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#economicsfest: How might UK policy-makers overcome the polycrisis?

The UK faces a host of economic challenges: from the cost of living crisis and intergenerational housing inequality to geopolitical tensions and climate change. These issues were addressed and potential policy solutions debated on day one of this year’s Bristol Festival of Economics.

Even by the standards of recent UK economic and political history, the week of this year’s Bristol Festival of Economics was eventful.

On Wednesday, inflation hit its highest rate in 41 years – at 11.1%. On Thursday, Chancellor Jeremy Hunt delivered a grim budget, setting the stage for higher taxes and a brutal spending squeeze. The Office for Budget Responsibility (OBR) forecast the biggest fall in household income since records began.

In discussion on the first day of the festival, panellists explored the impact of these developments on our lives. They didn’t always reach optimistic conclusions. But they argued for building resilient economies, investing in social infrastructure and sustainable growth – and suggested some ways to do this.

A polycrisis

In a conversation with the festival’s co-founder, Diane Coyle (University of Cambridge and a lead editor of the Economics Observatory), former chief economist at the Bank of England, Andy Haldane neatly summarised the predicament as a ‘polycrisis’.

Popularised recently by historian Adam Tooze, this term refers to when interacting global systems crises combine in a way that is far more damaging than the harm that they would cause in isolation. The polycrisis is greater – and more destructive – than the sum of its parts.

Speaking at the SS Great Britain (or at least the dock next to it), Andy said that the roots of this polycrisis were global. But he added that the UK had distinguished itself for ‘all the wrong reasons’ – greater losses of GDP, jobs and life as a result of Covid-19. This, he said, was probably not because of bad luck, but ‘bad economic management’.

Those who have listened to Andy’s speeches will be familiar with his use of metaphor. He used a medical analogy to describe the UK’s problem: the progressive weakening of the country’s metaphorical immune system has left it more susceptible to shocks, unable to grow and facing a longer convalescence. ‘All our subsystems have been denuded of capital’, he said.

But Diane did not let her interviewee get away without acknowledging his own role during the crisis – he was, after all, the Bank’s chief economist until last June. But he argued that monetary policy was less to blame than structural and supply-side economics. Chronic underinvestment in areas like education, health, local transport and innovation has left the UK struggling to grow.

Wages and housing

Throughout the day, panellists from a range of institutions both in the UK and further afield explored what that underinvestment might mean for the future of the country. They often argued for more investment to fix the huge challenges that the UK faces in living costs, quality of life, work and business.

In Tuesday’s first panel, chaired by Chris Giles (economics editor of the Financial Times), Vicky Pryce (Centre for Economics and Business Research) and Sarah Smith (University of Bristol) unpicked what is really going on with wages and prices. Imogen Waite (co-founder of the Bristol-based restaurant business Season and Taste) gave a perspective on what that means for employers struggling to pay their staff and keep their firms afloat.

Imogen said that her business has been ‘quietly dreading the winter of doom for some time’. On the back of a crisis of closures and lack of government support during the pandemic, she is now grappling with rising prices for goods, spiralling energy costs and a tight labour market that has left sectors like health and hospitality struggling to fill vacancies. ‘We have consistently made decisions to close at times we could open because we couldn’t recruit’, she said. Shortages of workers from the European Union (EU) since Brexit have compounded the issue.

Both Vicky and Sarah also explored some of the puzzles that central bankers and governments are grappling with, not least the combination of negative growth and tight labour markets, or whether to call for wage restraint to curb inflation.

Sarah pointed out that if people demanded pay increases in line with inflation, the economy would be at risk of a wage-price spiral. But while it may make sense for the governor of the Bank to advise caution in salary increases – as Andrew Bailey did earlier this year – it is also the prerogative of workers to improve their lives with higher wages.

At the end of the discussion, there were questions from the audience about a career reporting on the economy and the risks and responsibilities that economics journalists take on in terms of shaping the narrative of various debates. Chris recalled a hairy occasion when central bankers risked even greater turbulence in markets – and in their relationships with journalists – by speaking frankly about the dire straits the national finances were then in.

In the last panel of the day, Stephen Machin (director of the Centre for Economic Performance at the London School of Economics) was sceptical of the argument that workers should show restraint. ‘The idea that there’s a wage-price spiral happening now is fairly ridiculous,’ he said.

Across more than one panel, experts were awake to the fact that something appears to have gone badly wrong in wages, and in their usual relationship with job demand. In sectors where there is now the greatest need for workers – hospitality, health and public services – wages have fallen the most. Across the economy, they fell by 3.8% over the last year, according to the Office for National Statistics (ONS).

A discussion on generational cost pressures brought Stephen together with housing journalist Vicky Spratt (author of Tenants: The people on the frontline of Britain’s housing emergency), Oona Goldsworthy (chief executive of Brunel Cares, a South West-based housing and care business) and Clare Ralph (policy manager at Business West). The panel’s conclusions were sometimes bleak.

‘I didn’t think it was possible that things could get worse’, Vicky said, before going on to detail why this has happened. She referenced how spiralling rent costs, unaffordable housing and a hollowed-out safety net after the sell-off of social housing have all served to drive down access to housing and living standards.

Yet the panel also agreed that while young people do face barriers to housing, this is less a generational problem than one divided by wealth.

Oona described the predicament of one woman she works with who, at 69, cannot begin to think about retiring because her social rent is almost the same as what she would bring home in a weekly pension. The emotional impact and hit to mental health cannot be underestimated, Oona said: ‘The narrative around intergenerational tensions sometimes ignores a huge section of society.

Geopolitics and green growth

During the festival’s discussion of geopolitics and the global economy, Anu Anand (BBC) led panellists including John Kampfner (author of Why Germans Do it Better: Notes from a grown-up country and executive director of Chatham House) and Adnan Vatansever (King’s College London) in charting the current global turmoil and predicting the big ideological shifts that might emerge from it.

George Magnus (author of Red Flags: Why Xi’s China is in jeopardy) said manufacturers dealing with the most essential materials and technologies will face escalating costs and challenging supply chain restructuring as they are ‘thrust into the crosshairs’ of geopolitics. ‘We are beginning to see the early stages of de-globalisation – this will raise costs, it will raise inflation, it will affect all of us in lots of ways’, he said. ‘It’s not good, but it’s the reality.’

George argued that we are at a moment of change in the global order: an ‘ideological intent to shrink the state’ and ensure the untrammelled function of free markets is drawing to a close. ‘That fever has broken in my view.’

But Clara Mattei (author of The Capital Order: How economists invented austerity and paved the way to fascism) disagreed. She argued that mainstream economics stands fast in its orthodoxy – and that austerity policies, including cutting social spending and regressive taxation, are part of a bigger strategy: class war safeguarding the ‘pillars of capitalism’ to get accumulation back on track.

Alessio Terzi (European Commission and author of Growth for Good: Reshaping capitalism to save humanity from climate change) takes those criticisms of capitalism seriously but comes to different conclusions. In conversation with Andrew Kelly (Bristol Ideas), he said it was not surprising that some people had grown cynical of growth, not least because for many under-35s it has never really arrived.

He made the case that growth could still be a tool that is compatible with the planet. But this will take a joint effort from both the public and private sectors, to drive the innovation that history tells us will play a role in a green economy. It also means that some people will lose out – and governments and companies will need to take measures to make sure that any change is equitable.

‘We are at a point of revolution yet again in capitalism’s history’, Alessio said. ‘The green industrial revolution will provide huge growth but not for everybody.’

On more than one occasion at the festival, panellists apologised for sounding too depressing in their assessment of today’s economic woes. The day’s discussions may not have proved that we are on the path to a more resilient economy. Nevertheless, they did hint that there could be ways out of the polycrisis, if we think to the future.

Author: Bethan Staton (Financial Times)
Picture by vovashevchuk on iStock
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