Friday, 28 April 2023

Poor health - the cost to the economy:

From The Guardian - it's free and Larry Elliott is a good read:

Britain’s poor record on health costs economy £43bn a year, says report

Thinktank urges ministers to make reducing long-term sickness health equivalent of drive for net zero

Britain’s poor record on health is costing the economy £43bn a year and cutting the annual incomes of individuals affected by long-term sickness by up to £2,200 a year on average, a report says.

With official figures showing more days lost to sickness than at any time since 2004, the Institute for Public Policy Research said improving the country’s health was vital both for the economy and to boost the incomes of disadvantaged groups.

The left of centre thinktank said the government should aim to make Britain the healthiest country in the world within 30 years and urged ministers to make efforts to tackle long-term sickness the health equivalent of the drive for net zero carbon emissions.

In a report that covered seven years before and during the Covid pandemic, the IPPR said the health of the population was going backwards. The UK had rising rates of death and impairment – including greater incidence of long-term health conditions, and since 1960 had fallen from 7th to 23rd for life expectancy among members of the Organisation for Economic Co-operation and Development group of wealthy countries.

Sickness was a factor in half the people leaving work and had a marked impact on an individual’s income and job prospects, the thinktank said. The report found that in the the five years before the pandemic, the annual earnings of someone with a new physical illness fell by £1,800 on average. The impact on annual earnings was even more marked for people with a new mental health condition, falling by about £2,200 on average.

Since 2020, someone with a new chronic physical illness experienced an average fall of £1,400 in annual earnings, while the onset of a mental health condition the decrease was about £1,700 on average.

The IPPR said the UK needed a new health and prosperity legislation modelled on the 2008 Climate Change Act to “hardwire” health into policy making.

The report found loss of earnings after sickness had a number of causes including people leaving their job, working fewer hours, or not returning to work when they might have done so if in better health.

IPPR said: “For many, these costs prove life changing. Among those diagnosed with a long-term illness since the pandemic, two in five lost 10% or more of their earnings. Chronic physical conditions are estimated to have driven 700,000 people to leave employment in the same period, forgoing all their earned income.”

Those groups hardest hit by the impact of sickness – the low paid, women and people from minority ethnic backgrounds – would benefit most from an improvement in health, the IPPR added.

Dame Sally Davies, a former chief medical officer for England, who co-chairs the IPPR commission on health and prosperity, said: “We now know that the UK does worse on health than most other comparable countries – and that this has a tremendous human and economic cost. We also know exactly what policies and innovations could transform health. So it is mystifying why UK politicians, across all parties, have failed to take decisive action.

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“We need a radical increase in our national ambition – equivalent to the Victorian efforts to transform sanitation and clear slums. Why shouldn’t Britain be the healthiest country in the world?”

Figures from the Office for National Statistics published on Wednesday showed the sickness absence rate – the percentage of working hours lost because of sickness or injury – rose to 2.6% in 2022, an increase of 0.4 percentage points from 2021 and the highest since 2004, when it was 2.7%.

Carys Roberts, the IPPR executive director and a member of its commission on health and prosperity, said: “Designed well, missions can work to transform agendas. This has been true of climate change where – while much still needs to be done – the ambition of net-zero has catalysed and coordinated change.

“That’s why we’re calling for a health mission to be hardwired into law – its own, long-term net zero.”

Thursday, 27 April 2023

Wage-price spiral? Nice, easy read:

26 April 2023

Do Brits need to ‘accept that they’re poorer’?

By Julian Jessop @julianHjessop

Photo: Getty Images

The Bank of England’s Chief Economist, Huw Pill, has caused another public relations disaster by criticising workers for demanding higher pay – and firms for passing on higher costs. Instead, he told a podcast from Columbia Law School, that Brits ‘need to accept’ that they’re worse off.

Let’s begin with a recap of what Pill was trying to say. This is important, because many economists would actually agree with him. Pill was making two points.

First, that the UK economy has been hit by an inflation shock (or more precisely, a ‘terms of trade’ shock) which will inevitably leave us poorer. He was referring here to the jump in the cost of imported energy. Or as he put it, ‘you don’t need to be much of an economist to realise that if what you’re buying has gone up a lot relative to what you’re selling, you’re going to be worse off’.

This is not particularly controversial. We can debate whether the hit is being fairly shared across the whole economy, but a net importer of energy is bound to suffer more than most during an energy crisis.

Second, he argued that attempts to maintain spending power ‘by bidding up prices, whether through higher wages or passing energy costs on to customers’ would only make the inflation problem worse.

This is simply another way of talking about the risk of wage-price spiral. Higher wages may not have caused the initial jump in inflation, but they could prolong it. There may well be something significant in the fact that wage inflation, services inflation and ‘core’ inflation (excluding food and energy) are all running at around 6%.

So Pill was only making points that other followers of the ‘dismal science’ would recognise. But I still think he was wrong to speak in the way that he did.

For a start, these comments are, as we have seen, highly insensitive – and likely to offend many people. Pill must have known that this would be the reaction, especially after the Bank’s Governor, Andrew Bailey, was slammed for similar comments last year. This adds to the sense that the Bank is asking households and businesses to control inflation, when that’s its job, and that its senior figures are out of touch.

The economics can be challenged too. It is fair enough to point out the risks of a wage-price spiral where higher wages are not justified by higher productivity. But there is little sign that pay settlements are running out of control. A norm of 5% would be consistent with getting underlying inflation back down to 3%, assuming productivity growth of 2%.

The Bank also has no business telling individual workers and employers what wages to pay or prices to charge. This should be left to the markets. Indeed, higher wages in some sectors and occupations could actually help to ease labour shortages and the capacity constraints that are contributing to inflation.

Put another way, what Pill describes as a ‘pass-the-parcel game’ is simply the markets doing their job of allocating scarce resources to their best uses, with relative prices adjusting according to supply, demand and cost pressures.

Finally, these calls for wage and price restraint simply won’t work. It seems inconceivable that anyone about to ask for a 6% pay rise is going to have a rethink and say ‘make that 3%’ on the basis of appeals from Bank officials. And no business will be keen to miss the opportunity to pass on higher costs either – if the market can take it, and especially if the alternative is bankruptcy.

In short, Pill might be able to get away with these remarks if talking to an audience of fellow economists. But it is naïve to imagine that they would be received anything other than very badly in the real world.

Sunday, 23 April 2023

If nothing else look at the forecasts for inflation from BoE

STEPHEN KING | ECONOMIC OUTLOOK

Four tests that tell me inflation is here to stay

Stephen King

Sunday April 23 2023, 12.01am, The Sunday Times

Wednesday’s inflation numbers made matters worse for a Bank of England that, frankly, has had a poor record of late. At 10.1 per cent, consumer prices rose at a double-digit rate for the seventh consecutive month. The widely anticipated benefits of lower energy price inflation were mostly offset by hefty increases in food prices and a range of increasingly costly leisure activities. Meanwhile, although wages are rising a lot more slowly than prices, they’re nevertheless rising fast enough to suggest that inflation is becoming properly embedded.

We are, thus, a long way away from both the Bank’s and the government’s ambitions regarding price stability. Earlier this year, Rishi Sunak promised to halve the inflation rate, a frankly limited commitment given where we currently are. The Bank, meanwhile, continues to forecast an eventual drop in inflation to below 2 per cent, even though upside surprises to date have forced the Bank’s Monetary Policy Committee to raise the key policy rate on multiple occasions.

Another way of thinking about the Bank’s inflationary challenge is to argue that the “costs” of achieving price stability have gone up. For the first time in decades, monetary policy is having to do some serious heavy lifting.

Yet too many policymakers prefer to blame inflation primarily on what might loosely be described as “external shocks”: developments over which they have no direct control. The implication is that inflation can be “self-correcting”. On this rather blinkered view, monetary policy can only do so much.

One version of this self-correcting argument is that higher energy prices (and food prices) push overall prices up relative to wages, leading to a real wage “squeeze” that will lead to a natural slowing of economic growth, in the process truncating any inflationary risk.

This view can be summarised in two quotes: “To a considerable extent ... inflation has been the consequence of costs and prices imported from abroad and over which we have no control”, and “the consequence of the staggering increase in [energy] prices at present will be to depress consumer demand”.

Yet these words were uttered by Anthony Barber, the then-chancellor, in early 1974. “Excusing” inflation is all very well but, as Barber discovered, excuses alone are no way to tackle inflation. It is, after all, a profoundly unfair process, redistributing income and wealth in entirely undemocratic ways. History tells us, time after time, that those who have “pricing power” will seek compensation for inflationary traumas, in the process throwing more fuel on the inflationary fire.

How did central banks end up in this alarming position? In my new book, We Need to Talk About Inflation: 14 Urgent Lessons from the Last 2000 Years, I offer four tests to gauge whether inflation is in danger of becoming embedded. My tests are less about forecasting — which is a mug’s game at the best of times — and more about how inflation can become re-established after a period of relative tranquillity.

My first test is simple. Have there been institutional changes creating a bias in favour of inflation? In recent years, the answer is “yes”. In 2020, the US Federal Reserve adopted a “flexible average inflation target” (FAIT) when it thought deflation, a world of falling prices, was the bigger danger. The move came too late: the seeds had already been sown for a period of rapidly rising inflation. Yet the Fed carried on worrying about the last deflationary war, suggesting, initially, a degree of inflationary indifference.

Meanwhile, the persistent use of quantitative easing meant that government bond markets were increasingly being “nationalised” (for want of a better word). Historically, bond markets acted as a rather useful early warning system for future inflation: yields would typically rise in anticipation of an inflationary threat. This time, yields rose only when higher inflation was already an unfortunate reality. The financial “radar system” had been turned off.

The second test is evidence of monetary excess. You don’t have to be a monetarist to recognise that “printing” a huge amount of extra money is likely to lead to higher prices. That’s exactly what central bankers did in the early stages of the pandemic. Most of them, however, shrugged their shoulders and concluded “nothing to see here”. Monetarism was out of fashion. Bizarrely, in central banking corridors, so too was monitoring the money supply.

The third test is to see whether inflationary risks are being trivialised, consistent with the Barber approach of the 1970s. One variant of this is the treatment of “two-year ahead” inflation forecasts made by central banks. The table below shows the Bank of England’s record in recent years. Over time, the “current” inflation rate has risen and so, too, has the Bank’s “one-year ahead” inflation forecast. The “two-year ahead” forecast, however, has consistently been either at, or below, the Bank’s 2 per cent target. Apparently, the Bank believes that, in the medium term, all is for the best in the best of all monetary worlds. History suggests that it’s a worryingly complacent approach.

The fourth test is to assess whether supply conditions have changed for the worse. Post-pandemic, many people have opted for early retirement, others have chosen to work part-time from home, and both companies and governments are thinking about “nearshoring” or “reshoring” to escape from the fragility of global supply chains.

These developments are an extension of changes that were already under way. The deteriorating relationship between the US and China was pointing to a moderation of hyper-globalisation, the overriding narrative for decades. Pitiful productivity performance had lowered the “speed limits” for economic growth. Yes, inflation was still well-behaved. The policy risk, however, was already established. Offering too much stimulus when economic capacity was limited was likely to end in inflationary tears. And so it has proved.

Central bank thinking on inflation has simply become too blinkered. Armed with my four tests, it’s possible to tease out the risks to what remains a cosy forecasting consensus. Either monetary policy may have to be tightened further than people expect or we’ll have to get used to a world in which inflation is persistently higher than existing central bank targets, with a whole bunch of additional volatility to boot.

The chances of central banks daring to forecast such outcomes is, however, low. As such, faith in our monetary masters is likely to come under pressure in the months and years ahead.

Central bank independence has been regarded as the best way of establishing monetary credibility and low and stable inflation. Politicians were always tempted by the monetary printing press. Central banking technocrats, in contrast, would always be able to look beyond the next election, setting interest rates in ways that would offer price stability over the medium term.

Such independence was worshipped in some countries. The folk memories of hyperinflation from the Weimar era left most Germans content to give the Bundesbank sweeping monetary powers. Not all countries have had such hideous experiences and many central banks gained their independence only when inflation was under control. The Bank of England is a case in point.

What happens, however, if a previously untested central bank is confronted with inflation rates in a return to the “bad old days”? Do technocrats really have the power to throw an economy into a deep recession in a bid to bring inflation under control?

Margaret Thatcher was deeply unpopular among many in the UK in the early 1980s when dealing with inflation, but at least she could claim political legitimacy for her painful policies: she was re-elected in 1983 and again in 1987. Could central bankers claim the same today? It seems unlikely. Politicians looking for scapegoats for poor economic performance will be tempted to blame their central bankers. Perhaps the golden era of all-powerful central banking titans is drawing to a close.

Stephen King (@kingeconomist) is HSBC’s senior economic adviser and author of We Need to Talk About Inflation (Yale)