World’s Top Financial Journalist Explains Why Britain Is Broke | #NovaraLIVE

Welcome to Navara Live, which today is not live. And that's because in the run-up to the November budget, I wanted to take a step back from the news cycle and do a series of interviews on the state of the UK economy. Um, why does nothing work? Is there anything Labor could do to fix it? Um, and do we need, for example, a wealth tax? And I'm planning to put questions like these to a number of high-profile economists and commentators um over the next few weeks. And in terms of prestige today, I'm starting at the top. Martin Wolf has been chief economics commentator at the Financial Times since 1996. He's worked at the paper since 1987. Um, before that, he worked at the World Bank for a decade. Um, he's widely considered the most well-connected economics journalist in the world. Former US Treasury Secretary Larry Summers has called him the world's preeminent financial journalist. And according to Foreign Policy magazine, he has quote for decades been the most influential economics columnist in the English-speaking world. Um, Martin Wolf is very much a man of the economics establishment. Um, he's a keen supporter of market capitalism, but he's also become a prominent critic of its excesses. And in his book, The Crisis of Democratic Capitalism, which I've got here, um, he argues that increased inequality and an economy which has failed to deliver for ordinary people, threatens to bring down the post-war economic system, which he values, um, taking down liberal democracy with it. Um, personally, I think Wolf may have underestimated how radical a political movement would need to be if it's to rescue liberal democracy from the rentier elites who currently control it. We explore those tensions throughout this conversation. Um, what's undeniable though is that Martin is a deeply self-reflective thinker whose access to and grasp of the economic changes we've witnessed over the past four decades is pretty much unparalleled. Um, as ever, if you'd like to support our work, you can sign up at navardia.com/support. For now, over to the interview. Martin Wolf, thank you so much for joining me on Navar Media.

>> It's a pleasure. Um, you're often described as the premier financial journalist in the world, a financial commentator at least. Um, but you're slightly different. Um, so for anyone who's watching who doesn't have a Financial Times subscription and has never watched a Davos panel, um, I suppose could you sort of situate yourself, um, give a bit of an outline of sort of your career, where you're coming from when it comes to economic commentary?

>> So, first of all, I'm grateful that you just said economic commentary. Um, I'm often considered a financial commentator because the Financial Times says financial in it and not economics times, which is history as it were, but I consider myself an economist more than an expert on finance. Now, obviously, when I am writing about what I write about, and I've done this particular job now for 30 years as chief economics commentator, uh, it often ends up being about finance because that's an important part of the economy. But really, I started off, and this is important, with the real economy, uh, uh, because I started my life as a development economist. After I left Oxford, where I did a graduate degree, the MPhil, um, I went to work for 10 years at the World Bank, which was very, very important to me, uh, because I learned about developing countries. I tried to grapple with the problems of development, which are long-term problems. They're about growth and how growth works and how the state interacts with markets. And I had the great privilege of working on very different economies, uh, principally on Africa and India, uh, and both were very challenging intellectually, and I made very good friends, particularly in India. So that was the first 10 years of my life. While I did that, um, I became more expert. I'd already done a lot of work on this as a graduate, um, in international trade and international commerce, because at that stage, there was a widely held view among professional economists who were serious about development that international trade would and could play a huge part in economic development, and there were some examples at the time. South Korea was probably the most famous at the time of quite extraordinary export-led growth. So that fascinated me. I worked on South Korea, and so I became a trade expert, again, more trade than finance and capital flows, and I worked on that for a think tank when I returned to England with my family, my wife and my family. Um, we'd gone out together, we came back together, and I wanted to be to live here. Uh, I made a conscious decision. I didn't want to spend my life in an international organization, and I didn't uh, want to live in the US. I wanted to come home. I wanted my children to have their parents, their grandparents, and my parents, our parents. And I worked there for six or seven years. And then I needed to find a new job. This was going to close. And completely out of the blue, utterly unexpected, the then editor of the Financial Times asked me whether I'd like to come as chief leader writer. And of the jobs available to me, since I'd already decided very significantly 15 or 16 years earlier that I definitely didn't want to be an academic and I definitely didn't want to be a civil servant, um, and I really wasn't interested in working in the City, and there were no other think tanks that looked good, and I did want to live in London, that the FT sounded just the thing for me, and I thought it would be a great opportunity, and I thought I had some of the abilities needed to combine an understanding of economics with relatively crisp analysis. It's sort of a challenge, and it was a challenge. So I accepted that. That was 1987. I did that job as chief leader writer for nine years, and then I became chief economics commentator, and that's my history.

>> And are you the, the longest serving um person at the Financial Times at the moment, since 1987, almost 40 years?

>> Well, recently, very recently, I definitely wasn't. Um, people tend to work at the FT forever, as it were. Uh, um, uh, and I, and I joined in my early 40s. Though I'm ridiculously elderly, and I haven't been pensioned off, which is itself quite striking, but that's how it is. In sort of a, I approve of the principle. I'm not going to defend it in my particular case. I think people should go on working as long as they want to. Uh, I think actually it's economically necessary, quite apart from anything else. But the, I'm not sure I'm the longest serving, but I'm clearly among them. Um, it is worth noting that my predecessor in this role, Sam Samuel Brittan, did the job from, uh, the 60s, uh, into, well, into the '90s. So he was about as long-serving as I've been. Um, and there are many journalists at the FT during my time and till now who've served their entire lives. And the reason, in, in a sense, is there is no other newspaper in the world actually like it. Uh, and, um, if you're a serious journalist interested in economics and business, finance and politics, well, I would argue, um, we are the best. So people tend to say, some people have moved on, but people tend to say, and I'm one of them.

>> Yeah, there's nowhere else. There's nowhere else to go in terms of career progression.

>> Not in terms of being an economics journalist. Uh, certainly nowhere in Britain. And I would say actually, in the English language, there's nowhere else. I really wouldn't want to work for the Wall Street Journal.

>> Um, let's talk about sort of how your economic analysis, your political analysis has changed over that career. I suppose in case our audience are wondering when are you going to get onto the British economy? I think this is really useful both to get a sort of perspective on, on, on where you're coming from, but then also, um, I think your changing economic analysis and politics also says something about the, the British economy over previous decades. Um, because as far as I understand it, as a student, you're a Labour member. Um, then after you sort of left Oxford, you joined the World Bank, you become much more of a free marketeer. You read Hayek. Um, you become what many people might call a bit of a neoliberal. Um, and then after the financial crisis, you rediscover Keynes. And I mean, your latest book, which we're going to sort of reference, um, later on in the conversation, you very much sound like a, a traditional social democrat. Um, is that a sort of reasonable summary of, of your journey?

>> I think it is, in a way. But for me, I, I think it's important to sort of put some nuance on this. Um, and I don't think it's just sort of self-defense, but it's, I think it's deeper. I started off as a social democrat. My parents were social democrats. They were, and that's important. I mean, they were continental, uh, Jewish people. They came to this country as refugees, and like many, my father was an almost classic example of a Viennese Jewish intellectual writer, incredibly well-read, and so forth. And they were both social democrats. I mean, that's who they were, as so many people of that background were. Now, it's important to stress that my father, and this was not unheard of by any means, but very strikingly so, was a social democrat, but he was very anti-communist. And this was a big issue, uh, of course, for his generation. He grew, he was born in 1910, and I inherited that. Um, and it went along with my very, very deep, and this fits in with my recent book, hatred of dictatorship. So, uh, um, so we were, my father would have thought of himself, if that means anything to, to your re, to your listeners, I'm sure it will mean something to you, as a Gaitskellite. So he was a right-wing social democrat. He was with Bevan rather than Bevin, as it were, if you can make that distinction. And so was I. So I was always a relatively right-wing Labour person. And, uh, uh, what did happen is that while I was reading economics at Oxford and afterwards, I became increasingly interested as an economist in free market ideas. Uh, I thought Hayek and Schumpeter and the other major figures in the Viennese school, early ones, not von Mises, who I thought was always a bit crazy, um, had very important ideas, and I still do, by the way. I think The Constitution of Liberty by Hayek, much more than The Road to Serfdom, is a very great book and very important book, and quite subtle. But I was never, I was never a member of the Mont Pelerin Society, for example, which is where neoliberals, where neoliberals tended to go and die, as it were. Um, I was always sort of among what people call liberal. I've never used the word because I've never understood the difference between neo and liberal. Uh, I would have always considered myself to be a liberal. In, and to me, that doesn't really go very far from being a social democrat. Um, but I was much more free market, uh, than I'd been before I did economics. But I did economics specifically because I was interested in politics, and I felt I had to understand economics if I was going to understand modern politics at all. And when I did it, I was influenced by teachers and by what I saw in developing countries, and I began to feel markets are pretty important, and trade fitted into that. I would never have considered myself, you know, a true Austrian economist. I've never written really stuff that would fit into that. But I became more market-oriented. And then, uh, um, two things happened that shifted my view. I won't go into all the ups and downs, but I think there are two that shifted my view. First, it began to become obvious to me, uh, that we had a real problem with financial markets, and financial markets were not behaving in ways that seemed to be compatible with any happy view of the way markets worked. And I first became aware of that really in the '90s with these huge set of financial crises, of which the most shocking was the Asian financial crisis, which may not mean much to people listening now, but for somebody really interested in development, the fact that so many Asian developing countries got into crisis, and these were the most successful developing countries ever, that was pretty disturbing. And then, of course, there was the 2007-9 financial crisis and onwards. So that was a big thing. And, and then the second thing is I began to be concerned in the 2000s, really, that the macro, global macroeconomy wasn't working properly. We had some, some of the issues that Keynes had addressed way back when, in designing the IMF or being part of the design, were obviously becoming very visible in terms of macroeconomic imbalances, their effect on the stability of the financial system, and at the same time, the inequality issue began to become more obvious. And this finally was all brought together in the last 15 years, really started with the financial crisis, very clear in my book on that, The Shifts and the Shocks, even more, as you say, in my latest book. I began to be concerned that what was going on in the economy and in the polity together was putting an enormous, creating enormous threat to democracy itself. And I have to say that half a century ago, I thought that unless you, as long as you avoided catastrophic errors like the Great Depression, the, we weren't going to go back to dictatorship or far-right, um, neo-fascistic sort of viewpoints, because I thought that was dead. But it became very obvious to me, um, 10 years ago, and beginning to become obvious 15 years ago, that I was wrong, that the political dangers were profound. I think most economists were also blind on this. Um, but that brought me back, I think you're right, to say to a broadly defined social democratic position. So, I think of myself as never having moved very far to the right, but I had a sort of circle between, uh, right-wing social democracy and liberal democrats and leftish conservative. And I've sort of gone back more or less. Well, but I also have to say, I'm not sure I now have a political home, quite. But that may reflect more my age and the complexity of the way I see things, because if I've learned anything else in the 60 years of thinking about these things pretty seriously, is the world is a very complicated place, which is benign, and for that reason, you have to be very cautious about being absolutely sure you know what's going on and what to do about it. But I know what I'm against. And what I'm against are the, are the extremes where people are utterly self-confident and believe that they know it all and they have a right to tell everybody what to do.

>> And I suppose where you've landed now, you've said sort of in terms of political parties, maybe you don't have a home, but would you still describe yourself as a right-wing social democrat? Because I suppose from your book, the proposals you're putting forward, it's not just wishy-washy centrism. Sounds like you think that something more dramatic needs to happen. FDR is the person you're often putting forward as as the kind of figure we need, which doesn't scream right-wing social democrat to me, sort of in this day and age.

>> No. No. Well, it depends on how you define, uh, right-wing social democracy. It's not quite clear what that means right now. Uh, the, social democracy itself has inevitably had to change. I mean, to me, the sort of the people who got these best were the Scandinavians, but I think there are very obvious reasons why we can't be Scandinavia. So it had to be us, uh, our traditions, which were and are different in all sorts of ways. But I agree, I've become, uh, in many respects more radical. And FDR, I like FDR because he knew things had to change. He knew what he was against, but he, he had a deliberately and self-consciously experimental approach to policy, and he hired a lot of very, very smart people to implement it. I do think for various reasons, it's much more difficult to do what he did, because we've done so much of the obvious things, and that's makes policymaking so much more difficult than it was the first time social democracy was implemented. I'm sure we should talk about that. But yes, I think he, he had the right sort of idea of the changes that had to be brought about, um, in the context of a complete collapse of the system. And I think there was a real danger. I still think this, that if without FDR, America could have gone fascist in the '30s. There were plenty of figures of that kind, and the world would be totally different. And in the absence of somebody like this this time, effectively, well, the US sort of has gone fascistic, and that's pretty disturbing.

>> Um, let's move on to the Labour government, the state of the British economy. And I suppose the way I want to frame this question is, you've been at the FT since 1987, and so you've been reporting on economic policy in Britain during the fat years, the lean years, the Blair-Brown years, all the chaos we've had since 2010, and now the Labour government. How does this Labour government, Starmer, Rachel Reeves, compare to what you've reported on, what you've commented on, what you've been analyzing, um, before?

>> Well, I think first of all, I think they're, these are perfectly decent people. It's quite important, um, because we've had some prime, well, we've had one or two prime ministers in, in the not too distant past who I don't think were very decent people. Um, but I think they are at a loss. And I think they're at a loss for completely understandable reasons, because, and this is the most important thing, I think the options they have are extremely difficult, because so many of the things, as it were, that that we could have done, we've done and tried, and, and the underlying economic economy that they inherited is just so weak. And, uh, trying to understand why that's the case, um, has been a big part of what I've tried to do in the last 15 years. And I will be completely honest, I think that nobody really understands, uh, what's been going on, because it would be much easier if we could say, well, is there a country like ours which is doing really well? And the answer is no. Um, the economies that are most like ours on almost all dimensions, really, in terms of what they're good at, where they are, what culture, civilization they have, are the continental countries. And really, none of the important, the big ones, is doing very well. I mean, they're very similar to us, uh, remarkably so, actually. And even the ones that I thought were doing rather well have really fallen off their pedestal very badly. The US is doing quite well in terms of productivity relative to us. They're poorly by its historical standards. It has a colossal inequality problem, and its ability to generate, um, to do with its politics, a decent living standard for the bulk of its population is disappointing, to put it mildly. So it's not a model either. So we are in a situation when there really aren't any countries like ours which you can point to which are models. And that I didn't feel that in the '60s. It was obvious the Continentals were doing better. And in the '80s, I thought that what I thought some of what the Thatcher, um, revolution was about was going to be helpful, and some of it I think was, but the longer-run consequences, and I've written that too, were not what I'd hoped. So I think we have to recognize that. So we're in a big problem. We don't fully understand the big problem. We can discuss some of the details of that, and, and there isn't a model we can follow. And I think that's, um, that's new. I think that's genuinely new, uh, and it's depressing. And it, no doubt, has to do with many things that have happened and situations we're in which are completely new. To couple of examples: we really are an old country now. That changes what we can do. If we want to increase our labor force and improve the number of young people here, we have to import them. And immigration has become a huge issue. The public finances are, by historical standards, stretched. There isn't a huge amount of slack there. So if you want to spend more, we have to raise taxes, from what already, by British standards, very high levels. The underlying growth process, I've recently written about it, is incredibly feeble. So the position the government finds itself in is a horrible one, and it completely confounded their predecessor, to put it mildly, and, uh, it's confounding the French and the Italians and the Spanish and the Germans. Um, so we are in a, and that's the starting point, we are in a pretty depressing mess, and we don't have easy signposts, obvious signposts to where we should be going. And that's, I think, is new. And I don't think anybody really is saying something which is convincing, who said, "Just do this and everything will be fine."

>> I mean, I suppose on the decency question, um, there will be many in our audience who, who aren't convinced that they are decent people, partly because they, they lied to the left to get into the leadership. Now, some people might think that's excusable, depending on your politics, but I actually do think a big problem Keir Starmer has had, and why he's so historically unpopular, is because he, he doesn't seem to have a guiding star, and he does seem very willing to be dishonest. Actually, whether or not he's got this, this good core, I don't know, but sort of the way he has sort of pursued his career, I think does have dishonorable moments.

>> Well, that's, uh, this, everything is relative. I suppose at my age, perhaps, um, I expect politicians to be somewhat deceitful. Uh, that is pretty normal. There's a matter of degree. Um, but I agree. I can understand, uh, that I did think, and I'm assuming many of your listeners will think this, horrific, that we had to get rid of Jeremy Corbyn. So, I'm sorry. Uh, now, does that forgive, uh, Starmer? Um, not really. U, but then it's not an accident. I didn't become a politician, though I have to recognize there was a time in my life when I thought about it very briefly. Well, I did think about it in my early 20s, and, uh, uh, and many of my friends were interested in politics. So, none of them really succeeded. But the, um, uh, I recognize that if you want to be a politician in a democratic society, you are going to flirt with deceit quite frequently, and I am forgiving of that, uh, if there's a core that is trying to do things, um, that need to be done. And the problem here, and this is where I would agree with you, because I, I really don't think that the Prime Minister knows what he's trying to do.

>> We'll come back to Corbyn a bit later, not so much as a person, because I think you know that moment has passed, but I suppose in terms of of what are the kind of politics that might get through the kind of policies you're talking about in your sort of more abstract big picture works. Um, I suppose just sticking with the Labour party briefly, one thing I think I wonder if you agree, I imagine you probably will actually, is if they can be accused of naivety, because there was this message from the Labour party before they got into power: "Stability is change." That was sort of this word they kept using, and they seem to believe that the moment you had a relatively sensible-looking government in power, suddenly investment, this was repeated by Andrew Marr, infamously, on Question Time. The moment they looked like they were sane people, money was just flooding to the country, um, and, and growth would then magically appear, and that they wouldn't actually have to make many difficult choices, and it would all just just be okay because the adults were in the room. And to me, that was somewhat criminally naive. I, I don't know what you make of that.

>> Yeah, that was, I think, um, it was certainly naive. It is certainly not what I believed. Uh, now, to be fair, let me put, I've been trying to be as honest as I can. I don't think we fully understand why productivity growth collapsed as much as it had. I was surprised. I mean, I was consistently more pessimistic than the OBR. So to me, the OBR is moving towards reality, which is sort of tough, in a way, on Rachel Reeves, because why do they choose now? Why couldn't they continue to have this fantasy? It was we were going to go back to where we were before, um, 2007, or where we thought we were before. But I, it was clear to me we didn't understand why productivity growth had collapsed everywhere, really, uh, uh, um, and particularly across Europe, the countries most like us. Um, we understood some of it. Obvious mistakes, Brexit, clearly, um, the austerity under George Osborne was a misty mistake, I was very clear on that. But would it have made a difference if we hadn't had Brexit, we hadn't had, um, Osborne? Yes, some, but not such as to completely transform it. So the idea that if, um, Rachel Reeves was Chancellor and Keir Starmer was was Prime Minister, suddenly animal spirits would explode, uh, upwards, and, uh, we would suddenly get fantastic recovery and investment, all the rest of it, was extraordinarily naive, and certainly I, not a view I shared in any way. If you looked at the structural weaknesses of the British economy, I go into that in detail, it was obviously not going to happen, because some of them were so, were and are so extreme by international standards. And as a result, and I criticize them very, very strongly, many of my colleagues did, for these ridiculous commitments not to use the major fiscal instruments to deal with the, the fiscal problems that the previous government was obviously leaving for them. There was only secret about it. It was completely obvious that the assumptions in the, uh, the budgets, the last couple of budgets before the election, were deceitful, that none of this could happen, that if they were going to keep to the budgetary promises of, uh, uh, uh, uh, Jeremy Hunt, they were going to have to slash spending that they wouldn't dream of slashing, or they would have to raise taxes. Seriously, unless a miracle happened, and you can't, you can't bet on a miracle. So, they walked into a trap. I don't have, and then when it was obvious there was a trap, they then decided on what I thought would turn out to be, and I was very clear of that in my commentary on it, a particularly destructive solution, which is to massively increase the tax on employment imposed on employers, and the, in the proposition that workers wouldn't pay for it, but that's just not how taxes like this work. So they made some very, very big mistakes, which were a product either of naivety or of cowardice, or some combination, and they got duly trapped, and a result, confidence in them has been further weakened, and that affects all the business, because they know things are going to get worse.

>> Yeah. I suppose, I mean, this could also be where the deception comes in, right? Because they, they seem very relaxed about just making promises here, there, and everywhere, not really worrying if they're going to have to break them at some point.

>> I think they meant that promise, which is worse. Uh, I mean, if I'd been them, well, I've suggested this, you know, you say in the budget last year, well, this is what we thought, but these guys, these lying bastards, left us a budget which we never imagined would be so bad. Oh, that's not true, but never mind. But they could have said that. And we have, unfortunately and tragically, going to have to raise taxes. Uh, we're going to have to raise income tax and VAT, because we won't be able to do all the things we promised otherwise. And they didn't do that. I suspect they're going to do that now. We will see. Uh, and, uh, in a way, they weren't deceitful enough. I hesitate to say that, because in general, I'm not in favor of it. But if you've got yourself into an impossible situation, for whatever reason, maybe they didn't understand it. I think it's possible. But I think it's unlikely, because they really was pointed out to them by people who'd done the figures, and not, not just me. Um, but they should have changed their minds, and they didn't. And now, whatever they do, they will be seen as deceitful and depressing. Uh, and they're already way into their term. And this is politically, and this is what, this is a point I would make, in my experience, doing what seems to be politically, quote unquote, the best thing today is a very bad thing to do if it's about economic policy, unless you're absolutely confident that the future situation of the economy will allow you to get away with it. And if you can't, you are really screwed. And that, I think, was a huge error.

>> I want to just take a step back actually. You were talking about productivity earlier. No one knows how to explain why we've had stagnant productivity growth, and that's the real problem that faces our government and, and lots of governments across the West. What is productivity? Um, what does it mean if we don't have productivity growth? And I suppose, what are some of the potential reasons why we haven't had productivity growth since the financial crisis?

>> Ultimately, let's forget for the moment the problem of measurement, because measurement is sort of a difficult issue. But productivity is, uh, about, um, being able to produce more with essentially the same input of labor. That's, that's what really matters. So, it's about getting richer, in a sense. And, uh, much of, if you look back over the last, the last two centuries, roughly, have been a unique period in so far as we know, I think we know reasonably well in world history, in which the economies like ours, and lots of other economies increasingly, have had been able to generate consistent, not every year, but consistent increases in productivity on a gigantic scale. Um, so, and a lot of that has gone along with and been the product of constant innovation and innovations. So, if you look at our economy now, you, it's not very difficult to see that there are huge number of goods and services we take for granted that didn't exist 100 years ago, and they didn't exist at all 200 years ago, because none of it had been even dreamt of. Um, and the result of these inventions and innovations has been a vastly increased range of goods and services we take for granted. Um, um, some of them really important, like all the drugs we have, uh, all the medicines, the vaccines, and also the transport systems, uh, uh, the, the ability, I think it's the single most important thing we've learned how to do. Uh, we learned in the 19th century, actually, my god, this was important, to provide completely safe, clean water to everybody. I mean, it's unimaginable how important that was. But, and I could go through many, many other examples, and that was an improvement in productivity because the quality of the output, it's difficult to measure, was immeasurably improved by changing technology. But of course, the big way we've done this has been by finding new ways to get things done by machines, including computers, that, and to invest in those machines. And computers are part of that, and, and that allows us increasingly to produce all the products we used to make, um, without employing much labor. Labor gets shifted to doing other things. It changes the shape of our economy, creates some problems in the process. But that's essentially the process through which productivity works in our societies. And for reasons we don't fully understand, it's always difficult to measure because it depends on measuring output correctly. GDP is difficult to measure. But we used to have productivity growth for a long time since the war. Let's just focus on that period. The inter-war period is complicated. Productivity would grew at about 2% a year, or or more. And over 10 years, that's an increase of actually way over 20%, 25, 30, depends on the precise figures. And that is measurable. So when Harold Robert Macmillan said to the British people in the late '50s, "You've never had it so good," he was right. We had full employment, which is very important, a great achievement, and people were, uh, we got into a world, for example, that increasingly perfectly ordinary people could have a car. And 20, 30 years earlier, um, cars were only for very, very, very rich people. And people liked having cars, uh, and they liked having flight, being able to take planes to go and have a holiday in Spain. All this is completely about productivity, broadly defined. And this slowed dramatically, and has now been going in Europe, it varies up and down between zero and, point seven percent, and we're in the middle, roughly, of that. Um, so instead of growing at 2% or more, it's now hardly growing. And that means that the standards of living of people, that they feel don't really change. Shifts in income distribution have a dramatic effect on those on the bottom, because it means they're absolutely worse off than they were before. And that's pretty horrible. Things they got used to, they can't have anymore. And in addition to all this, there were changes in the structure of our economy which couldn't easily have been prevented, but like de-industrialization, which changed the whole social structure. And then there's the aging thing. So, if you add these things together, things got difficult and bad. That was already obvious before, uh, the 2007 crisis, but since then, it's really got hard. And governments are constantly struggling, as a result, with where do we raise the revenue, who's going to pay more in taxes, because that will make them worse off, unambiguously worse off, uh, uh, uh, what should we spend our money on, uh, uh, and, uh, how do we sort of squeeze the money out to help the people we want to help, while maintaining balance in our public finances? And these problems have become recurrent now, since, since 2007, nearly 20 years. So that's, I mean, very simply, naively, as it were, what's been going on.

>> Um, I want to talk about an article you wrote this week for the Financial Times, in terms of what Rachel Reeves should do. She said, Rachel Reeves, I think something along the lines of, "Rachel Reeves should go for growth for all costs," was the headline. And then the proposals in it, um, were essentially sort of watering down the workers' rights bill, planning reform to make it easier to build, and then raising income tax and VAT. I suppose we could discuss the, you know, the pros and cons of each of those, um, policies individually. I suppose I wanted to come at it from, from a broader perspective, which is, you know, from, from the book and from your analysis of there being a crisis in democratic capitalism, the need for an FDR-like figure to, to come along and radically reshape the social contract, let's say, before our social fabric completely crumbles. There seems to be a bit of a dissonance between, sort of, the, the concrete proposals for the Labour government and, sort of, your, your broader analysis of the crisis of democratic capitalism. I don't know if you, what you make of of that analysis. I suppose.

>> I think that's a perfectly reasonable criticism. And the, the question is, and I have thought about this quite a bit. I, in my book, I, uh, um, I had a number of proposals, um, which certainly, some of them were actually, they were political rather than economic. And I'll just mention it, uh, I, I have become very interested in, uh, the idea of citizens' assemblies, the idea of bringing people into the political process. I'm very unhappy with the way our political process works. That seems one way. There may be, uh, others. I discuss, for example, proportional representation, which seems to me potentially something we really now should be thinking about, looking at British politics. Those are outside, uh, uh, the economic, um, uh, area. I think that, um, but I would have to admit that I'm not absolutely sure I would go about it. But the, um, I think there's a really pretty big problem with corporate governance, and I, uh, have been very, very interested in the idea of, um, changing boards to, uh, represent, to include, uh, worker representatives. I thought the German firms had done pretty well with this. I think it gave them, people, a lot of buy-in to what their employers were doing. And the, certainly the way shareholder capitalism now works seems to me very, very, uh, really quite problematic. I have a lot of discussion of that. To put that into three lines in such a column really would have been very, uh, complicated. But I think that is an area that radicals should be thinking about. I really, I do agree with that. I also think that there are interesting questions about how industrial policy should work, and, uh, whether we can do better with it than we have. Um, to me, uh, there is a question to me, the most concreted area is whether, um, the sort of things that they actually have done, creating national investment banks, I mean, things that actually operate like this, whether there is a way of facilitating the move from a, uh, small startup firms to successful big ones, which is clearly a very important part of what hasn't worked here very well. But I've tended to focus in recent years, uh, sort of key part of broadening ownership and so forth, in reform of the pension system, um, increasing contribution rates in the pension system, um, making our new, um, defined contribution system more generous, more all-embracing, and more relevant to everybody, because I think that is potentially important, and it's particularly important because Britain has the lowest savings rate of any significant country, and that directly affects what I think is going to be a very important problem. It will directly affect the living standards of people in the next half century, over the next half century. So there are things that can be done. But I suppose right at the moment, what strikes me most is the constraints that governments are operating under, and the difficulty of doing relatively large, radical things and getting by in it, seems, seems unbelievably difficult. But all I would say is that what I have in that article are the, as it were, the least, it seems to me, um, they can do if they're going to get, avoid things getting worse. And I am actually genuinely worried that we're creating for ourselves a very large structural unemployment problem. Um, that I hope that's wrong, but it's one of the things I am concerned about, in which case things get worse rather than better.

>> The biggest demand from the left at the moment from this Labour government in this budget is to implement a wealth tax. Um, I, I don't think you sort of address wealth taxes directly in the book, but it does seem to sort of speak to a number of the concerns, which is you're sort of saying rising inequality is undermining, um, the, the legitimacy or of capitalism. Also, we've moved to a rentier society where your wealth can accrue more to you than your, your work can. Um, a wealth tax is seen as, you know, a way of leveling the, the playing field, making work pay more than wealth. Um, also a way of, you know, getting some revenue for, for the government from those who can afford it. What's your view on a wealth tax?

>> Well, I'm, I'm actually, I do discuss in the book in passing. It's, I'm agnostic on wealth, wealth tax. I'm, it seems to me very, very clear we could increase taxes on property, which has the enormous advantage that it's immobile, and you can work out what it's worth. Now, raising property taxes creates themselves huge problems, because, um, there's a large amount of untaxed, um, wealth created through rising house prices, and that's the biggest assets of most of the middle classes. So obviously going for that is going to create big problems. Going for a wealth tax on, um, um, liquid property, property that's mobile. I think if you're going to do that, you're going to have to work out some system of extraterritorial reach. And, um, because obviously wealth in this country is owned by lots of foreigners, and British people own lots of foreign wealth, and I think all the tax, the tax system that we have, and that we're contemplating, are resident-based. And once you've got residence-based wealth taxes, and the wealth is liquid, it's really non-impossible to prevent them from leaving and disappearing, ing from your tax net. What you could do, and I haven't discussed it in the book, is to follow the Americans in having a tax which is applied to citizens. Um, the problem with that is even the Americans accept that people can give up their citizenship. And I think a lot of people who own large quantities of liquid wealth, so are really wealthy, would do exactly that. They would renounce citizenship and go and live somewhere else. And then you would be doing something very extraordinary if you taxed that wealth. So the conclusion I reached, which I think most of the people who looked at this closely, is we could raise a wealth tax. It would probably be workable. Quite strange countries like Switzerland have a wealth tax, but the sums that you could take would be limited in the sense it would increase income. That's a perfectly income tax. Well, but if you went for it to the point that it really started reducing people's wealth significantly to shift income distribution and wealth distribution, I think you'd find it very, very difficult to implement while you still have, in other respects, a capitalist system, namely that capital is mobile, people are mobile, and foreigners can continue to own wealth in this country, and that would be extraordinarily radical thing, um, to do, and I'm not, I've not favored that. So, you can get somewhere with it. I think you could improve inheritance tax by getting rid of the, turning it into a gifts tax. Um, you get rid of the seven-year rule, which is obviously, uh, ridiculous. So, there are certainly things you can do, and I actually think you can probably increase income taxes on people, um, as well. Again, I discussed that a bit. Um, but in a mobile, in an internationally mobile system, there are going to be limits to how effectively you're going to tax mobile capital. And you can tax housing wealth and property wealth relatively easily. That's not a problem, except that the, you know, you, you'll get into the problem of, you know, the widow living in, in a house which is worth £3 million, and you impose some, uh, one or two percent tax on it, and suddenly it's 30 to £60,000 a year, and the person can't afford it. There are ways around that. I think you can capitalize the taxes, but nobody has actually really proposed anything that would rectify that. So the key point is wealth taxes are difficult.

>> Do you think the Bank of England, um, needs to do more to allow governments to solve the nation's problems? Adam Toss in your paper had an article a couple of weeks ago saying that the bank should stop doing quantitative tightening, so sort of selling government debt, and it should recognize that this is a bit of an emergency, and the government needs support to be able to print a bit more money to do some more investment. These, I think, are separate things. I think there's a, you can certainly have an argument that quantitative tightening should stop. The, uh, the real question is whether, in the situation the UK is in now, with a quite significant deficit and pretty high debt, um, a, uh, obvious policy which would change, presumably it would involve changing the inflation target, which basically said the, the Bank of England will be funding the government. Um, I think that would almost certainly, 'cause we're in a very different situation from five or six years ago, lead to, um, a degree of flight from sterling. And we are a country, we, America is the only other country like us, but America is America. We are among European countries, we are the most dependent on foreign savings. We have a very large structural current account deficit, with foreigners have to buy UK assets in, and of course, among the UK assets, they buy UK bonds, government bonds, and UK debt. And if they think, I think if they, thought that the government actually decided on a policy of monetization of the debt, um, when the deficits are significant, then the debt as an, a debt is high, as an alternative to raising taxes or cutting spending, it would be, I think it simply would be very, very risky for sterling. And if you get flight from your currency, um, and you don't have, unlike America, and like, unlike Britain back way back when, but we used to have surpluses then in external accounts. But if you, um, it's not clear who's going to buy this stuff and who's going to hold it. Nobody needs to hold.

Sterling in the world. And I think we will be in real danger of becoming, uh, moving into an emerging market status as a, um, as a country. And I've worked on emerging market economies, and once you are in that situation, you've basically got a permanent risk factor in your interest rates, and that's, in other words, real interest rates rise significantly. The cost of that is enormous. So I strongly argued for, um, large fiscal deficits after the financial crisis and for the KUI program. Um, many criticized me for that, but I thought they were necessary at the time. But the circumstances now, in my view, are different, and if I were running the Bank of England, I wouldn't go there. And certainly the risks, in my view, are very real, and I don't want to go back to where we were in the '70s when there really was a question about people's confidence in Sterling.

The person who's made the biggest splash in terms of economic commentary in the last year or so has been Gary Stevenson, someone who comes from sort of our wing of the political spectrum. I wondered what you thought of his analysis of the economy. Obviously, he's calling especially for a wealth tax. He thinks that wealth inequality is one of the reasons that, um, working people have been impoverished. Um, I don't know if you've sort of engaged with the work or what you make of the ideas.

I don't feel I've engaged with it enough to have useful comments on it. I have to say that apart from following Britain to some extent, most of what I've engaged with in the last year has been global economics, particularly Trump's trade war, uh, the impact of Trump, uh, on the world, the implication of that for, um, uh, democracy across the world, the competition we have with China, uh, and so forth. So that's been the dominant thing I've focused on. So, I would have to say I know, sort of, very broadly the arguments, but I don't know enough about them to be engaging them, uh, um, sensibly or usefully.

No, that's fair enough. That's fair enough. Um, I suppose where I was maybe going to go with this is back to this sort of FDR question and how, sort of, in the book, your analysis is very much, you know, democratic capitalism, or the what you think of as the marriage between liberal democracy and market capitalism is under threat and needs some kind of radical change. And I wonder if you've got that theory of change, which is, you know, for me, you probably do need some kind of economic populist to come along, not a communist. Um, I mean, I'd say sort of like a pro-business economic populist. So, someone who's not sort of anti-innovation, but who is really tough on rentiers, really willing to take on the ultra-wealthy who don't seem to be contributing much to the economy, but extract those rents. And to me, that requires a kind of, you know, you obviously didn't like Jeremy Corbyn. Um, there are a number of, you know, he's not a perfect politician, but someone like John McDonnell did seem like he was coming with a political vision that was at least trying to create a fundamental shift in our political economy. So I wonder, in a way, what your theory of change is, if you feel that democratic capitalism needs to be saved, who's going to save it?

I think that's a very fair question, and, um, the difficulty I feel, and that was important in, um, the book, um, a lot of this was perhaps partly because the subject was triggered by America, uh, is, um, was in a way addressed at the possibilities for American politicians. So the, um, the simple truth is that if you're running America and you decide to take on the rentiers, they're your rentiers. Most of the rentiers, the really big rentiers in the world, are American rentiers running American firms which have huge rents. There aren't really firms with comparable status here. And the, uh, there are land rents, yes, of course. But the number of, of colossal, uh, business fortunes created by people with new businesses which involve huge monopoly profits in the UK, incredibly small. So alas, uh, so in America, you could do this. Uh, it would be risky, but you could imagine somebody being elected to do that. The problem with the UK has, uh, and this is why I'm perhaps not imaginative enough to see a way out of it, I thought in, after the financial crisis, was a general need for doing this, and so you could see this very well. If the UK goes on its own to attack its domestic rentiers and wealth owners, I think this will be seen, uh, by the world as, as it were, socialism in one country. Uh, and the only countries that, in my experience, have really tried this in the post-war period have been quite a large slew of Latin American countries, and it doesn't work because you get capital flight. I mean, you really get capital flight. And I don't think Britain is strong enough to, and maybe I'm being too pessimistic, but I very strongly believe this, to do this on its own if it's not part of something bigger and, uh, global.

The, um, it is worth saying that we did do it after the Second World War, but the situation after the Second World War was very, very different. We had comprehensive exchange controls, very, very important. Uh, everybody accepted that because the legacy of the war, we'd had a fully mobilized economy. Um, and the, as it turned out, though it wasn't completely obvious, the opportunities for growth were extraordinary. So you could implement very, very large changes which were then, uh, accepted. Of the changes they implemented, it seems to me in retrospect, it's pretty clear that the really important ones were the welfare state ones, not nationalization, which don't I think really work, as it were. The shifting of ownership didn't really work, and problems in the labor market were never really resolved. But they did do something really big with the welfare state, but to do that, they had to make a really big commitment to permanently higher taxes than before. And given where we are now, I just don't see the political backing for permanently much higher taxes than ever before. So you would be doing something different. It would be, I think, very risky for a small open economy to do this. And if you wanted to do it, we would have to close the borders in some important ways, above all to capital movement. And that would be a pretty big decision for Britain to make. I personally wouldn't support it, but that's the argument you would have to make if you wanted to do this. You'd have to say, we are going for a sort of fortress economy. And that was a decision, by the way, a big debate in the '70s, um, towards the end of the '70s. There were lots of people, particularly in the, um, in Cambridge, arguing for a fortress economy, siege economy, as it were. And that would be part of what you were proposing. I don't think Britain would do very well as a siege economy, but that would be the issue.

Does that mean that in your model, we just, we've just got to keep our fingers crossed and hope that someone gets into power in America who's serious about this stuff?

Well, I think that there are things we could do to improve growth, improve distribution. We can raise taxes, as I suggested. Uh, I think I'm going to be arguing more about this. Um, and use money much more wisely. Uh, um, there are lots of, I have to admit, not colossally radical things which could, I think, improve the situation somewhat. Um, but I don't see how, um, you can just say, look at Britain as it is now, with all the constraints, the realities of the economy, uh, what it does, what it has, the skills and the, uh, that we possess, and to say, well, we can wave a wand and get it. It is important to note, just to take one small example, that we have to maintain a very large export sector because there's so much stuff we want and need which we just can't make. Uh, again, the US is in a much stronger position from that point of view, and the Chinese are working very hard to be in a much stronger position, but Britain cannot be in that situation. It's in, inelectibly a small open economy because there's just so much stuff we want and need. We will never be able to make, and that means trade, it means openness, it means foreign investment, it means foreign knowledge and foreign skills, and that is a constraint. The small open economies, you know, Denmark is a pretty classic market economy along with a generous welfare state. Now, that I think I can buy, uh, if you can get the people to accept the taxes. Um, but I think generating a completely different sort of siege economy type or a comp an economy without capitalism and so forth, I just don't think this is in any way realistic.

You've sort of isolated rentierism, uh, as a problem in the West, and it seems like our sort of democratic systems aren't really set up very well to deal with it. Let's face it. So it seems like it's difficult for a government in a liberal system like our own to really hold rentiers to account. Um, does that put the Chinese model into a slightly different light? Because I suppose one thing that Xi Jinping is very much able to do is say, if I think that your sector isn't useful for the general economy, or if I think that you're not providing towards the national interest and the productivity of China, then I'm going to cut you down to size. Um, is that a benefit of the Chinese system?

Well, I, I think that in the long, it's actually a very interesting question. If you're in the long, uh, period, uh, what's going on now in China is actually the economy is slowing considerably more than it should be at this stage of development. And I think that's partly the consequence of Xi Jinping's policies. This is goes alongside the fact that they've invested very heavily in some sectors. They have colossal resources, including people, and they can do very well in those sectors, but overall, the last 10 years looks to me like pretty serious misallocation of resources, and the economy is not doing as well as it should be. So I would come back to the argument that having a competitive political system, an open political system, and is not only good for people who can feel more secure, at least against the predations of the state, um, but, uh, actually, uh, has tended in the long run to do better economically. It is important to remember China is still a relatively poor country. GDP per head in real terms is about less than half ours, quite a bit less, and, uh, and well, perhaps about half, and that's still a relatively poor country. Um, uh, so making direct comparisons is difficult. What I do think is true is that we have this problem, which Chinese also in a different way have, of balancing our political system against our economic system. And I argue in my book that they're a marriage, but like many marriages, they're difficult. It's a difficult marriage. And I do think that rebalancing, uh, the relationship, and particularly, um, changing the way, uh, um, some part aspects of capitalism work now, particularly the financial sector, but also in other areas, is quite important. I just don't think, um, that it's something you can easily do on your own.

Now, the, uh, I mean, one of the things we haven't discussed at all, but if you imagined we had remained part of the EU, which is closer to being a superpower, and we'd move to a greater degree of political cohesion in Europe, which is, I think, the challenge they now face, then some of the questions you raise, for instance, how we, how we do taxation, how we do internal distribution, would become relatively relevant, and how the, the market economy should work. I just don't think, um, but my vision, outside of what's happened in other countries, is that we would have to be very, very careful about how we interfere with our role in the world economy, um, in the process of doing any things we want, and I think there are pretty significant limits on moving towards essentially socialism in one country.

Martin Wolf, we now, we've brought in the EU and China, we could talk for another hour, but I've got to let you go. Uh, so thank you so much for your time. We really do appreciate it.

Thank you so much for joining me on the RA Media.

Oh, it's a very interesting discussion. Thank you.