The Consequences of Slow Growth, part one

 Echoes of the global financial crisis of 2007-9 are in the air. Both the US Nasdaq and the tech-heavy South Korean stock market have fallen heavily recently, prompted by threats by the US Federal Reserve to raise interest rates. Back in February 2007, stocks in the US and Asia also nose-dived, presaging ‘Debtonation Day’ in August of that year.

And the proximate cause of the credit crunch, which many very knowledgeable people assured us could never happen, was an incremental rise in interest rates.

But whether an almighty bubble is about to burst, as it has threatened to many times before, there is one thing we in the West can be sure of. We are living in a society defined by slow economic growth, which qualitatively distinguishes it from economies in most of the second half of the 20^th century.

Statistics can lie but not here because they are so stark. In the decade to 2025, UK GDP grew by just 14%, an annual growth rate of just over 1 per cent. In the decade to 1965, growth was 37%, and economic growth per capita (growth adjusted for population growth) in the last 10 years has actually been negative.

The European Union has seen average growth of 1.3% over the last 19 years and 1.1% in the Eurozone.  This is a decline from nearly 5% in the 1960s, 2.1% from 1973-83, and 1.6% in the 1990s.

The US, the world’s largest economy, has performed slightly better but the trends are still unmistakable. In the 1950s and ‘60s, the growth rate was above 4% before decreasing to around 3% in the 1970s and ‘80s. Over the last ten years, the average has been below 2%.

These are not figures relative to other economies. Other parts of the world, like China, have clearly been catching up over the last few decades. But the West’s growth decline is palpable without comparisons to other countries.

Nor, as an aside, is this what was meant to happen. Thatcher and Reagan’s ‘free market’ economic medicine was sold on the basis on reviving the economy, ushering in an era of prosperity. But as these supply-side prescriptions have bedded down into conventional wisdom, they have had precisely the opposite effect.

 And slow growth has definite consequences. One of these is that ‘democratic’ government (to the extent that our government can ever really be called democratic’) gets absorbed by private economic power. Back in the 1930s, US President Franklin Roosevelt called this “the essence of Fascism”.

I was reading recently a book about “deaths of despair” in the US. These are deaths by suicide, drug overdose, or alcoholism, which the authors contend have shot up among white people without a degree since the turn of the century. There are many possible reasons, which I can’t go into here, but one factor is slowing economic growth.

“What may seem like small differences in growth rates have effects over long periods of time”, the authors, Anne Case and Angus Deaton (not that one), say.

One of these effects is increasingly bitter fights over distribution. “With lower growth, there is more pressure to shut out less successful groups”, they write.  This “poisons politics”.

Such a poisoning can be seen in British politics in the demonisation of immigrants and refugees. Or in the intense concentration on attacking the very limited, and very conditional, benefits of sick and disabled people; an issue which simply didn’t exist prior to the 1990s, in an era marked by higher economic growth. The ‘problem’ of excessive benefits paid to vulnerable people has become an obsession of British politics in the age of austerity.

Case and Deaton also say that with slower growth, the “positive-sum game of innovation” gets usurped by “Rent-seeking”. This turns into a “vicious circle that impoverishes everyone”.

Rent-seeking does not just mean seeking housing rents from tenants, but the appropriation by powerful corporations of the existing income of government and society, rather than attempting to create new sources of wealth.

Based on these insights, the basic features of slow growth society, in Britain and elsewhere, can be identified.

In a slow growth society, living standards decline or stagnate

Wage rates in the US have been stagnating for half a century. In Britain, the process has been more telescoped but no less pronounced. According to the Resolution Foundation, if wages had continued to grow as they had been before the 2008 financial crisis, they would be 37% higher than they actually are.

This has taken place in the context of a decline in real GDP – GDP that takes account of a rise in population. “It is extremely difficult for living standards to rise in such circumstances” says socialist economist Michael Burke. Likewise, Case and Deaton say that in an economy growing at 2.5%, living standards double in 28 years but at 1.5% it takes 47 years.

Of course, in a strongly growing economy, there is no guarantee that income will be shared out. While global GDP has increased by 65% since 1990, for example, the number of people living on less than $5 a day has increased by 370 million.

But in a stagnant economy, there is even less chance of living standards increasing. Why should this be so? Partly this is because living standards are dependent on labour productivity which is in turn dependent on business investment. And both of these metrics have been falling over the last few decades. As Case and Deaton say, “investment is a prerequisite for growth, it embodies the latest knowledge and techniques and it raises productivity.”

In the absence of investment, business tends to concentrate on low-cost labour, possibly overseas, or cheap AI transformations. Neither of which raise living standards.

There is easy money to be made – for some people

But in these circumstances, capital is irresistibly attracted to something else – rent-seeking. This involves making money, not from consumer spending on new products, but from government revenues or unavoidable spending by consumers (on housing or heating costs, for example). Something that is already there and merely has to be tapped or exploited. The deal negotiated by pharmaceutical companies with the Starmer government to double NHS spending on new drugs over the next decade – the cost of which has been variously placed at £64 billion or £44.7 billion, causing hundreds of thousands of excess deaths – is a prime example of rent-seeking.

The “VIP Lane” created by ‘Boris’ Johnson’s Conservative government, to enable firms with political connections to the Tories to get PPE contracts under Covid, is another.

More generally, Britain’s ‘privatised’ utilities – in truth not genuinely privatised but contracted out – are a haven of rent-seeking. They provide both a monopoly ensured by the government and a captive market of consumers who have no choice but to buy the ‘product’ being sold. Unsurprisingly, charges have increased way beyond the rate of inflation.

But rent-seeking can occur in purely private sector settings. When a private equity consortium buys a company, in the process loading it down with debt, and then prepares it for re-sale by asset stripping it and increasing the charges to customers, that is rent-seeking. It is destructive to the viability of the firms that are acquired, but the ‘investors’ acquire massive profits.

These processes come to dominate entire economies. The Tories’ PPE scandal has been described as “the rule of contemporary British capitalism, rather than the exception”, while a recent report by UCL professor Mariana Mazzucato has characterised the European economy as a “capitalism of rent”, where income is captured not by producing anything but by achieving market power, and owning assets and charging for access to them.

It is no accident that this degradation has occurred in an era of slow GDP growth, where the levying of rent becomes a far more lucrative and risk-free strategy than actually creating anything.

In a slow growth economy, everything costs more – for a reason

As the Mazzucato report asserts, the crux of corporate strategies is the achievement of market power, which enables income to flow from charging people or other companies to access what you possess. This brings into focus another aspect of slow growth economies – an increase in price mark-ups.

A price mark-up is overcharging for products. According to orthodox economic theory, the price of goods is determined by the cost of the labour and raw materials it takes to produce them, plus a ‘normal’ rate of profit (as we are talking about a profit-based system).

But under a regime of price mark-ups, this normal level of profit becomes ever more elastic. According to one recent book on the cost-of-living crisis, the largest UK firms have massively raised their mark-ups over the last two decades, from 58% in 2002 to 82% in 2020.

This ability to profiteer, and impose what is essentially a private tax on consumers, is intimately related to size and market power. Research by the anti-monopoly group The Balanced Economy Project, reveals that for the world’s top 20 companies, in the five years to 2022, the average mark-up rose to around 50%. For the bottom half of firms (around 34,000 companies were studied), however, the average mark-up was just 25%.

And for some sectors of the economy – pharma or Big Tech for example – mark-ups can be huge, many hundreds of per cent.

The economist Isabella Weber coined the term “sellers’ inflation”, to account for the inflation that took hold after Covid-19 that, she said, was based on “the ability of firms with market power to hike prices”. In truth this process was happening before the Covid epidemic, but as inflation was so low few noticed.

A decade ago, the Economist magazine found that corporations in the US were raking in “exceptional profits” of $300 billion a year, equivalent to a third of taxed operating profits. Some sectors of the US economy were seeing price rises of double the rate of inflation. This, at a time when inflation was negligible (indeed there was a pervasive fear of deflation). Of course, GDP growth was tiny as well, lower than it had been since before World War Two.

What is interesting is that these price mark-ups were occurring in the most concentrated parts of the American economy. In the same article, the Economist analysed 900 sectors of the US economy and found that 2/3rds had become more concentrated between 1997 and 2012.

Not only do high mark-ups contribute high profits and high market value, they are enabled by it. When it comes to charging much more for your products than it takes to produce them, the bigger you are the better.

Which leads to another insight.

Bigness is a curse

In the late 1930s, Franklin Roosevelt called attention to a “concentration of private power without equal in history”.

0.1% of corporations in America, he told the US Congress in 1938, owned 52% of the assets of all of them. Now that figure has risen to 90%.

Roosevelt said something else in his speech, delivered in the midst of the Great Depression. That the history of modern times “proves that in times of depression concentration of business speeds up. Bigger business then has a larger opportunity to grow still bigger at the expense of smaller competitors who are weakened by financial adversity.”

We are undoubtedly now faced with, and have been for some time, conditions of “financial adversity”.

A slow growth economy means generalized financial adversity — not just among people struggling to make ends meet but among small businesses who are dependent on consumer spending or may be the suppliers of corporate behemoths like Amazon.

One group, though, palpably not suffering from financial adversity are large corporations. Corporate profits are at all-time highs, eclipsing previous all-time highs achieved a few months before.

And the large are getting larger. According to Goldman Sachs, “despite uncertainty in the global economy” mergers and acquisitions – which by definition involve the creation of ever larger economic and financial entities – could hit $3.8 trillion in 2026, surpassing the previous peak in the Covid-year of 2021.

Received wisdom has it that the threat of Fascism is nurtured by conditions of inequality, poverty, anxiety, and a lack of social mobility. Conditions that will call out for scapegoats to be found which temporarily soothe the anxiety.

But if we listen to Roosevelt who was speaking when Nazism was approaching its zenith, that isn’t the whole story. Fascism also has an economic corollary, what he called “a cluster of private collectivisms” … “masking itself as a system of free enterprise” that seeks to control democratic government.

Fascism doesn’t just base itself on the exploitation of popular discontent among its mass base. It also has an elite element, which finds nourishment, as it did in the 1930s, in the conditions of a slow growth society.

What Roosevelt termed the “essence of Fascism” is what I want to consider in the second half of this article.

The If Only Theory of Contemporary Capitalism

 

According to the International Energy Agency (IEA), the closure of the Strait of Hormuz has precipitated “the largest oil supply disruption in history”, eclipsing the oil shocks of the 1970s in severity.

We are like the characters in the film On the Beach (about Australians waiting for the radiation from a nuclear war to reach them), biding our time before the effects seep through. Clearly, not only industries that directly consume oil will be affected. As fertilizers rely on natural gas for their production, decimated crop yields and ensuing food shortages – in addition to flight cancellations and severe inflation – will become the norm.

Bankers JP Morgan predict global oil inventories will hit “Operation Floor” – when oil production stops functioning – in September.

Already faced with 1970s-style stagflation (weak GDP growth and inflation), economies will soon have to deal with slumpflation (falling growth and inflation) says economist Michael Roberts.

This will happen regardless of whether there is a “final agreement” with Iran.

But doom-laden concentration on the inevitable effects of war clouds our judgement. It leads to the feeling that if only these random geopolitical shocks didn’t happen, everything would be fine.

But maybe, rather than being the root cause of crisis, a ‘shock’ like the closure of the Strait of Hormuz is merely exposing fault-lines that were already there.

And maybe there’s a mutually reinforcing dynamic at work. In that the weakness of the economic system generates geopolitical responses which have the effect of further enervating the economy.

Looking again at the oil shock of October 1973 – up until the halting of shipping in the Strait of Hormuz, the worst disruption of the global oil industry in history according to the IEA – is instructive. This older shock involved an oil embargo on countries like the US and UK and a fourfold increase in the price of oil.

Unquestionably this ‘triggered’ a financial crisis and a recession in 1974-75, the first year-on-year fall in output in the West since the Second World War.

But if the problem was merely external (a large increase in the price of oil) once it abated, things should have returned to ‘normal’ i.e. steadily increasing growth and prosperity. But that’s not what happened.

According to historian David Gibbs, the crisis resulted decades’ long flat productivity growth in the US and impaired economic performance in most of the rest of the world

“If you look at long-term rates of GDP,” he says, “it was quite high up until 1973 and in 1973 you see a big drop. And rates of economic performance have never fully recovered from the earlier period.”

It was “a historic break point”.

The same illusion of the primacy of the external cause can be seen in attitudes towards the Global Financial Crisis of 2008. The crisis was caused, so goes the official story, by reckless bank lending leading to a seizing up of credit that the rest of the economy relies on. Now those causes no longer apply, businesses can get credit and the big banks, largely thanks to huge doses of Quantitative Easing, are no longer insolvent.

But if you look at UK economic growth in the pre- and post-crisis period, it is clearly debilitated, less than half as strong. In the 18 years since the 2008 crisis, the economy has grown by 22% compared to 53% growth in the 18 years before it.

Why should this be? Why, once the causes of the crisis are dealt with, should the crisis linger on, not in full-on crisis mode but in enfeebled performance?

Possibly because there was far more to the crisis than revealed by its surface ‘causes’.

To take medical analogy, if a person survives a heart attack but goes on to suffer worsening heart failure – not being able to walk far with running out of breath – the underlying problem should obviously be put down to heart disease, not sought in the particular circumstances that brought on the original heart attack.

But we do precisely this with the economy, continually, as economist Harry Shutt once said, mistaking symptoms for causes.

The former head of Goldman Sachs says he can “smell” a new financial crisis in the offing. This won’t happen, 2008-style, through the banks but in the burgeoning private credit industry where companies, such as private equity firms, lend to other companies.

If it does erupt, what will provoke this crisis will be a rise in interest rates to try and tamp down the inflation caused by the closure of the Strait of Hormuz.

According to chief economist of the World Bank, “the war is hitting the global economy in cumulative waves: first through higher energy prices, then higher food prices, and finally, higher inflation, which will push up interest rates and make debt even more expensive.”

But the external cause won’t explain the crisis. To do that we first need to explain why the global economy in the 21^st century is so much more dependent on trade (i.e. globalised) than it was 50 years ago. Trade now represents about 60% of world GDP compared to 25% in 1970.

Then we need to consider the fact that the economy is much more deregulated than last time, a process which is ongoing. Finally, we need to factor in that the economy runs on huge levels of corporate and personal debt, which makes it so much more susceptible to any increase in the cost of debt (i.e. through higher interest rates).

And these causes are in turn related to the ending, caused by the oil shock of October 1973, of the “thirty glorious years” of strong economic performance after World War Two, and why that turned out to be a “historic break point”.

You cannot understand external shocks like the interruption of the ‘life-blood’ of oil supplies without also understanding how, internally, we are more vulnerable to their effects.

And You're Working for No-one but Us

 “And you’re working for no-one but me” is George Harrison’s sign off to the first song on one of the greatest British albums of all time, the Beatles’ Revolver. But compared to what follows it has always struck me as rather a damp squib – lyrically one extended whinge about how Surrey mansion dwellers pay too much in tax. I suppose to be fair to the author, Harrison was very anti-war and he objected to unwillingly paying millions in tax – at the time the top rate stood at 92.6% – so governments could bomb people.

Nonetheless it is quite sad that of all the sentiments the Beatles expressed, “in the end” it was those of Taxman that had the greatest longevity. You need a lot than love, and giving war a chance now seems to be the spirit of the age (alright that was Lennon). But thanks to Margaret Thatcher, Ronald Reagan, and the sprouting up of numerous tax havens around the world successful pop stars need no longer fret about governments getting their paws on their money.

But from the perspective of nearly sixty years, to sing “you’re working for no-one but me” with reference to His Majesty’s tax collectors seems faintly ridiculous. We’re definitely working for someone but there are people much further up the queue than HMRC. Perhaps their silhouettes need more light shone on them:

Landlords and Banks

The first thing we all need is somewhere to live. After rising above inflation for years, rents increased by 9% in 2024, the highest surge on record. The average rent now consumes over a third of renters’ income and more than half of it in London.

Though there are only 11 and half million renters in the UK, their numbers are inexorably rising. But they are still below the so-called “owner occupiers”. Except in many cases, while they occupy, they don’t own anything. The ‘owners’ are paying off a debt (which everyone calls a mortgage to avoid calling it a debt) to the actual owner of their property, usually a bank. And since interest rates have ballooned in the last few years – in the context of house prices inflating by 1,000% since the early 1980s – that debt has become much more expensive.

Banks, by the way, are sharing the pain by making record profits – HSBC amassed £24 billion in 2023, an 80% increase. This windfall results from the interest they receive on mortgage payments and loans being so much higher than the interest they pay on their savings accounts. Why this discrepancy should exist is a bit of a mystery. Theoretically, the two should cancel each other out and banks should not be laughing all the way to the bank because interest rates have been hiked. Maybe Sir Kier – who gave HSBC’s chief executive a knighthood in December – can enlighten us.

It’s good to know the people your monthly labours are paying off are having a hard time too.

Utility companies

Next on the identity parade are water and energy companies. In the past, these two public services were nationalized. But in our post-Thatcherite wasteland, sorry landscape, they are the play things of private equity firms who load the owners with debt and expect their captive customers – us in other words – to pay for the privilege of being compelled to use them. I just love the free market.

And when, as with Bulb Energy, these wealth destroyers experience liquidity problems, they can rely on the taxpayer, in the form of the government, to bail them out. Not that we have any say in the matter.

When the direct debits kick in every month, a lot of the damage to your balance is down to these two suspects. Energy bills are about 50% higher than they were pre-Covid. As with rent and mortgage payments, only in a semantic sense is this not taxation. Unless you want to live in a cave somewhere, or on the streets, you need a home and you need heating and water. Contrary to American monetarist proselytiser, Milton Friedman, we are not “free to choose”.

And it’s going to get worse. The average water bill will increase by 36% over the few years.

“If you get too cold, I’ll tax the heat,” Harrison sang in 1966. He meant, “I’ll raise the energy price cap”.

Corporations and things like eating

In common with all living beings, human beings need to consume if they want to continue living. But the cost of consumption keeps going up. If consumer inflation has fallen from its highs of a couple of years ago, that doesn’t mean prices will return to their former levels, just that they will continue to rise at a slower rate (although inflation seems going up again now anyway).

But the ever-increasing cost of essential goods is not solely due to ‘impersonal’ factors like the cost of raw materials. It is also down to the power of the huge corporations that dominate the market to increase costs above the ‘natural’ rate of inflation. For example, in the UK, “price mark ups” – price increases above the production costs to produce profit – rose from 58% in 2002 to 82% in 2020. The profits of the 350 largest companies on the London Stock Exchange have swollen by 73% since 2019.

This price gouging is symbolised by internet providers typically hiking raising annual broadband fees – now essential for doing most things in life, including work – by CPI (inflation) plus 3.9%. Why? Because they can.

What is now hitting home is that, contrary to the advertising, the Thatcherite revolution did not enthrone the consumer as king. Everyone knew that workers would have to suck it up, but the customer was felicitated. But that’s not how things have turned out. All regulators have a duty to protect the consumer but, as evidenced by the failure to compel banks to pay interest on savings in line with hikes in interest rates, this is just honoured in the breach. And with Reeves’s drive for deregulation, such a responsibility is going to become even more threadbare.

 You have to crane your neck to see the real beneficiaries.

Only in the perverse universe we now inhabit, could a privately educated ex-stockbroker who claims to be “keeping the flame of Thatcherism alive” and controls a company masquerading as a political party be the one to take advantage of this situation.

It’s enough to make you gently weep.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inflation – what a Hout!

As I write, Britain is bombing a former colony – one of the poorest countries on earth, the scene recently of the “world’s worst humanitarian crisis” according to the UN, which was caused by a war inflicted by the medieval limb-severing Saudi Arabian regime with British weapons. But trying to stop the genocide in Palestine is crime enough to resume the sorties. And they want ordinary people to actively help out with this never-ending war for civilisation!

But pause for a minute and consider the reason for ‘Operation Prosperity Guardian’. The fear is that any continued obstruction to shipping routes in the Red Sea, which accounts for 15% of global sea trade, will reignite inflation, the bogeyman western governments and central banks have been trying to slay for the past two years or more.

I don’t want to minimise the problem of consumer inflation, to give it its proper name, which given that it causes massive rises in the cost of essentials like food involves real misery. This is exacerbated in an era when collective bargaining has been reduced to a rump of the economy so that wages can’t keep up with the price rises.

However, consumer inflation is not the only kind of inflation. Over many years, western countries have also been subject to asset price inflation – basically huge rises in the prices of shares and houses. In Britain, house prices have risen by about 1,000% since the early 1980s. And despite some ups and downs, the stock market across the western world keeps hitting record highs. In America it has enjoyed some of its best returns since the 1880s.

It is a basic axiom of our Thatcherite political mind-set that, in total contrast to consumer inflation, asset-price inflation is not something to dread. Quite the opposite, it is positively benign.

But, as we are now seeing, this is a travesty of the truth.

The inflation we like

So, unlike consumer inflation, the authorities have not tried to fight asset-price inflation. They have, by contrast, endeavoured to boost it at every turn and, if it seems to be flagging, to rekindle it with blatant forms of state intervention (despite the propaganda we don’t live in a ‘free’ market economy).

House prices in Britain have been deliberately stoked by restricting supply. It is a basic law of economics that if the supply of any good is suppressed, its price will increase.  This happened first through Thatcher’s ‘Right to Buy’ policy and was then reinforced by simply banning local councils from building new council houses. More recently, more direct forms of buttressing house prices have been necessary, for example the government’s ‘Help to Buy’ policy which is a simple subsidy to housebuilders.

The rise in share prices was first underpinned by legalising the process of share buy backs, banned in the aftermath of the Wall Street Crash of 1929. This has led to an internally-generated rise in share prices, caused by companies being pressured by their shareholders to ‘retire’ some of their shares, thus increasing the share price and the dividend payments to existing stock-holders. This practice has now become routine in the corporate world – according to economist Michael Hudson, publicly-listed American companies have, since 1985, retired more stock than they have issued.

Since the 2008 financial crisis, share prices have also been massively boosted by the artificial method of (electronic) money printing known as Quantitative Easing (QE). QE works by creating a huge mass of money, and by reducing the yield on government bonds, ‘incentivising’ investors to place it in the stock market or with other assets such as housing, or financing corporate mergers. According to investment manager, Kate Rogers, at venerable asset manager Cazenove, “Quantitative easing certainly stimulated asset markets. The billions that went from the banks to investors to buy the bonds was soon recycled into more attractively valued equities and property-boosting prices.”

This flagrant state intervention, practiced simultaneously in Britain, America, and Europe, is what lies behind the thriving stock market performance of the last decade or more (15% returns compared to an average of 9%). It is nothing to do with a healthy economy pushing up share prices. GDP growth, as we know, has been consistently poor for many years.

Of course, central banks are now pursuing the opposite policy to Quantitative Easing. ‘Quantitative Tightening’ involves selling assets to reduce liquidity in the financial system. This hasn’t (as yet but more on that later) produced a collapse in share prices. The conventional interpretation is that large companies are finally able to stand on their own two feet. But possibly QE under Covid was so huge – the creation of $834 million per hour – that the subsidy is still having an effect.

This is how it feels

The only way in which this asset-price inflation is commonly seen to have a downside is in terms of housing. The enormous rise in house prices – from an average of £26,000 in 1983 to £280,000 today – is regarded as a boon for the majority of people who already ‘own’ houses (or have mortgages on them). They can sit back and see their asset rise in value without having to do anything. But for young people who want to buy their first house – to ‘get on the housing ladder’ in common parlance – it’s a disaster. They frequently can’t even afford the deposit and are forced into permanent renting which, for those who have experienced it, is a distinctly unpleasant and insecure existence, apart from the fact that it soaks up most of your disposable income.

The last time houses were this unaffordable in Britain Benjamin Disraeli was Prime Minster.

However, with the resumption of consumer inflation and the central banks’ response of raising interest rates, the majority are no longer so content. They are, belatedly, seeing at first hand the malevolent side of asset-price inflation. Because house prices, with official blessing, have risen exponentially for decades, mortgages are a lot more expensive. And when interest rates rise above the minute level they have occupied for years, so do mortgage interest payments. This has resulted in huge increases in mortgage payments for many people. More than anything else, this lies behind the haemorrhaging of Conservative support in Britain. The private renting experience is going viral.

The share-owing oligarchy

What has happened to house prices might have its downsides, a defender of the status quo might argue, but surely there is little to object to in shares rising in value, the other main form of asset-price inflation? In fact there is. Undoubtedly some people benefit but the windfall accrues to a very small minority of share owners, including corporate executives who, these days, are all partially paid in share options. The original Thatcherite promise of a ‘share-owning democracy’ is now just a bad joke.

We now live in a resolutely two-track economy in which the stock market prospers while the real economy flounders. But given that rich people, who own shares, largely control the manufacture of public opinion, this experience doesn’t truly hit home. Thus the official opposition can come out with ludicrous non sequiturs like “when business profits, we all do” and are taken seriously.

The share price boom also comes at the cost of spiralling inequality. Since 2009, as the stock market has enjoyed nearly unprecedented gains, the wealth of the top billionaires in Britain has grown by 281%. In 2021, as actual economic activity was mothballed but massive amounts of QE ensured asset prices went skywards, the planet’s wealthiest people saw their balance sheets swell by $5 trillion. In Britain, since the pandemic, in the midst of the cost of living crisis, the number of billionaires has risen by a fifth.

Another trusted method of ensuring share prices go on rising – share buy backs – also damages the real economy. Because often the money companies use to buy back their shares (thus decreasing their number and raising their price) comes from funds that could otherwise be spent on business investment, they work to enrich their shareholder owners at the expense of wider economic health. Anaemic investment in production is a problem all over the western world.

The share price boom is not a win-win situation. It’s more like they win, you lose.

The economic trapeze

Central bankers – those who twiddle the dials of the world economy – are in a real quandary because of the actions of the Houthis. They believed they had, through historically moderate interest rates rises, solved the problem of the re-emergence of consumer inflation, as prices were heading downwards. They could then return to their prime function – ensuring that asset prices go on rising.

However, if global trade is impaired because of attacks on shipping in the Middle East, consumer inflation may return with a vengeance. If that happens, central bankers might feel they have no choice but to increase interest rates again, risking pricking the multi-asset bubble they have so carefully cultivated for the last decade or more.

It is a little appreciated fact that the 2008 Global Financial Crisis was sparked after a rise in interest rates. In America, they rose, incrementally, from 1 per cent in 2003 to 5.25% in 2007. Really large rises in interest rates do cause recessions, as evidenced by the experience of Britain and America in the early 1980s when, to prepare the ground for the Thatcher and Reagan ‘revolutions’, rates were increased to 17/18% in full knowledge of the carnage that would – and did – follow.

Given that western economies are much more indebted than they ever were when John Lennon was murdered, much more modest rises could have a catastrophic effect. 

According to economist Radhika Desai, if the Federal Reserve raises interest rates to “required levels, the US can expect a recession that will make that of the 1980s seem like a boom”. The alternative to not doing so is, if the projected effect on world trade comes to pass, the return of chronic (consumer) inflation. “Both paths,” she says “will damage working class incomes and wellbeing”.

Other People's Money – The Degeneration of Thatcherism, part two

 And so we move on to part two of the chronicle of the Conservatives’ remarkably profligate attitude towards other people’s money, despite what Margaret Thatcher may have led you to believe in 1978. Here is part one. 

This revisionism is not solely directed at Conservative hypocrisy – tempting as that may be – it also exposes the barren hulk of the current Labour party, which promises to transport us back to the halcyon days of early David Cameron. Another of Margaret Thatcher’s famous lines was to describe New Labour as her greatest achievement. “We forced our opponents to change their minds,” she said. And we haven’t stopped paying for it since.

Housing

If any part of British society bears the unmistakable imprint of Thatcherism – and almost all do in some way – it is the housing sector. The policy of the ‘Right to Buy’ – allowing council house tenants to buy their homes at discounted rates – undoubtedly came to embody the Thatcherite promise of creating a ‘property-owning democracy’. In awarding her the Presidential Medal of Freedom, the elder George Bush commended Thatcher for putting “private roofs over British heads”. But the policy, because it also involved preventing councils from replacing the stock they had to sell, had one consequence that was the polar opposite of owning your own property – having to rent it.

The number of private renters has more than doubled since the turn of the century and that doesn’t include those renting from housing associations. This change was enabled by classic Thatcher-era legislation, the 1988 Housing Act, a deregulatory bonfire which introduced short-term tenancies, allowed landlords to charge whatever rent they liked, and got rid of any security of tenure for tenants, permitting them to be evicted with only two months’ notice. It presaged a huge change from the post-war social democratic settlement which was characterised by a mix of owner occupation and council housing. “The private landlord, increasingly associated with the rack-renting of slums was nearly eliminated”, wrote historian David Edgerton of that period.

But this brave new (old) world which saw the triumphant return of the private landlord and the phasing out of council housing had consequences: the number of private tenants who couldn’t afford the rent, and thus became reliant on financial assistance from the state, shot up. The amount spent on housing benefit increased from less than £2 billion to £24 billion in 2015/6 and now stands at over £30 billion a year. This is a public subsidy to landlords to make up for the fact that the level of rent they are charging is beyond the capacity of their tenants to pay. True Thatcherite Conservatives like to present the enormous housing benefit bill as indicative of out-of-control welfare spending that needs to be pruned back but, in fact, it is a direct result of their deliberate gutting of the post-war social order.

Speaking of which, the Cameron/Osborne administration did successfully, although temporarily, reduce the size of the housing benefit subsidy. Naturally, this was through eliminating tenants’ entitlement to it – through denying it to under-21 year olds and introducing a benefit cap – rather than reducing the need for it by cutting rents. Curiously though, a little publicised feature of the Conservatives’ 2016 Welfare Reform Act did indicate the financially sensible nature of the latter approach. ‘Social’ Landlords – i.e. local councils and housing associations – were required to reduce rents by 1% a year for four years. According to a House of Commons Research Briefing, “of all the measures implemented to date, the requirement on social landlords to reduce rents …. has achieved the highest level of saving.”

Innocently, you might think therefore that such a policy of rent capping should be applied to the private sector, where rents, the number of renters and the housing benefit subsidy have all mushroomed over the last 30 years. But such an idea doesn’t factor in how the Conservatives are the party of asset owners, whose interests – even if reliant on a huge state subsidy – must be protected at all costs. Rent control, if applied to the private sector, seems to cause an irrationally vituperative reaction among Conservatives. Friedrich Hayek, Margaret Thatcher’s favourite philosopher, described the policy as “deadly”. More recent adepts have condemned it as almost as devastating to a city as bombing it.

At the other end of the scale, the Conservatives have subsidised the deposits and mortgage repayments of first time home (usually flat) buyers through the Help to Buy scheme launched in 2013 which has so far cost £21 billion. Aside from artificially raising house prices, and thus benefiting housebuilders like Taylor Wimpey, the scheme has left recipients high and dry after the huge rise in interest rates, and thus mortgage interest payments, following the Truss debacle. But such is the Conservatives’ obsession with home ownership, seen as such an indelible part of Thatcher’s remodelling of British society, they are prepared to move heaven and earth –  including their own allegedly free market ideology – to massage the optics.

The Economy

The Conservatives did not, it should be said, instigate the huge state bail out of the banks that the British government felt it had no choice but to pay following the 2008 financial crisis. That was the prerogative of the last Labour government. But market fundamentalist Thatcherite ideology – convinced of the inherent wisdom of allowing those at the top of society maximum leeway – was certainly in attendance in spirit.  And the Sunak administration is pursuing the very sensible policy of removing the regulations that Cameron introduced as a sop to the prevailing zeitgeist that something had to be done to prevent 2008 from playing out again. I’m sure it’ll end well.

What can be laid at the door of Thatcher’s children, however, is subsequently using the exclusive money generating power of the state to massively augment the wealth of the richest in society. This was through the capital creating policy of Quantitative Easing (QE). Since 2008, QE has been deployed three times – immediately in response to the financial crisis (Labour), after the Brexit vote (Tory) and then again in the economic panic that ensued post-Covid (Tory) – totalling £895 billion in Britain alone.

QE works by creating a huge mass of money (so-called fiat money), that naturally seeks investment opportunities. The stock market is one of those investment outlets, although the booms engineered are decoupled from traditional market reasoning – the backing of companies because they are thought likely to be successful in the future. The resultant “explosion in billionaire wealth” – the cumulative wealth of the UK’s top 10 billionaires has increased by 281% since 2009 – therefore cannot be explained solely, or even mainly, by the natural workings of the market. During the pandemic for example, economic activity and growth plummeted but the number of UK billionaires rose by a fifth. This huge wealth – a billion is a thousand million – has been given a stupendous boost by positively Stalinist state intervention, carried out by, among others, devoted Thatcherites.

It should also be pointed out that Quantitative Easing directly contradicts one of the core tenets of original Thatcherism, that of monetarism. Developed by the American ‘free market’ economist, Milton Friedman, monetarism held that, to combat inflation, the supply of money should be strictly controlled. Doubtless the theory was honoured in the breach by ’80s Conservatives, but from the 2010s government policy around the world has simply laughed at it. Whether the inflation we are now experiencing has something to do with massive increases in the money supply – á la Friedman – is a moot point. In the last decade, notwithstanding regular doses of QE, the main threat was deflation, not inflation, suggesting that the capital boost of QE had stayed within the financial system. Possibly the last tranche of it – the creation of $834 million dollars an hour worldwide for 18 months – was so huge that some of it, in line with the official narrative, leaked out. Or maybe support for a largely mothballed ‘real’ economy – i.e. increasing the amount of money in circulation but reducing the amount of goods – produced the classic ingredients for inflation. Who knows?

Certainly now, we are seeing the opposite of QE, so-called Quantitative Tightening (QT), on the part of the world’s central banks, along with increases in interest rates. Whether this presages a new financial crisis, which may be unfolding as we speak, is an interesting question. But to even make a dent in the massive inequality caused by the economic intervention of adoring Thatcherites it would have to go on for decades.

Possibly Conservatives would retort that their post-Thatcher predilection for economic intervention does not just help those at the summit of the society but also the many millions at the bottom end. This is through working tax credits which ‘top up’ low or moderate incomes. Tax credits were introduced in America in the 1970s and expanded massively by Bill Clinton. Naturally, this country followed suit, and working tax credits became a core part of New Labour’s welfare philosophy (with emphasis on the working).

Their origin among parties theoretically antithetical to Thatcherism and Reaganism is deceptive, however. In reality, tax credits are another form of state subsidy to vested interests, enabling employers to pay low wages and institute more part-time or zero hours contracts with the assurance that the state will meet the shortfall. They are an essential part of our Thatcherite economic landscape. In 2015, the charity Citizens UK revealed that large retailers, such as Next and Tesco, were costing taxpayers £11 billion annually so that their staff could enjoy “a basic standard of living”. The situation has only become more acute in the interim.

Perfunctory, if high profile, attempts to wean on employers off tax credits, such as Osborne’s higher minimum wage, have not worked partly because they have been accompanied by a never-ending war on trade unions, the one force in society capable of making tax credits unnecessary through compelling employers to pay higher wages. Rishi Sunak’s anti-strike legislation, which permits employers to seek damages for the effect of strikes, will hit what’s left of trade union power, already hobbled, as we know, by archetypal Thatcherism. Tax credits in themselves are hostile to trade unions because if wages rise because of trade union influence, the tax credit level will fall as a result. It is no accident that a country such as Norway, which regards trade unions as social partners, not ‘the enemy within’, and which has a system of sectoral collective bargaining to determine wages, has not introduced tax credits. It doesn’t even have a minimum wage because strong trade unions mean it isn’t necessary. Norway, incidentally, also has a much higher standard of living.

It’s clear that the Thatcherites in Britain didn’t vanquish ‘socialism’ as they claimed they had. They merely changed the beneficiary group.

Covid and Corruption

There is something viscerally enraging about the Conservatives’ fiscal incontinence during the Covid pandemic.  It came after years of justifying taking money away from poor people – through policies like the benefit cap, sanctions and reducing the amount received by sickness claimants by £30 a week – on the grounds that it was only fair to the hard-pressed taxpayer.

But the interests of the taxpayer, allegedly so close to Conservative hearts, were strangely downgraded during the Covid lockdown when corruption and the raiding of the public purse by friendly businesses were rife. Virtually no prosecutions concerning the £5.8 million lost through fraud have taken place despite 30,000 allegations of fraud being reported to HMRC. The same is true of Rishi Sunak’s month-long Eat Out to Help Out scheme, which attracted an estimated £21 million in fraudulent claims from the hospitality sector. This dawdling contrasts with the alacrity that the Conservatives look upon alleged fraud in the benefits system. Permanently staffed hot-lines for the public to report fraud, regular tests for sick and disabled people, and the dispensing of thousands of sanctions to claimants for not upholding their “contract with the state”, have been features of this parallel universe in the UK for years.

In total £4.3 billion lost in fraud during Covid has been written off by the Treasury, prompting one minister in the House of the Lords to resign and accuse the government of “having little interest in the consequences of fraud to our society”.

But far from having little interest in it, Conservatives seem positively in favour of subverting free market ethics when it involves their friends. Michelle Mone, accused of secretly receiving some of the profits of a PPE firm that won large government contracts after she recommended it ministers, became a Conservative life peer in 2015. Altogether, nearly £1 billion in Covid contracts were awarded to 15 companies linked to donations to the Conservative party. It certainly pays to network.

The Conservatives’ alleged concern with getting value for money for the taxpayer is for the birds. The overriding aim is that 1) A narrow elite circle benefit and 2) The cash – otherwise known as other people’s money – finds its way through labyrinthine sub-contracting to the “good hands” of the private sector. Dido Harding, appointed as chair of “NHS Test and Trace” in 2020 is an example. Her lack of medical experience was no obstacle. Known as “an accomplished networker” according to The Times, she went to Oxford with David Cameron, married a future Conservative minister, and rose to become the chief executive of a mobile phone company and a Tory peer. Despite being given an astronomical £37 billion in funding, Test and Trace, reliant on sub-contracting by firms like Serco and consultants paid up to £6,000 a day, was a monumental failure, with more than 60% of those with Covid symptoms not being contacted. By contrast, the in-house teams of the doomed Public Health England and local authorities reached nearly 98% of their contacts. Go figure.

Ubi omnes errabis?

As alluded to earlier, this is not about simple hypocrisy. Arguably most political movements are hypocritical in that they don’t do what they say they are going to. The historical reputation of the Britain and America is that they compelled the rest of the world to accept the virtues of free trade, whereas in reality they were arch protectionists, and in Britain’s case, actually destroyed the industries of competitors through imperialism.

But Thatcherism started out with free market intentions. In its early days it preached the tenets of monetarism and controlling the money supply, sold off loss making industries to the private sector, declared war on trade unions as impediments to ‘free’ employment relations and hiked interest rates (causing a huge recession and remaining unmoved while thousands of businesses who couldn’t survive in the new unforgiving environment went to the wall). Only gradually – through for example contracting out essential public services and bailing out ‘too big to fail’ banks – did it morph into something else. Now the Thatcherites, notwithstanding their free market sheen, are presiding contentedly over a system of socialism for the rich.

Partly this is to do with misunderstanding what conservatism is. Friedrich Hayek, the major intellectual influence on the modern Conservative party, succeeded in reconnecting it to its classical liberal, or ‘old Whig’, philosophical inheritance. According to him, this conservative-liberalism, in contrast to idealistic socialism, had a “low” view of human nature. Hayek famously said that everything would turn out well if everyone behaved selfishly. But this selfishness was meant to exist within the law and the rules of the free market.

But nobody, besides intellectuals, believes in the sanctity of the free market. Many wealthy people will go where they can make even more money and the state, which rakes in and distributes hundreds of billions of pounds, offers that opportunity. The corruption around Covid illustrates the temptations and modern privatisation more broadly relies on the existence of a well-endowed state which can re-distribute taxpayer funds to the private sector. The Conservatives have, for years, been resolutely unforgiving about a ‘something for nothing’ attitude on the part of the multitude. Benefit sanctions, already at an all-time high, are being multiplied still further by Jeremy Hunt. But for the rich this sternness melts like ice left out in the sun. This is because the Conservatives are, and always were, a class-based party and exponents of class solidarity. When Tony Blair declared in 1999 that the class war was over, only one side was listening.

But the degeneration of Thatcherism has deeper causes than just the class bias of the Conservative party. Thatcher tapped into a profound conviction among Conservatives that if burdensome regulations and socialistic rates of taxation were lifted, the result would be prosperity for all and runaway economic growth. This certitude can be traced back to Adam Smith who thought the “natural effort of every individual to better his condition” was so powerful a principle it would carry society to “wealth and prosperity” and surmount ignorant obstacles placed in the way by “the folly of human laws”.

Coincidentally, the UK did – in common with the rest of the world – experience an economic boom in the mid-1980s. Naturally, Thatcherites took this as confirmation of the economic wisdom of their policies, which despite the temporary pain involved, had to be persevered with (actually the pain was probably connected to the ensuing boom, capitalism had always relied on a shake-down of capital value to lay the ground for subsequent growth). In fact, the economic boom of the mid-1980s became lodged in the public mind as the consequence of tough Thatcherite medicine and has endured despite the boom being revealed as a unique event.  Economic growth has declined in every decade since the 1980s, culminating in the present torpor. Real wages are not predicted to return to their 2008 level until 2026 and are experiencing a 3.9% annual decline, productivity is terrible when compared to before the Financial Crisis (0.5% compared to 2.3%), and business investment is anaemic.

But rather than face up to these issues, Thatcher’s children are umbilically attached to the idea that the only solution is more deregulation and tax reductions for the investors. These policies – known as supply-side reforms because they concentrate on those ‘supplying’ investment and employment (or not) – are religiously propagated by many conservatives despite the fact that they have already been implemented, with the results we see before us, for nigh on four decades (the corporation tax rate was 52% in 1981, it is now 19%). Liz Truss, for example, convinced herself that a bias towards redistribution over economic growth lay at the root of poor economic performance despite the evidence pointing in exactly the opposite direction.

One very obvious reason why these questions are not honestly examined, is that it would move into the crosshairs numerous Thatcherite shibboleths, most notably the idée fixe that underperforming economic growth can be palliated by reducing tax rates and irksome regulations on the wealthy. This ‘fix’ seems to be impervious to empirical evidence, though the Sunak administration is finally increasing corporation tax after decades of reductions, hoping no-one will notice that this contradicts a basic tenet of conservative economic philosophy.

As the South Korean economist Ha-Joon Chang pointed out a few years ago, the level of regulation is not a disincentive if there is a prospect of profit to be made. “…. strange as it may seem to most people without business experience,” he wrote in 2010  “businesspeople will get 299 permits … if there is enough money to be made at the end of the process. “In contrast, if there is little money to be made at the end of the process, even 29 permits may look too onerous.”

Why there is in the UK “little money to be made” – with the notable exception of finance and property – is not a question many are eager to ask, especially if it indicts their whole economic strategy which supposedly rests upon the inherent virtue of making money.

Herein lays the explanation as to why Thatcherism has degenerated into a system of socialism for the rich. It’s quite possible – indeed common – to remain ideologically blinkered in the face of evidence showing the hollowness of your ideology. It’s even possible to implement policies, such as corporate tax cuts, that do not have the beneficial effect you say they will. But it’s not possible to ignore the real world consequences of the failure of your economic philosophy. That is why free market Thatcherism has degraded into a swirl of subsidies, bail-outs, phoney privatisations, landlord patronage and plain corruption. They’ve been necessary because the free market hasn’t been able to prosper under its own devices and if you, as a party, represent the interests of asset-holders at the end of the day, they aren’t especially difficult choices to make. And in those circumstances, delving into the ready pile of “other people’s money” becomes irresistibly tempting.

But the remains – what lies at the root of economic failure?