Lord Risby is a former Chairman of the Conservative City Circle and former Shadow Paymaster General.
A defining characteristic of the last eight years of anaemic world economic recovery has been the role and actions of central banks. When the Bank of England cut its rate from 0.5 per cent to 0.25 per cent, it was banner headlines, but in practice meaningless. Markets are currently on tenterhooks as to whether the US Federal Reserve Bank will move rates upwards, no matter how fractionally. In this period, central banks have been centre stage in trying to promote growth through monetary tools. By contrast, fiscal policy has played a minor role. With neither governments nor the private sector taking up the reins from central banks, ultra-loose monetary policy has been comprehensively deployed again and again, but with very limited success.
The politics of this are clear. Whilst jobs and wages have in many countries been at best static and have not contributed to higher aggregate demand, there has been robust asset price inflation. If you are in the happy position of being able to borrow money often at minimal cost, your assets – most often property – are likely to have increased materially in value. Other factors like globalisation, migration and poor skill sets have added to the swathes of people in Western societies who have been absent from this limited and unbalanced post-crash economic recovery. In the United States, the real median wage is lower than it was 30 years ago and for the first time in a generation, Americans do not believe that their children will have better lives than they themselves do.
As the Prime Minister has rightly sensed, the political disaffection by many that we witnessed in the Leave vote arose out of a perceived lack of participation in our own even relatively good economic outcomes. Whilst upskilling, education and training are necessary ingredients to enlarge our shared prosperity, the solution is certainly not the protectionism being advanced elsewhere. Additionally, the dramatic potential of artificial intelligence, as we already see in the growing significance of autonomous driving, will make the consequential politics of this even more important as new automation begins to further transform the jobs market.
The recent inevitable post-referendum currency gyrations also highlight this. The beneficiaries are those who are holders of assets, in this case British companies with high overseas earnings, which may become increasingly attractive to foreign predators and mergers, given our depreciated currency. For the moment, therefore, it is yet another form of asset advantage through soaring share prices, which simply serves to underscore the asset divide yet again.
Central banks’ policies were structured to find a route through the irresponsible fiscal and regulatory policies which produced the financial crisis in the first place. But perversely in pursuing an ever looser monetary response, this has led to well-publicised and unhealthy divergences between the beneficiaries of asset inflation and those left out, and resulted in less social cohesion. In a period of low inflation, weak consumption and minimal returns on savings, despite best intentions, social and economic divisions in many countries have grown appreciably.
The referendum result highlighted the limitations of what we have had in the existing tool box to deal with the economic causes and consequences which moved many to this view. Happily our government has acknowledged this and appears willing to extend fiscal policy in a careful and targeted way.
Those on the vociferous Left who talk ceaselessly about inequality and social justice have not the slightest idea of a remedy other than another unaffordable client state which in practice so bitterly failed those it was trumpeted to help in the first place.
All of this presents an immense and historic opportunity to frame a more balanced policy mix in the months and years ahead.