What is the plan?
As China falters and globalisation goes into reverse, Britain must plan for its long-term economic security
Towering columns
In The Times, Juliet Samuel says decarbonisation has chiefly involved offshoring to China, and that the Government has no industrial plan to deliver net zero:
Instead of fixating upon how many magic costless zeroes they can attach to pledge cards and placards, climate campaigners ought to engage with the practical problems of the energy transition. How is it possible, for example, that our government can outlaw new petrol cars while doing almost nothing to ensure a sufficient car-battery industry is available to replace them? How can our officials claim to be doing their jobs when they are implicitly relying solely on the principle that “China will provide”?
It is the same with the grid. Supposedly, all our electricity will come from “green” sources by 2035. This requires the construction of floating offshore wind farms on a scale never seen before. So where is the government’s plan to secure a fleet of service ships to lift 1,000-ton wind turbines in and out of the sea, to build and maintain them? How many orders is it placing at Singapore’s busy shipyards to construct these expensive vessels, and what discount might it gain by planning ahead? What incentives is it creating to clear the unbelievable backlog for connecting new infrastructure to the grid? What is the official assessment of new power-storage technologies, from batteries to liquid air, needed to make renewables reliable, and what is the backup plan if they don’t come through? How is any of this “cheap”?
…[P]olicy is set by default: if in doubt, ban. The Climate Change Committee, which has no mandate to consider Britain’s security or prosperity, is a perfect example of unaccountable officialdom not bound to consider real-world consequences of its proposals, like the decimation of British industry in favour of coal-fired Chinese production. In one breath, it criticises “restrictive planning rules”; in the next, it recommends a complete ban on airport expansions. Yet by elevating net zero to the status of law while doing little to achieve it, the government has recklessly handed power to quangos, courts and campaigners.
At Project Syndicate, economist Dani Rodrik says academic objections to industrial policy are increasingly looking out of date:
For example, a comparative project at the OECD quantifies industrial policies through deep accounting of government activity, focusing on government expenditures allocated specifically for industrial-policy objectives. A team of economists led by two of us (Réka Juhász and Nathan Lane) apply natural language processing to publicly available policy inventories to generate a detailed classification of industrial policies. The latter work is yielding important new insights. For starters, industrial policy has been ubiquitous, and its prevalence predates the recent rise in its use and prominence in public discussions. Moreover, it is no longer appropriate, if it ever was, to identify industrial policy with inward-looking, protectionist trade policies; contemporary industrial policies typically target export promotion. And the prevalence of industrial policies tends to increase with income: advanced economies use it more often and intensively than developing countries do.
…Newer studies also shed light on the long-standing controversy over the contribution of industrial policy to East Asia’s economic miracle. The early economic literature on East Asia’s rise had argued that industrial policies were at best ineffective. Newer analyses paying closer attention to the structure of upstream and downstream linkages in these economies reach considerably more sanguine conclusions. To cite one example, studies of South Korea’s Heavy-Chemical Industry Drive (HCI), a landmark – and controversial – industrial policy pursued by President Park Chung-hee in the 1970s, found that the policy promoted the growth of targeted industries, both in the short and long run. HCI’s effects on productivity and export performance were both positive.
Critics of East Asian policies thought governments could never pick the right sectors because they lacked information on where market failures were more prominent. Princeton economist Ernest Liu has recently provided a useful guide for policymakers confronting an economy where market imperfections occur across multiple, linked sectors. In such settings, subsidizing upstream sectors generally minimizes policy mistakes. Liu shows that the actual policies used in China and during South Korea’s HCI were in line with this guidance.
On UnHerd, Mary Harrington says Britain relies on immigration to give the appearance of economic growth, while the conditions for a high-trust society are undermined:
Why is London pricing families out at this rate? It’s not just that the capital’s outsized cultural and economic draw sucks in workers from all over the country. Our national birth rate is well below replacement, and has been since 1973. But Britain’s population is still growing rapidly: it is just that 60% of this growth is via immigration, which has increased Britain’s foreign-born resident population from 4.6 million in 2001 to 10 million in 2021. Almost a third of that immigration has been into the capital, which is now the most ethnically diverse part of Britain. In respectable society, this is framed as a feature rather than a bug: the Mayor of London, for example, is fond of telling us that “Diversity is our strength”. The consensus across government, media, NGOs and the urban educated classes is that ongoing high immigration is good, and anyone who disagrees is morally beyond the pale. And for beneficiaries of the resulting economic growth, this must seem self-evident. London is wealthier than my town, which is wealthier than rural Norfolk. Who gives a stuff about honesty boxes?
…In London, the result is a pressure on housing that has been escalating for my entire adult life. Even young urban graduates, a group long associated with high openness and liberal views, are beginning to make the connection. Why, they ask, is the country’s most expensive real estate housing its “least productive” residents? Why should the unemployed get social housing in central London, while young working graduates queue for house viewings and languish in mouldy Zone 6 bedsits? Should those on benefits be pressured to move to Middlesbrough? Perhaps it’s unsurprising that those who have grown up in a world of waning social trust, and graduated into cut-throat resource competition, should be giving the London housing debate an increasingly Darwinist edge. A prudent social democrat might read such sentiments as a warning signal. For while it’s clearly possible to justify large-scale immigration on progressive grounds, a wealth of studies shows that mass immigration undermines social solidarity, which in turn reduces public support for generous welfare policies.
…So, is mass immigration a sinister elite conspiracy? Not really. The Tories are indeed profoundly two-faced on the issue, while Labour are enthusiastic accelerationists. Yet this is simply the consequence of Britain’s structural reliance, for both the economy and the welfare state, on continued economic growth. In practice, in a low-productivity economy such as Britain’s, this means population growth. And since Britain’s native population has been below replacement for decades, leaders must either level with the electorate about the need to trim our sails, or else grow the economy (i.e. the population) by other means.
In Compact magazine, Dan Hitchens describes the silent buy-up of British land and infrastructure by the asset management industry, as uncovered by Brett Christophers in “Our Lives in their Portfolios: Why Asset Managers Rule the World”:
Not many, though, will have realized the scale of the industry and how deeply it reaches into everyday life. The sector manages an estimated $100 trillion or so, about two-fifths of the world’s wealth. Already at least $4 trillion of that is in housing and infrastructure; and the CEO of Brookfield, one of the biggest asset managers, predicts that over the next 40 years, the share of infrastructure in private hands will increase tenfold. In a bravura passage, Christophers takes us through a single English county, Kent. The entire water supply is controlled by Australian asset managers. So is the sewage system. Every gas pipe that goes into a Kentish home belongs to Canadian and US asset managers. And that’s before you get to their presence in hospitals, schools, rental properties, student housing, solar farms, parking spaces, electric-car charging ports, trains, and broadband cables. Yes, Christophers tells me, “asset-manager society” is an emerging phenomenon more than an established one. But “the trend is only in one direction.”
Essentially, asset managers set up investment funds—individual projects, often with a time limit—and seek money from institutions that have piles of cash lying around, like pension funds and insurance companies. The fund invests that money, sometimes in equities, bonds, and so on, and sometimes—here is Christophers’s main focus—in housing and infrastructure. The “super sewer” gets built, the gas pipelines keep running, the apartment block gets a new landlord. The profits go to the pension funds or insurance companies, with a healthy performance-related fee for the asset manager. Who could object to so efficient an arrangement? One answer is the tenants of Invitation Homes, a property company owned by Blackstone. Between 2014 and 2016, rents rose while the amount spent on maintenance fell; Reuters reported widespread allegations (disputed by Blackstone) of “slumlord-like” conditions. But thanks to the cost-cutting, the profit margin jumped 61 percent, up from 52 percent, and when Blackstone sold the company, it had made a total profit of $3.5 billion.
He started digging. “It didn’t take long before I realized that this is a hugely significant phenomenon, both in terms of scale and—at least I argued—in terms of its implications, socially and economically.” Since 1979, 10 percent of the entire British landmass—public housing, farmland, school playing fields, leisure centers—has been sold off by national and local governments, on the basis that private ownership would be more efficient. But as Christophers tells the story, it starts to look more like a blunder. Such was the haste to sell off land that property companies and others knew they could get it cheap. Often, they have then failed to develop the land, instead treating it as a lucrative financial asset. By 2016, a list of the 100 richest people in Britain found that more than a quarter could list property as a major source of wealth. Such unequal distribution, as Britain’s renting precariat knows especially well, tends toward exploitation—and toward that sense, so often reported by contemporary Brits, of being a stranger in one’s own land. The national malaise makes a lot more sense in the light of this $510 billion privatization.
On his Substack, Rian Whitton says British strategy on nuclear power has suffered from decades of flip-flopping and underinvestment:
From 2005, former prime minister Tony Blair actively supported increasing nuclear plant capacity. This was vigorously opposed by the anti-nuclear Liberal Democrats, alongside various activist groups. A judicial decision rebuked the government’s inadequate public consultation in 2007, slowing down initial investment. While the current Tory government is envisioning nuclear power to make up 25% of power-generating capacity, Blair was envisioning as much as 40%, effectively doubling the 2006 share. Blair was pugnacious about this project, eviscerating David Cameron in a PMQ session over the Tory leader’s antipathy towards fission. Unfortunately, Blair’s resignation, the financial crash, and the general turmoil of the late noughties delayed government action.
Despite being ambivalent about the technology, the Cameroonian government overpowered their Liberal Democrat partners and made nuclear power buildouts viable. Then-Chancellor George Osborne hoped that Chinese state-owned nuclear energy developers would, alongside EDF, invest in British nuclear plants. This was part of a wider attempt to expand UK-Chinese economic cooperation. In hindsight, such a pivot was doomed as long as the UK envisioned maintaining its established relationship with the U.S.
…More recently, the government announced a new agency called Great British Nuclear (GBN). GBN is not a state-run nuclear corporation, but rather a venture arm that facilitates grants. It is incredibly light-touch and does not represent a strategic shift. It has three main components;
A competition to decide on which small modular reactor (SMR) technology to use. This seems loosely based on Canada’s SMR roadmap. But while Canada’s Ontario Power Generation is already building its first SMRs, GBN does not plan to reach a final investment decision until 2029.
£157 million in grant funding packages. A portion of this will go towards developing advanced modular reactors (AMR), a subgroup of SMRs focused on providing heat for industrial uses.
£22.3 million from the Nuclear Fuel Fund will enable 8 projects to develop new fuel production and manufacturing capabilities in the UK.
While perfectly reasonable, this is a very limited intervention, far smaller than the very minor investment in semiconductors. While the government is aware that an industrial strategy of some kind is needed, it is constrained by the country’s troubled finances and the fact that major subsidies could result in misallocation. It is therefore providing small sums of money to placate industry while avoiding costly mistakes. This is understandable, but can only be a placeholder for a much larger intervention if a major nuclear buildout is to occur.
In The Times, Iain Martin says a China in decline may be even more dangerous:
In Britain a decade ago, politicians including George Osborne, desperate for investment, rushed to celebrate a new “golden era” of relations with Beijing by strengthening economic ties. Britain had little choice, it was said, and we should certainly not think about disagreeing with China or, heaven forbid, causing offence to its autocratic leaders.
Now the supposed golden era is long forgotten, Beijing’s economic model is increasingly tarnished and it is the Chinese empire that looks as though it is entering a phase of decline. For so long we have lived with the received wisdom that China is the rising superpower and we must get used to it. How, I wonder, will we behave now that the opposite is turning out to be true?
After the lifting of the country’s disastrous zero-Covid policy, which shut down too much of the economy and alienated the population, the economy has not recovered as the regime hoped. China’s exports declined by 14.5 per cent in July compared with the same month last year. Imports were down by 12.4 per cent. China is in deflation, meaning prices are falling, which wrecks business confidence and reduces production and orders.
Wonky thinking
In Peaked Interest, the Resolution Foundation analyses the impact of the pandemic and inflation crisis on household wealth. Molly Broome, Ian Mulheirn & Simon Pittaway suggest we may be moving towards a “new normal” of lower intergenerational inequality:
The onset of the pandemic saw a further acceleration of this long-term trend. As interest rates hit record lows, asset prices boomed. This pushed the value of wealth still higher, dominated by rises in housing and pension wealth, peaking at 840 per cent of GDP in early 2021.
But the cost of living crisis has been markedly different, putting an end to the trend of rising wealth with the biggest fall on record. Asset values have fallen sharply as interest rates have surged , and market pricing now implies interest rates are expected to remain at levels not seen since the financial crisis for the foreseeable future. This in turn has sent the price of government and corporate bonds tumbling: holders of UK government debt have seen around a 30 per cent loss in the value of their investments since the Bank of England started raising interest rates, and holders of sterling corporate bonds have lost 20 per cent. We estimate that this has dramatically reduced households’ measured wealth as the value of financial assets falls and the implied value of guaranteed income streams, like defined benefit pensions, is reduced. House prices have also started to weaken, with inflation-adjusted prices already down by seven per cent from their peak in mid-2022.
Our analysis suggests that, from early 2021, these passive changes reduced the household-wealth-to-GDP ratio by 185 percentage points, to around 650 per cent, by early 2023, based on a snapshot of asset prices and interest rates in March. This is by far the biggest fall on record as a proportion of GDP, wiping out £2.1 trillion of household net worth in cash terms. We can expect further falls in wealth as asset prices continue to adjust to higher interest rates, although the scale of those falls is highly uncertain.
…The drop in household wealth in a matter of months has put these trends into reverse. This wealth shock underscores the fact that there was nothing inevitable about its increase over the past generation, and raises the question of whether lower wealth is here to stay. The answer depends on whether the rapid and unexpected rise in long-term interest rates persists, as market pricing suggests, or whether the global economic forces that created the low-rate environment of the pre-pandemic world are likely to reassert themselves. The scale and distribution of wealth would look very different in each of these two worlds, with profound consequences for intergenerational inequality.
Book of the week
This week we recommend The New East End: Kinship, Race and Conflict by Geoff Dench, Kate Gavron and Michael Young. In this account of social change in East London, the authors chart the departure of traditional families and 50 years of radical demographic change:
In this book we have attempted to explain the hostility directed towards Bangladeshis by white East Enders. The main reason we have identified is that the state's reception of newcomers has ridden over the existing local community's assumptions about their ownership of public resources, and that this has precipitated a loss of confidence in the fairness of British social democracy.
…The central problem here is, we believe, that by attempting to use state power to create a fairer society, modernisers may be forgetting the importance of informal moral economies in giving ordinary people some power to control their own lives according to their own values: some stake in the system. The rise of public virtue is eclipsing the private realm. It is this which may now be pulling us into an increasingly polarised and unstable society, in which small groups feel powerless to resist the influence of mass, impersonal forces. Most people in all communities believe in the value of informal mutual support in sustaining a decent and humane society. But the over-centralisation of welfare in the name of strict equality is stifling this. Face-to-face relationships carry little weight when confronted by faceless policies from the state.
…Perhaps because [incorporation into the nation of previous waves of immigrants] required (which it does not now) the forging of active economic and local-political ties with members of the national majority, it involved shared recognition by both the host community and newcomers that the latter “belonged” by virtue of participating conscientiously in the life of the community that was admitting them. The key to this process, as with the settlement of most minorities in other countries, was that needy immigrants needed to make some manifest contribution to the host society. An exchange takes place between the national majority and newcomers to the nation, whereby legitimacy to a full share in collective benefits is earned - and felt to be merited - by those groups seen to contribute to the common good.
Some of our informants told us they believe that in Britain in recent years this has been reversed. The rights of immigrants and even of potential immigrants - who have yet to enter the system or even to think about doing so - sometimes seem to them to be given greater moral weight than those of families who have been here for generations. The message that this sends them is that national resources no longer belong in any real sense to them as citizens of the nation, but are in the gift of the ruling class. So instead of feeling that they are at the centre of the nation, they feel more than just not championed by the elite, but actually pushed away by it. This is a prescription for mass civic insecurity…
The culture of entitlement is now deeply entrenched in British society as a whole, and there can be no quick solution to the problems it creates. However, we would suggest that as post-war immigrant communities come to experience its negative implications themselves - and to share the bitterness of parts of the white working class - a concerted attack on it becomes viable. And the responses of established immigrant groups will be crucial here. It is the needs of the poorest groups that have justified the emphasis on targeted, means-tested benefits. As these groups become better off, more of them with gain from a universalist system. No consensus will be possible unless the welfare state includes some renewal of the expectation that full citizenship should be contingent on conscientious contribution to the common good. Revival of reciprocity is the key.
The logic of give and take is far more compelling within small groups, where people can see who is giving and what they take. In small groups it is infinitely harder for people to ignore their obligations to other people, or the fact that often the best way to help yourself is by helping others. So one way to stem the tide of demoralisation lies in rediscovering the importance of small groups as a source of civic virtues, and giving them some protection. At the heart of this is the family. The culture of individual rights has obscured the value of family ties and local community for many people. The most practical way to resist that culture may lie in strengthening family…
As the culture of rights has blossomed, central government has grown with it, around the proclamation that full equality is possible only when services are allocated strictly according to individual need. This argument has been shielded from proper scrutiny by the perception that it is protecting the interests of the most vulnerable. But perhaps the message to give now is that more collective rights and social capital are needed, to compensate for the growing concentration of state-managed individual social capital such as educational qualifications. Allowing more rights to groups means giving greater priority to individuals' obligations to each other.
Quick links
Ministers including the Home Secretary have called on the Prime Minister to back leaving the ECHR if the Rwanda migrant plan is blocked.
The economy grew by 0.5% in June.
GDP per capita grew by just 4% between 2008 and 2023, compared to 40% from 1993 to 2008.
The state pension costs more than education, defence and policing combined.
The Government is considering following America in blocking outbound investment to China in AI, chips and quantum computing.
A British doctor was murdered in Cape Town after getting caught in civil unrest.
Without London, the UK would be as poor as Mississippi.
The UK is set for five years of lost growth, according to a new study.
100,000 migrants have arrived on small boats since 2018.
Civil servants were addressed by an academic who described the Home Secretary’s views on immigration as “odious”.
A diversity and inclusion lobby group implicated in the Farage-Coutts row has called for inclusion policies to be made mandatory in UK companies.
The Electoral Commission was subject to a hostile cyber-attack.
Labour’s poll lead is ten points lower among working-class voters.
China has dipped into deflation.
…and a record number of Chinese local government financing vehicles are overdue on short-term debt.
India has launched a spacecraft bound for the Moon’s little explored south pole.
Met chief Mark Rowley has called on the Government to toughen up disciplinary processes for misconduct.
Britain has agreed an intelligence deal with Turkey to target people-smugglers.
The working-age population has continued to fall as a percentage even as immigration has risen.
The Head Master of Eton admitted to being “woke”.
Cristiano Ronaldo made the sign of the Cross after scoring in Saudi Arabia, where public displays of Christianity are forbidden.
Polling forecasts big gains for right-wing parties in the next European elections.