The Coming Crunch

Will "fixing the foundations" of the economy simply mean more Treasury orthodoxy?

Towering Columns

In The Telegraph, Andrew Roberts says international institutions such as the UN and International Court of Justice are no longer serving the liberal order they were designed to protect.

In a gross inversion of what they should be doing, the court is appearing to be taking the side of the terrorists against the victims, despite the Israel Defence Forces fighting as ethical a campaign as is humanly possible under the monstrous conditions. Genuine mistakes are occasionally made, as in southern Lebanon yesterday, but that is sadly true of all wars.

The Labour Government’s recent surrender of British sovereignty over Diego Garcia, in which we have paid Mauritius for the privilege of no longer owning the islands, was also the result of our being outvoted on another international body – the International Court of Justice (ICJ)– that we helped to set up. 

Because a group of foreign judges want the Chagos Archipelago, which has belonged to Britain since the end of the Napoleonic Wars, to no longer be ours, Labour rolled over and gave the islands away. That was the same court where South Africa sought to indict Israel of war crimes. Where is the sheer outrage at UNWRA reportedly being nominated for any kind of award, let alone the Nobel Peace Prize? Where is the fury at the WHO being suborned by China, or the ICC by anti-Israel campaigners? Where is the gumption to ignore the ICJ when it puts the security and strategic interests of the West below the interests of Mauritius and a small group of former residents of a place which they left in 1967?

In The Times, Joanna Williams says politicised agendas have gradually creeped into teaching methods and school curricula despite never having obtained democratic consent.

The English and Media Centre, an organisation dedicated to supporting English teachers, highlights “approaches to diversity and anti-racist pedagogy” and suggests books that explore “identity” and encourage pupils to engage with “real-world issues”. Pearson, “the world’s leading learning company”, advises English teachers to analyse exam texts such as Jane Eyre, Journey’s End and Lord of the Flies through an LGBTQ+ lens. It is teachers, not parents, who are giving children a values framework and political perspective.

None of this has ever featured in any election manifesto, yet over the past 50 years schools have gradually taken on responsibility for children’s physical, mental and emotional health, moral values and political views. In the process, parents have been left increasingly sidelined. The LGBTQ+ Primary Hub, a group that works with primary schools, advises teachers to “be open to the idea that a child might not be heterosexual and/or cisgender” while Stonewall encourages schools to ensure “that LGBTQ+ families, people and themes are embedded throughout the curriculum”. Many children come to see their parents as being behind the times or simply wrong about crucial aspects of life such as gender roles and relationships.

When teachers assume that the values they promote are superior to those of the home, parents are not only viewed as inadequate but in need of re-education. Pupils are encouraged to challenge the prejudices of their parents and to get them to adopt expert-approved views in a process the sociologist Frank Furedi has termed “socialisation in reverse”. In other words, rather than parents socialising children into acceptable values, norms and ways of behaving, children play this role in relation to their own parents…It is not only with parents. The Sunday Times revealed in 2021 that a primary school in Birmingham had co-opted children into policing members of staff. Pupils were taught to be on guard for any adult in school who “mis-spoke”, for example, by referring to a group that includes girls as “guys”. Having identified miscreants, pupils held up posters highlighting the particular speech crime that had been committed. Each week, the two children who pursued this task most enthusiastically were rewarded with a certificate. Furedi says this reversal in authority has “dramatic consequences for intergenerational interaction”.

Ahead of the coming Budget, Paul Johnson of the Institute for Fiscal Studies lays out in The Times how capital gains tax could be reformed to improve incentives and broaden the base.

What Reeves needs to do is to think about the tax base — the measure of gains on which the tax is charged — as well as the tax rate. She also needs to close some obvious routes through which payment can be escaped. One way to change the base would be to give an allowance for inflation, as happened between 1982 and 1998, plus a “normal return”, let’s say 2 per cent for simplicity. That way you would pay tax only on real returns, above a normal interest rate. That is the appropriate subject for taxation, and for taxation at the same rate as applies to earned income. Doing this avoids creating disincentives to invest in the first place while ensuring that different forms of income are taxed at the same rate.

This would be perfectly straightforward but it would not work unless you closed two other big leaks in the system. The first is forgiveness, or uplift, at death. If you hold on to an asset until you die then it passes to your heirs and is revalued at that date, so any CGT is subsequently payable only on gains from the moment of inheritance. This provides a huge incentive for people to hold on to assets long after it is productive to do so. While that remains in place other reforms, and certainly rate increases, will be much less effective.

The second leak to the system applies to the internationally mobile. If you make a whacking great capital gain in the UK, move abroad and then realise the gain: hey presto, no CGT. Conversely, in principle at least, we try to tax capital gains made by people while abroad if they subsequently become resident. Raising rates while leaving this system in place could again be counterproductive. Other countries, including Australia and Canada, have demonstrated that sensible reform is perfectly possible. You tax people on gains made while they are resident in the UK and only on those gains.

Also in The Times, Juliet Samuel says society needs to start treating smartphones the same way it treats addictive drugs.

[T]here will only be a breakthrough in our behaviour when we begin to think of smartphone and internet use as a kind of drug that delivers an addictive dopamine hit. Like alcohol, phone dope can be enjoyed fairly harmlessly and may bring some benefits. The occasional binge is probably also not harmful. But the unusual feature of this drug is how seamlessly its delivery — or potential delivery — is built into otherwise productive, useful tools. Whether you are trying to park the car, download your child’s homework or track your blood sugar, the promise of a gratifying notification is ever-present. Even the design enabling you to “pull down” to load new emails is based on the motion of a slot machine.

As a result, phone dope can quickly morph from benign quirk to damaging addiction, keeping you constantly distracted and never far from reaching for the phone even in the midst of heart-to-heart conversations, critical work projects, family meals, bedtime stories with the kids, sex and so on. Meanwhile, all sorts of experts are marvelling at our rocketing rates of, among other things, mental health problems (both real and imagined), cognitive disorders, stagnating productivity, marital breakdown, childlessness and insomnia. Our excessive consumption of phone dope, surely, must be a factor.

We already know this addiction is linked to anxiety, poor concentration, radicalisation and more, but it is probably also affecting our brains in ways we barely understand. To take one example: the focal length of our vision in any given moment is often intimately connected to what types of thoughts and emotions we have. If this sounds odd, ask yourself whether you ever find yourself looking up when trying to remember something. Do you look down when embarrassed, into the distance when bored or at a fixed point on the gym wall when straining to lift a heavy weight? Once you start noticing these peculiar features of cognitive mechanics, the question surely arises: what subtle effect does it have on our minds to stare at a little screen for so many hours a day?

On his Substack, Oren Cass argues that the inability of American families to survive on one income represents a step backwards from Cold War living standards.

In 1974, the New York Times published an article titled, “In Soviet Union, Day Care Is the Norm.” The USSR heavily subsidized daycare, without which some families would have to “fend for themselves,” mothers would “quit their jobs in order to raise their children,” or some families might even “resort” to the “traditional” reliance on extended family. Some “middle-class intellectuals” didn't think the daycare was very good. They “disliked having children raised so much of the time by people outside of the family during the early, formative years.” But even they “conceded” these are niche concerns, inapplicable to most.

One centre's director, the Times reported, “exudes enthusiasm” about “the benefits of children being able to grow up in a collective rather than being spoiled by doting parents and grandparents.” Generally, working-class women were “delighted.” Indeed, what other word could there be besides “delight” when “the vast majority of Soviet families require the salary of a working wife to make ends meet.” Soviet citizens “express astonishment when they learn that an American father can support a family of two, three or four children without his wife's working. Many are surprised that American women would willingly have more than one child.” Imagine telling an American in 1974: 50 years from now, our families will face these same pressures and we’ll embrace this mandatory two-earner structure and push toward this kind of national daycare system... it’s what people want, and frankly we won’t have a choice. He'd assume we lost the Cold War and our economic system had collapsed. “No, no,” you tell him. “We won! And our economy has been growing by leaps and bounds! We're more prosperous than ever!” He’d shake his head, chuckle, and walk away. Because that’s just crazy.

Yet here we are. In recent decades, a fundamental shift occurred in the economic condition of the American family, largely unmeasured in the economic data. Whereas the typical male worker could comfortably provide middle-class security to a family of four in the 1980s, he is nowhere near able to do so today. American Compass’s Cost-of-Thriving Index, which measures the number of weeks of the median male worker’s income necessary to cover a family’s health care, housing, transportation, education, and food, climbed from 40 weeks in 1985 to 62 weeks in 2022. Unfortunately, the number of weeks in the year has remained at 52.

On ConservativeHome, Gavin Rice explains that voters who abandoned the Tories for the Liberal Democrats at the last election actually have conservative views on issues such as immigration and crime.

There are common themes across all voters who abandoned the party this year. Immigration is the stand-out, number-one issue, followed by weakness and division in the party, then public services being worse. Perhaps surprisingly, a majority of 2019 Conservatives who switched to the Liberal Democrats say we should cut immigration “a lot” (along with 65% of current Tories and 82% of Reform switchers). This is a consensus issue for voters the party must win back.

This makes more sense if you consider a constituency like Yeovil, which voted Leave in 2016 and Conservative in 2019 but has gone back to the Liberal Democrats this time – the historic challenger in this seat. These voters are actually especially liberal, but have nevertheless suffered from cost of living rises and exhaustion with the Tories. The Lib Dems benefited significantly from the anti-incumbency dynamic in their marginals with Conservatives.

And immigration is the top priority for defectors to the Liberal Democrats, followed by increasing public spending on services. It’s therefore vital that the party does not make too many assumptions about the ideological histories of those who abandoned it at the last election. Immigration predominates regardless of which party voters switched to, but public services are important for all 2019 defectors. Just as Liberal Democrat defectors say the previous government failed on immigration, similarly defectors to Reform say it failed on the economy and cost of living, for example.

Wonky Thinking

Onward published Capital Issues: Reforming capital markets to boost science and tech. London was once the world’s largest stock exchange but today rank’s sixth, and over the past ten years the value of the S&P 500 (the index of the top 500 companies listed in the United States) has grown ten times faster than the United Kingdom’s FTSE 100. The report makes the case for policy reforms to restore investor confidence and increase the pool of capital to UK listed firms.

Fixing London’s capital-market issues will not be easy. First, what is causing London’s decline is poorly understood. The traditional tale is that the decline is driven by too little being invested in the UK’s biggest companies – and persistent discounts to their share prices (that is to say, lower valuations for firms trading on the LSE compared to those listed on other exchanges). In this telling, if only London had more investors or more money for its biggest companies, then the City’s fortunes would be restored. However, while there is some evidence of small discounts for firms trading in London, this oversimplification does not capture the full picture of London’s underperformance. Instead, London’s challenges are being caused by three interlinking issues:

First, while not the sole factor, there is indeed a lack of institutional investment in large private and newly public companies with high growth potential, but this is different to the traditional focus on driving money into established, larger public companies. The advantage held by the US has been overwhelmingly driven by the “magnificent seven” – US tech giants such as Google and Amazon whose shares have swelled in value. Without these seven firms, there have been long periods where American shares have actually traded at a discount relative to British ones. But the UK, and therefore its stock market, has failed to be the home of the fastgrowing companies of the future, leaving the FTSE dependent on legacy firms such as those in financial services and natural resources that do not have the growth potential of the technology sector. Central to this is the UK’s inability to invest at appropriate levels. Institutional risk-aversion within the UK’s pension and insurance systems has caused chronic underinvestment in both private and public markets.

Second, there are specific factors reducing investment in smaller public firms, beyond broader issues related to pension funds or insurers. In the UK, investment in smaller firms tends to come from smaller investment funds. But these funds are in decline, primarily due to regulatory burdens that have increased compliance costs and made smaller funds less viable. The proportion of small British investment funds compared to larger ones has more than halved over the past 15 years. At the same time, passive investment strategies – where asset managers invest in composite indices rather than specific companies – have increased, meaning less is invested in smaller firms outside major indices such as the FTSE 100.

Third, the public-listing environment is unfavourable for smaller firms. Low liquidity and insufficient professional-analyst coverage – mid-sized AIM firms have on average a quarter of the analysts covering their US equivalents – are making small and medium-sized listed companies unattractive investment propositions. UK defined-benefit pensions are not only investing less in public markets but are also withdrawing from equity funds, reducing participants and capital in new, innovative companies. This results in lower liquidity for smaller listed firms, making them less appealing to investors and making it harder to raise funds.

To reclaim its status as a global financial hub, London needs radical transformation. London’s ambition should be to become the premier public exchange for high-growth tech companies focused on European customers that are too big to stay private in the long term. The London Stock Exchange has made some important positive steps, but more must be done. This requires bold and broad-ranging reform.

Policy Exchange published A Portrait of Modern Britain: Ethnicity and Religion. Analysis 2021 census data and other statistical sources, the report paints a detailed demographic profile of the UK, finding wide-ranging support for pride in shared Britishness.

The report found that almost 3 in 4 people – 72% of those polled believe that children should be taught to be proud of British history, with a majority also believing that Britain has historically been a force for good in the world.

• When asked if children should be taught to be proud of Britain and its history, net positive agreement was recorded for every ethnic group polled, including net positive scores of +58 for the black African, +50 for the black Caribbean and +35 for the Indian ethnic groups.

• Events from British history that people took most pride in included Britain’s role in the World Wars, Magna Carta, the Industrial Revolution and the Abolition of the Slave Trade. 

…[T]he report uses census data and exclusive new polling to chart the economic, social and political positions of ethnic minority Britons. 

Top findings include: 

• Ethnic minority individuals overwhelmingly thought that class was more important than race in determining whether a person would succeed in modern day Britain (54% class vs 26% race). This held true over every ethnic group polled.

• The ethnic group with the highest concentration of professional workers was Indian

• White British pupils lag considerably behind multiple non-white ethnic-minority groups. Chinese-heritage pupils on free school meals perform better than their white-British peers who are not on free school meals.

• Black Caribbean and Gypsy, Roma and Traveller ethnic groups continue to lag on most life outcomes.

• Family breakdown has a dramatically disparate impact across ethnic groups: 63% of dependants with Black Caribbean ethnicity living in a lone-parent household, compared to just 6% of those with Indian ethnicity.

The report argues Britain has historically represented one of the most successful examples of a multi-ethnic democracy in the modern world – but that the summer’s far-right riots and previous intercommunal tensions between ethnic groups show that integration and social cohesiveness cannot be taken for granted. It argues that politicians, educators, and cultural institutions should not feel abashed in building upon this appetite for inclusive patriotism, whether that is doing more to celebrate the contribution of Commonwealth citizens to the World Wars, or by celebrating achievements of universal resonance, such as Britain’s industrial and scientific achievements or our proud history of Parliamentary democracy. 

Book of the Week

We recommend The Wages of Destruction: The Making and breaking of the Nazi economy by Adam Tooze. The author argues that the 1941 invasion of the USSR by Germany was made necessary by resource constraints, and that the Third Reich’s economic collapse was key to the outcome of the Second World War.

The aim if this book, therefore, is to reposition economics at the centre of our understanding of Hitler’s regime, by providing an economic narrative that helps to make sense of and underpin the political histories produced over the last generation. No less urgent, however, is our need to bring our understanding of the economic history of the Third Reich into line with the subtle but profound rewriting of the history of the European economy that has been ongoing since the late 1980s but has gone largely unnoticed in the mainstream historiography of Germany…

…The aggression of Hitler’s regime can thus be rationalized as an intelligible response to the tensions stirred up by the uneven development of global capitalism, tensions that are of course still with us today. But at the same time an understanding of the economic fundamentals also serves to sharpen our appreciation of the profound irrationality of Hitler’s project. As this book will show, Hitler’s regime after 1933 undertook a truly remarkable campaign of economic mobilization. The armaments programme of the Third Reich was the largest transfer of resources ever undertaken by a capitalist state in peacetime. Nevertheless, Hitler was powerless to alter the underlying balance of economic and military force. The German economy was simply not strong enough to create the military force necessary to overwhelm all its European neighbours, including both Britain and the United States. Though Hitler scored brilliant short-term successes in 1936 and 1938, the diplomacy of the Third Reich failed to bring about the anti-Soviet alliance proposed in Mein Kampf. Faced with a war against Britain and France, Hitler was forced at the last moment to resort to an opportunistic arrangement with Stalin. The devastating effectiveness of the Panzer forces, the deus ex machina of the early years of the war, certainly did not form the basis for strategy in advance of the summer of 1940, since it came as a surprise even to the German leadership. And though the victories of the German army in 1940 and 1941 were undoubtedly spectacular they were inconclusive. We are thus left with the truly vertiginous conclusion that Hitler went to war in September 1939 without any coherent plan as to how actually to defeat the British Empire, his major antagonist.

Quick links

Hamas leader Yahya Sinwar was killed by the Israeli Defence Forces.

The Government activated a “blackout prevention plan” for the first time in nearly 2 years.

Foreign Secretary David Lammy has dropped plans to recognise China’s treatment of the Uyghurs as a genocide ahead of his trip Beijing today.

A battalion of 3,000 North Korean troops will deploy to Ukraine in support of Russia.

The Government will introduce a “current balance” rule, bringing day-to-day spending line with tax receipts, which is projected to cost £20bn in tax rises.

Avoiding cuts to “unprotected” government departments, like the Home Office and Ministry of Justice, would require £21bn of extra spending by 2029-30.

The Chancellor intends to continue with the previous government’s plan to tighten the rules on sickness benefits.

Directors of UK-listed companies have sold £31 million worth of shares per week since the general election in anticipating of a capital gains tax rise.

US real GDP is up 10.7% on its pre-pandemic level, compared to just 2.7% in the UK.

Students who left university this summer will start work on lower salaries than 3 years ago.

Software giant ServiceNow and AI start-up Coreweave are to invest $8.2bn in UK data centres to fuel AI growth.

Vice-President Kamala Harris has been accused of plagiarising Martin Luther King in the book that launched her career…

…and referred to the history of European settlers in the Americas as “shameful”.

The political ideology of US corporate executives has moved meaningfully to the left over the last 20 years.

Iraq is to vote on legalising child marriage for girls as young as 9.

Research has shown that higher incomes do not always lead to fewer births.

Google has ordered 6-7 small modular reactors (SMRs) to power data centres.

Violence and child poverty are higher in cities with higher rates of single parenthood, research finds.