ARE THE TECTONIC PLATES SHIFTING?

 

ARE THE TECTONIC PLATES SHIFTING?

The postwar centrist political consensus has come to an end. This is apparent here in the UK, across Europe, and in the United States. Whether this is a good or bad thing depends on what replaces it. Right wing populism, manifesting as a kind of ethno-nationalism, is on the rise. The popularity of European leaders like Marine le Pen, Victor Orban, Geert Wilders, and Nigel Farage has been turbocharged with the election of Donald Trump as US President.

The common thread that links all these populist leaders is public opposition to immigration and underpinning that is the failure of the mainstream, centrist parties to manage their country’s economies properly or to deliver sustainable growth and improvements to living standards. “It’s the economy stupid” is as true today as it was when Bill Clinton’s election team first coined the phrase. People don’t reach for political extremists offering simple solutions to complex problems if the established political parties are providing real solutions to the problems that people face in their lives.

Let’s look in broad-brushstroke terms at economic management: the mainstream parties of government in Europe and the USA are wedded to a failed economic model based on a series of profound misunderstandings of how the economy works, and the role of government in facilitating economic growth. Neo-Keynesianism and its belief that governments can drive economic growth through demand management policies is deeply embedded in the Central Banks’ bureaucracies. Modern Monetary Theory takes this discredited model a giant leap further by asserting that governments of countries with their own currencies can never run out of money, provided there is an output gap that monetary stimulus can close.

These theories tell politicians what they want to hear – that they can print money or create it digitally – and thereby stimulate economic growth and the taxes needed to finance better public services. This is profoundly mistaken. The high inflation we have seen as a result of the money printing that occurred during the Covid pandemic has illustrated this beyond any doubt.

The recently elected Labour Government in the UK differs from its Conservative predecessor only in terms of the tactics needed to manage the economy but has not ushered in a different economic model. More state spending and higher borrowing is the problem not the solution. So, what hope is there for the future, taking the UK as an example?

We need a return to basic conservative principles of economic policy – which have been abandoned by the current Conservative Party. The foundational principles for sustainable, per capita economic growth are what they have always been:

•          Limited government – with government doing less, but doing it better
•          Fiscal responsibility – low taxes and a balanced budget
•          A monetary policy of ‘sound money’ that recognises that a well-managed fiat currency sees growth in the stock of money being aligned with real GDP growth and not exceeding it
•          Reducing public spending from its current level of just below 50 per cent of GDP, to the level it was in the early 1990s of around 35 per cent of GDP, would enable us to run a balanced budget and this could be achieved over a five-year Parliament.
•          Ideally, reducing public spending to 25 per cent of GDP is optimal for sustainable, per capita growth.
•          A central bank that manages inflation through Open Market Operations (OMO) that controls growth in the quantity of money but gets rid of bank base rate and allows the market to control the price of money.
•          Reduce the cost of doing business by simplifying the tax code, reducing unnecessary government regulations and planning controls.

Do all of these things and then step back and watch the economy fly!

President Javier Milei has shown the way forward in Argentina but his ‘chainsaw approach’ to establishing a new economic model has only been made possible politically because of the virtual collapse of the Argentine economy.

 The populists of Europe and America have no real answers – only an appeal to the lowest common denominator of prejudice. It remains to be seen if Kemi Badenoch will be able to remould the Conservative Party as the party of economic competence and complete the supply-side revolution of the early years of the Thatcher government.

The tectonic plates are shifting. How they will eventually settle remains to be seen.

Paul Chase