Under Liz Truss’s mercifully short-lived premiership, the yield on British government bonds surged last September – a penalty described as a “moron risk premium” that markets imposed on her reckless plan for a tax giveaway to the rich. Now it appears that the morons are back: yields on gilts have exceeded the levels they reached last year, and are higher than at any point since the 2008 global financial crisis.
The reason is that, although workers are having a tough time in the current cost of living crisis, it’s not tough enough for the City’s liking. In this topsy-turvy world, it’s bad news that unemployment fell and pay growth accelerated to a record high. Never mind that prices are rising at a faster rate than wages, investors are taking their cue from the governor of the Bank of England, Andrew Bailey.
Last month, Mr Bailey warned that unemployment was “happening at a slower pace than we expected” and wages were still going up. Inflation was high because the shallow recession the Bank had forecast hadn’t happened. Many Britons, he signalled, would therefore have to be pushed out of work to keep a lid on prices. The Bank will almost certainly raise interest rates next week – and keep raising them for months to come. The result will be economic pain as mortgage costs rise for millions of households. The level for mortgage arrears is already at its highest for a decade, and the rate of repossessions is starting to go up, too.
Rishi Sunak became prime minister because he bet – rightly – on Ms Truss’s ineptitude. However, he may not win a wager that voters would bear pain now for uncertain future gains. The Conservative party depends on a coalition of outright owners, who comprise 32% of households, and mortgage holders, who make up 30%. It’s the latter whom the Tories risk losing as rates rise. Millions of Britons are living in areas where they are unable to afford a mid-priced property, face a disproportionately high rent, or both. Higher rates would see many more priced out. This would lead to cracks in the “blue wall” of Tory southern seats. Some MPs think Mr Sunak could call an early general election this year before a rate crisis peaks.
The Bank’s theory of how to bring inflation under control is twofold: higher housing costs prevent money being spent in the economy; keeping jobs scarce means workers won’t ask for pay increases. This is the wrong interpretation, particularly as wage growth is not a cause, but a consequence, of inflation. Workers are responding with pay claims to cope with higher prices set by firms. Regulatory action to curb monopoly power and financial speculation, as well as price controls, would be better policies. These may yet be deployed, as the UN has warned that food prices could rise again.
The lack of creative thinking about the causes of, and responses to, inflation reflects the sorry state of the economics profession. Behaviour that economists call rational would be foolish in ordinary language. That was underlined by Jeremy Hunt’s admission that a recession was an acceptable price to pay if interest rate rises curbed inflation. People’s livelihoods are being deliberately put at risk by a government committed to growing the economy by shrinking it.
Just how many might have to lose their jobs to satisfy this bizarre turn to austerity might be answered by the economist Claudia Sahm, who accurately predicted US recessions before they happened with her employment measure. For Britain to be in a “Sahm recession” next month would need about 150,000 workers to be thrown out of work. If this is for the good of the country, would economists promoting such ideas, and their political followers, volunteer to be unemployed first? It seems not – because unemployment is other people’s problem.
• The headline of this article was amended on 15 June 2023 for editorial reasons
