking to the MP, and he was a pro-fracking person, and the limit I think was 0.5 on the Richter scale.

“This thing came in at about 2.9, and walls were shaking and plates were falling off them.

“And someone said we’d never have had the coal industry if we’d had that approach, which may or may not be true, but the coal industry started in whenever, 1650, and we’re talking about 2020 when we have a full democracy and all the rest of it.

“So we said that we would impose a moratorium and when we had new evidence that this could be done without too much disruption we would look at the moratorium again.

“And I think there were too many communities that were being disrupted. We’re a small country. The fact that it can work in the United States, and it works successfully, it’s what a thousand times bigger than England? Something like that.

“They would frack in a hundred places, and maybe one would be successful. But we don’t have that luxury here.

“There’s also geological questions. I know a firm that Tim Eggar was involved with, they fracked all over Poland and it didn’t work.

“So I get the whole fracking thing, but I don’t think it’s the answer. I think more nuclear is the answer. I think a wider range of renewable technology and things like tidal stream, those sort of things, can help us as well.”

ConHome: “The Government takes Critical Race Theory seriously enough to have a minister go to the Despatch Box and say it shouldn’t be taught in schools.

“Why is it that Kemi Badenoch seems to be the only Conservative among a mass of MPs who takes Critical Race Theory seriously?”

Kwarteng: “No one knows what Critical Race Theory is. If you ask 360 MPs what Critical Race Theory is, how many do you think on our benches would be able to give you a coherent answer?

“To be fair to Kemi Badenoch, that is part of her brief. She was Minister for Equalities even when she was in the Treasury.

“And she’s got a particular approach, I think a very robust approach to a lot of this sort of thing.

“I think the best approach is for us just to simply allow the Left to have these incredible navel-gazing debates on identity politics, because actually Critical Race Theory is not something that comes up on the doorstep, it’s not something that’s going to put food on anyone’s table.”

ConHome: “Are you saying it’s not a problem in any way?”

Kwarteng: “I’m saying I don’t see why we should engage with it. Even your readers, people who subscribe to ConservativeHome, I’d be amazed if more than about five or ten per cent know what Critical Race Theory is.

“I’m trying to run a business department that affects the whole of the UK economy. My views or otherwise on Critical Race Theory are singularly irrelevant to how I do my job.”

ConHome: “Can only women have a cervix?”

Kwarteng: “What did Sajid Javid say? I agree with him.”

ConHome: “I think he said it defies science.”

Kwarteng: “All these things, I know they’re very important to a minority of people, but they’re not really levelling up issues, they’re not about the prosperity of the UK, they don’t deliver jobs.

“It’s the worst kind of rabbit hole which I don’t think sheds any light on anything, it doesn’t improve people’s lives.”

ConHome: “Can you deliver levelling up, Net Zero, industrial strategy, skills, without more localism – without more elected mayors?”

Kwarteng: “Really good question. I think you’ve got to have more local involvement. I think the Prime Minister’s view, which I share, is we shouldn’t get into a theological debate about the structures and what the people are called.

“We’ve got to just deal with what we have. Because if you were very rationalistic and Napoleonic about it, dare I say, you would just spread the combined mayoral authorities across the UK.

“You’d divide the UK up into mayoralties and then you’d have a little mayor with a little badge.”

ConHome: “You’d have a Mairie.”

Kwarteng: “Exactly. We’re not going to do that, so we’ve got to work with the structures, and some of them do work very well, the mayoralties, some county councils work very well, we’ve got to work with the kind of patchwork that we have, we’re not going to rationalise things in a kind of centralised way.”

ConHome: “If Johnson wasn’t Prime Minister he’d be finishing his book about Shakespeare. What book would you be finishing?”

Kwarteng: “I’ve already got one on the stocks about the Congo called Masters of the World, and it’s been there since I’ve been made a minister. I’ve done the research, so it’s simply a question of cleaning up the text.”

Howard Flight: Sunak’s Keynesian interventions are working. Here’s what the Treasury should consider next.

30 Nov

Lord Flight is Chairman of Flight & Partners Recovery Fund and is a former Shadow Chief Secretary to the Treasury.

Western Governments continued “Keynesian” deficit spending in the 1950s/60s and 70s, long after western economies had recovered from the 1930s depression when they needed the economic stimulants. As a result, the unnecessary public spending caused inflation and damaged Keynes’ reputation.

We are, however, now back to a depression economy which needs the sort of deficit public spending Keynes advocated and implemented in the 1920s and 1930s depression. To give him credit, the Chancellor was quick to move to provide Keynesian stimulus to keep businesses and employees “alive”, as the pandemic hit.

The biggest area of deficit spending has been in the retail and related sectors: here are the largest number of jobs/employees and some 55 per cent of the economy.

I would hope the Treasury has researched which areas of expenditure have the largest spending multiplier effects. Logically, these should be the first areas in which to increase public spending.

In a different context, infrastructure spending is the second area in which to boost public spending. Such infrastructure spending has a good economic multiplier and also represents an investment for the future.

With an economic explosion of the size we have experienced this can also help provide the stimulus for major longer-term changes in capital and consumption spending.

Arguably the NHS could do with major changes of the management. There also needs to be a thorough review of our energy policies. Is it the right thing to do to for the future to accelerate the supply of offshore wind and solar power and to move to a majority of electric and hydrogen cars; or would such a major shift be risky in terms of being able to assure the supply of the new sources of needed energy?

We also need to investigate what changes in our economy are going to remain, versus where, in due course, we will broadly revert to previous patterns of behaviour. It does, however, look very probable that much more work will be done from home, reducing travel costs and travel times. This must have implications for the volume of road, rail and hotel facilities needed, which will likely reduce.

It should also mean pricewise that good quality/suburban residential properties will outperform city centres, pricewise; although it remains to be seen how much residential housing demand and prices will actually weaken in central London. Where people live will also affect where more or fewer schools are needed; the implication is less in city centres and more in country/suburban areas. Thorough and intelligent research is needed to expose such changes in behaviour consumption and habits, which are likely to stick, and the contrary.

We do not want to find ourselves building more schools where there is not an increase in pupil demand or increasing electricity power supplies where power demand is reducing.

I think it would be useful to draw up a “picture/inventory” forecasting how economies will look in the future versus how they were before the pandemic hit. As time passes the previous estimates of how economies will change can be compared with what happens.

Largely owing to the Chancellor’s timely Keynesian interventions the economy, and in particular, the state of individual’s economic affairs, have held up remarkably well. It will, however, only be time to turn down and then turn off the Keynesian spending taps when there is the evidence of major economic recovery actually occurring.

On the positive side there is the scope to implement changes to our economy and economic behaviour which support an increase in future economic growth rates.

A friend of mine produced an analysis a few years ago which showed that most of our economic output in terms of value depended on the work of some 18 per cent only of the population. Investigation of this sort of information need to be undertaken in earnest. The significant majority of the nation is under contributing to the economy’s performance. This needs to be addressed in earnest.