What to expect economically for the next five years and how the left should respond: Why we face Japanification, not Americanisation.

In politics narrative is hugely important and it is vital we get the narrative right for the next five years. We have to hammer home an effective and plausible message that fits people's real experiences and we need to start now. To do that we need to know what's going to happen over the next five years… which is impossible.

However I believe it's possible to have a good guess at the next five years and I want to talk about why! The first instinct is to catastrophise: the people we don't like are in power and they are about to do Brexit, ergo there will be a big recession and we should tell everyone that as proof of how awful the Tories are… but there is a problem: what if there then isn't a recession?

If there isn't then Johnson will be seen as a success so long as economic growth never dips below zero for more than 3 months. It would be a huge mistake to set that as the yardstick. We must instead warn of stagnation.

This is not least because stagnation is actually more likely. A sudden hard Brexit is an enormous shock for the economy and may still cause a recession (if it does and we've been warning of stagnation then we get to say that the Conservatives are even more incompetent than we predicted!) but it is actually quite possible for the Tories to push us over into stagnation rather than recession… how?

Well the last couple of decades have taught us a lot about how economies function, especially the wealthiest countries. Whereas in the 80s the economy was more like a rollercoaster, screaming up and then violently collapsing back down, we now have a different situation. Economists call this "Japanification" because it happened to Japan first. What happens is that growth slows down, as does inflation, so to compensate the central bank reduces interest rates to stimulate the economy but in the long run they keep falling lower and lower and lower just to reach the same place until eventually they hit more or less zero. At this point economic growth slows to crawl, prices freeze in place and unemployment actually goes down very low BUT wages freeze and people work longer and longer hours while their housing and other fixed costs rise. That's where we're heading.

Brexit is not necessary for this process, we're already there, as is Europe, but Brexit exaggerates it for a few different reasons:

First demographics: part of the reason for Japanification is an aging demographic. This is something we see in a lot of wealthy countries but it's particularly acute in Japan because they won't allow any real immigration… sound familiar? We already have an aging demographic in the UK, if we restrict immigration then that effect is going to show up even more strongly.

Second: imports and their effect on prices and wages. Johnson could choose to play hardball in trade deals to get positive terms but that would mean cutting off the UK from imports and exports which really would cause a recession. Why? Because it would mean rising prices which would force the Bank of England to raise interest rates, which would slow down the economy. We're already basically at zero growth so any slowdown is a recession. Instead Johnson will choose trade deals on everyone else's terms (look how he caved to the EU immediately on the withdrawal agreement) in order to get quick results. This means cheap imports, which holds down both prices AND wages as workers here are forced to compete with workers paid far less elsewhere. Japan and the UK even specialize in similar things with us both producing high tech manufacturing and services while importing things like food and clothing.

Thirdly: capital flows. The UK and Japan both receive large amounts of investment not just into our economies per se but into our currencies and government debt as a reliable asset. For reasons that aren’t important to my overall point, so I’m skipping over why this happens, this also lowers interest rates and inflation.

So if I'm right how should we respond to this?

Well let's look at what this has done to Japan. It has resulted in a workforce so exhausted, overworked and underpaid that they had to invent a specific Japanese word for "death from overwork". Suicides due to overwork are increasingly common and people are tired, frustrated and angry.

We have to assume that Johnson will behave more like Trump than coalition Conservatives and lower taxes while keeping spending more level, presumably with a few big vanity infrastructure investment projects because he likes those. It's worth pointing out that for all their rhetoric on debt this is actually by far the norm for Conservatives and the coalition was unusual in that regard. Regardless UK debt/GDP is currently around 80%, in Japan it is more like 200% with no ill effects. We should assume Johnson will copy this so that he can lower taxes without doing unpopular cuts while people are already feeling overworked. Nevertheless the NHS, police, schools and local authority services will still definitely be massively overstretched.

Our line should therefore be this:

"Government is like everything in life, you get what you pay for. The Conservatives have given us bargain basement government and it has blown up the debt, squashed economic growth, destroyed our public services and left us all exhausted and overworked.

What we need is capable, effective, quality government. We will get Britain back off the mat and give us a strong economy again with public services that work and decent pay for decent work."

We should start setting up the narrative immediately that the next five years will see a stagnant economy from an incompetent government and that people should expect in five years to find themselves working longer hours just to keep their head above water. If we embed that expectation and it is fulfilled (which sadly I honestly believe it will be) then we can also sell people on the solution- high quality, effective government, not the broken bargain basement government of the Conservative party!

That’s a message that is authentic, honest and one that I believe we can win with. If not within one election then at least within two.



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Stephen John Richmond (The Richmond Papers)

My attempt to understand policy and economics. Some ideas practical, some not. Currently Chair @CovLibDems and Council member for the Social Liberal forum.