The British economy has become a cautionary tale. Over the past year it has recorded the highest inflation rate in the G7 and one of the lowest growth rates. The government’s debt interest payments will be the largest in the developed world in 2023 (10.4 per cent of revenue), according to the ratings agency Fitch. Average British living standards are comparable to those of Alabama, one of the poorest US states. What explains this malaise?
One of those best placed to answer this question is Adam Posen, president of the Peterson Institute for International Economics and a former external member of the Bank of England’s Monetary Policy Committee (from 2009 to 2012). The US economist’s transatlantic experience gives him both an inside and outside perspective on “the British disease”.
In a piece for the Financial Times in June he argued that the UK should “think like an emerging market”. When we recently spoke via video call, I asked Posen, 57 – who resembles another transatlantic figure, Bill Bryson – what he meant by this comparison.
“There are two ways in which it’s meaningful. The first is that there is more instability in the overall macroeconomic regime right now than there’s been for a long time. I may not have liked the austerity programmes of [David] Cameron and [George] Osborne but it was a clear policy… The turnover in governments, Trussonomics, other bits of amateurism before and since and, frankly, some of the communications out of the Bank of England, all make me think that the credibility of the regime is not as high as it was.”
While the UK is hardly unique in this regard – “in the US we’ve just had our ridiculous budget game,” noted Posen – it now has less room for error than many of its counterparts.
The second aspect in which the UK should think like an emerging market, he added, is “taking seriously the need for structural reform”. “All the G7 countries had a slowdown in productivity growth in the 2000s but only the UK has seen this persistent, substantial further decline.”
UK productivity grew by just 0.4 per cent a year from 2008 to 2020, less than half the rate of the richest 25 OECD countries. What does Posen attribute this parlous performance to? “There’s been a good case made, which I’m sympathetic to, though I don’t think it’s fully proved yet, that low levels of public investment and investment in education since 2010 [when austerity began] is a big part of this.
“Without overselling it, we also shouldn’t ignore Brexit. Brexit is a trade war by the UK on itself. Disrupting trade with your longest-standing, closest and most important trading partner is a hit to real incomes.”
Posen speaks not as an ideological Remainer but as an empirical economist – and is more persuasive for it.
As striking as Britain’s weakness is the US’s enduring economic heft (it now accounts for 58 per cent of the G7’s GDP, compared with 40 per cent in 1990). When I asked Posen about this under-examined trend, he began by reciting America’s own maladies. “There are so many things that go wrong, including civil violence, racial discrimination, throwing away 9-10 per cent of GDP a year inefficiently in health care, right-wing Republicans destroying the budget process.
“But with all those caveats, there fundamentally remains a secret sauce in the US… The combination of immigration, entrepreneurship, innovation, top-flight universities, scale and increasingly, sadly, geopolitical dominance in a more conflictual, unsafe world provide boosts to US purchasing power and relative incomes.”
[See also: Is the Bank of England raising interest rates too far?]
Posen grew up in Brookline, Massachusetts, a town “not dissimilar from Islington, where I lived when I was in the UK”. His parents were both civil servants: his father for the US Air Force and his mother for the Smithsonian Institution. Posen’s passion for economics is born of life experience.
“Both my parents were the children of immigrants in Toronto, Canada. Both grew up in genuine poverty. They both had huge potential but also life struggles, particularly my father, that were imposed on them by social and economic conditions.”
During his time at the Bank of England, Posen was known as a “dove” – consistently voting in favour of loose monetary policy and ultra-low interest rates. But the facts have changed, and so Posen has changed his mind.
He defends the Bank’s decision to raise the base rate on 3 August to 5.25 per cent – its highest level for 15 years – as a necessary response to the inflation surge. “Either the government should say that they’re resetting the inflation target to 3 per cent [from 2 per cent] or the Bank has to raise rates further,” he concluded. “What I think is not responsible or acceptable is to say, ‘We’re just going to ignore the target indefinitely.’ ”
Does he blame the Bank for the UK’s inflation problem? “It didn’t screw up much more than either the ECB [European Central Bank] or the [US] Fed, all of which were behind the curve… The UK’s energy pricing system, the unavoidable inflationary costs of Brexit, the reduction in labour supply in certain areas, plus fiscal games by successive Tory governments, those are the real causes of inflation.”
While he defends the Bank, Posen, who hosted a Q&A with the shadow chancellor, Rachel Reeves, during her recent trip to the US, is sharply critical of Labour. “I think the priorities are out of whack. I would not be so afraid of being characterised as ‘tax and spend’. I would be looking for places to raise taxes, including carbon taxes, wealth and property taxes… I would use that money not to pay down debt but for public investment and to get rid of the two-child benefit limit. I was gobsmacked that any Labour shadow cabinet member would speak in favour of it.”
He is sceptical of Reeves’s signature policy of “securonomics”, which advocates greater state activism and a more protectionist industrial strategy. “Attempting to create an electric vehicle or battery industry in the UK in a subsidies trade war with the EU, the US and China is a very bad idea. As [the former US treasury secretary] Larry Summers said, one of the things progressives are supposed to want to do is to prevent these races to the bottom of different regions bidding against each other to pay off businesses.
“Tax and spend wouldn’t be as politically dangerous as they [Labour] think, especially given their lead in the polls, and would be a better policy than subsidising these white elephants.”
Posen similarly believes Labour should be far bolder on Brexit. “I find myself getting into arguments with Democrats in office and my friends in Labour about this absolute belief that what lost them the elections was China and trade in the US [in 2016] or Brexit in the UK [in 2019] and if they say anything good about trade it will only hurt them. I think Labour vastly underestimate how many voters would think it positive to address Brexit, given the shifting poll numbers.”
Indeed, opinion polls show that a comfortable majority of voters now regard Brexit as a mistake and, on occasion, that they support a second referendum. But the shadow cabinet fear the pivotal impact the issue could have in Leave-voting swing seats. “I’ve had two senior Labour people when I’ve said this to them basically pat me on my head and say, ‘You’re a political naif and you’re also not a Brit and you don’t understand.’ They may be right.”
But Posen’s plea is ultimately for greater honesty. “As I said with the inflation target, I think what you say and what you do should match. The idea that after Labour wins they’re going to come in and they’re going to open the desk and say, ‘Even though there’s been no topic more debated in this country than Brexit, we suddenly realise we have to do something about it…’ You don’t have to have an ideal vision of voters to know that’s just not a good way to behave.”
[See also: Is anybody running the Bank of England?]
Content from our partners
Related
This article appears in the 16 Aug 2023 issue of the New Statesman, Russia’s War on the Future