Editorial: The Return of Incompetence in Rishi Sunak’s Economic Policies – The Guardian’s Perspective

U
nder Liz Truss’s short-lived premiership, the yield on British government bonds soared last September. This surge was referred to as a “moron risk premium” imposed by the markets due to Truss’s reckless plan to provide tax benefits to the wealthy. Unfortunately, it seems that this premium has returned as gilt yields have now surpassed last year’s levels and reached the highest point since the 2008 financial crisis.

The reason behind this increase in yields is that the current cost of living crisis is not severe enough for the City’s liking. In a strange twist of events, it’s considered bad news that unemployment has decreased and pay growth has accelerated to a record high. Ignoring the fact that prices are rising faster than wages, investors are taking cues from Andrew Bailey, the governor of the Bank of England.

Last month, Bailey expressed concern that unemployment was not declining as quickly as expected and wages were still rising. Inflation rates were high because the shallow recession predicted by the Bank did not occur. To keep prices in check, many British workers would need to be pushed out of their jobs. As a result, the Bank is likely to increase interest rates next week and continue raising them for several months. This will lead to economic hardship as mortgage costs rise for millions of households. Mortgage arrears are already at their highest level in a decade, and the rate of repossessions is increasing.

Rishi Sunak became prime minister due to his correct bet on Liz Truss’s incompetence. However, he may not win his wager that voters are willing to endure present pain for uncertain future gains. The Conservative party relies on a coalition of outright homeowners (32% of households) and mortgage holders (30% of households). The Tories risk losing the latter group as interest rates rise. Many Britons are living in areas where they cannot afford mid-priced properties or face disproportionately high rents, or both. Increased rates would further price out many individuals, leading to cracks in the Tory southern stronghold. Some MPs believe Sunak might call an early general election this year before the rate crisis intensifies.

The Bank’s strategy for controlling inflation is twofold: higher housing costs deter spending in the economy, and scarcity of jobs prevents workers from demanding higher wages. However, this interpretation is flawed, especially since wage growth is a consequence, not a cause, of inflation. Workers are requesting higher pay to cope with increased prices set by companies. Implementing regulatory measures to curb monopoly power and financial speculation, as well as introducing price controls, would be more effective policies. The UN has already warned that food prices could rise again.

The lack of creative thinking regarding the causes and responses to inflation is indicative of the sorry state of the economics profession. Behavior that economists consider rational would be deemed foolish in everyday language. Jeremy Hunt’s admission that a recession is an acceptable price to pay for curbing inflation underscores this point. The government is deliberately putting people’s livelihoods at risk in its quest to grow the economy by shrinking it.

The number of individuals who may lose their jobs due to this peculiar turn to austerity could potentially be determined by economist Claudia Sahm, who accurately predicted US recessions using her employment measure. To be in a “Sahm recession” next month, Britain would need to lay off approximately 150,000 workers. If this is truly in the country’s best interest, economists who promote such ideas, along with their political followers, should be willing to become unemployed first. However, it seems that unemployment is viewed as a problem affecting other people.