Plenty to (re)moan about

Events of recent days have confirmed what many of us thought all along: the UK government's original position on Brexit is untenable. And as we watch one red line after another being crossed, the credibility of its position is weakened further. This matters because in a negotiating environment, you only have a chance of achieving your goals if the other side believes in the strength of your position. Those of us derided as Remoaners have consistently highlighted that the idea of the UK threatening to walk away from negotiations was nonsense. The European Commission knows it too, so either we are headed for a car crash, or an exit on the EC's terms as I have long suspected. Of course, another alternative may be – and whisper it quietly – that the government realises the folly of the whole charade and is seeking to ensure that Brexit means "as little as possible, as slowly as possible" to quote Dan Roberts in The Guardian.

Where to start? I have already dealt with the Economists for Free Trade paper, which has been widely criticised for being at best a piece of wishful thinking (here). But for anyone interested in an alternative take, the view by Flipchart Rick is worth a read as he also lays into the latest piece by the Institute of Economic Affairs.

Another key event this week was the release of the government's position paper conceding that the European Court of Justice in Luxembourg could still play a key role in Britain after Brexit. This comes after Theresa May promised last year that “we are not leaving only to return to the jurisdiction of the European Court of Justice. That’s not going to happen.” But the government now recognises that some form of oversight body will be required to manage relations between the EU and UK and concedes that it will have to abide by many of the regulations passed down from the ECJ. Indeed, justice minister Dominic Raab noted that the UK would have to keep “half an eye” on ECJ rulings in future simply because it controls many of the non-tariff barriers which will be so crucial to any trade agreement between the UK and EU.

As the commentator Ian Dunt argued in a recent article, “the government's new Brexit position paper is actually pretty good” which as he acknowledges “isn't something I usually say.” He also makes the valid point that rather than criticise the government for adopting a course they have advocated all along, pro-Remain MPs should be “welcoming it and encouraging them to go further.” Indeed, as many people increasingly believe, there is an argument in favour of both sides engaging in more constructive dialogue rather than sniping at each other. I agree, but this is easier said than done given the blatant lies told by both sides during the referendum campaign, and the hardening of the rhetoric from the prime minister during last autumn’s party conference season.

Personally I have never understood the Brexiteers’ pathological hatred of the ECJ. I always thought they had bigger issues with the European Court of Human Rights, which did so much to block the extradition of convicted terrorists from the UK to the US. The ECJ has actually come down in the UK's favour in the recent past on the vexed issue of whether euro clearing could take place in London. I suspect that the two courts have simply become interlinked during the whole Brexit debate without anyone bothering to differentiate between the two.

The other issue which has enraged the Twittersphere this week is immigration. I will look more closely at the figures another time, but suffice to say that net migration to the UK was down to 246,000 in the year to March, from 327,000 12 months earlier, with most of the slowdown driven by a reduction in numbers from the EU (primarily the new accession countries). Those concerned about skill shortages in an economy running close to full employment – at least as measured by the unemployment rate – will take no comfort from that. Worse still, official figures revealed that fewer than 5,000 students a year stay on after their visa expires whereas the government repeatedly claimed the figure was around 100,000. As one wag put it on Twitter, it's a good thing we have not based a huge change in economic policy on figures which are so evidently flawed.

Just to round things off, 100 EU citizens this week received letters notifying them that “a decision has now been taken to remove you from the United Kingdom.” Clearly they were sent in error but as one of the recipients, a Finnish academic Eva Johanna Holmberg, noted "it shows the Home Office currently cannot function. It does not know how to obey the law or even its own rules. It is probably not able to deal with all the paperwork.” She added that this has made her "even less likely to trust anything Amber Rudd, Theresa May, or David Davis says to calm us EU nationals down". It certainly does nothing to promote the case of a Britain which is open to the world and in the long run could do a lot of reputational damage if these cases continue to arise.

Trust is indeed the key word here. Dysfunction seems to be endemic at the heart of government and it is hard to trust the current administration to manage Brexit properly. I have been accused of being a Remoaner but I prefer to think of myself as a realist. The complexity of Brexit was always far greater than either its proponents or the government acknowledged, and to waste part of the post Article 50 period with an unnecessary election campaign looks more ill-judged as time passes. I still find it hard to understand how the government can square the circle between what it promised and what it can deliver without doing great economic harm. The only way, surely, is to row back on some of the more unrealistic promises. That will undoubtedly enrage those elements of the Conservative Party that wish to see Brexit at any price. But it is time to make a stand based on economic rationality rather than ideology. And that is something else to which I will return in future posts.

The economic benefits of Brexit (or how to oversell your case)

Patrick Minford is a heavyweight academic economist whose work on macro modelling is first rate. He is also the front man for the group Economists for Free Trade (EfFT) which provides the intellectual ballast in favour of Brexit and which has recently published the main results of a study due for release in the autumn. Minford and his collaborators argue that “Brexit could boost the UK economy by as much as £135 billion a year” which is equivalent to 6% of annual GDP, and that “’Hard Brexit’ is good for the UK economically while ‘Soft Brexit’ leaves us as badly off as before.” Obviously, when someone as able as Minford produces detailed analysis of this sort, it deserves to be taken seriously. But the view across the economics profession is that it is – to put it politely – flawed.

One of the key premises of the paper is that unilateral abolition of all UK tariffs should be a key plank of the post-Brexit world. But most economists do not buy the analysis. For one thing, it assumes that most of the benefits to the UK are derived from the import side. In the view of EfFT, there will be an immediate increase in UK living standards as a result of the abolition of UK import tariffs. This will put competitive pressure on domestic business to improve its relative position and as a result the economy will emerge stronger in the long-term. Minford et al justify this with reference to the example of Sir Robert Peel’s abolition of the Corn Laws in 1846 which “greatly reduc[ed] the price of food and help[ed] to stimulate the industrial revolution.”

There are just a few tiny problems with this Panglossian view of the world. 

• First, it will lead to a massive initial widening of the trade deficit which will likely result in a sterling depreciation which boosts inflation and squeezes household incomes – a bit like we are seeing today.
• Second, it will wipe out large chunks of UK manufacturing industry which are unable to compete with low cost Asian producers. Even if there is a competitiveness response, it will take years to show through and we would have to balance out the short-term welfare losses against any potential long-term gains. 
• Third, Minford argues that “to offset the long run effect of losing EU protection, manufacturing productivity needs to be raised, compared with no Brexit, by only about 1% a year for a decade, which looks entirely feasible.” Given that one of the main macroeconomic problems we face today is the weakness of productivity, which has flatlined since 2008, raising productivity growth to 4% per annum, as he implies, looks entirely infeasible. 
• Fourth, the 1846 example is misguided. In a world of much more intense global competition, it is not clear that the UK could easily cope with the near-tripling of the trade deficit that occurred in 1847 and which was left permanently higher as a result.

Nor do most economists buy the view that unilateral tariff elimination is a sensible strategy. If you don’t believe in unilateral nuclear disarmament why should you believe the same principle applies to trade? You might promise to cut tariffs during trade negotiations but you certainly do not throw away one of the main bargaining chips before even entering the negotiating chamber. He may be a good macroeconomist but he’s a lousy game theorist.

Alan Winters, at the University of Sussex, has been a major critic of Minford’s analysis all along and his latest blog piece does a good job of skewering some of the assumptions. The detailed breakdown of the EfFT numbers suggests that the gains from free trade alone will amount to 4% of GDP. Winters points out “EfFT claim that current EU trade barriers are equivalent to a tax of 20% on both agriculture and manufacturing. In manufactures only about 3.5% of the extra cost is tariffs, so what is the rest? If the 20% is correct, much of the remaining 16%-17% is standards.” Applying the arithmetic, abolishing trade barriers might only be expected to produce a boost equivalent to 0.7% of GDP (4%*3.5%/20%).

Indeed, this hits upon a major problem – standards and other non-tariff barriers are much bigger obstacles to trade. One simple example is differing car pollution emission limits: Even if tariffs could be eliminated, the fact that cars are subject to different standards around the world significantly raises production costs. Indeed it was the raising of US emissions standards in the 1970s which killed off the classic Jaguar E Type. Another example is financial services, in which a passport allowing regulatory equivalence enables banks to trade their products across EU borders without let or hindrance. It may not be everyone’s idea of a great industrial role model but the UK does at least run a consistent external surplus in financial services trade.

Leaving the EU Single Market will require the UK to massively raise its foreign trade with non-EU countries to make up for the loss of tariff-free access to the EU market. Analysis by NIESR suggests that if the UK left the single market but made unilateral trade deals with major developing economies and the Anglosphere, it would only claw back about one-third of the 20-30% reduction in lost total trade resulting from leaving the EU. Moreover, deals on services trade are far less comprehensive than those for goods, and as NIESR has also indicated, it will be hard to replicate the EU deals that we have now.

Winters also points out that “EfFT believe that we can get all the benefits of the European Single Market (SM) unilaterally. That is not true. The SM boosts our exports, which confers benefits over and above those achieved by liberalising imports.” It is precisely because the UK has some say over single market regulations it can influence them to benefit certain industries, such as financial services. Small economies simply cannot decide their own trading standards in a globalised world and the UK will become a rule taker rather than a rule maker. The bottom line is that by leaving the single market, the UK will be giving up a lot of influence over its ability to set terms and conditions. Far from taking back control, we will be throwing ourselves on the mercy of the global economy.

One of the ironies associated with this analysis, which has been criticised for being given far too much prominence, is that it is the mirror image of the doom-laden scenarios produced before the referendum which were dismissed as Project Fear. So why should this be treated so reverentially by the media? After all, it was produced by the “experts” we all thought we had heard enough from.

How should we remunerate politicians?

Many of us spend a lot of time bashing politicians – sometimes fairly, sometimes not – but it cannot be denied that the job which they do in most democratic societies is a thankless one. They have to subject themselves to electoral approval every four or five years and they get a lot more brickbats than bouquets – when things go wrong, it is politicians who stand in the front line of public criticism. You have to be idealistic enough to believe you can change things; extrovert (some might say narcissistic) enough put yourself forward to the electorate on a regular basis and sufficiently thick-skinned to cope with the criticism. It puzzles me why anyone would ever want to do that – in most developed economies, at least, the rewards do not stack up to the degree of opprobrium heaped upon politicians.

Aside from the prime minister of Singapore, who earns an annual salary of USD 2.2 million, public sector chief executives are paid significantly less than chief execs in the private sector (see chart 1). There are various metrics against which we could measure a country’s performance in order to assess whether the chief executive is worth their pay. One way would simply be the size of the economy – the bigger they are, the more they can afford to pay. But that rather falls at the first hurdle given the size of the Singaporean economy. Indeed, in our sample of 60 countries, the correlation between the ranking of overall economy size (GDP) and the salary of head of government is rather low, at 0.375. Another way to think about it is that the bigger the population, the higher the salary should be given that they are responsible for many more people. But this falls pretty flat with the rankings showing zero correlation – hardly surprising given that President Xi of China earns only USD 22,000 per year and Indian Prime Minister Modi’s official salary is just USD 30,000.

We get more success, however, if we look at incomes per capita with the rankings showing a correlation of 0.55 (rising to 0.57 if we look at PPP adjusted incomes). Societies appear prepared to reward their politicians on the basis of their ability to deliver economic prosperity. Naturally, there are some outliers. The President of the Comoros earns a whopping $408,000 per year (541 times the average income) despite it being one of the poorest countries in the world. Contrast this with Uruguay where the presidential salary is only 80% of the average income. Indeed, the degree of disparity is highest in countries not known for the quality of the democratic process (chart 2). But on the whole there is a decent degree of correlation: For example, Donald Trump is paid the fifth highest salary (USD 400,000) whilst the US ranks sixth in terms of GDP per capita; Theresa May’s salary of USD 215,000 puts her 13^th on the list compared to a GDP per capita ranking of 16 whilst French prime minister Édouard Philippe’s salary of USD 200,000 is placed 16 against a GDP per capita ranking of 17. Perhaps societies are indeed prepared to reward their leaders in proportion to how well they manage the economy.

Even the position in Singapore, where the apparently outlandish salary of PM Lee Hsien Loong is off the charts on an international comparison, does correlate with the fact that standards of living are amongst the world’s highest. Singapore is also safe, clean and ranks second on both the WEF’s global index and the World Bank’s Ease of Doing Business index. At a time when the economic threat posed by China is increasing, that is no mean feat.

But compare this with corporate salaries where the median total compensation for S&P500 CEOs in 2016 was USD 11.5 million whilst the average FTSE100 CEO received remuneration of around USD 6 million. Thus, given the dissatisfaction with politicians around the world, would we improve their quality if we paid them more? The case for paying more is that we attract a higher quality of candidate. But there is also a principal-agent problem: Politicians generally set their own salaries, and aside from the odd burst of outrage, in many countries there is little to stop them from raising their own salaries in excess of inflation or indeed in excess of their deliverable outcome in a way which is detrimental to society.

The empirical evidence is mixed. A 2009 paper based on Brazilian data suggested “that higher wages increases political competition and improves the quality of legislators.” Similarly, a study based on Mexican data  indicated that the quality of civil servants also increases when higher wages are offered. Against that, a study based on the European Parliament found that a salary hike raised the proportion of politicians with lower education levels, perhaps because  it “gave lower-quality MEPs a greater incentive to get into office and, once there, to stay put.”

As Stephen J. Dubner of Freakonomics fame put it, “I am not willing to argue that paying … government officials more would necessarily improve our political system. But, just as it seems a bad idea to pay a schoolteacher less than a commensurately talented person can make in other fields, it is probably a bad idea to expect that enough good politicians and civil servants will fill those jobs even though they can make a lot more money doing something else.” There are no easy answers to the question of how to reward politicians. But we generally know a good one when we see them.

Not pleasing anyone any of the time

One of the great ironies of the modern information economy is that we have more facts at our disposal than ever before, yet we are also subject to more fake news. In this environment, proponents of Brexit are able to make the most outrageous claims and brush aside objections without any regard for the facts. This is particularly annoying in the context of the phrase “will of the people” which is used to justify going ahead with a Brexit policy very much at odds with what a large slice of the electorate voted for. More importantly, the statement is statistically incorrect.

Admittedly 51.9% of those who voted did indeed favour Brexit. But this merely represents the will of those who voted: The fact that 28% of eligible voters did not even make it to the polling booth means that, by definition, the outcome cannot represent the views of all people. This is not to deny the democratic legitimacy of the vote. After all, no UK government in modern times has ever taken more than 50% of all available votes, so the process is no more undemocratic than usual. The difference is that Brexit is an irreversible process and it was therefore incumbent on the powers-that-be to make sure that sufficient checks and balances were built in to prevent it from descending into the farce we see today. This is why the  Scottish devolution referendum held in 1979 required that a threshold of 40% of all eligible voters was necessary to validate the result. Although the pro-devolution faction secured 51.6% of the popular vote, they only obtained 32% of eligible votes due to the fact that the turnout was fairly low at 63.7%. Ironically, if the turnout had been 77.5% or higher, the same final outcome would have given them victory. In 2014 the turnout was 84.6% so had people been as motivated to vote as in 1979, Scotland would long since have achieved greater independence from the UK.

A key issue of contention over the past year is whether the narrow margin of victory in the Brexit referendum is sufficient to justify the government’s gung-ho attitude. If all those eligible to vote had done so, there would be no need to have the discussion. But on a statistical basis since more than a quarter of those eligible to do so did not cast a vote, we can think of the result as representing a sample – albeit a large one – of the whole population. And as with any sample, there is an associated error. We cannot ever know how the stay-at-homes would have voted but if they had voted 55-45 in favour of Remain, the result would have gone the other way. It is thus reasonable to look more closely at the statistical evidence. 

Classical statistics suggests that a 90% confidence interval around the Leave vote share implies that they would still have swung it. But this neat little paper entititled 'What does the data of the Brexit referendum really say?, written by a couple of statisticians, uses effect size, which is a way of quantifying the magnitude of the difference between two groups without relying on sample size as in classical statistics, and this paper measures the sizes of differences between the Leave and Remain votes. The authors conclude that “a 52%-48% split represents only a spurious difference, not sufficiently different from a 50-50 split to claim a majority for either side.” They also suggest that on the basis of a 72% turnout “a minimum split required to make those claims is 69%-31%.” 

This obviously raises the question of how we should respect the result – a question posed by Simon Wren-Lewis on his blog. SWL takes the view that the lies told by the Leavers during the referendum campaign are “enough to completely discredit the referendum as an exercise in democracy.” Although he stops short of suggesting we should ignore the result, it is quite clear that many of the things which people thought they were voting for cannot possibly be achieved. For example, UK government sources suggest that EU citizens will be free to visit the UK after Brexit without having to obtain visas. Whilst this does not mean they will have the right to remain indefinitely, it is a significant watering-down of the position which many Brexit supporters thought they were voting for.

The very fact that the referendum result was insignificantly different from a 50-50 shot suggests that nobody is going to be satisfied with whatever compromise agreement is finally achieved. The UK will clearly not be able to leave the EU on the basis which many hard Brexiteers might wish but given the government’s decision to trigger Article 50 (before it lost its parliamentary majority, lest it be forgotten) it equally cannot remain an EU member. I maintain my view that for a long time to come, various elements of UK policy will be conducted on the basis of a Schrödinger’s Cat approach: Simultaneously half-in and half-out of the EU. They say you can’t please all the people all of the time. Brexit is a case of not being able to please anybody any of the time. If the current generation of politicians had a better grasp of statistics they would have known this all along.

* 22 August 2017: I subsequently amended this piece to correct a couple of errors. Thanks to those who pointed them out

How to learn from your mistakes

There are many things to admire about modern Germany and a lot of them were evident during a recent visit which, unusually for me, was a private rather than business trip. One of the things that always strikes me is the sense that Germany is still a big manufacturing economy. You notice this in the vicinity of all the big cities, where there is always lots of traffic and a large number of lorries delivering industrial goods. Indeed, a high proportion of the lorries are themselves German made. 

But perhaps the thing that always impresses me the most is the sense that it is a prosperous country where the wealth is shared relatively evenly. According to OECD data, Germany’s income Gini coefficient in 2014 was 0.289 (the lower the number, the higher the degree of equality) which ranks it 13 out of 33 OECD countries. It is certainly well below the UK with a Gini coefficient of 0.356, ranking at 29. We should also not forget that it was Bismarck who introduced the first national pension scheme in Germany in 1889, almost 20 years before the UK followed suit. Travelling around northern Germany, through the smaller towns, they appear solid and well cared for, which in my view is a sign of communities that display a sense of civic pride. Many German economists complain that the infrastructure is crumbling and that the government does not spend enough on maintenance and renewal. I can safely say this is not something which is evident in the same way as it is in Britain, although I guess you have to live there to notice it on a day-to-day basis. 

This is certainly not evident in Hamburg, where the magnificent new conference venue, die Elbphilharmonie, is a symbol of modern German economic confidence. In a sign of the difference between the German and British economic systems visitors are able to visit the Plaza for free, giving a magnificent view of the harbour, whereas comparable venues in London such as The Shard or London Eye levy hefty visitor charges.

There are some things which still grate on the modern traveller. Deutsche Bahn's inability to accept certain forms of plastic payment card is an oddity which I thought had been confined to the past. Even stranger is that a card which works perfectly well in Frankfurt will not work in Hamburg. Indeed, cash is much more widely used in Germany than in Britain, where I rarely carry very much, and cash in circulation across the euro area relative to GDP is three times that in the UK.

During the course of my recent travels, one question which inevitably came up was that of Brexit, with many Germans puzzled as to why the British voted as they did. It is hard to explain to them that the Brexit vote occurred in large part because the UK has rejected many aspects that German society takes so seriously. I have long extolled the virtues of German inclusivity. That is not what we have in the UK where we operate a system in which the devil increasingly takes the hindmost, as the safety net which underpins the more vulnerable elements of society is withdrawn. Many people in the UK simply do not see that the government is acting in their interests and this is something which is hard to explain to many Germans.

We also should never underestimate the desire of modern Germany to learn the lessons of the past. “Never again” means exactly that. I was fortunate enough to speak to people who were children in the immediate post-war period, who told me what it was like to grow up hungry and how they experienced permanent stomach pains without knowing why. The story of how the women and children used to work in the fields removing Colorado beetles to ensure that the potato crop provided sufficient food for the population was a fascinating vignette of how it was back then. Faced with such hardships, it is no surprise that modern Germany has no desire to go back there.

Germany is far from perfect: No modern society is and it may yet find that the great humanitarian gesture of opening its borders to countless numbers of immigrants causes more problems than currently imagined. But its determination to learn from the mistakes of the past is admirable and something the British can themselves learn from. Many people who voted for Brexit, especially older voters, are guilty of looking back to a Britain that never really existed. It may have emerged on the "right" side of history, but we should not forget that once Lend-Lease was terminated in 1945, economic circumstances changed overnight. Nor should we forget that the UK received more Marshall Aid than Germany in the immediate post-war period, but it was wasted by successive British governments trying to cling on to superpower status rather than modernising the domestic economy. The grim period of rationing and slow post-war reconstruction in the UK was at least partly the result of policy failure. Brexit may not be of the same order of magnitude but it still threatens economic hardships which are avoidable and which people may not be ready for. 

As one older German said to me, Brexit is a betrayal of future generations. I happen to believe he is right. Better to try and reform the EU from the inside than cut and run. When even a Guardian journalist points out that the potential loss of banking jobs will put a big hole in government finances, you realise that people are starting to wake up to the fact that Brexit will have real economic consequences. Many of us told you so all along.

Do we know what drives inflation?

A few years ago, I recall attending a seminar in which a microeconomist gave a fascinating presentation explaining how supermarkets set prices. The process involved looking at margins and assessing competitors actions in order to set prices sufficiently low as to attract custom but high enough to generate decent revenue. This was followed by a presentation from a macroeconomist outlining the standard macro model of inflation involving inflation expectations, output gaps and employment conditions. The contrast between the two notions was so stark that it was at this point I realised that economists do not fully understand the inflation generation process.

I should qualify this: Obviously, we broadly understand the principles of inflation but in practice we run into difficulties. It is generally believed that inflation is, to quote Milton Friedman, always and everywhere a monetary phenomenon. For obvious historical reasons many German economists, and indeed many elsewhere, still believe that excess monetary creation will lead to a rapid pickup in prices (I recall hearing a prominent monetary economist saying in 2009 how QE would lead to higher inflation within months). However, this model was largely discredited in the Anglo Saxon world during the early 1980s when the naïve quantity theory of money was debunked by the fact that monetary velocity was found to be unstable. In other words, the ratio between GDP and monetary aggregates changed due to the financial deregulation taking place at the time, which reduced the usefulness of monetary targeting as means of controlling inflation.

We should not dismiss monetary theories of inflation completely because, as the German hyperinflation of the 1920s demonstrated, a huge increase in the supply of money will reduce its value. But in the western world over the past eight years we have had one of the most aggressive periods of monetary easing in history without any significant pickup in inflation. Why?

Central banks’ quantitative easing policy which injected huge amounts of liquidity into the economy did not result in a wider spillover into prices because: (i) the liquidity was deposited in a banking system which at the time was not best placed to distribute it more widely throughout the economy; (ii) the liquidity was delivered directly to asset holders who sold bonds to the central bank, and it did not accrue to households and businesses and (iii) there was plenty of spare capacity in economies, with demand muted and the private sector engaged in deleveraging, with the result that we never got into a situation where too much money was chasing too few goods. Thus the conditions for the simple monetarist model of inflation have not held in recent years.

It is also the case that the pre-crisis literature was based on relatively closed economic systems, in which economies would more quickly run into capacity limits. In today’s globalised world that is no longer true, and the rise of China as an economic superpower has hugely increased global productive capacity. As a result, global production costs and prices have been driven down, which has encouraged consumption. Economies such as the US and UK are more likely to experience a rising external deficit as a symptom of excess demand, rather than rising prices as once would have been the case.

The Japanese case is perhaps the most extreme example of an economy which has failed to generate inflation, despite the best efforts of the central bank to get it back towards 2%. The BoJ continues to buy huge quantities of securities, sending its balance sheet to 90% of GDP in the process. No thought has been given to the longer term consequences of this policy, but suffice to say that if the BoJ were forced to run down its balance sheet, the effects on markets would be dramatic. I have long believed that the Japanese policy of trying to push up inflation is misguided in an economy where an ageing population is reliant on its savings. It does seem odd that the central bank is engaged in a policy which has not worked for 16 years and does not appear likely to do so anytime soon. It is probably a measure of desperation that it does not know what else to do. Unfortunately, the higher it drives the balance sheet today, the more difficult will be the process of unwinding it in future – all the more so if it does not generate the desired inflation.

There is not one single reason why inflation remains so muted. I suspect that structural changes are helping to depress inflationary forces – globalisation; the effects of the recession on inflation expectations and the substitution of capital for labour to name but three. Our standard inflation models, in which tight labour markets and excess liquidity creation will lead to higher prices, are currently not working. This is not to say they never will again. It is just that for the foreseeable future, we are going to have to learn to live with lower inflation.

There are pros and cons of such a situation. On the plus side, we will be spared the destabilising effects of a 1970s-style pickup. But it also means that we will find it harder to run down our debt burdens than we have become used to, and that might be one of the reasons why people feel more miserable than they once did. Back in the day, we used to construct misery indices as the sum of unemployment and inflation rates: the higher the index, the more “miserable” we are, but as the chart shows, the UK misery index is near to multi-decade lows. Maybe what we need is a dose of inflation (especially wages). Quite how we can generate that is a matter of much debate.