It was the phrase on everyone’s lips. We were going to “Build Back Better”. Boris Johnson, Joe Biden, New Zealand’s Prime Minister Jacinda Ardern, Greenpeace, the United Nations and the International Monetary Fund have all used these “magic” words. Their meaning is, of course, a matter of taste: we can build back “greener”, we can build back “stronger”, and we can build back “fairer”.
The pandemic appeared to present an opportunity to recalibrate national priorities, based on the idea that the world could change for the better. Some favoured a strengthening of international institutions. Some, losing faith in the quality of those institutions, favoured a “go it alone” policy, concluding that the rebuilding of borders provided both the best protection against global threats and an opportunity to “level up” at home.
Some took a more pragmatic view, hoping to remain part of the international community while, at the same time building stockpiles of protection — most obviously in the form of medical supplies — for future emergencies.
As for Britain, Build Back Better ambitions were laid out in a policy paper last March, the magic words this time augmented with “our plan for growth”. The Prime Minister offered his vision in the foreword. “I believe the formula for our success [is] strong and active government investing massively in science and technology, coupled with a dynamic enterprise economy that embraces the instincts and know-how of the private sector”.
He added, in a fit of Victorian enthusiasm, that he’d be investing our money in ambitious infrastructure plans, reaching out to establish new trade deals for Britain all over the world and creating new, green, jobs. All in all, “this plan for growth aspires to serve and support everyone in our United Kingdom, whoever you are and wherever you live”.
The Prime Minister’s desire for an “active government” is not working out too well, unless by “active” he’s referring to the consumption of birthday cake or a contentious increase in National Insurance contributions. Even more bothersome is that, while there are around 24,000 words in the Build Back Better paper, inflation is mentioned just once.
Yet the UK’s inflation rate now stands at 5.4 per cent, well above the Bank of England’s two per cent target. It’s almost certainly heading higher over the next few months. And it threatens to undermine the Government’s ambitions. There are three main challenges.
First, rising inflation will drag interest rates higher. Having already tightened monetary policy once, the Bank of England is going to have to do quite a lot more.
Admittedly, higher rates won’t provide much of a buffer against rising global oil or gas prices but they will help limit inflation in domestic goods, services and labour markets. They’ll do so, however, partly by limiting the pace of economic growth, exactly the opposite of the Government’s Build Back Better plans.
Second, inflation unfairly rewards some even as others are made worse off — as Jack Munroe noted last week about the rising price of essentials.
In the Seventies, unionised labour and big business typically did well, thanks to their ability to force through inflation-busting wage and price increases, but others were left behind, including labour market “outsiders” unable to secure pay increases, those on fixed-cash incomes (pensioners, most obviously) and those whose savings were mostly in the form of cash in the bank, building society or Post Office. Levelling up then becomes near-impossible.
Finally, inflation creates uncertainty regarding policy options. Tackling it is costly. Higher interest rates can trigger a recession. The exchange rate can go into freefall if international investors take fright. Encouraging inflation is costly. People end up not knowing the true cost of anything. Has the price of carrots risen because of inflation more generally, or are carrots genuinely in short supply compared with other vegetables?
And, as John Maynard Keynes once wrote: “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” Indeed.
To be fair, few politicians today intentionally have such grand designs. Nevertheless, while “Build Back Better” may trip easily off the tongue, its various architects are in danger of being tripped up by the return of a ghost they hoped was trapped in the Seventies.
