Debunking Economics - the podcast

This week Phil and Steve look at cost-plus inflation, driven by rising wages. Right now its being given as the reason that services inflation is remaining sticky and that’s why many central banks are reluctant to reduce interest rates. Steve says it’s a far more sensible assumption than the neoclassical belief, promulgated by Milton Friedman, that inflation is always and everywhere a monetary phenomenon.It's not just workers who can put prices up, of course. Companies can increase their margins, and we saw a fair bit of that post-COVID. Burt what of the tech-driven future, where wage negotiations will be harder. Basically, we’ll be lucky if we have a job. Does that mean the tech bros call the shots and wage driven inflation will be a thing of the past?

Is it fair enough to totally write off Ricardo’s theory of competitive advantage? Certainly, President Trump isn’t an advocate, using tariffs to protect America’s domestic industries from those countries that produce stuff cheaper. A broad economy, producing a range of products and services, is preferably to a narrow one, reliant on one or two key exports, which is what Ricardo advocated. But in support of Ricardo, some of the narrowest economies, like Australia, have some of the highest levels of GDP per capita. It seems to work for resource-based economies, so far. But could they be even richer? Phil and Steve discuss Ricardo and economic complexity in the age of Trump’s tariff agenda. 

The UK Labour party has struggled to forge a recovery for the beleaguered economy. Rachel Reeves is intent on reducing the government deficit. Her first attempt involved increasing the National Insurance contributions made by businesses – in effect, raising a payrolls tax. In short, a reason for companies unsure about recruiting in a slow growth economy to err on the side of caution. Now, there’s talk of tax rises. Steve and phil talk about the impact on growth of added more to the consumer’s tax burden, and the impact it’ll have on money in circulation. Then there’s the confusing idea of increasing savings as though that’ll drive investment which will add to economic growth. That might be the case if the money was invested in new businesses, rather than inflating share prices and other financial instruments, which all deflect money from the real economy.

Before he was the UK Prime Minister at war with the Nazis, Winston Churchill ws the UK’s Chancellor. He played it very straight, with a preoccupation with balancing the budget. He also took the Uk back onto the Gold Exchange, despite warnings from Keynes that the move would be deflationary. In 1928 he reinforced his neoclassical credentials, saying very little additional employment and no permanent employment can be created by state borrowing and state expenditure. That is, of course, the exact opposite of the idea of a job guarantee, but is Churchill partially right? Can a job guarantee ever create jobs that will enhance productivity?This week Phil and Steve look into job creation and Churchill’s fear of using government spending to protect the labour market. It was a time when even Joh Maynard Keynes didn’t get everything right. For example, he argued that the multiplier effect would add new money and new employment from government cash injections. But how can you multiple the injection if no new money is created? And it ignores the real benefits jobs can create, behind the money gained from those directly employed, whether by the government or the private sector. 

In UK politicians of all persuasions agree that foreign investment I s important to add to the growth of the UK economy. Steve says you have to have foreigners buying into the UK to counter the currency losses from a sizeable balance of trade deficit. But a lot of that investment will see profits being repatriated back overseas. And then there’d the overseas investment in UK bonds and shares. Andy Burnham, the Manchester Mayor who seems to be positioning himself to replace Keir Starmer, has said we need to limit the ownership of UK nbonds to foreign investors, and not be ‘in hock’ to bond markets. Has he got his thinking right?

recent spoke at a meeting of Jeremy Corbyn’s new venture – Your Party. Steve gave a presentation on how governments can spend more without worrying about the deficit, provided it was done sensibly. The argument that the private sector buying up government bonds will crowd out investment in other initiatives is bunkum. The private sector can still borrow for investment, perhaps benefiting from the enhanced infrastructure and trading environment government spending has created. But Phil argues there’s a big education job to be done – the politicians, the electorate and, more significantly, the bond vigilantes, who will see high government spending as a reason to push up bond yields, which will flow through to borrowing costs for everyone. Meanwhile, what chance as Corbyn’s new party got? Is the left divided itself between Corbyn, Galloway, the Greens, Labour and thew LibDems? Is this division creating a pathway for Reform to offer an agenda of low tax, fewer government services and heavily controlled immigration. In other words, Project 2025 transferred to British soil.

During the pandemic central banks had no choice but to buy up government bonds. There were just so many of them being issued. That’s why the UK’s quantitative easing program totalled more than £900 billion during 2020-1. Recently, the bank – like other central banks the world over – are trying to unwind these huge additions to their balance sheet. Recently the Bank of England slowed down the pace at which they sold-off these assets. Why? In part because this process of ‘quantitative tightening’ can reduce the amount of money in circulation. That could slow what little economic growth we have right now. But, Steve says, if these bonds are bought up by banks, it’ll simply mean they replace reserves with zero impact on the economy, except for the interest the banks will earn from those holdings. All this raises the question, why sell now? Or ever? And how much does QE and QT sit alongside or in contrast with government fiscal policy? Don’t they need to be coordinated and, if that’s the case, is there any case for an independent central bank?

You would assume that government spending is largely designed to help those on lower incomes. The NHS was designed to ensure free healthcare for all. The same for public education. And for welfare payments. So, I theory, the more the government spends, the more wealth is transferred to lower incomes.This week Phil and Steve explore the idea that rising government deficits actually help the rich. That’s because the so-called debt is financed by the issuance of bonds, much of which is nought on the secondary market to add to the wealth funds of the richer end of society. They receive dividend payments funded from the government. That’s a case of government money supporting the wealthy.So, is there a way of government money being used to support the less well-off, without helping the rich to get richer?

After the war the European economy was humming along, with growth rates of 5 percent or more. Now Germany’s forecast to grow by just 0.1 percent. Allowing for population growth and inflation and it’s an economy in decline. Steve says part of the problem is the assumption that rising government debt is bad for the economy – the old neoclassical belief that if the government spends, it crowds out the private sector. They’ve been testing that theory in Europe for a while now, and it isn’t working for them. Yet, politicians have convinced enough people of the principle such that populist right-wing governments are taking more political control across the continent. All the while, Europe has lost its innovation, and its manufacturing capability is in decline. Hence, Phil asks, how can it get its mojo back?