In for a penny, in for a pounding: Britain’s economic gyrations

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Hello and welcome to the Intelligence from the Economist. In New York, I'm John Fassman.

And in London, I'm Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world.

In many countries, if you get arrested, the police can take a sample of your DNA. But in Tibet, the Chinese government isn't waiting for arrests. They're taking DNA from monks, children and pretty much anyone they like as much as one third of the total population.

And it's no surprise that the pandemic led to a lot of early retirements. What's surprising is just how many people are now unretiring and heading back to work. But first, For those watching the British economy, it's been a queasy few days.

The bank of England today raised the base rate of interest to its highest level in 14 years. This is the figure it started the day at. It's gone up by half a percentage point to two and a quarter percent to try and bring inflation under control.

If that wasn't bad enough, last Thursday the Bank of England did what so many other central banks are doing to fight inflation. It raised rates. A day later, Britain heard from its new chancellor or chief finance minister, Kwasi Kwartang. He announced the biggest tax cuts in Britain for half a century.

We need a new approach for a new era focused on growth. Our aim over the medium term is to reach a trend rate of growth of 2.5%. And our plan, Mr. Speaker, is to expand the supply side of the economy through tax incentives and reform. That is how we will deliver higher wages, greater opportunities, and crucially, Mr. Speaker, fund public services now and into the future.

You only need to look at the value of the pound to tell that investors didn't buy it.

Now the British pound has fallen to its lowest level ever against the US dollar. In early Asia trade, sterling fell to.

$1.03 before regaining some ground to around.

$1.06 as the London markets opened.

Then yesterday, the bank of England weighed in again, saying it wouldn't hesitate to bump rates further to calm the froth. Mr. Kwateng seems convinced his plans are sound. But his plans, those of his boss, the new Prime Minister, Liz Truss, could well be based on some flawed economic thinking.

Britain is not alone in that it faces really high inflation and also the prospects of a recession. That's partly because of really high energy prices. But its latest wound is self inflicted.

Sumaya Keynes is our Britain Economics editor and presents Money Talks, our sister show on business, economics and finance.

The government's fiscal statement last Friday cut taxes by more than almost anyone expected. And that has just thrown up these really big questions about Britain's economic credibility.

So let's wind back a bit. What's the background here? What's the sort of scene against which Mr. Kwarteng has done what he's done?

Yeah, there is this old strain of thinking within the Conservative Party that essentially says that tax cuts will unleash growth so much so that you don't really need to worry too much how to pay for them. This has echoes of America in the 1980s. Back then, inflation was super high, interest rates were also very high, and Ronald Reagan argued that tax cuts and deregulation would stimulate the US economy.

This is the time for a new beginning. I ask you now to put aside any feelings of frustration or helplessness about our political institutions and join me in this dramatic but responsible plan to reduce the enormous burden of federal taxation on you and your family.

By August of 1981, he had signed into law America's biggest tax cut since the First World War that was worth nearly 3% of GDP. And essentially, Liz Truss, government is trying to do the same thing here. So apply deregulation and tax cuts and ultimately they hope, unleash growth.

And so what exactly is in the statement here? What are the policies aimed in that direction?

Some measures were expected. So there's a plan to help households and businesses with their energy bills. That's really more of a temporary emergency measure. The more worrying ones from investors perspective were the big permanent cuts in tax. There were plans to scrap an increase in corporation tax and to cut national insurance contributions. And so the expected measures add up to extra borrowing of around one and a half percent of gdp. But in addition to those expected measures, the Chancellor did his thing where the Chancellor always likes to pull a rabbit out of a hat, announce something surprising. But in this case he sort of started chucking rabbits at his colleagues. And so he announced a reform to property taxes, investment zones, a cut in the top rate of income tax. So all these additional measures and then as important as what he did announce is what he didn't announce because he didn't spell out spending cuts, instead he just offered fairly vague assurances that, yep, the public finances will definitely be sustainable. But you know, we're not going to ask the Office for Budget Responsibility, which is a fiscal watchdog, to give their forecast to the public finances. That's not necessary in this case. And so there was a bit of a black hole of information. And as far as anyone could tell, the these permanent tax cuts would be paid for through higher borrowing. Big questions about fiscal sustainability there, lots of uncertainty.

And what about the forecast from, from your vantage, do you think all this will work?

Yeah, I'm pretty skeptical. So if you look back at history in the us, the deficit finance tax cuts had a pretty mixed record. So despite the tax cuts, there was still a deep recession. And then even by March 1984, a few years later, annual inflation was almost 5% while the Y on the government's 10 year bonds was over 12%. So it doesn't seem to have worked as a stabilizing force. If you look back, inflation was only really anchored after Congress had raised taxes. Now there are reasons to think that the plan could go down even more badly. In the uk, the US had and still has the advantage of having the world's reserve currency. So when times are uncertain, investors rush towards it. The UK does not have that privilege. Essentially, in the earlier 1980s in the US there was a strengthening dollar, whereas in the UK the pound is weakening. That weakening pound means that imports become more expensive and that adds to inflationary pressures, making life for central bankers more difficult at this precise moment. So there's this extra sour ingredient in this cocktail that the US did not have to contend with, but that the UK really does.

And the sort of safe haven status of the pound couldn't be more in question this week. Why is it tanking so much?

Well, there are a few things over the past few months. Obviously the context is that everything has been weakening relative to the dollar. That's really a story about the Fed. But after the fiscal statement there was an extra special bit of sterling weakness. So some of us were having great fun drawing up charts showing the pound against the Turkish lira. Not a comparison any Brit should want us to be drawing. And essentially what's going on is that international investors are skeptical that this package is going to boost growth in the way that the Conservative government says that it will. And similarly, they're skeptical that it will raise the amount of revenue that could potentially make these things self financing generally. Also, there are just questions about the credibility of Britain's institutions, including the Government's willingness to keep the public finances in order. Now, yesterday the Government did try to reassure investors by saying that on November 23rd it would outline its fiscal rules and the OBR would publish its full forecast. This was kind of like saying, don't worry folks, nothing to see here. We'll tell you our plan in two months. It wasn't the most reassuring of statements.

So this might be a time then for the central bank to step in and try to calm matters. No?

Yeah. And investors are expecting the bank of England to respond fairly aggressively. At one point they were expecting an emergency interest rate increase. This week, expectations of where the bank of England's base rate would be next year went up to almost 6%. And that's partly to counteract the effects of the fiscal stimulus, keep inflation at 2%, but also to deal with the fallout from the depreciation in sterling. The increase in borrowing costs for households is going to be enormous if current rate projections hold up. And then there's also the effect on the borrowing costs of the government. I've done some basic number crunching and if the expected increase in rates between now and the middle of next year actually happens, that could mean extra borrowing of over 1.7% of GDP, just through the extra debt interest. If that becomes very extreme, that could raise questions about whether the government might interfere with the bank of England's independence. And if you think that the underlying problem is a lack of institutional credibility, that type of interference could make the problem even worse.

So the government seems to have painted itself into a very uncomfortable corner here. Isn't one way to fix it? To back off these ambitious Reaganomics based plans?

Yeah, yeah, that would help. It seems very unlikely, though. What I suspect will happen is I think in November, when they have their fiscal statement, they will try to make noises about spending cuts and reassure investors that that's how they will balance the books. Now, the problem is that the spending cuts they would have to announce are so large that unless you give full details of what they are, it's possible that people just won't think that they're credible. I think what we're likely to see is lots of fragility, lots of volatility, uncertainty with respect to the pound and also interest rates. And that means that we're just very vulnerable to tipping into a bad equilibrium and some kind of nasty spiral that we really don't want to be in.

And on the question of the pound and the fun you've been having drawing charts of the pound against the lira and so on, I know you've had more fun on this week's episode of Money Talks.

Yes, we are going to be taking a broader look at currency moves on this week's edition of Money Talks. Everyone should download it. We'll be looking at the Fed, the US dollar, also the Japanese yen. Really fascinating stuff, all of which can.

Be heard from tomorrow. Great stuff. I will have a listen. Somaya, thank you very much for your time.

Thanks so much for having me.

China is no stranger to surveillance. The country was an early adopter of facial recognition technology. Social media is aggressively monitored and moderated against ethnic minority groups like the Uyghurs. That surveillance facilitates an ongoing state of oppression. And in Tibet, new methods are being employed.

The Chinese government is undertaking a campaign to collect DNA from the Tibetan people.

Alice Hsu is a senior China correspondent at the Economist.

It's painted as an effort to manage the population and maintain stability. But these are euphemisms for Chinese authorities. Real purpose social control.

So they're collecting DNA. How are they doing this and what does it look like?

Well, in some ways, it's a very casual campaign. And I say that because it's really not a secret. The reason that we know this is happening is because Chinese police, Chinese authorities have been posting about what they're doing on WeChat. So when you go through these local police officers accounts or these local official police accounts, you see police going all over Tibet, going into villages, into monasteries, into schools, in some cases into kindergartens. And they gather all sorts of people. They gather monks, children, migrant workers and prick their fingers and take their blood.

And why are they doing this? What's the official rationale and what do you think the real reason is?

Yeah, well, there are reasons that the police give in all these accounts, and they tend to be vague. You know, they say things like, we need to collect DNA for population management, for stability control, or very commonly, to fight crime. The thing is, China already has a forensic DNA database. In fact, it's the largest one in the world that is used for fighting crime. So what is different about the campaign in Tibet and what has raised concerns from activists and scholars abroad is that police are collecting samples from everyone, from young and old, from villagers and workers, and in essence, they're treating everybody as a potential criminal suspect. And the current campaign that we're looking at now raises even more concerns because it's in Tibet.

And what are those concerns? What are the concerns specific to Tibet?

Well, the campaign in Tibet raises new alarms. Because of the government's history of using genetic material to repress ethnic minorities, activists have drawn parallels with the region of Xinjiang in northwestern China. That's the only other place in China we know of where authorities have rolled out mass DNA collection. They did this to the Uyghurs and other Muslim majority groups in Xinjiang, ostensibly as part of a health program. But later on, we saw that they used that DNA material to build a totalitarian system of surveillance and social control in Xinjiang. And later on, they then established this campaign of re education camps where they took people to be re educated not because they had committed crimes, but because based on data that they were constantly collecting from them through the DNA database, through facial recognition, and through the security cameras that blanket the region, they had determined that people had the potential to commit crimes. So when you see that the Chinese government is rolling out a mass DNA collection campaign in another part of China that is home to an ethnic minority that has been subject to intensive surveillance and repression already there are concerns about what the material could be used for.

And I assume people don't have much choice whether or not to cooperate.

No, they don't. Tibetans don't have the ability to say no to the police. Although you wouldn't know it from the way that the campaign is being described on WeChat. For example, in several of the posts, police talk about their efforts to convince Tibetans to comply with the campaign. And they will say things like, officers used careful explanation of the purpose and effectiveness of sample collection to make the doubtful participants become enthusiastically cooperative. And these powers of persuasion never seem to fail. In other cases, they casually mention that they do things like they sample all who should be sampled. This kind of language suggests to us that the police are likely trying to meet quotas on how many samples they should be taken. It's reminiscent of language we've seen again in Xinjiang, where when the re education camps were being rolled out, authorities used similar slogans like round up all who should be rounded up. And typically this phrasing means that there is a quota coming from superiors that local security officials are trying to fulfill. It's very much the case that people understand there is no real option but to allow it to happen. A recent report from the Citizen Lab, which is a research group at the University of Toronto, analyzed 100 of these posts, and they estimated that the police may have already collected DNA from 25% to 33% of the population in Tibet.

So you would characterize this, what's happening in Tibet, as part of a broader campaign, part of a pattern under Xi Jinping, right?

Yes. In fact, that's how the Chinese police characterize it themselves, although they use euphemisms like we're collecting basic information, we are improving population management, we are working on our grassroots social governance at the heart of it. The aim of what's going on here, and kind of a central theme of President Xi Jinping's governance in general, is control. It's social control. Even if there is no specific purpose for the DNA collection, that is to say they're not hunting down suspects of specific crimes because the crimes have not yet been committed. Right. But they're collecting the DNA just in case, because the idea is that more DNA, more data, and more surveillance mean more control. And in the case of the Chinese government, that is always a good thing. This is a continuation of the themes that we've seen developing over the last 10 years. And it's especially worrying for minority groups. But I would like to add that it is also worrying for the rest of the world, because what we have seen with other examples of surveillance technology, like facial recognition in China, is that other countries like to learn from China and other governments, you know, Western governments included, they may initially criticize and say, you know, this is an authoritarian state's practice, but we see that that technology very, very quickly gets exported and gets adopted in the rest of the world.

All right, Alice, thanks so much for joining us today.

Thank you. For.

For my part, I can't wait to retire. All the reading, the project cooking, the not getting up early to sit in front of a microphone. So I certainly understood, maybe even envied, the many people who called it quits during the pandemic and retired early. But maybe it's not all it's cracked up to be. It seems a lot of those people are. Are thinking better of it.

So we've looked into the data, done some analysis, and what we found was that when the pandemic struck in the spring of 2020, the economic activity rate. So basically, people who were in the workforce among people who were over the age of 65 dropped very quickly and dropped much more severely than for people of working age.

Callum Williams is a senior economics writer for the Economist.

So this is partly because, like everyone else, some older people were fired because demand had dried up. But there was a kind of ADD thing for older people, which was that they faced much higher risks of getting seriously ill or dying from COVID And so what happened is a lot of those people actually quit and they brought forward their retirements. But now that the threat of the pandemic has largely faded, something surprising is happening in labour markets.

And what's that?

Well, in 2020, economists had assumed that pandemic retirees would never come back. In part, that's because some employers discriminate against older workers. And then, of course, the idea of starting a new job when you're in your 60s or 70s might be quite daunting. Learning the ropes is not easy. And so that's why, typically, you don't really get many people unretiring. But what's happened this time round is that a surprising number of retirees have returned to the labour market.

And you say it's a surprising number of people. What kind of numbers are we talking here?

So it's hard to be really definite about this because you need to kind of track the same person from one year to the next. But the kind of headline figures are as follows. One is that we think there are more over 65s in the rich world labour force than there were in 2019. So that's one thing. Of course, there are more people who are over 65 than there were in 2019, too. And it is the case that the participation rate among over 65s is a bit lower than it would have been without the pandemic. That's pretty clear. But if you compare where we are to a kind of reasonable counterfactual, I think what's clear is that you had a massive surge in retirements in the spring of 2020 and then another one in the spring of 2021. And what's clearly happened is that the peak has fallen quite substantially between 20 to 40% of people, we think, who retired have actually now come back.

And so those patterns then, when you dig into the numbers are clear.

Yeah. So you can also look at the kind of more micro data, the longitudinal data in the jargon, which kind of backs up this idea that people are coming back. So, for instance, Eurostat does publish some data on kind of what people do from one year to the next. And even by the end of 2020, there was some pretty clear evidence that people in older age brackets were moving from what's called inactivity, so not being in the labour force, to being in employment. And then if you look at, say, for example, the latest data from the uk, there's a lot of people now who are in paid work who say to the statisticians, a year ago, I was retired. So something clearly is happening.

So what's going on here? Why is this happening?

So I think there are probably pull and push factors. So on the push factors, I think part of it is economic necessity. Obviously, the turmoil in markets has reduced the value of pensions, pension pots. So some people might be thinking, oh, I'm not quite as rich as I thought I was, I better get back to work. I think inflation probably is having an effect here too. If you're receiving a cash terms payment of some sort, a pension or whatever, the purchasing power of that has gone down. So I think some people are moving back because they kind of have to. But I don't think it's just economic necessity. I think partly it's to do with the fact that the threat of the virus has kind of faded and so more people, particularly older people, are going to feel more comfortable about being in offices and factories and so forth. And also, you know, the labour market has a lot of shortages right now, so if you've got skills that are in demand, you can probably earn pretty well. So I think there's both pull and push factors going on here.

Callum, thanks very much for joining us.

Thanks, Jason.

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