16 January 2025: Politics | Economics

‘10 Things I Think I Know About Politics Now’ / The deep roots of Britain’s economic mess [J2T #656]

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1: ‘10 Things I Think I Know About Politics Now’

A guest post by Ian Christie

For a while now Ian Christie has sent me versions of this ‘Ten Things I Know’ post about the current state of international politics. But this is the first time he has given me permission to re-publish it here. Enjoy, if that is the right word.

1. The MAGA Coalition: Having invested so much time, money and career effort into seizing control of the US federal state, the MAGA coalition, for all its internal tensions and contradictions, will not go quietly if defeated in elections for Congress and Presidency. The taste of power is too strong; the fear of legal retribution by a Democrat administration too great; the fear and loathing of anti-MAGA Americans too strong.

   Trump may be a blip and something like democratic normality may come back to the USA, but we can’t count on it. It is likely that the MAGA regime will try to stay in office regardless of public opinion and votes and law. Even if it does leave office, unless the MAGA coalition has been totally discredited it may revive. We know now - and crucially, do does the MAGA elite - that US institutions are not strong enough to restrain a kleptocratic and authoritarian regime. And US business has shown that it is too scared and / or self-interested to defend democratic order.

   

   (Arthur Charles Dodd, ‘Might is right’, 1898. Image: Bonhams)

2. The UK and EU are in a strategic bind, needing to de-risk their relations with the USA very fast, but unable for the short to medium term to oppose the MAGA regime because we depend on it for military security and ICT systems. So a very difficult policy is called for, blending obeisance with containment with rapid planning and investment for decoupling from USA. The EU has to become a superpower, or else. All bets are off for Europe if it can’t manage that by 2040 and/or if it splits between pro- and anti-MAGA forces.

3. The convergence of some EU states on Russia is clear—Hungary, Slovakia, maybe even Czechia. The convergence of the USA on a Russian mode of rogue autocracy is also obvious. The MAGA vision is of America as a vastly richer and militarily superior version of Russia, i.e. a continental extractive autocracy capable of global projection of force.

4. The remedy against hard right populism across Europe is surely a prolonged surge of investment in jobs, skills, infrastructure and affordable housing that benefits the aggrieved places and groups neglected over recent decades (see Andrew’s piece below on George Osborne’s baleful impact on prosperity in the UK). A programme to achieve that—as envisaged in the EU Green Deal, which has been watered down—needs to be equitable and must help decouple economic growth from fossil energy emissions. It needs to come very fast, given the rise of the hard right across the continent. But France, Germany and the UK, the major economies of the continent, are all stuck in stagnation, and the mainstream parties are short of confidence, imagination and leadership qualities.

5. The UK is facing its own risk of falling to a pro-MAGA movement, and its hopes of achieving [4] above are gravely damaged by Brexit and the reluctance of the Starmer government to take more radical steps for EU re-integration. The EU needs the UK back if it is to become the democratic superpower the West and the world needs. But the politics of Brexit fallout make this unlikely.

6. The Internet and social media platforms are now obviously detrimental to collective goods, cooperative politics and sane public debate. The UK and EU need to construct alternative platforms and enclose them against info-pollution, and also close down X in Europe. Just writing that down makes me realise afresh how unlikely that is, but also how necessary.

7. AI is a Wild West and it is likely that ungoverned AGI would be a global disaster. Luckily for us AGI may be impossible (I think it is). But non-general AI represents two huge risks. First, investment bubble-bursting and consequent recession or worse. Second, a boom in fossil-powered or nuclear-powered energy systems all to service AI, with dire ecological impacts and also risks of energy poverty and instability for citizens.

8. AI needs to be seen as part of a resource contest in a world viewed by USA, Russia and China as zero-sum and dependent on resource extraction at increasing scale. The onset of limits to growth will not make any of these actors keener on positive-sum collaborations and power-sharing. The EU and UK are the only positive-sum polities left of any weight.

   

   (Thanks to Celina Bledowska for the meme.)

9. Ecological breakdown—above all global heating—is seen by the MAGA regime and Russia as an opportunity for hegemony and enrichment. They and other petro-states need to be quarantined by the rest of the world, by shifting rapidly to renewables, investing fast in climate adaptation, and insulating themselves from US platforms and trade dependency.

10. As Orwell said at the end of WW2, the global outlook is very dark and analysis has to start from there. His prescription then was for a large zone to be established in which democratic socialism - as it turned out, social democracy - could be safeguarded and eventually disseminated. His candidate for that zone was Western Europe. Here we are again, but in a situation where Western Europe cannot rely any more on the USA.

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2: The deep roots of Britain’s economic mess

I was asked by a friend on East Anglia Bylines if I could write something on why Britain feels poorer than it used to. It appeared there last weekend, and this is a version of the piece, appearing here with their permission. Trying to get to this in the length they had was a challenge. Lots of nuance is missing. I know that there are elements here that ought to be expanded; there are other elements that people have written whole books about. So please treat it in the spirit of Richard Rumelt’s “diagnosis”, which “simplifies the complexity by identifying the critical aspects of the situation” and connects to a “guiding policy for dealing with the challenge”.

Our politics is dominated by concerns about affordability. The British Chancellor of the Exchequer, Rachel Reeves, announced a budget in which she raised taxes so as to subsidise prices. The price of eggs was a noisy theme in the last American presidential election. Economic crisis becomes a political issue: voters struggling with energy costs and higher food prices tend to vote incumbent governments out of office.

There are short-term reasons for this: energy costs climbed because of the Russia-Ukraine war, although this was worsened by Britain’s energy regulation regime. Food prices are being affected by climate change and, in the case of eggs, by bird flu. These factors all helped to create the cost of living crisis.

Taking the long view

But there is a long term story as well. The reasons for Britain’s economic stagnation over the past 15 years can be explained simply, even if the underlying story is more complex. The simple version is captured in a well-known chart from the Office of Budget Review—the arms-length body that monitors the government’s economic analysis.

(Source: Office for Budget Responsibility, Briefing Paper No. 9: Forecasting productivity. November 2025.)

In short, in the wake of the 2008 global financial crisis, the underlying performance of Britain’s economy jumped tracks downwards to a lower level of productivity performance. This didn’t happen in any of the western European countries that Britain usually compares itself against, or the United States. The dotted line shows what would have happened had productivity growth continued on its pre-2008 track. The gap now is not a small one. Without this decline, the British economy would be about 14% richer, and earnings per household around £11,000 a year higher.

The political project of austerity

The simple version of the story can be summed up in two words: George Osborne. Unlike Treasury ministers in other countries, the British Chancellor of the Exchequer decided that austerity was the best economic strategy in response to the financial crisis. Intellectual cover was provided by a 2010 economics paper, ‘Growth in a Time of Debt’, by two US influential economists, Carmen Reinhart and Kenneth Rogoff. The paper apparently demonstrated that when government debt went above 90% of GDP (national annual income), then economic growth stalled. But the paper was able to show this only because of a series of spreadsheet errors. When these were revealed three years later, by a University of Massachusetts graduate student, Thomas Herndon, British economic policy didn’t change. Austerity was always a political project.

Increases in productivity essentially come from a combination of public-sector investment and private-sector investment. Austerity killed off public-sector investment, so also dampened the confidence of the private sector, and its willingness to invest. There is now credible academic research that shows that people’s experience of living in a stagnating economy with squeezed local services both created the conditions for UKIP’s surge in popularity, and was then enough to tip the Brexit vote from Remain to Leave. This acted as a further dampener on private investment.

Long-run economic decline

Opportunities to tank an economy don’t just appear as if by magic. The Global Financial Crisis was the last in a line of financial shocks that snaked through the 1990s. These, in turn, had their roots in four deep-seated, and inter-connected factors:

• A long decline in global growth rates that started at the end of the 1960s

• The rapid rise of Asia’s share of the global economy from the 1980s

• An increase in the level of debt in the international economy

• A steady rise in the financialisation of everything, from the 1980s, as investors chased returns in a lower growth world, which also reflected a deeper change:

“The great unremarked class struggle that happened in the 1970s and the 1980s”, writes Dan Davies in The Unaccountability Machine, “was between capitalism and managerialism. The managers lost this struggle, pretty comprehensively.”

Financialisation took multiple forms. The notion of “shareholder value” as the lodestar of company purpose was framed by the conservative economist Milton Friedman and put into practice by influential chief executives such as Jack Welch at the American company GE. Another is the rise of privately held capital, most visibly in the form of private equity companies, that attach themselves to anything with a steady income stream — anything from water companies, to care homes, to Manchester United — then saddle them with debt, and extract revenues from them for investors.

And then there is the rise of financial instruments such as derivatives that are essentially sophisticated forms of betting that exist at least in part so people can extract a margin from each transaction in spreads or fees. The world economy is worth around $105 trillion at the moment, but the annual value of the financial derivatives that sit on top of this is around $667 trillion. As John Lanchester said recently in the London Review of Books,

“What modern finance does, for the most part, is gamble. It speculates on the movements of prices and makes bets on their direction.”

This was amplified by the design of the Quantitative Easing [QE] schemes that were invented to keep the global banking system afloat after the financial crisis, which had the effect of making asset holders wealthier at the expense of the rest of us by inflating, for example, the value of property. A different design could, instead, have accelerated investment in green infrastructure. It was an opportunity missed. The result ofall of this is that the rich have got richer and wealth inequalities have ballooned.

Complex problems with deep roots whose outcomes benefit the rich and powerful tend to be hard policy problems to fix. In political terms, many of the levers that might create change in the short-term are within the financial system, which politicians tend not to understand.

A “finance curse?”

The UK financial services sector is also over-developed compared to most other countries, which brings its own problems. Much of what the sector claims is economic value added is simply extraction from other parts of the economy. The research organisation New Capital Consensus argues in its report, Effective Investment, that

“The UK’s investment system routinely diverts financial flows away from the real economy… the expansion of financial services — beyond a certain point — produces lower, not higher, productivity and fails to deliver for the real economy in which we all live.”¹

Britain, said the author Nicholas Shaxson, suffers from “a finance curse”.

Some of the ways to address these issues are technical. Dan Davies, a former Bank of England economist, proposes changing company law to stop private equity companies loading their acquisitions with debt. Tax tweaks to secondary transactions such as derivatives could reduce the gains from short-term speculation in these kinds of financial instruments.

But if we’re serious about making the British economy more productive, the place to start is with the pension system. Pension funds invest our money—currently some three trillion pounds— to ensure long-term returns, but don’t act in our long-term interests. Instead they behave in the same short-termist way as the rest of the financial sector.

There’s no shortage of ideas on how to make them both take a longer-term view of investment, and to invest more for the public good, going back at least to the Kay Review in 2012. No one is going to be on the streets any time soon chanting “WHAT DO WE WANT? NEW RULES FOR PENSION TRUSTEES”. But if we want to start feeling better off again, a public campaign about the role of the destructive elements of the finance sector is the place to start.

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j2t#656

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1. The usual disclosures: I have been facilitating some workshops for New Capital Consensus exploring the reasons for this.