Yesterday Andy Burnham announced that he was going to improve high streets by making it harder for people to open betting and vape shops as well as those dodgy barber shops. His argument is that not many people really want them and, if we’re being completely honest, many of them are involved in tax evasion, money laundering, and other illicit activities.

It’s a popular policy and I do have some sympathy for it but I’m not 100 per cent sold on the idea. It’s easy to say ‘nobody asked for them’ but that probably isn’t entirely true. There clearly is at least some demand for the vape stores and betting shops. I would also argue that despite the many faults with vape shops, vaping is far less harmful for people than smoking cigarettes so they are doing some good. Moreover, while hanging out in a bookies is not really my scene, it does provide a social space for many people (not to mention the importance of the gambling industry to our economy and public finances).

Regardless, it is encouraging to see the Prime Minister try to improve our high streets. I’m fortunate enough to live just off Kensington High Street which is obviously lovely but atypical when it comes to high streets. I contrast it with the high street in Huddersfield which is grim and depressing in equal measure so something should be done.

However, Burnham is not being bold enough so below are five suggestions on other reforms he should implement if he really wants to improve our high streets.

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First, the planning system is a real problem (many such cases). Given the very restrictive planning system which is all too often gamed by NIMBYs, it is difficult to build anything or get permission for most types of venues. The vacuum is then eventually filled by these ‘undesirable’ stores. The government should liberalise the planning system so that it’s easier to build and to get permission for all types of businesses whether that be a pub, cafe, florists, shoe shop, book store, or even a vape shop.

Second, we need to end Business Rates relief for charity shops. I wrote about this for CapX two years ago and the argument still stands. Removing the subsidy for charity shops will create a level playing field for small businesses and the hospitality industry for the available space. This will no doubt cause many charity shops to close but this is no bad thing if it makes space for something more useful such as a data centre or a more productive business which adds variety and makes a high street more pleasant.

Third, the government should outlaw ‘chugging’. This is related to the second point but ‘chugging’ or ‘charity mugging’ is a nuisance. People should be free to walk down the high street without being harassed and harangued by someone in a fluorescent jacket attempting to guilt trip them into setting up a direct debit. It should also be noted that some of these chuggers do not represent actual charities and some are downright fraudulent. They are a nuisance and so banning them from high streets will not only make a small improvement to all our lives, the shops, bars, and restaurants on the high street will benefit from the increased foot fall.

Fourth, bring back the Vagrancy Act. It was bizarre that Starmer repealed it recently. I wrote about this for UnHerd the other month and you can read the article here. People are homeless for a number of reasons and many of them are fleeing domestic abuse or have issues with addiction and mental health. They deserve our care and compassion but allowing them to sleep on the street – especially in shop doorways – is neither caring nor compassionate to them or to the rest of society. They need to get help (and be forced to do so if necessary) and be moved away from our town centres. As for begging, this is often just one step below mugging and needs to be clamped down on. All of this will obviously require extra funding for mental health and addiction support as well as for the police and criminal justice system but it needs to be done if we want to improve our high streets.

Finally, the government should significantly lower the VAT registration threshold. Under the current system many firms constrain their own growth as they do not want to pay VAT (assuming they’re legit). This means they remain small and unproductive, they don’t innovate or expand, and they don’t hire more people. It also means that they have an unfair advantage over larger businesses.

Lowering the threshold will get the pain out of the way earlier so the barrier to growth will disappear, allowing productive businesses to thrive and make a positive contribution to our high streets and town centres. Many small businesses would collapse but again, this is no bad thing. It would free up the space and other resources to be used by better and more productive firms. It would also be a significant revenue raiser for HM Treasury, allowing it to cut much more damaging taxes faced by businesses – including those on the high street.

So, there we have it. The government should also obviously tackle high energy prices by abandoning the frantic rush towards Net Zero. It should also look into reforming the entire system of property taxes such as by scrapping Stamp Duty, Council Tax, and Business Rates (but that’s an article for another day).

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Other stuff

Yesterday I wrote an article for the Great British Think Tank. It’s on why the EU’s ban on beef from Brazil is pure protectionism and why the government should ignore the NFU and not introduce a similar ban in the UK. You can read it here.

Thanks as ever for reading. I’ll probably write something else this week. Stay cool and enjoy the eclipse!

On Monday, after several years of negotiations, the UK and Switzerland concluded a new enhanced Free Trade Agreement. It won’t dominate headlines the way the US or India deals did (the India FTA came into force last night).

However, it is the most significant services trade agreement Britain has ever signed and so it’s worth pausing on why that matters, both for the direct economic upside and for what it says about post-Brexit trade strategy more broadly.

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The deal is projected to add £5.2 billion a year to UK services exports to Switzerland in the long run, building on a relationship that’s already substantial: Switzerland is the UK’s sixth-largest services export market, with bilateral services trade exceeding £30 billion in 2025 and total two-way trade of roughly £53 billion. Foreign direct investment between the two countries stood at around £87 billion at the end of 2024, a reminder that this isn’t a fledgling trading relationship being built from scratch, but a deep one being deliberately deepened.

On the goods side (a smaller but not trivial part of the package) Swiss tariffs come down on UK lamb (tariff-free within quota for the first time), beef, dairy and English sparkling wine. This is actually a remarkable achievement. The Swiss are incredibly sound in many ways but when it comes to agriculture they are so protectionist that they make French and Canadian farmers look like champions of free trade. Whoever was responsible for negotiating the Agriculture Chapter on behalf of HM Government deserves a pay rise!

What makes this deal distinctive is its focus. Every previous UK trade agreement since Brexit (some of which I worked on)with Australia, New Zealand, the CPTPP bloc, India, South Korea, the Gulf Cooperation Council has been built primarily around goods, tariff schedules and market access for physical products. I’ve written about this before but this is often the reason why most new FTAs have limited impact on GDP.

This is the first one built around services from the ground up. Services account for roughly 81 per cent of UK economic output and 83 per cent of UK employment. A trade policy that spends most of its energy on goods deals is, in a very real sense, optimising for the smaller part of the economy.

The substance backs up the framing. UK professionals will get permanent, permit-free access to deliver services in Switzerland for up to 90 days a year, locking in an arrangement that was previously only temporary. There’s a new mutual recognition regime that makes it easier for architects, auditors, lawyers, and accountants qualified in one country to practise in the other. Intra-company transfer rules are eased for graduates moving into finance, insurance and consultancy roles. None of this generates a dramatic tariff-cut headline, but for an economy whose comparative advantage is expertise rather than manufacturing, this is exactly the kind of friction reduction that compounds over years into real export growth.

The most interesting argument for this deal isn’t really about Switzerland at all. Instead it’s about sequencing and specialisation. Inside the EU, UK trade policy was necessarily a lowest-common-denominator exercise: any agreement had to work for 27 economies with very different structures, sensitivities, and export profiles. A bespoke, services-first deal calibrated to the specific overlap between two service-heavy, high-skill economies is precisely the kind of agreement that’s hard to negotiate as part of a large bloc, because the interests of a manufacturing-heavy or agriculture-heavy member state would dilute it.

That’s the theoretical case for independent trade policy: not that the UK can necessarily out-negotiate the EU on scale (Switzerland’s own experience suggests smaller, agile economies punch above their weight through a network of narrow, sector-specific agreements rather than one giant treaty), but that it can tailor deals to its actual comparative advantage rather than an averaged one.

Switzerland itself is the case study for this approach (not an EU member, but ‘deeply integrated into the European single market via a network of bilateral treaties’, built one sector at a time over decades). The UK-Switzerland deal builds on exactly that model, layering on top of a 2023 wholesale financial services agreement and a 2025 professional qualifications recognition deal.

The deal teaches us three important lessons about trade policy in general.

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First, mutual recognition beats tariff-cutting for services. You can’t tariff a consulting engagement or a legal opinion the way you can tariff a car. The real barriers to services trade are regulatory (differing licensing regimes, work-permit rules, data protection standards). This deal’s substance is almost entirely about dismantling those non-tariff barriers, which is a template other services-heavy economies (and there are more of them every year) should study closely. This is the key. This is what we managed to achieve with the enhanced deal with Japan (CEPA) with a comprehensive Digital Chapter and some focus on services trade. Hopefully CPTPP will develop more in this way as well.

Second,depth matters more than breadth for high-value trading relationships. £53 billion in two-way trade with a country of under 9 million people outstrips many of the UK’s larger, more populous trading partners on a per-capita basis. Chasing large, headline-grabbing markets isn’t always where the marginal deal delivers the most value; sometimes it’s the smaller, wealthier, more structurally similar economy. Again, the deal with Japan is a useful illustration here. The negotiating team had mugs made with the branding: ‘CEPA goes deeper than EPA’. It was true. It did, and it matters.

Finally, trade deals compound. This agreement only makes sense as the latest layer in a decade-long relationship-building exercise with Switzerland, not a standalone event. Countries that treat trade policy as a portfolio built incrementally, rather than a series of unconnected wins, end up with agreements that reinforce each other (mobility rules that support professional-qualification recognition that supports financial-services access, and so on).

Again, this is key. Commentators and opposition politicians seemed to view our deals with Australia and New Zealand as the final word and so it was seen as a disaster that we might not have got everything we wanted. Brexit itself showed this wasn’t the case given that we negotiated enhanced deals with Japan and Canada while President Trump shows (less gloriously) that all trade deals can be renegotiated (or simply ripped up).

None of this transforms the UK’s growth trajectory overnight. £5.2 billion a year is real money, but it’s a rounding error against a roughly £2.5 trillion economy. The significance is more structural than numerical: it’s a demonstration that a services-led economy can negotiate services-led trade deals when it isn’t constrained by a bloc built around a different comparative advantage. It is a reminder that in trade policy, as in most things, playing to your strengths beats chasing headlines or photos in front of flags.

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Other stuff

Yesterday a report I co-authored for Policy Exchange was released. ‘How to Make Taxation Less Taxing’ highlights many of the problems with the UK’s tax system and how it should be reformed to reduce the burden on households and firms and help to drive growth. You can read it here. Lots of the policies will be expensive and so it should be viewed as a ‘sequel’ to an earlier Policy Exchange report which I co-authored with the same economists plus Iain Mansfield, which you can read here.

I also banged on about steel yet again. This time it was for the Great British Think Tank on why the government’s tariffs and effective nationalisation is expensive, economically damaging, and deeply unfair. Feel free to read it on the GBTT website.

Today I’m in CapX with an article about the tax report.

Thanks as ever for reading. I’ll probably write at least one more post this week. Enjoy the Football - it’s coming home!

Tonight England will (hopefully) thrash Norway in the World Cup. This is a blog about economics and public policy and making tenuous links so this post will be in that vein.

You often see people on the Left arguing that the UK should have been more like Norway and set up a sovereign wealth fund with the revenue generated from North Sea oil. In fact, I’ve already seen someone make that point on X (formally Twitter) in relation to the Football so I’m pleased I’m not the only one who manages to shoehorn their pet theory into whatever is in the news that day. Anyway, those making that argument are wrong for a number of reasons.

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Despite the similarities between Britain and Norway, they are, in many ways, very different. Norway is a country of around 5.5 million people. The UK has roughly 67 million. As such, that population gap alone means that even identical revenue streams would produce wildly different per-capita outcomes.

Furthermore, Norway did not start extracting oil at scale, nor start saving it, at the moment Britain most needed the money. Statoil (now Equinor) was established in 1972 and oil production ramped up through the 1970s and 80s, but the Government Pension Fund Global (the actual sovereign wealth vehicle) was not created until 1990, and it received no meaningful deposits until 1996. By that point Norway had already built a mature, well-functioning economy with low unemployment, sound public finances, and a political culture built around long-term consensus. Saving oil money was, for Norway, a matter of prudent surplus management by an already-stable state.

Britain’s experience with North Sea oil was completely different. Production began flowing in earnest just as the UK was living through the most severe fiscal and industrial crisis of its postwar history due to the economic mismanagement of successive governments: the 1976 IMF bailout, high inflation, mass unemployment, and a currency under sustained pressure.

When oil revenue started flowing in volume in the early 80s, it wasn’t arriving into a healthy economy with the luxury of wondering what to do with a surplus. Rather, it was landing in an economy haemorrhaging jobs in coal, steel, and manufacturing, with a government trying to simultaneously cut inflation, reform a bloated public sector, and keep unemployment benefit payments from bankrupting the country. Oil revenue wasn’t like a nice bonus but instead more like manna from Heaven. It was used to smooth an extraordinarily painful structural adjustment. It pretty much saved the economy and so it would have been incredibly reckless of the government to simply lock it away for decades.

Even setting aside timing, the raw scale of UK oil wealth relative to Norway’s is often wildly overstated. Because of the size of the UK population, and because the UK North Sea sector was structured very differently from Norway’s (split across a large number of private, often foreign-owned, operators on relatively short licences, rather than concentrated in a majority state-owned enterprise) the effective tax take per barrel was consistently lower in Britain.

For example, Norway taxed petroleum profits far more aggressively, with marginal rates on North Sea operators reaching into the 70–80 per cent range for extended periods, alongside direct state equity stakes in fields through the State’s Direct Financial Interest. Britain, by contrast, ran a comparatively investor-friendly fiscal regime designed to attract much needed private capital into a basin that, in many parts, was more expensive and riskier to develop than Norway’s larger and more geologically favourable fields.

The practical result is that even in absolute terms, and certainly per person, the pool of money genuinely available for a British sovereign fund was always going to be a fraction of Norway’s.

However, this does raise the question that even If It had been possible, should Britain have done It or should it do it now? The answer is no.

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First, the government is a poor capital allocator. A sovereign wealth fund is, at root, the State deciding to become one of the world’s largest shareholders rather than returning the money raised to the people who might allocate that capital more productively such as through consumption, saving, or investment. Even Norway’s fund, held up as the disciplined exception, has faced recurring political pressure to weight its holdings according to ethical screens, climate targets, and diplomatic considerations rather than pure return-maximisation.

Once a pool of capital that size exists under State control, it becomes a magnet for political interference lobbying for domestic ‘strategic’ investments, pressure to prop up national champions, or to punish geopolitical rivals. Given that successive governments had demonstrated that the British State with its profligate politicians and grasping trade unions struggle to manage ordinary spending discipline, it would have been deeply responsible to do this.

Second, opportunity cost is real and immediate. Every pound diverted into a State fund is a pound not used to cut distortionary taxes, pay down the National Debt, or remain in private hands to be spent, saved, or invested. Britain in the late 70s and early 80s had crushing marginal tax rates, a shrinking industrial base badly in need of new private investment, and a public sector borrowing requirement that was itself acting as a drag on the economy (not unlike today). Using oil revenue to fund tax cuts and reduce that borrowing requirement (which is broadly what happened) was the right thing to do, despite what the critics of today might say.

Finally, intergenerational equity doesn’t require state ownership of assets. An argument often made for a sovereign fund, and is one which I do have some sympathy for, is intergenerational fairness. Given that oil is a finite resource, revenue should be saved for future citizens rather than spent by the present generation.

However, this goal doesn’t actually require the State to hold a portfolio of global equities on the nation’s behalf. Paying down the National Debt achieves a similar transfer of value to future generations, by reducing the interest burden they would otherwise have to service, without requiring an enormous and permanent expansion of state-owned financial assets and the governance apparatus that comes with managing them.

Moreover, there is so much more the government should be doing to tackle intergenerational inequality. Liberalising the planning system so that young people can afford to own their own would be a good first step. Reforming the State Pension by raising the Age and scrapping the Triple Lock would also go a long way towards this as well.

So, there we have it. Britain is not like Norway when it comes to North Sea oil and even if it were, a sovereign wealth fund would have been a bad idea.

However, the UK should be much more like Norway when it comes to what to do with the actual oil itself. Norway unashamedly uses its oil to provide its citizens and firms with cheap energy (and sells some of it to Britain). The UK, on the other hand, has recklessly rushed towards a Net Zero target, leading to energy prices which have crippled industry and plunged people into poverty. Of course the UK should take climate change seriously and do what it reasonably can to reduce carbon emissions, but this should not come at the expense of economic growth and the country’s future prosperity. The new government needs to grant new oil and gas licenses and get drilling.

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Thanks as ever for reading. I don’t intend to be in a fit state to write anything tomorrow but will no doubt write a few things in the week. It’s coming home!

The government looks set to align more closely with Europe on the environment by introducing anti-deforestation rules modeled on those of the EU’s own regime. This would be a mistake.

Before we go on, it’s important to point out that obviously we should care about nature and the environment and that this is not an ‘everything the EU does is evil’ posts (I favour taking a pragmatic approach to dealing with our closest trading partner). However, following the EU’s example on this would not be in the UK’s best interests.

This is because, despite the importance of the two points discussed above, the optimal level of illegal deforestation is not zero. I wrote about this almost exactly two years ago in response to the government’s plan to introduce the well meaning but ridiculous ‘Martyn’s Law’.

We often hear people say things such as ‘If it saves just one life then it would have been worth it’. While I appreciate the sentiment this is obviously nonsense. We could spend an absolute fortune on policies which reduce harm and might save even more than one life, but I doubt anyone would say it was worth it. We don’t live our lives this way. Nobody likes the idea of car crashes, but nobody is seriously suggesting we lower the speed limit to 5MPH. Or, we could completely eliminate our Carbon emissions overnight, the issue would be to essentially stop doing anything and going to live in a shack on a commune in the woods. Unfortunately this is a surprisingly popular idea, but no rational person thinks it’s a good or workable idea. My point is: we accept trade offs and that we can’t eliminate or even internalise all of the negative externalities associated with economic growth and everyday life.

While incredibly worthy and well meaning, the plans to follow the EU on deforestation rules falls within this camp for five main reasons.

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First, it would place a very heavy burden on firms. For example, the EU’s own Deforestation Regulation (EUDR) requires that operators must submit high-precision geolocation coordinates linking products to specific plots of land, alongside evidence of legal, deforestation-free production, with manual spreadsheets unable to scale to the data standards required. Penalties for non-compliance can reach up to four per cent of EU turnover.

For large multinational food and consumer-goods firms with compliance departments and existing traceability systems, this is manageable, if expensive. For the small importers in the UK it is a different proposition entirely. It is revealing that even the EU has had to carve out simplified rules and one-off declarations specifically to stop smaller operators being crushed by the regime it designed.

Second, it is important to look at what the UK already does and how this differs from the EU’s approach. Britain targets illegal deforestation, whereas the EUDR requires products to comply with local laws and also be entirely deforestation-free, defined by reference to land use after December 2020. That distinction has real trade consequences. A deforestation-free standard effectively delists any producer (however law-abiding under their own country’s rules) who has converted land since the cut-off date. For commodity-exporting economies in Latin America, West Africa, and Southeast Asia, that can mean losing market access.

Given that many of these are low-income countries, it would impact some of the poorest people on the planet. The British government would effectively be denying them the opportunity to lift themselves out of subsistence and poverty and provide a better life for themselves and their families. It is why when I was working at DIT we had to battle well meaning amendments which would have required peasant farmers to meet the same standards as British and European Farmers – a worthy aim, but on which would destroy the livelihoods and prospects of those already in poverty.

Third, it would make it incredibly difficult for the UK to strike future trade deals or for the benefits of existing ones to be realised. We have already seen that it has taken the EU over a quarter of a century to strike a deal with Mercosur. Although this was mainly due to rent-seeking from French farmers (many such cases), stringent environmental requirements also held things up. Trade deals are already tricky enough to negotiate without adding even more clauses and chapters to them. I wrote just yesterday that Britain needs to double down on free trade. We need to be importing products from all over the world either by striking new deals or simply unilaterally relaxing our tariffs and regulations. Following the EU’s lead will just make this harder.

Fourth, it risks incurring the ire of the USA. Britain is, of course, a sovereign nation and so we should do what we think is best even and not be dictated to by other countries. However, the government also needs to live in the real world. The US has already expressed its annoyance with the EU over this as the USTR has (rightly) started to identify regulations and other non-tariff measures as the biggest barrier to trade. America has a mercurial President who is easily aggrieved and needs no excuse to slap tariffs on those who he believes have wronged the US. Following the EU’s example could see British businesses facing higher tariffs or denied access to the American market. Not an ideal start to Andy Burnham’s Premiership.

Finally, it will ultimately be ordinary British people who suffer. As discussed above, the requirements would increase costs for firms. These will be passed on in some form, most likely through higher prices. At a time when people are already struggling with a high cost of living, this would simply exacerbate their misery. It could also lead to job losses, fewer opportunities, and lower wages – it would be the young and the low-skilled who would suffer the most. It would also deprive consumers of the greater choice of products and services which would be afforded to them through free trade.

In an ideal world we would have no deforestation. We’d also have no pollution, nobody would ever die in a car crash, and the NHS would have an infinite pot of money to spend on medications and treatments to keep us healthy and happy forever. Unfortunately, we have to live in the real world and so the optimal level of deforestation is not zero. This is not to say that we should not take deforestation seriously. We should work closely with like-minded partners such as the EU to tackle this and use the Aid Budget to work with farmers in developing countries to improve their agricultural techniques and increase standards. Deforestation is a worthy aim, but it should not come at any cost.

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Thanks as ever for reading. I’ll probably write something else tomorrow. Enjoy the football and stay cool!

I’ve just finished reading the excellent How To Win A Trade War by Soumaya Keynes and Chad Bown. I will be writing a full review of it at some point but I think one of the best chapters in the whole book is the one on trade deficits. Keynes and Bown are absolutely right to point out that while they sometimes can be problematic, they often aren’t. I’ve been planning on writing about this for a while so here is my take on it.

Advanced economies such as Britain and the US do tend to worry about the trade deficit. Especially in terms of goods. They see it as a sign of industrial or even national decline. And, in the case of Trump’s America, of being cheated by the rest of the world. In reality, the trade deficit is not a sign of decline. It’s closer to a side effect of being a country which the rest of the world most wants to invest in. Rather than something to panic about, it can actually be a sign of a relatively healthy economy.

I’ve written about this before but there is this idea in politics that trade is a zero-sum game with winners and losers where exports count as a positive point and imports a negative. In the UK’s negotiations with Australia and New Zealand, for example, much of the commentary was around how we had been ‘beaten’ because we opened up our markets (especially in agriculture) more than the other side and so we had lost. Leaving aside the fact that Australia and New Zealand were already very open in terms of agriculture, it reveals a fundamental (and very old-fashioned) understanding of trade.

Imports are a win. They lower prices for consumers and give them greater choice. They force domestic firms to up their game and become more productive. There will be some losers such as firms who refuse to adapt, but they make most of our lives better. When I worked for Truss I tried to set up an ‘Importing is GREAT Britain’ campaign to make this case but sadly it never took off. Thankfully Adam Smith made the case more eloquently than I ever could 250 years ago.

Our politicians and much of the media treat the trade balance like a scoreboard between countries instead of what it actually is: an accounting identity that mechanically reflects how much a country saves versus how much it invests. If you actually run the numbers, and the ‘we’re losing’ narrative collapses almost immediately for both Britain and America.

Let’s start with the US. America. has run a trade deficit nearly every year since 1976. If the doom-mongers were right, that’s 50 years of continuous economic self-destruction. Instead, America spent that half-century becoming the largest, most dynamic, most innovative economy on the planet, home to the companies the rest of the world envies and the capital markets the rest of the world depends on.

I wrote about this year but the link between currencies and trade is vitally important here. The Dollar is the world’s reserve currency. Central banks, sovereign wealth funds, pension systems, and ordinary savers around the world want dollar-denominated assets (Treasury bonds, US equities, American real estate etc) because the US has the deepest, most liquid, most trusted capital markets in human history. To buy those assets, foreigners need dollars. The main way the world acquires dollars is by selling goods to the US. The trade deficit is, in large part, simply the flip side of the rest of the world’s appetite for American assets.

This confers an exorbitant privilege on the US. It has the ability to borrow cheaply in its own currency from a world eager to lend it money. Try running this experiment in reverse: imagine if America forcibly balanced its trade tomorrow. That would mean choking off the foreign capital inflows that fund American businesses, keep Treasury borrowing costs low, and finance the federal government far more cheaply than it could otherwise. President Trump and Peter Navarro should be careful what they wish for.

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Let’s focus on Britain. The UK runs a goods trade deficit (it imports more cars, machinery, food, and oil than it exports. That’s the number that gets waved around as though it’s an issue which urgently needs to be fixed. You see this across the political spectrum, including from organisations I respect.

However, Britain consistently runs a substantial surplus in services trade such as financial services, insurance, legal services, consulting, and creative industries that the rest of the world buys from London at scale. The City remains one of the most important financial centres on Earth, and that status generates enormous invisible exports that never show up on the evening news but absolutely show up in the balance of payments. Britain effectively sells the world expertise and trust; the world sells Britain physical goods. Measured the way mercantilists measure things (bags of gold) that looks bad. Measured the way a modern, services-dominated economy should be measured, it’s a sign Britain still punches well above its weight in exactly the sectors of the future: finance, professional services, and intellectual capital.

Moreover, like America (and despite all its current problems), Britain attracts substantial foreign investment such as into the property market, firms, and our gilts. This is because investors still see Britain as a stable, rule-of-law jurisdiction with deep capital markets and a lot of potential. That capital has to come from somewhere, and the trade deficit is, again, part of how it gets there.

The Trumps of this world and the mercantilists among our own political and media class cry out that other countries are beating us. No they’re not! The countries most often cited as trade ‘winners’ such as China, Germany, and Japan run large persistent surpluses, and the case can be made this reflects a weakness, not a strength: chronically weak domestic demand, ageing populations reluctant to spend, and businesses that would rather export their savings than invest them at home in better wages or infrastructure. Germany has been quietly hammered by its own central bank, the EU, and by the IMF for exactly this as it is running a surplus so large it amounts to under-investment in its own economy.

If running a surplus made a country an economic winner, Germany and Japan would have been growing faster than America for decades. They haven’t. The US economy has outgrown both for most of the past thirty years, deficit and all.

We do need to discuss the loss of manufacturing jobs. While it is true that some communities really were hurt, and pretending otherwise insults the people who lived through it. Specific regions exposed to import competition (parts of the American Rust Belt and certain British manufacturing towns) experienced real, sustained job losses that didn’t simply get absorbed by new opportunities elsewhere.

However, the trade deficit barely deserves the blame it gets for this. The single biggest force hollowing out manufacturing employment in both countries over the past forty years has been automation and productivity growth, not imports. American factories produce vastly more output today with a fraction of the workforce they once needed and that’s true even adjusting for trade. In the case of Britain we should also be pointing the finger at the reckless and frantic push towards Net Zero which has raised energy prices and crippled industry.

The deficit didn’t cause the disruption; it’s one symptom of a much larger structural shift that was happening anyway. Tariffs aimed at ‘fixing’ the trade balance, in both countries, have a long track record of raising consumer prices and provoking retaliation against exporters while doing almost nothing to bring back the specific jobs people are nostalgic for.

However, we shouldn’t be complacent here. A serious in-balance in trade can cause issues, especially if the country is facing other issues. What is more, Britain is in danger of its services surplus being eroded in the coming years and decades. We have a tax system which punishes hard work, investment, and other productive activity. We have a planning system which makes it expensive to build enough of the stuff we need including homes, offices, labs, data centres, and energy and transport infrastructure. We have burdensome taxes and regulations targeting the Jewel in the Crown of our economy: the financial services sector. Finally, we have an unstable political environment with profligate politicians determined to borrow more while we’re in the midst of a global bond glut which risks spooking the markets.

All this is to say that rather than blaming the trade deficit, we should actually do something. Provide targeted support and opportunities for people in ‘left behind’ areas who have lost out from trade. We also need to liberalise the planning system, cut red tape, and slash public spending so that we can start lowering taxes. We should then double down on free trade by striking more deals with other countries and pursuing free trade in food.

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Other stuff

I’ve written a few opinion pieces over the past two weeks. I wrote two for the Great British Think Tank: the first was on why an ‘exit tax’ would be a terrible idea and the second was on the parlous state of the public finances.

I also wrote a piece for CapX on why Burnham’s ‘Buy British’ plan is fraught with danger. I wrote an article for Conservative Home on why those on the centre-right should support the OBR. Finally, I wrote a short piece for UnHerd on why repealing the Vagrancy Act was a bad move. You can read it here.

Thanks as ever for reading. I might write something else this week. Stay cool.

Before I ‘enjoyed’ watching England play Ghana in the World Cup the other night, I watched Uzbekistan play Portugal. I’ve been ‘long’ on Uzbekistan since last September when I met some of their representatives at the WTO and they were very kind to chat to me about their accession proceedings and also treat me to Uzbek food (seriously delicious). It’s a country I knew very little about prior to then but I have since done a bit of reading about the country and I find it fascinating. Below I set out why I’m optimistic about the country’s prospects and why this shows that the WTO is a force for good in the world.

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Despite being a landlocked country wedged between some of the world’s most challenging neighbours, the country is transforming its economy with the ambition of joining the WTO. It’s on track to meet its deadline and the impact has been impressive.

To appreciate how far Uzbekistan has come, you need to understand where it started. Under Islam Karimov, who ruled the country from independence in 1991 until his death in 2016, Uzbekistan was among the world’s most closed economies. Currency controls were in place, foreign exchange was rationed, and the state maintained an iron grip over vast swathes of agriculture and industry. The cotton sector was effectively a system of state-enforced labour, rightly drawing international condemnation and trade sanctions.

The accession of President Shavkat Mirziyoyev changed the trajectory almost immediately. Since 2017, Uzbekistan has embarked on one of the more ambitious reform programmes in the post-Soviet space (liberalising the currency, slashing red tape, opening up to foreign investment, and beginning the long, painstaking process of reducing the role of state-owned enterprises). The WTO accession process, begun formally in 1994 but pursued with new urgency since 2017, has become the organising framework for this transformation.

The numbers are genuinely impressive. In 2025, Uzbekistan recorded its strongest economic performance on record, with GDP expanding by 7.7 per cent. For the first time, GDP exceeded $145 billion. This follows growth of 6.5 per cent in 2024, when the economy reached $115 billion and foreign investments surged 1.6 times to $34.9 billion.

These are not the numbers of a country muddling through. They are the numbers of an economy with genuine structural momentum. In 2025, construction output, services, and exports all grew significantly This was driven by agriculture, the textile industry, energy, and raw material processing. Real household incomes increased by 9.2 per cent, while the current account deficit narrowed. Inflation, long an issue for developing economies in transition, is being tamed. Inflation slowed to 7.3 per cent in 2025, taking it to one of the lowest levels in the past nine years.

For context: this is an economy growing at roughly the pace of India, but hardly anybody is talking about it. The question is not whether Uzbekistan is growing. It clearly is. The question is whether that growth can be sustained, broadened, and deepened. That is precisely what WTO accession is designed to help achieve

Uzbekistan applied for WTO membership all the way back in 1994, but spent two decades in a kind of institutional limbo given that it was an economic basket case and the fact that most countries are thankfully not a fan of slavery.

The recent push has been of a different character entirely. Deputy Prime Minister Khodjaev has been explicit that for Uzbekistan, the WTO accession process is not merely a technical exercise but a powerful catalyst for the broader domestic reforms underway. That framing matters. It signals that the country is using the external discipline of WTO negotiations to drive internal change. This is a proven strategy that worked for China, Vietnam, and others before it.

The pace of reform legislation has been striking. Since May 2024 alone, Uzbekistan has enacted 192 legal acts to comply with WTO standards. In April 2025, President Mirziyoyev signed Decree No. 74 (a comprehensive reform plan aimed at modernising the economy, liberalising markets, and preparing for WTO accession) covering everything from technical regulation to competition policy and energy sector reform.

In October 2025, the EU and Uzbekistan concluded their bilateral negotiations on market access for both goods and services (a significant milestone in the accession process). The EU, which accounts for roughly 10 per cent of Uzbekistan’s trade, described the deal as underscoring its political support for both WTO membership and Uzbekistan’s underlying reform process. Uzbekistan has reaffirmed its commitment to completing accession by the time of the 14th WTO Ministerial Conference next year.

Reforms undertaken in preparation for accession have included the elimination of export-contingent subsidies and exclusive rights for state-owned enterprises in sectors such as gas, electricity, and metals, as well as the liberalisation of price controls. These are not cosmetic changes. They go to the structural architecture of how the economy actually functions.

The sectors with genuine potential are diverse, which is itself a source of strength.

Agriculture and food exports are already demonstrating what liberalisation can achieve. Agricultural exports, led by fruits and vegetables, reached $2.17 billion in 2024 ) a 22.4 per cent increase), driven by a 32.5 per cent surge in fruit and vegetable sales. Uzbekistan has the climate, the land, and the labour force to become a serious food exporter to the Middle East, Europe, and beyond. WTO membership would lock in market access and give exporters the legal certainty they need to invest in supply chains and cold storage infrastructure.

Mining and resources are another obvious strength. The country holds significant reserves of gold, copper, uranium, zinc, and natural gas. Chemical exports totalled $1.68 billion in 2024, with a 29.1 per cent rise, including an 83 per cent jump in inorganic substances. Energy exports are also climbing. These commodities attract foreign capital, and with WTO-consistent rules governing investment protection and dispute resolution, the sector is likely to draw considerably more.

Textiles represent a particularly interesting case. Uzbekistan is one of the world’s largest cotton producers, and the government has invested heavily in moving up the value chain from raw fibre to yarn, fabric, and finished garments. Progress has been uneven, and the sector underperformed its investment targets in 2024, but the underlying logic is sound. If Uzbekistan can replicate even a fraction of Bangladesh’s or Vietnam’s journey up the textile value chain, the employment and export dividends would be enormous.

Demography is perhaps the most underappreciated asset. The population increased by nearly 700,000 people in 2025 alone, surpassing 38 million, further expanding the domestic consumer market. Uzbekistan is a young country, with a median age well below the regional average. That means a growing labour force, rising domestic consumption, and a potential human capital dividend in the decades ahead.

However, Uzbekistan does face a lot of challenges.

Landlocked geography is perhaps the most immovable constraint. Uzbekistan shares borders with five countries and is one of only two doubly landlocked nations in the world, meaning every route to the sea requires crossing at least two international borders. Landlocked geography creates logistical trade diversification hurdles, and a raw-materials-focused export base heightens commodity price risk. Until regional infrastructure improves getting goods to market remains expensive and complex.

Dependence on Russia and China is a vulnerability. Uzbekistan’s heavy reliance on trade and remittances from Russia exposes it to considerable risks. Economic downturns in Russia, which accounts for around 11 per cent of GDP threaten Uzbekistan’s stability, and geopolitical tensions worsen these vulnerabilities. The country has navigated the aftermath of Russia’s invasion of Ukraine with more dexterity than many expected, but the underlying exposure remains.

Inflation and structural energy reform are ongoing challenges. Energy prices have been kept artificially low for decades, and bringing them toward market levels (as WTO accession effectively requires) creates transitional pain. Inflation in services surged to 21.8 per cent in 2024 following an increase in administered prices for electricity and natural gas. Managing this transition without squeezing households too hard is no easy task.

State-owned enterprise reform remains a work in progress. Privatisation has been promised and has begun, but the pace has been uneven, and vested interests around legacy SOEs are substantial. The WTO Working Party has specifically flagged progress on privatisation and competition policy as areas requiring continued attention. Rules on paper do not automatically translate into competitive markets in practice.

Institutional capacity needs to mature alongside the legislative reforms. Investors need not just good laws but confidence that those laws will be applied consistently and fairly. Uzbekistan’s rankings on rule-of-law and business environment indices have improved, but they remain well below what would be needed to attract the most demanding categories of foreign direct investment.

Finally, and perhaps most importantly, the Uzbek people are still not free. Even if the country might become more economically free, political freedom is still pretty non-existent. It is an authoritarian state with political repression and no real opposition. This needs to change before the country is embraced too warmly by the West.

So, there we have it. I’m long on Uzbekistan because it’s already made a lot of changes. I think it also highlights the fact that despite all its issues, the WTO remains a force for good in the world. In a manner similar to the EU, countries want to join it. However, membership comes at a cost and countries which want to join have to reform. They have to liberalise their economies, stop wasting taxpayers’ money on subsidies, and open their markets to trade. Doing so has improved their economies and lifted their people out of lives of subsistence and squalor. They live longer, healthier, happier lives and their children get a good education as a result.

This obviously doesn’t work perfectly in every country. China, for example, while it has made significant reforms and has become rich, still cheats. It abuses the global trading system with high tariffs, subsidies, and intellectual property theft. The less said about Russia the better.

I might write something in the future about China’s accession process (it’s fascinating) but for the most part, when countries have decided they want to join the global trading system, they make positive reforms.

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Other stuff

It was overshadowed by Sir Keir Starmer’s resignation but Alan Greenspan died on Monday. I wrote a short piece for City AM on what his career can teach policy makers today. You can read it here.

Thanks as ever for reading! I might write something else this week if I don’t melt or burst into flames.

About this time last year I tweeted that Rachel Reeves would be pressured to changing her fiscal rules and adopt a Public Sector Net Worth (PSNW) target. Thankfully, she had more sense and didn’t do this in the end.Now, It looks almost certain that Andy Burnham will be the next Prime Minister. Whoever his next Chancellor is will likely succumb to pressure and adopt a PSNW target.

This would be a mistake.

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PSNW is, in essence, an attempt to draw up a balance sheet for the British State. The Office for National Statistics and the Office for Budget Responsibility define it as the broadest balance-sheet aggregate available under current statistical frameworks: the value of everything the public sector owns, financial and non-financial, minus everything it owes.

That makes it different from the measure most people associate with ‘the national debt’. Public Sector Net Debt (PSND) only nets a narrow set of liquid financial assets against gross debt. PSNFL, which became one of the government’s two formal fiscal targets from January 2025, goes a little further, also counting illiquid financial assets such as the student loan book and a wider range of financial liabilities. PSNW goes further still: it adds in the estimated value of physical, non-financial assets such as roads, hospitals, schools, military hardware, government buildings, and land.

On paper, this sounds like progress. A debt measure alone cannot distinguish between a government that borrows to fund a wasteful subsidy and one that borrows to build a hospital that will deliver decades of public value. Both add identically to PSND. A net worth measure, in theory, would show the hospital as an asset roughly offsetting the new liability, while the wasteful subsidy would simply make the country poorer. That asymmetry is the entire intellectual case for PSNW, and it is not a silly one. The trouble is what happens once you try to put it into practice as the rule that decides how much a Chancellor is allowed to borrow.

A fiscal rule exists to answer one practical question: how much can the government safely borrow without endangering its ability to service that debt? Net debt and net financial liabilities are reasonably good proxies for this, because the assets they net off (cash reserves, gilts held by the state, loan books) can, in principle, be sold or drawn down to meet financing needs.

Physical infrastructure cannot. Ben Zaranko (formerly of the IFS) has pointed out that the government cannot sell the strategic road network or the NHS estate to meet a gilt redemption, and in the rare cases where it could sell such assets, it would typically be because a private buyer intends to start charging the public for something that was previously free (turning a motorway into a toll road, for instance). An improvement in PSNW driven by a revaluation of the road network tells you nothing about whether the Debt Management Office will be able to sell enough gilts next quarter. Treating it as a green light to borrow more conflates wealth on paper with cash in hand.

This is not a hypothetical concern. Between 2021 and 2023, one statistical measure of UK PSNW improved significantly (driven almost entirely by rising interest rates pushing down the market value of the government’s own gilt liabilities and reducing the present value of public sector pension promises). Read naively, that would have suggested room for a substantial debt-fuelled fiscal expansion, at precisely the moment borrowing costs were spiking and the Bank of England was offloading bonds into an already strained gilt market. A target that says ‘borrow more’ exactly when underlying conditions say ‘borrow less’ is not a safeguard. It is, in the immortal words of Admiral Ackbar, a trap!

A second problem compounds the first: there is no single, agreed way to calculate PSNW, and the choices involved are not minor technicalities (they can move the headline figure by tens of percentage points of GDP). The ONS itself publishes two different versions, one consistent with European statistical standards and one with IMF standards, which disagree on whether to include unfunded public sector pension liabilities and on whether to value government debt at face value or market value. The OBR uses yet another convention for its own forecasts. Each choice sends a different signal about how much ‘headroom’ exists.

Non-financial assets compound the problem further. Statistical convention generally requires roads, hospitals and government buildings to be valued at ‘replacement cost’ (what it would cost to rebuild them today) rather than at any measure of the economic or social value they generate. A rise in construction costs or land prices mechanically inflates PSNW, even though it makes the government’s actual fiscal position worse, not better, because future infrastructure investment will now cost more to deliver. A government chasing a net worth target could end up cheering exactly the kind of cost inflation that ought to alarm it.

And because changes in pension liability valuations depend heavily on the discount rate chosen, relatively small adjustments to actuarial methodology can be the difference between a government meeting or missing its target, for reasons entirely unconnected to anything it has actually done. A fiscal rule that can be satisfied or breached by an actuary’s spreadsheet, rather than by a Chancellor’s decisions, is not a serious constraint on policy.

Even the most comprehensive version of PSNW leaves out the government’s single largest asset and single largest liability. The asset is the state’s power to tax current and future citizens. The liability is its implicit promise to fund the NHS, the State Pension, schools and defence for generations not yet born. Neither shows up on any balance sheet, however broadly drawn, which is precisely why the OBR’s long-term fiscal sustainability projections remain the more informative tool for judging whether Britain’s public finances are actually sustainable. A target built on PSNW risks giving policymakers false comfort: a balance sheet that looks healthy today tells you almost nothing about whether the next forty years of demographic change and rising health costs are affordable.

Proponents sometimes point to New Zealand as proof that balance-sheet management works. It is worth looking at what New Zealand actually does. The Public Finance Act 1989 does include net worth among its fiscal principles, instructing the government to build a buffer in total net worth against future shocks.

However, New Zealand’s binding operational target is a conventional debt ceiling (a commitment to bring net core Crown debt below 40% of GDP) not a net worth figure. Moreover, New Zealand’s own Treasury data illustrate exactly the IFS’s warning about volatility: in the 2023/24 fiscal year, an operating deficit was almost entirely masked in the net worth figure by revaluation gains on physical assets, including an upward revaluation of the state highway network, leaving net worth broadly unchanged even as the government ran a real cash shortfall. In 2024/25, net worth fell even though the headline operating position improved, because of a one-off increase in veterans’ disability entitlements.

These are not signs of a measure that reliably tracks the government’s underlying capacity to borrow; they are signs of a measure that bounces around for reasons unconnected to the day-to-day stance of fiscal policy. This is exactly why even New Zealand still anchors its real fiscal discipline to a debt ratio.

The IMF’s own 2018 Fiscal Monitor, which did more than any other document to popularise balance-sheet thinking in public finance, made the same point: net worth measures are a valuable supplementary lens, not a substitute for monitoring debt, debt service and financing needs.

This is, in fact, more or less the conclusion the UK has already reached after several years of genuine debate. Rachel Reeves explored taking ‘greater account’ of public sector assets but stopped well short of a net worth target. Reeves essentially went for PSNFL even despite pressure to go for a PSNW target.

That is a sensible middle ground: it captures some of the genuine unfairness of penalising governments for buying a financial asset of equal value to the debt incurred, without resting national fiscal credibility on the replacement cost of the road network or the latest pension discount rate.

None of this means net worth thinking is worthless. Considering both sides of the balance sheet is a useful discipline when governments contemplate nationalisations or asset sales — the 2010s sale of the student loan book at a price the Public Accounts Committee later judged poor value is a textbook example of a decision driven by a narrow desire to cut headline debt, which would have looked far less attractive judged against net worth.

However, there is a wide gulf between using net worth as one input among several and targeting it as the rule that determines how much a Chancellor may borrow.

The reckless version of this idea is one in which a government, eager to expand borrowing for political reasons, seizes on a flattering net worth reading and treats it as licence for a large, debt-fuelled expansion of spending, even as actual debt-servicing costs and gilt issuance volumes are climbing to historic highs. Markets price government debt on the basis of the state’s demonstrated capacity to raise tax revenue and control deficits, not on a replacement-cost estimate of the motorway network. A fiscal framework that confuses the two would not free Britain from austerity; it would simply move the moment of reckoning further down the road, to be paid, with interest, by a future Chancellor as the bond vigilantes and the IMF come knocking.

Ultimately, the government needs to get over its addiction to borrowing and start to live within its means. I’ve banged on about this before but we need a much smaller State where the government does a few things really well and leaves the rest to the private sector. This will involve massive spending cuts so that taxes can eventually be cut in a responsible way, productivity increases, and the economy grows. Rather than trying to figure out how it can borrow even more money via accounting trickery, the next Chancellor should focus on slashing spending.

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Thanks as ever for reading. I might write something else this week depending on events and the World Cup.

Working on trade negotiations can often feel similar to having lived through the Blitz or survived a natural disaster. Perhaps this is why officials and politicians are so keen to pop open a bottle of something fizzy and alcoholic and pose for photographs in front of flags as soon as things are wrapped up.

However, while the pleasantries are still under way, the lawyers descend in order to perform the legal scrub. Their mission: to translate the agreement into every official language of the signatory parties and ensure perfect legal equivalence across all versions. Months pass. In the case of the EU, this can take years.

While the principle of going through the legal scrub and translation process is fair and reasonable in theory, it is probably time for the EU to scrap it.

Certain words and terms can carry completely different meanings in different languages and cultures. This is why you don’t just stick the Dead Sea Scrolls or the Odyssey into Chat-GPT and hope for the best. It’s for this reason that trade deals, even after they have been negotiated, can take so long to come into force as trade lawyers argue over what exactly is meant by ‘level paying field’ or ‘sausage’.

The EU needs to embrace ambiguity. It is not a bug but a feature of trade negotiations. While officials would probably not say it publicly, trade deals are concluded because both sides believe the agreed text supports their interpretation. A clause on digital services may mean one thing to Brussels and another to London or Washington. Both parties sign because they can live with the text as they read it. The agreement comes into force. Trade increases. We all become richer. Disputes, if they arise, get sorted at some point down the line.

Insisting on a translation into every language before ratification means relitigating issues already agreed by officials and their political masters. There are significant costs associated with this.

Trade deals between the EU and other countries and blocs can run to thousands of pages. Ensuring authentic equivalence across multiple languages requires armies of specialist legal-linguists, extended timelines, and the sustained attention of negotiating teams who might otherwise be implementing the agreement or starting the next one. It’s bad for the EU, its Member States, and its trade partners.

The EU – and France in particular – might be understandably squeamish about this, but it is time for them to recognise that the Lingua Franca is English. Many bilateral investment treaties and a growing number of trade instruments designate English as the single authoritative language and provide translations provided for accessibility but carrying no legal weight. This is the approach of much commercial arbitration.

European nations are at risk of being left behind the US and Asia given their tendency to favour regulation over innovation. They cannot afford to squander the benefits of free trade by waiting years to implement Free Trade Agreements.

Trade deals can bring enormous economic benefits but are ultimately political instruments. Their genius often lies in what they leave unsaid. It’s time for the EU to embrace ambiguity and the English language.

Other stuff

I realise that I haven’t written here since May 29th!

I was pleased to write a piece for Great British Think Tank the other week. They’re new but are doing good work so do check them out and you can read why I think the government’s industrial strategy is a mistake.

I also wrote for CapX for the first time in about 18 months. It combined three of my interests: football; free trade; and making tenuous links. You can read it here.

I was also in City AM as part of their Shadow MPC where I explained why the Bank of England should not increase interest rates. Feel free to read it here.

Thanks as ever for reading. I might write something tomorrow if I don’t die from heat exhaustion but there is a chance that nobody would read it given that for some reason people will sadly be more interested in the Prime Minister.

The Chancellor has announced a list of food products which she intends to abolish tariffs on over the summer. It’s part of her Summer Holiday Savings plan dreamt up by her team at HM Treasury in an attempt to reduce the cost of living for families/keep her in gainful employment come autumn. While some of the plans announced such as the VAT cut leave much to be desired, Rachel Reeves should be commended for the cuts to tariffs.

However, lots of my fellow travellers on the centre-right have questioned why on earth Britain has tariffs on goods such as bananas in the first place. It’s a good question and I fully agree with the sentiment behind it. What’s more, the reason(s) why we do have them is fascinating (IMHO) and can teach us a lot about trade policy.

The most frequently cited reason for why governments levy tariffs on goods is to protect their domestic industries. Producers don’t like competition and most politicians don’t like confrontation and they definitely don’t like negative headlines about how they’ve sold out their farmers and so they ignore the economics and bring in protectionist measures and so everyone is happy for a while (apart from consumers and industries with less powerful lobby groups). This clearly isn’t the case with bananas (and lots of other fruit and veg) as Britain doesn’t grow them,

So, what’s the deal?

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The main reason the UK has tariffs on bananas etc is strategic. We don’t produce them but other countries do and they tend to be very important to those countries as well. As such, they are seen as bargaining chips which can be traded away in negotiations (‘We’ll drop our banana tariffs if you abolish tariffs on our beef’). So, they’re there to increase Britain’s bargaining power in current and future trade negotiations.

The UK is currently considering working towards a trade deal with Mercosur. It should definitely do this and take less time than the EU (this shouldn’t be difficult given that it took over a quarter of a century). In the negotiations Britain will be under pressure to open its market to all that lovely Argentine beef (steak lovers, rejoice) and other agricultural products. The rent-seekers at the NFU will no doubt kick up a massive fuss over this and so the government will feel pressured to not liberalise in this area and so there is a danger of the negotiations stalling. Moreover, the UK will be pushing for greater access in services and for the countries in the Mercosur bloc to liberalise in terms of digital trade. This is another potential sticking point. I wrote the other month about why Trump and the USTR are (surprisingly) correct when it comes to digital trade and the need to take a more liberal approach with fewer protections for domestic industries.

Brazil is one of the key players in Mercosur and one of the main opponents of liberalisation in digital trade. This is where bananas come in. Brazil is also a massive exporter of bananas and is keen to get its producers greater access to British consumers. So, we will likely see a situation where the UK gets concessions out of the Mercosur nations in exchange for lowering/abolishing its tariffs on bananas and increasing or abolishing its quotas.

Second (and it’s related to the first point), we still have tariffs on bananas and similar such fruits as a result of Brexit. Working on the design and implementation of the UK Global Tariff (UKGT) was pretty good fun (despite the incessant lobbying from Big Margarine) and we got rid of nuisance tariffs (those under two per cent), made them all whole numbers, and listing them in Sterling as opposed to Euros.

However, it was also a complex process. I’ll probably write a separate piece on designing the UKGT at some point but we had to strike a balance between making intermediate goods cheaper in order to boost the competitiveness of UK exports without spooking the EU, protect domestic industries, minimise disruption, make negotiations with the EU over Rules of Origin less problematic, take the Northern Ireland issue seriously, and help in trade negotiations.

On the latter point, bananas are again relevant here. You might not think of the EU as a banana producer but it is because of the Canary Islands. As such, we kept tariffs on bananas and other fruits and veg (we did some interesting stuff with tariffs on oranges, although that’s a story for another blog post) in order to put pressure on the EU via Spanish, Italian, and French farmers to get a deal.

Finally, we have tariffs on bananas because we’re worried about the potential impact on farmers in developing nations. Take Ghana, for example. As part of the UK’s membership of the EU it already had a deal in place with Ghana (and lots of other countries). All of these needed to be rolled-over. Some of them were relatively simple procedures and so the critics were kind of right to call them ‘copy and paste jobs’ but many did have to be re-negotiated and some countries saw it as an opportunity to try and get more concessions out of the UK as they knew that we faced political and media pressure to get deals signed.

Surprisingly, Ghana was one such country. Well, I say ‘Ghana’, but it was actually Nigeria. Essentially, Ghana wanted a liberalisation on Rules of Origin requirements which would allow goods shipped from Ghana (but were essentially Nigerian) to be classed as ‘Ghanaian’ for trade purposes and enter the UK market tariff free. Given that Ghana is very poor, the UK is more than happy to take a very liberal approach to low-value goods from the country to come in tariff free. Nigeria, on the other hand, is very much not poor and is on the up, the UK government felt that this was very cheeky and so the negotiations stalled. There was a very real possibility that there would have been a shortage of bananas or that the price might have spiked if this had happened – in fact there were scare stories in the UK press at the time that this might happen with sources from a certain West African country being cited.

Eventually everything was resolved. However, the UK government is cognizant of the potential impact of liberalising trade in bananas on farmers in Ghana. It is concerned that if it permanently abolished tariffs on bananas then Ghanaian producers would be out-competed by their counterparts in countries such as Brazil.

So, there we have it. Having tariffs on bananas might seem, well, bananas. However, unlike many of the things the UK government does, there are actually some logical reasons for it.

Although the reasons for tariffs on bananas and other fruit and veg might be reasonable, it does not mean they are right. The Chancellor should be applauded for the temporary tariff cut to certain food products but she should go even further. Rachel Reeves should commit to permanently abolishing tariffs on all agricultural products.

I wrote a blog post on this a while ago and so I won’t repeat myself here. The argument is the same in that it will reduce costs for consumers, provide a boost to firms in other industries, and make UK agriculture even more productive. In my earlier piece I did not reference the potential impact on producers in less economically developed nations such as Ghana and that was an oversight on my part. The obvious solution is for the UK to use the money it spends on development to help these countries to actually develop. Spend the money helping Ghanaian farmers to become more productive and for the entire country to move up the value chain.

Although there are some logical and well meaning reasons why we have such tariffs, it is still bananas that we have tariffs on bananas (and nuts that we have tariffs on nuts). The Chancellor is right to temporarily abolish tariffs on some foods not produced in the UK in order to ease the cost of living. Rachel Reeves (or whoever replaces her) should go further and abolish all agricultural tariffs and quotas and pursue free trade in food with the whole world.

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Thanks as ever for reading. I might write something else over the weekend.

It was about half 11 at night during Lockdown One. I was at my mum’s house in Huddersfield and had settled down with a hot chocolate to watch Law & Order: Special Victims Unit (my guilty pleasure). The phone rang. Late night calls are generally not spam and are almost never good news and so, even though I didn’t recognise the number, I picked up. It was the representative of a drinks manufacturer who was in quite a panic. They had been expecting the USTR to announce its new set of retaliatory tariffs as part of the ongoing Airbus-Boeing dispute which had, at the time, been levied on several drinks produced by this firm. They were puzzled as to why this hadn’t happened yet and wanted to know if I had any information. Over the next few hours I spent the time on the phone and on Teams calls with that company, other concerned firms (taking Engaging with Stakeholders to the max), other advisers, Scottish politicians, and trade lawyers.

I take you on this jaunt down Memory Lane on this Bank Holiday Monday because it’s all to do with one of the most interesting (in my humble opinion) trade disputes in history and I think it has a lot to teach us about trade policy and industrial strategy. I also spent quite a significant chunk of time working on it. So, buckle up and enjoy about 3,400 words on the Airbus-Boeing dispute.

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There are very few industries on earth where the competitive landscape has narrowed to two players and essentially stayed there for decades. Commercial aviation is one of them. Since the absorption of McDonnell-Douglas into Boeing in 1997, the global market for large commercial aircraft has been shared between a US manufacturer headquartered in Arlington, Virginia, and a European consortium incorporated in Toulouse. Between them, Airbus and Boeing supply virtually every wide-body and narrow-body jet operated by the world’s airlines. Their order books run into the hundreds of billions of dollars. Their supply chains stretch across continents. And their relationship with their respective governments has been, to put it mildly, intimate.

That intimacy is what made the dispute between the US and the EU (and UK) over aircraft subsidies so combustible. What began as a legal filing at the World Trade Organisation in 2004 metastasised over seventeen years into the largest trade dispute in WTO history, involving mutual accusations of tens of billions of dollars of illegal state support, retaliatory tariff packages covering goods far beyond the aviation sector, and a geopolitical subtext that only sharpened as China’s own aerospace ambitions grew. When the two sides finally agreed to a truce in June 2021, it was not so much a resolution as an acknowledgement that the fight had become more costly than useful.

Understanding how the dispute arose, how it was structured, and what it failed to settle tells us a great deal about the limits of international trade law, the economics of strategic industries, and the enduring temptation of industrial policy.

Our story begins not in 2004 but in 1992, when the US and the EU struck a bilateral agreement on civil aircraft subsidies (the Large Civil Aircraft Agreement, or TLCA). That deal attempted to draw a line between acceptable and unacceptable government support: it capped direct government support for new aircraft programmes at 33 per cent of development costs and regulated the terms of the repayable loans, known as “launch aid,” that European governments provided to Airbus. For over a decade, the arrangement held, or at least held well enough that neither side felt compelled to kick up a fuss about it.

The détente collapsed in 2004. The US withdrew from the TLCA and filed a complaint at the WTO, alleging that European launch aid for the A380 and other aircraft constituted illegal subsidies. Days later, the EU filed its own counter-complaint, alleging that Boeing had benefited from a vast web of federal and state support programmes that gave it an equally unfair competitive advantage. Two disputes were born simultaneously, running in parallel through the WTO’s notoriously slow dispute-settlement machinery (I intend to write something on WTO dispute resolution at some point). Thus began a lengthy dispute which would make the parties in Jarndyce and Jarndyce blush.

The US case centred primarily on launch aid (the concessional, government-backed loans provided by France, Germany, Spain, and the UK) to help fund Airbus aircraft development. It was argued that it was provided at below-market rates and structured in ways that insulated Airbus from normal commercial risk. The WTO Appellate Body ultimately agreed that launch aid constituted an actionable (though not prohibited) subsidy, finding that it had caused adverse effects to Boeing by allowing Airbus to develop aircraft it otherwise could not have financed commercially.

The EU’s case against Boeing was more sweeping. Brussels challenged what it claimed were over $19 billion in illegal subsidies flowing from a constellation of state and federal sources. These included a $3.8 billion package of tax breaks from Washington State specifically designed to help Boeing beat Airbus (politicians from the State made no secret of this); a $900 million subsidy from Kansas; a $25 million package from Illinois tied to the relocation of Boeing’s headquarters to Chicago; over $16 billion in subsidies routed through NASA and the US Department of Defense in the form of research and development contracts; and Foreign Sales Corporation export subsidies that earlier WTO rulings had already condemned. In its findings, the WTO confirmed that NASA had provided Boeing with more than $2.6 billion in subsidies through direct payments and access to government facilities, equipment, and personnel. Also, that US Department of Defense technology transfers had provided additional competitive advantages whose value the arbitrators described as unclear’.

In 2010, after a mere six years of proceedings, the WTO delivered its judgments. The verdict was, in effect, a draw. Both sides had cheated. Both had structured their support programmes in ways that breached the Agreement on Subsidies and Countervailing Measures. Both were instructed to bring their practices into conformity with WTO rules. Neither fully did.

Compliance proceedings dragged on for another decade. In 2019, the WTO authorised the United States to impose retaliatory tariffs (at the time the largest such authorisation in the organisation’s history) after finding that the EU had not adequately withdrawn its subsidies to Airbus. On 18 October 2019, the US imposed additional tariffs on $7.5 billion worth of EU exports. Crucially, the tariff list was not limited to aircraft: it covered European wines, cheeses, olives, aircraft parts, and a range of other goods. Essentially classic trade retaliation, in which you choose targets that inflict maximum political pain on your counterpart’s domestic constituencies (Sam Lowe has a cracking piece on trade retaliation from last year).

The EU struck back in October 2020, when the WTO awarded it authorisation to impose countermeasures of approximately $4 billion on US goods, following its own compliance ruling in the Boeing dispute. By this point, American whisky and motorcycles were on Europe’s target lists, and transatlantic trade in a wide range of goods had been disrupted by tariffs whose stated justification was the commercial aviation subsidy practices of two manufacturers.

The economic damage was both real and diffuse. The tariffs on goods covering $12 billion of transatlantic trade cost the US economy alone an estimated $1.6 billion. Producers of Scotch whisky (hence the calls from Scottish politicians), French wine, Italian olive oil, and American bourbon found themselves collateral victims of a legal dispute between two aircraft manufacturers and two sets of governments.

The political conditions for a settlement were not ripe until the arrival of the Biden administration. We had sent Truss to meet Trump in DC with a massive bottle of Scotch (the very unsubtle message being ‘Stop sticking tariffs on this?’). Trump gave Truss a copy of his own The Art of the Deal signed with the inscription, ‘To Secretary Truss, Let’s get a great deal, Donald’.

On 5 March 2021, Washington and Brussels/London agreed to a four-month suspension of the tariffs as a confidence-building measure, signalling that a more durable arrangement might be possible. On 15 June 2021, on the margins of the US-EU summit in Brussels, the parties announced a five-year suspension of all tariffs arising from the dispute.

The announcement was hailed in the language of partnership. ‘Instead of fighting with one of our closest allies, we are finally coming together against a common threat,’ said new US Trade Representative Katherine Tai (a much more reasonable person to deal with than her predecessor, Bob Lighthizer). The ‘common threat’ being, implicitly, China’s state-backed development of its own commercial aircraft industry through the COMAC C919. European Commission President Ursula von der Leyen declared it a breakthrough. Both Airbus and Boeing issued supportive statements.

What exactly was agreed, however, was considerably less definitive than the rhetoric suggested. The deal suspended tariffs for five years but did not eliminate the underlying subsidy programmes. It committed the EU to ‘addressing’ launch aid and established monitoring arrangements to ensure compliance, with the understanding that tariffs could be reimposed if either side was found to be violating the agreement’s principles. However, the specific subsidies that had been the subject of seventeen years of litigation were not abolished. The WTO cases were not formally closed. The fundamental tension, that both governments wished to continue supporting their own firm, was managed rather than resolved.

One concrete piece of compliance did emerge from the American side. In March 2020, Washington State enacted legislation repealing the preferential aerospace business and occupation tax rate that the WTO had found to be a prohibited subsidy. The US duly notified the WTO of full compliance on that specific finding. But this addressed only one relatively narrow element of the EU’s broader case against Boeing; the vast majority of the alleged subsidies (NASA contracts, Department of Defense R&D transfers, and various other federal programmes) remained untouched, either because the WTO had not found them to violate rules in the compliance proceeding, or because the political will to eliminate them simply did not exist.

To understand why this dispute was so intractable, it helps to understand the economics of the commercial aviation industry and the theoretical framework that makes government support for it so seductive.

Large commercial aircraft manufacturing is, by its nature, an industry of enormous scale economies, steep learning curves, and massive upfront fixed costs. Designing and certifying a new commercial aircraft programme costs tens of billions of dollars (the Boeing 787 Dreamliner cost an estimated $32 billion to develop) and these costs must be recovered over production runs measured in hundreds of aircraft spread across decades. The first unit of any aircraft is vastly more expensive to produce than the hundredth, and the hundredth more expensive than the thousandth. This means that a manufacturer who achieves greater volume will, over time, enjoy substantially lower unit costs than a competitor with smaller market share.

In an industry with these characteristics, it may not be possible to sustain more than a small number of viable competitors at global scale. In econ call this an industry with ‘natural oligopoly’ tendencies. If that is true, then which country’s firms occupy the profitable positions in this oligopoly is not simply a matter of comparative advantage in the traditional Ricardian sense, it depends heavily on history, first-mover advantage, and yes, government support.

This is the core aspect of strategic trade theory, developed by economists including Krugman and Brander in the 1980s. In industries with large economies of scale and imperfect competition, a government can, in principle, shift rents from foreign firms to domestic ones by subsidising national champions. If a government supports its manufacturer in gaining market share, that manufacturer may achieve cost advantages through learning-by-doing and scale that make it difficult for rivals to compete (even without ongoing subsidy). The strategic subsidy, in this view, is not just a gift to the firm: it is an investment in securing a profitable industrial position that generates long-run economic rents, including high-wage employment in engineering and manufacturing.

Applied to Airbus, this framework suggests a coherent rationale for European launch aid. In the 1960s, European aircraft manufacturers were being squeezed out of the market by US dominance. Without government support, it is plausible that no European challenger to Boeing would have emerged. A landmark 1995 study modelled a counterfactual world without Airbus and concluded that its entry into the market had reduced airliner prices by roughly 3.5 per cent on average, constrained Boeing’s monopoly behaviour, and transferred tens of billions of dollars in economic rents from a US monopolist to European producers and global airline customers.

However, strategic trade theory also carries important caveats that tend to get lost in the political deployment of its conclusions. The case for intervention is highly sensitive to the specific assumptions of the model: whether incumbent firms have commitment advantages, whether governments can credibly pre-commit to subsidies, whether foreign governments will retaliate (and they did). When both the US and EU subsidised their manufacturers simultaneously, neither could claim to be the clever first-mover; both were simply spending taxpayers’ money to maintain a duopoly that might have emerged from competition anyway.

The 1995 study also noted that the consumer surplus argument for subsidising Airbus was only weakly supported, because the competitive discipline of McDonnell-Douglas (before its collapse and absorption by Boeing) was already providing a check on Boeing’s market power. Airbus entry reduced prices, but much of the competitive benefit it provided might have come from MDD regardless.

So, what does all this teach us?

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First, it reveals the WTO’s limits in oligopolistic industries. The dispute demonstrated, more clearly than any previous case, that the WTO’s subsidy disciplines are poorly calibrated for industries where market structure is naturally concentrated and where government support is ubiquitous on both sides. The rules distinguish between ‘prohibited’ subsidies (tied to exports or domestic content) and ‘actionable’ subsidies (those causing adverse effects), but applying these categories to complex, long-running programmes in capital-intensive industries generates rulings that are both delayed and difficult to enforce. Seventeen years of litigation produced mutual condemnation and a negotiated truce rather than a principled resolution of what kinds of government support are legitimate in strategic industries.

Second, industrial policy is universal (everybody is at it), the question is what form it takes. Perhaps the most striking revelation of the dispute was the extent to which Boeing, nominally a product of free-market capitalism, was also deeply dependent on government support. NASA contracts, Department of Defense R&D, State tax breaks, and export finance from the US Export-Import Bank were not peripheral to Boeing’s competitive position. These were all central to it. The dispute between the US and EU was never really about whether governments should support their aerospace industries; it was about which forms of support were legally permissible under agreements that both sides had helped write. It highlights the hypocrisy of the both sides with both the US and EU claiming to be in favour of free trade and quick to accuse others of unfair practices while they both flagrantly break the rules.

Third, retaliation is a crude instrument. The tariffs imposed on wine, whisky, motorcycles, and cheese illustrated both the power and the irrationality of the WTO’s current approach to trade remedies. Collateral damage to uninvolved industries creates political pressure, but it also imposes real costs on consumers and exporters who bear no responsibility for the underlying dispute. More sophisticated mechanisms. Perhaps industry-specific tariffs, or negotiated subsidy disciplines with independent monitoring might produce better outcomes than the blunt logic of ‘hit their whisky to punish their planes’.

Fourth, geopolitical alignment shapes economic agreements. The 2021 truce was only possible because the Biden administration chose to prioritise transatlantic solidarity over the specific grievances of the Boeing dispute. The explicit framing (instead of fighting with one of our closest allies, we are finally coming together against a common threat’) referenced China’s state-backed development of its own large commercial aircraft. The rise of COMAC as a potential third competitor in the commercial aviation market changed the strategic calculus for both sides: a duopoly that fights itself is more vulnerable to displacement by a new entrant. Economic agreements, even ostensibly technocratic ones about aircraft financing, are inseparable from the broader geopolitical relationships between their signatories.

Fifth, the WTO’s enforcement architecture is fragile. The dispute unfolded against the backdrop of the crisis in the WTO Appellate Body, which was effectively paralysed from 2019 onwards after the US blocked the appointment of new members. The inability to appeal panel decisions has created a gap at the heart of the rules-based trading system. The Airbus-Boeing case was old enough that its major rulings predated the Appellate Body’s effective collapse, but future disputes of similar complexity may find themselves without a functioning arbiter. As I mentioned above, I would like to write something on this in the future.

Finally – and most importantly – industrial strategy is risky business. Many commentators argue that research spillovers, learning-by-doing, coordination between firms and suppliers, and the financing of projects with long payback horizons can justify some form of government support in industries like aerospace. However, some form is doing a lot of heavy lifting here. The question of whether that support should take the form of low-interest development loans, government R&D contracts, tax breaks, or export finance has both economic and legal dimensions that the current WTO rulebook addresses only imperfectly.

However, it is not just the danger of running afoul of trade rules that is the issue here. Politicians in both the US and the EU decided that they wanted to pick winners and were prepared to use taxpayers’ money to do so. Now, it might have been the case that Airbus may never have been able to compete with Boeing without EU State Aid. Or, Boeing may not have been able to respond to the competition from Airbus and ultimately collapsed. The end result would have been a monopoly where consumers were worse off.

This may well be true. However, we just do not know and we can never really know. There was a significant opportunity cost associated with all of this. Taxpayers’ money which could have been spent on other projects which may have produced more benefits for people, or simply not spent at all and where households and firms got to keep more of their own money and spend and invest it as they saw fit.

Moreover, the additional costs faced by other firms and industries who got caught in the cross-fire of the dispute. They lost billions, deferred investment, and had to spend significant sums hiring trade lawyers and lobbyists to harass government advisers late at night.

Ultimately, one could argue that after a lengthy dispute, huge disruption, and tens of billions of taxpayers’ money, all that was really achieved was the maintaining of a duopoly. It might not be as futile as Jarndyce and Jarndyce, but it is difficult to make the case for it being a good use of time and money.

This is particularly important for the UK and the EU. Just today the FT had a piece on how the EU is embracing subsidies and both Labour and Reform are quite keen on industrial strategy as they see the need to nationalise ‘strategically important’ industries. As discussed above, this is a waste of taxpayers’ money and is economically distortionary. Moreover, it tends to ignore the problems faced by many ‘traditional’ industries such as steel in countries such as the UK; namely the frantic push towards Net Zero and the plethora of taxes and regulations.

If the UK and the EU are to have an industrial strategy it should not involve governments trying to pick winners and supporting them with taxpayers’ money. Rather, it should focus on lowering the cost of business for all industries (including the ones it thinks are strategically important) by slowing down on Net Zero so that energy becomes more affordable, liberalising the planning system so it’s easier to build homes and infrastructure, cutting red tape, and reducing public spending so that taxes can be slashed.

So, there we have it. Airbus-Boeing was a fascinating case study in trade policy. It teaches us a lot, mostly that governments shouldn’t be wasting taxpayers’ money on trying to pick winners through subsidies.

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Thanks as ever for reading. I’ll write something next weekend and perhaps something else before. Enjoy the rest of your Bank Holiday!

For most of its post-independence history, Jamaica has been defined economically by a trio of afflictions: high debt, low growth, and stubborn inflation. For decades, successive governments lurched between IMF bail outs, currency crises, and economic emergencies, while the Bank of Jamaica (BOJ) tried to hold the line with an unwieldy cocktail of monetary aggregates and exchange rate management. Then, in 2017, something changed. Jamaica formally adopted inflation targeting. Here are 2,500 words on why and how this happened.

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To understand why inflation targeting mattered so much, you have to understand just how dysfunctional Jamaica’s macroeconomic environment had become by the early 2000s.

After gaining independence in 1962, Jamaica enjoyed strong economic growth and quickly achieved middle-income status. However, three decades later, incomes started to plateau, including following a massive financial crisis in the 1990s and a further setback after the Global Financial Crisis. The country’s economic trajectory went from promising to precarious, driven by a complex mix of policy failures, external shocks, and deep structural weaknesses.

The roots of its inflationary problem lie in the early 1990s. Jamaica actually did the right thing by liberalising its financial sector in 1992. However, with no exchange rate controls, foreign currency was supplied on demand. Reserves quickly depleted and the exchange rate depreciated sharply. A rapid increase in prices ensued, and the inflation rate reached a whopping 60 per cent in 1992. This liberalisation without adequate prudential scaffolding proved catastrophic. Inflation averaged 27.2 per cent per annum over the period 1990 to 1999.

As a result, the exchange rate became the central obsession of monetary policy, and for understandable reasons. Inflation, particularly since the 1990s, has been driven primarily by shocks to the exchange rate. Jamaica’s heavy dependence on imports for both consumption goods and productive inputs meant that currency depreciation fed directly into consumer prices and so it faced the classic pass-through problem which plagues small open economies. Monetary policy, in practice, had become a form of informal exchange rate management, with the BOJ watching the Jamaican dollar closely rather than anchoring on any explicit price stability mandate.

This is partly the result of Jamaica’s torturous monetary history, which has been characterised by decades of sustained high inflation, high interest rates, and persistent devaluation. Jamaica had little experience with a ‘normal’ monetary environment. This made monetary policy reform even more challenging.

By the early 2010s, the debt situation had reached breaking point. By 2013, Jamaica’s public debt had reached a historic high of about 147 per cent of GDP, making it one of the most indebted countries in the world (UK government: ‘hold my beer’). During most of the past three decades, Jamaica had suffered from very low growth, high public debt, and serious social challenges. A Stand-By Arrangement approved by the IMF in February 2010 went off-track, further eroding confidence. This further lowered economic growth and was undermining investor confidence, increasing crisis risks. At such debt levels, a return to international market financing was difficult to foresee.

Fiscal dominance is important here. This essentially occurs when a government’s debt burden is so large that the central bank is effectively forced to subordinate monetary policy to fiscal needs such as by monetising debt, suppressing interest rates, or maintaining an undervalued exchange rate. In such a situation genuine price stability becomes virtually impossible. Most critical for any switch to using interest rates as the principal monetary policy lever was a shift away from fiscal dominance, which had long defined Jamaica’s monetary landscape. Without solving the fiscal problem first, inflation targeting simply wouldn’t have worked.

The turning point came in 2013, when Jamaica struck a new deal with those unsung heroes at the IMF under an Extended Fund Facility. What distinguished the post-2013 era from earlier attempts was the government’s commitment to structural reform, legal enforcement of fiscal rules, and a rare cross-party consensus on debt reduction.

At the heart of Jamaica’s success was the introduction of a binding Fiscal Responsibility Framework, first legislated in 2010 and strengthened in 2014. The law required the government to balance the budget, reduce the debt-to-GDP ratio to 60 per cent by 2026, and cap public sector wages at 9 per cent of GDP. This kind of institutional constraint was a necessary precondition for monetary credibility. A central bank can only credibly target inflation if it is not simultaneously being called upon to finance a runaway fiscal deficit (we’ve seen something similar with Argentina which I’ve written about before).

Since the start of the 2013 Extended Fund Facility and the subsequent precautionary Stand-By Arrangement in 2016, Jamaica’s public debt fell by about 50 per cent of GDP and is on track to reach the legislated 60 per cent of GDP target. The unemployment rate fell to historical lows, and foreign reserves were rebuilt to comfortable levels.

In 2017 the government introduced the Bank of Jamaica Foreign Exchange Intervention and Trading Tool, which led to flexible two-way exchange rate movement. This shift to a genuinely flexible exchange rate was another essential enabling condition. Inflation targeting and a fixed or managed exchange rate are generally incompatible; a country cannot simultaneously commit to a price level target and an exchange rate target without giving up monetary independence.

The proposed amendments revising the BOJ Act were designed to facilitate the move to full-fledged inflation targeting, providing a legal basis for the operational independence of the central bank, and strengthening its governance structure and accountability framework.

Inflation Targeting rests on a well-developed body of monetary economics. The framework was pioneered by New Zealand and subsequently adopted across the developed world before spreading to emerging markets. After being initiated by New Zealand, Inflation Targeting has been adopted by a large number of countries. Research has found evidence that adopting such a policy leads to overall economic performance improvements.

The intellectual foundations were laid by Ben Bernanke and Frederic Mishkin, whose 1997 paper provided the framework. Mishkin argued that inflation targeting offers five key institutional advantages: a clear nominal anchor; a transparent decision-making process; reduced scope for time-inconsistency in monetary policy; a framework for communicating with the public; and enhanced accountability for central banks. The main argument underlying this concept is that an official announcement of an inflation target improves a central bank’s credibility and helps to lower inflation and the volatilities of inflation and real output.

The debate about whether inflation targeting works in emerging markets has been more contentious. Masson, Savastano, and Sharma identified the institutional preconditions for inflation targeting in developing countries, including central bank independence, absence of fiscal dominance, and well-developed financial markets. Jamaica, for most of its history, failed most of these tests. The 2013 reforms were, in large part, about meeting them.

Roger and Stone demonstrated a direct link between inflation targeting and improved economic performance across their sample of emerging market adoptees. Their work is particularly relevant to Jamaica because it emphasised the role of the transition period (the gradual journey from high inflation to a credible target) as a legitimate and important phase of policy evolution. A case can be made for a central bank in Jamaica’s situation to move to a soft inflation targeting regime, supported by fiscal consolidation, as an intermediate step before full-fledged inflation targeting. This is precisely the path Jamaica followed: consolidating its public finances through the 2013 IMF programme, then progressively building the institutional infrastructure for full-fledged inflation targeting before the formal adoption in 2017.

In 2017, the Bank of Jamaica, set an annual inflation target of between 4 per cent and 6 per cent (I wrote the other week on why ranges are better than a rigid target). The inflation target of 4 to 6 per cent is considered optimal to support Jamaica’s long-run growth and is also consistent with the programmed reduction in public debt. The width of the target range accounts for the historical volatility of inflation, given the economy’s susceptibility to weather-related, exchange rate, terms of trade, and other shocks.

The BOJ adopted what it calls a Forecast and Policy Assessment System. Using this system, the BOJ tracks inflation and provides projections of where the rate of price increases is expected to be in the future. The Bank’s economists provide the MPC with monetary policy advice eight times per year and enables it to make and communicate its decisions about the BOJ’s monetary policy stance. The Bank’s modelling is able to provide a snapshot of inflation projections two years ahead, in line with globally accepted methods.

One of the most distinctive aspects of the Jamaican inflation targeting experience has been the BOJ’s communications strategy. Central bank communication is now understood as a core policy tool: if people expect inflation to stay low, they behave in ways that help keep it low (wage demands are moderate, long-term contracts are easier to price, businesses plan more efficiently). But communicating this to a population with limited financial literacy posed a genuine challenge.

Jamaica is one of the poorest countries in the world to ever have adopted inflation targeting. In more advanced countries, people are generally able to understand the implications of central bank data releases for their mortgages and investment portfolios. In Jamaica, this is much less certain.

The BOJ’s response was to abandon the stiff, technical language of conventional central banking (which only people who like reading obscure blog posts on a sunny Saturday enjoy) and reach people where they actually were. It broke the central banking mould with a reggae-inspired communications strategy aimed at educating the public on inflation targeting and the country’s transition from a fixed exchange rate regime. The campaign went viral and won multiple awards (some of the videos are still on YouTube).

The planning began in late 2018. One of the campaign’s innovations has been the introduction of the Croc O. Doyle character (a suave secret agent with a licence to target inflation) who has the capacity to carry a serious message while being more fun and engaging than any central banker (I’m looking at you, Andrew Bailey).

For Inflation Targeting to work, people have to be confident that the government will be able to keep inflation within the target range. If people lack that confidence and believe prices will rise at a faster rate, they tend to spend their money as quickly as possible, which increases demand for goods and services, pushing prices even higher. Anchoring expectations is essential.

So, what has been the impact?

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The results, against a difficult historical baseline, have been striking. Inflation has been kept within the targeted range since mid-2017. The Bank’s surveys show expectations of price-setters in the years following the adoption have centred around 4 to 5 per cent, down from around 5 to 6 per cent in 2018.

The framework faced its most serious test during the global inflation shock of 2021–22. Post-pandemic supply chain disruptions, energy price surges, and the increase in money supply growth pushed inflation well above target in virtually every country on earth. Jamaica was no exception. The BOJ brought headline inflation down from 11.8 per cent at April 2022 to 5.9 per cent at September 2023, with the outturn further reduced to 5.1 per cent by October 2023. This rapid disinflation, achieved without a prolonged recession or financial instability, was widely seen as a validation of the framework’s credibility.

Inflation has generally tracked within the Bank’s target range of 4.0 to 6.0 per cent since March 2024.

The broader macroeconomic transformation has been remarkable. Since May 2013, Jamaica’s implementation of the economic reform programme has been exceptional by international standards. After three years of difficult economic reforms, inflation reached historical lows, the current account deficit more than halved, net international reserves doubled, and access to domestic and international financial markets was restored, supported by upgrades in credit ratings and historically high business confidence indicators.

Real GDP growth was 4.6 per cent, 5.2 per cent, 2 per cent and 1.8 per cent in 2021, 2022, 2023 and 2024 respectively, with record-low unemployment. These are numbers that would have seemed implausible during the dark years of 130–147 per cent debt-to-GDP ratios and double-digit inflation.

So, what can all this teach us?

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First, fiscal discipline is vitally important. Many countries around the world have learnt this lesson the hard way. There is no Magic Money Tree (MMT) and government’s need to live within their means. There is huge pressure on the current UK government to ignore this and a temptation for whoever replaces Starmer and Reeves to become profligate with the public finances. They need to resist this and dramatically reduce public spending so that the government can slash public spending and eventually lower taxes. The alternative is unthinkable. The country needs to get its public finances in order now or else it will face a painful reckoning in the not too distant future.

Second, monetary policy really does matter. It wasn’t Inflation Targeting alone which helped to fix Jamaica’s economy, but it did play a crucial role. Monetary policy does often feel detached from everyday life but it impacts us all. We’ve seen so far that Inflation Targeting can be an effective tool. However, it is a blunt instrument and in the UK should be replaced by nominal GDP targeting (I will eventually write something on this).

Regardless, Jamaica’s example shows us that Central Bank Independence matters and is far too important to allow politicians to meddle with it. Whoever ends up as Chancellor needs to commit to Central Bank Independence if they want to maintain even a shred of credibility.

Finally, communication is often overlooked but is important. Jamaica got this spot on and the Bank of England and the government could learn a lot from this. I’m not saying that Andrew Bailey and Catherine Mann should release a reggae album, but the MPC could clearly do a much better job (the introduction of Monetarism by Thatcher’s government was communicated via an advert with a catchy tune – although sadly it didn’t involve the Iron Lady and Geoffrey Howe).

I wrote about this back in March but its woeful communication about monetary policy spooked the bond market and set inflation expectations spiralling forcing Bailey into a hasty TV interview in an attempt to calm everyone down.

Or, take Rachel Reeves, who decided it was a good idea to ruin breakfast for everyone before the Budget by saying that she was going to hike taxes on everyone. This pretty much destroyed business and consumer confidence and so obviously had a negative impact on the economy. Contrast this with Mario Draghi. His ‘Whatever it Takes’ inspired confidence in consumers and investors and pretty much saved the Eurozone.

So, there we have it. Jamaica still has a long way to go but it’s transformation has been remarkable. Sound fiscal and monetary policy have played a crucial role in this. The UK and the rest of Europe could learn a lot from this.

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Thanks as ever for reading. Going forward it is my plan to write two pieces a week (one longish and another shorter and more topical) but we shall see how that works out. Enjoy your Bank Holiday!

The UK is set to sign a Free Trade Agreement with the Gulf Cooperation Council (GCC) comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE. This has been rumbling on for a while now so well done to the Secretary of State, his advisers, the officials, and the negotiators on getting it over the line. The deal is controversial for a number of reasons and, while I don’t think it’s perfect, it’s still a good thing for two main reasons.

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First, although it has already got a bit of derision online from the usual suspects who are pointing out that in GDP terms, it is pretty negligible and in no way makes up for leaving the EU. All this is true. As I’ve written before, most FTAs don’t really move the dial in economic terms as they still focus on tariff reduction and elimination which, given that they’re already relatively low, have limited impact.

However, even if the economic gains are modest – they are still a gain. To quote a well known supermarket (which definitely should NOT have its prices capped), ‘Every little helps’. Moreover, in the age of Trump where the global trading system seems to be disintegrating, it’s encouraging to see the UK committing to free trade. It’s free trade which has previously made Britain great and has lifted countless people out of poverty. Free trade is a wonderful thing and we should want much more of it.

The deal will boost British exports to the region with food producers and car manufacturers being the biggest winners. It will also give British businesses and consumers greater choice and access to cheaper goods and services – this is a good thing at any time and should be welcomed now when many firms are struggling and households are feeling the strain.

Second, FTAs are not just about economics. I wrote about this a few years ago in the context of the UK’s accession to CPTPP and this remains the case. Trade deals are about closer ties, geopolitics, and defence. This is important with all countries and blocs but it is particularly important when it comes to the Middle East and the Gulf. We live in an increasingly dangerous and unstable world and that whole region is even more volatile than usual and so it is imperative that the UK strengthens alliances there and around the world.

The deal and the debate around it also have two important lessons for us.

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First, it’s time for the government to stop ‘Engaging with Stakeholders’. I wrote about this the other week but it’s particularly pertinent in this context. The deal is controversial because some of the countries in the GCC have appalling human rights records and are also petrostates. This is sub-optimal. Obviously human rights and the environment are important and the UK should do what it can to protect them.

However, we also have to deal with the world as it is and not the one which we’d like to have. NGOs, trade unions, charities, and other campaign groups have all been quick to condemn these negotiations. Some of their concerns are legitimate, but they do this all the time. When I was at Trade, the Secretary of State, ministers, and hard-pressed advisers had to waste their valuable time meeting with these people, listening to their ‘concerns’, and then having to respond to the misinformation which they would then pump out. These people would rather we didn’t do any trade with anyone.

Free trade is one of the ways in which the UK can go for growth and so it is too important for the government to allow itself to be tied up in endless consultations or agreeing to the unreasonable demands of lobbyists. The government should stop wasting taxpayers’ resources on this and simply get on with striking as many trade deals as possible.

Second, it again shows why rejoining the Customs Union would be a mistake. I’ve written about this before but being in the Customs Union but outside of the EU was always the worst possible Brexit outcome. Whatever your thoughts on Brexit or how it’s been handled, the country’s trade policy has actually been quite successful with the UK being able to rollover and improve most of its old deals as well as strike new ones. Rejoining the EUCU would mean throwing all of that away.

Furthermore, the disruption caused by Trump has demonstrated the importance of being able to take a nimble approach to trade policy. Although the UK has lost a lot of negotiating power from being outside of the EUCU, it has been able to respond quickly and act in its own interests in order to strike deals without being held back by French farmers. Of course the UK should be aiming for a very close trading relationship with the EU – gravity is real – but it should also be aiming to trade freely with the rest of the world. Rejoining the Customs Union would prevent it from doing so.

So, there we have it. The devil will be in the detail, but the government should be congratulated on striking a trade deal with the Gulf Cooperation Council. Free trade is a wonderful thing and we should welcome more of it, even if it means dealing with some unsavoury states. The government needs to stop Engaging with Stakeholders when it comes to trade and the Prime Minister (and the people who want to replace him) need to put the notion of rejoining the Customs Union to bed.

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Thanks as ever for reading. Only a short one and I’ll probably write something more in depth once the deal is agreed and the text is published. Enjoy the rest of your week!

Every May, roughly 160 million people tune in to watch sequined performers deliver three minutes of carefully crafted spectacle to a panel of national juries and a continent (and more) of telephone voters. Eurovision is, on its face, a celebration of pop music and European solidarity. While I’m certainly not a mega-fan and the music isn’t quite my cup of tea, I really do enjoy watching it – often while in fancy dress (mercifully, photos are not available).

Anyway, this is a blog dedicated to economics and public policy and to often sucking the fun out of popular culture and this post will be no exception. I actually wrote about Eurovision three years ago in the context of government reform which you can read here, but this post will take a slightly different approach.

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Eurovision presents itself as a meritocratic competition. Yet the contest is, in economic terms, riddled with market imperfections. Chief among them is the problem of voting blocs.

Research by Ginsburgh and Noury found that while musical quality does play some role in voting outcomes, geographical proximity and shared cultural identity are powerful predictors of who gives points to whom. The Scandinavian countries tend to support each other. The Balkan bloc votes together. Baltic States tend to vote for each other. The UK tended to vote for Ireland. Nobody votes for the UK…

The phenomenon mirrors home bias in financial markets, where investors systematically over-weight domestic assets contrary to what diversification theory would recommend. Just as investors favour the familiar over the optimal, Eurovision voters favour the geographically and culturally proximate over the objectively excellent. The result is a systematic distortion of outcomes away from what a truly open, information-rich market would produce.

There is also the problem of information asymmetry. Most viewers vote on the night, having heard each song once (this isn’t true for super-fans including many of my friends who are obsessed with it). Professional juries, introduced in 2009 and reweighted several times since, were partly intended to correct this by injecting the equivalent of expert opinion into a noisy market. The tension between jury and televote results often reflects the gap between informed and uninformed preferences, a dynamic familiar to anyone who has studied principal-agent problems in economics.

Eurovision also illuminates the economics of public goods and cultural externalities. Participating in the contest is not cheap. The European Broadcasting Union requires member broadcasters to fund the event, and countries that qualify for the Grand Final must bear significant production costs for their staging. Smaller nations, in particular, face a classic dilemma: the collective prestige of the contest benefits all members, but the costs of participation are borne individually.

Yet countries keep entering, including ones which aren’t even in Europe, because the prize is not merely a trophy. It is soft power. Research in international relations has long documented the value of cultural diplomacy, and Eurovision is perhaps the world’s most-watched cultural competition. A strong performance generates tourism interest, boosts national mood, and projects an image to the rest of the world. These are textbook positive externalities: benefits that spill beyond the direct participants and are not captured in the price mechanism.

This is why states are willing to spend well beyond what strict cost-benefit analysis would justify. The returns are diffuse, long-term, and difficult to monetise. But they are real. This is perhaps why Britain pours so much money into it each year despite it often being an exercise in humiliation for the country.

Does hosting the event actually pay off? Here, the economics becomes genuinely contested. When a country wins Eurovision and hosts the following year’s contest, it enters a familiar debate that also surrounds the Olympics, the FIFA World Cup, and other mega-events: does hosting deliver a net economic benefit?

The case for hosting looks superficially compelling. The host city receives an influx of tourists, television exposure to a global audience, infrastructure investment, and a burst of local spending on hotels, restaurants, and transport. When Liverpool hosted in 2023 (standing in for Ukraine) the city reported visitor spend of around £50 million across the contest period, with an estimated £60 million in total economic impact according to research commissioned by the city council.

However, there is a case for caution. Analysis on major sporting events by Baade and Matheson found that ex-post economic impacts are far smaller than pre-event forecasts, and sometimes negative. Several mechanisms explain this gap.

First, there is crowding out: regular tourists are displaced by Eurovision visitors, meaning the net increase in visitor numbers is smaller than the gross figure suggests.

Second, there is leakage: a significant share of spending flows to international hotel chains and broadcasters rather than staying in the local economy. Third, event-related construction and security costs often fall on the public purse in ways that official impact assessments undercount.

There is also the opportunity cost to consider (rather apt for this blog). The resources devoted to hosting Eurovision such as public subsidies, staff time, infrastructure etc could have been deployed elsewhere. A city that spends £10 million in public funds to secure a net benefit of £12 million has done well, but only if those same funds could not have generated £15 million through alternative investment. We just don’t know.

The picture is further complicated by the legacy effect. Some host cities genuinely do enjoy lasting benefits such as improved transport links, upgraded venues, and an enhanced international profile that sustains tourism for years afterward. Others find themselves saddled with underused facilities and public debt. The difference often comes down to whether the host city had a coherent plan for using the event as a catalyst, rather than an end in itself.

In short, Eurovision teaches us a fair bit about economics. Taking part in it is almost certainly worth it for countries, despite the cost. Hosting it, on the other hand, probably isn’t.

Just a short one this week as I’ve been unwell and the FA Cup is about to start. Hoping to return to perhaps two a week (a long/niche one and a shorter/topical one) but we shall see.

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Thanks as ever for reading. Have a great weekend and enjoy the Eurovision if you’re watching!

I wasn’t going to write anything today but it’s raining. So here are roughly 1,500 words about onions.

Yesterday I saw on X (previously Twitter) that a group of students from the University of Chicago were handing out free onions in protest against the 1958 Onion Futures Act. The Act banned the trading of futures contracts on onions, making the humble vegetable the only commodity in the US for which futures trading is explicitly prohibited by law ( until 2010 when motion picture box office receipts were also included). Nearly seven decades later, this anachronistic statute remains on the books, a relic of political panic dressed up as consumer protection. The economic case for abolishing it is overwhelming.

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Our story begins in the mid-1950s, when two Chicago traders (Sam Siegel and Vincent Kosuga) accumulated a spectacularly large position in onion futures. By the autumn of 1955, they held contracts on roughly 30 million pounds of onions, more than the entire US crop. When they attempted to unwind their position, the market collapsed catastrophically. At one point, a 50-pound bag of onions was selling for as little as 10 cents which was less than the cost of the bag itself.

Outraged onion farmers lobbied Congress, and they found a champion in the form of Gerald Ford. The Onion Futures Act was signed into law in August 1958, prohibiting futures contracts on onions on any exchange. It has never been repealed.

The law was a political response to a specific episode of manipulation, not a considered economic policy. And yet it endures, despite the overwhelming evidence against its continued existence.

To understand why the ban is so damaging, we first need to look at what futures markets actually do. Critics tend to focus on the speculative element, namely the casino-like quality of traders betting on future prices. But this misses the fundamental function that futures markets serve: they aggregate dispersed information and produce price signals that guide real economic decisions.

When a futures market exists for a commodity, farmers, processors, and distributors can observe forward prices and adjust their behaviour accordingly. A high futures price for next spring’s onions signals that the market expects a shortage, encouraging farmers to plant more. A low price signals oversupply, discouraging over-production. These signals coordinate the decisions of thousands of independent actors without any central planner issuing directives. They are a mechanism for price discovery.

Without futures markets, participants in the onion supply chain must rely on gut instinct, personal experience, and lagged spot-market data. The result is predictable: chronic miscoordination, boom-and-bust cycles, and price volatility that harms everyone from the farmer to the consumer at the supermarket checkout.

Perhaps the most striking argument against the Onion Futures Act comes from the data. Economists who have studied the question have consistently found that onion prices are more volatile than the prices of comparable commodities that do have active futures markets. The very talented Polish econ student, Jan Muchorowski, pithily demonstrates this with just one chart.

The absence of a futures market was associated with significantly higher price swings. Onion prices routinely fluctuate by 50 per cent or more within a single year. Comparable vegetables such as carrots, potatoes, cabbages with functioning futures markets, tend to exhibit far less dramatic price movement.

This is not a coincidence. Futures markets provide a mechanism for hedging risk. When growers can lock in a price for their future harvest, they are insulated from catastrophic price falls. When processors can hedge their input costs, they can plan capital expenditure with greater confidence. The absence of these tools forces all the risk onto the weakest participants in the supply chain and these tend to be smaller family farms with the least capacity to absorb it.

A persistent myth holds that speculators destabilise commodity markets by introducing noise, manipulation, and irrational exuberance. The Siegel-Kosuga episode of 1955 seems to confirm this story. But a review of the literature tells a more nuanced and, on balance, more optimistic tale.

Speculators who get their bets wrong lose money and exit the market. Those who survive and profit tend to do so by correctly anticipating future supply and demand conditions. In other words, by bringing genuinely useful information to the market. Research going back to Milton Friedman’s foundational work in the 1950s has shown that profitable speculation tends to actually be stabilising, not destabilising: speculators buy when prices are low (supporting prices) and sell when prices are high (dampening peaks).

The manipulation that occurred in 1955 was egregious (but also pretty funny if you read up on it), but the appropriate response was stronger anti-manipulation enforcement, not an actual ban on the entire instrument. The Commodity Futures Trading Commission now has robust legal tools to prosecute market manipulation.

The cruelest irony of the Onion Futures Act is that it was passed ostensibly to protect farmers, but it systematically disadvantages them (many such cases). A farmer who can only sell onions on the spot market is fully exposed to price risk at harvest time. If the crop is large across the growing region and prices fall sharply, there is no recourse. The farmer cannot hedge, cannot lock in a forward price, and they cannot transfer that risk to a willing counterparty.

This structural vulnerability encourages farmers to under-invest in onion production. Why expand a business when your revenue is entirely unpredictable? It also accelerates consolidation, as only larger, better-capitalised operations can survive sustained price volatility. The small family onion farm, the very constituency the Act was meant to shield, is left more exposed than ever.

So, what does this mean for us?

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The first lesson is about the dangers of legislating in response to a single dramatic episode. The Siegel-Kosuga manipulation was pretty dodgy, obviously. However, it is a classic example of politicians over-reacting and making life worse for most people. I wrote about this the other year, but the optimal level of bad things is generally not zero.

The second lesson concerns regulatory capture and political incentives. The Onion Futures Act survived for decades in part because the constituency that benefits most from repeal is consumers. They would enjoy more stable food prices but are large, diffuse, and are unlikely to even be aware of the issue (so h/t to the Chicago students raising awareness).

Moreover, the group that originally drove the ban (Big Onion) was small, geographically concentrated, and highly motivated. This is a textbook example of concentrated benefits and dispersed costs: a dynamic that systematically produces bad policy and resists correction. Any serious programme of regulatory reform needs mechanisms to surface and represent the interests of the diffuse majority, not just the organised minority. I’ve written at length before on why public policy should represent the interests of consumers rather than Big Farmer.

We see this all the time in Britain; a small group of protestors in a town or city successfully lobby their MP to oppose the construction of new homes, energy infrastructure, or data centres. The end result is that these people might have a slightly easier life but things get worse for everyone else and the country as a whole. In fact, the whole of government is centred around ‘Engaging with Stakeholders’ which normally means mandarins and ministers sat in a room listening to the unfounded concerns and unreasonable demands of groups with vested interests. HM government needs to crush the NIMBYs and stop pandering to stakeholders if it wants to see the economy grow.

The third lesson speaks to the role of evidence in policymaking. The empirical case against the Onion Futures Act has been available for decades. Researchers have documented the excess volatility, the harm to farmers, and the absence of any stabilising effect from the ban. And yet the law remains. This suggests that evidence alone is rarely sufficient to dislodge entrenched legislation; political will and advocacy must accompany the data. Think tanks, academic economists, and commodity market practitioners have a role to play in translating research into reform. I’ve experienced all of these challenges in my previous roles as a think tanker, an academic, and a government adviser.

Finally, the Act raises an important question about the appropriate scope of financial regulation. Futures markets are not inherently dangerous instruments requiring special restriction. They are risk-transfer mechanisms that serve legitimate economic purposes. Regulation should focus on stamping out bad conduct such as fraud and manipulation rather than on blanket prohibitions of particular instruments or asset classes. Something I’ve thought for a while is that the reason why Total Factor Productivity Growth is so low in the UK in the UK can be largely explained by the fact that manufacturing and financial services never really recovered after the Global Financial Crisis. Manufacturing due to high energy costs and financial services because of the plethora of taxes and regulations placed on firms after the GFC. I’ll probably write a long piece on this at some point.

Repealing the Onion Futures Act would be a small legislative act with a surprisingly large symbolic significance: a signal that politicians are capable of learning from its mistakes – and this should (hopefully) inspire politicians in the UK as well.

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Thanks as ever for reading. I probably won’t write anything again until next weekend but I have a train journey to Cambridge on Tuesday so we shall see. Enjoy the rest of your long weekend!

Green Party Leader, Zack Polanski has announced that if his party forms the next government then they will introduce a £15 minimum wage (as well as a ‘billionaire tax’). Regular readers of this blog will probably know that I think both of these ideas are terrible. For an attempt at brevity, and to do the topic justice, I will just focus on the minimum wage.

It’s already generated quite a lot of fierce debate. Supporters of the policy answered objections by saying things such as ‘So, you think a cleaner is worth less than a CEO?’ or, ‘So you want bar staff to starve?!’ I won’t respond to those silly statements other than to say that as someone who has previously worked in a bar during the holidays (Koko in London and the Cockpit [not as dodgy as it sounds] in Leeds) and whose mum worked as a cleaner, I obviously think those statements are ludicrous and offensive.

Lots of people supporting the policy back it up with overly simplistic statements. However, critics of the policy – including many of my fellow travellers on the Centre Right – are also guilty of this. In reality, it’s actually quite a tricky issue. I’ve not written about it since all the way back in 2018. Back then I did essentially a literature review of the topic. The below attempts to do the same thing.

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The foundational expectation from a basic supply-and-demand model is straightforward: raise the price of labour above its market rate and employers will buy less of it, meaning job losses. For decades, this intuition dominated policy discussions. Then, in 1994, David Card and Alan Krueger published what became one of the most cited papers in labour economics.

Comparing fast-food employment in New Jersey, which had just raised its minimum wage, with neighbouring Pennsylvania, which had not, Card and Krueger found no negative employment effect. If anything, employment rose slightly in New Jersey. The paper was immediately contested, but it opened the door to a generation of ‘natural experiment’ studies that exploited State-level policy variation across the US.

The subsequent literature has been genuinely divided. A large body of work, including research by Dube, Lester, and Reich using county-pairs straddling state borders, consistently finds minimal negative employment effects from moderate minimum wage increases. Their 2010 study examined restaurant employment across hundreds of contiguous county pairs and found employment trends were essentially identical on both sides of borders where minimum wages differed substantially.

On the other side of the debate, a study of Seattle’s minimum wage increases published in 2017 by researchers at the University of Washington found meaningful reductions in hours worked by low-wage employees, even as worker counts remained stable, suggesting employers adjusted at the margins of hours rather than headcount. However, another study of the same and other minimum wage increases by economists at Berkeley, using different data and methods, reached the opposite conclusion: no significant employment losses.

However, a lot of studies focus on the short-term impact of increasing the minimum wage (where the impact on employment is often negligible). Taking a longer-term view shows that increases to the minimum wage can lead to higher unemployment.

Moreover, the impact is not shared equally among sectors or firms. For example, research from Harvard Business School found that firms on the margin are more likely to go bust (and their employees out of work) due to an increase in the minimum wage. (See my 2018 CapX piece for more interesting examples).

The honest summary of the US employment literature is one of central tendency rather than consensus. A 2019 meta-analysis by Doucouliagos and Stanley, examining hundreds of prior studies, found that after correcting for publication bias the employment effect of minimum wage increases clusters around zero, with a slight negative lean that is statistically indistinguishable from no effect for moderate increases. Large and rapid increases, however (such as hiking it to £15 an hour), do show more concerning signals in several studies.

In the UK, the Low Pay Commission has tracked employment outcomes carefully since 1999. Its annual reports have consistently found that increases in the minimum wage have not produced the job losses that many on the Right had feared. A review of two decades of evidence published by the Resolution Foundation in 2020 confirmed this picture: the UK’s minimum wage had been raised substantially in real terms without generating measurable aggregate employment damage.

While the aggregate employment picture is more benign than early critics feared, the evidence on youth unemployment is considerably more mixed and far more concerning.

Young workers are disproportionately employed in sectors most affected by minimum wages: retail, hospitality, food service, and care work. Several US studies find that while adult employment is largely unaffected, teenage employment is more responsive to minimum wage increases. Research by Neumark, Salas, and Wascher, who have found negative effects in the broader literature, identify youth employment as the area where effects are most robustly negative.

In the UK, the structure of the minimum wage system has historically addressed this concern by maintaining lower rates for younger workers. The National Minimum Wage has always had age-tiered rates, and when the National Living Wage was introduced in 2016 at a higher level, it initially applied only to workers aged 25 and above. The Low Pay Commission has repeatedly cited protection of youth employment as a reason for maintaining this age-differentiated structure.

Over time, eligibility has been extended to younger workers. Although at this time it is difficult to say conclusively if this has led to an increase in youth unemployment, the fact that there are nearly one million young people not in employment, education, or training would suggest that it is having some influence on the youth labour market.

We also need to look at the impact on productivity. Supporters of increasing the minimum wage say that it will reduce turnover, boost morale and therefore boost productivity. Critics argue that it could indeed boost productivity due to it leading to the firing of low-skilled workers who are replaced by self-service checkouts etc.

UK evidence on this question has been particularly instructive. A study by Draca, Machin, and Van Reenen examined the introduction of the National Minimum Wage and found that it significantly reduced profitability in low-wage sectors without measurable gains in productivity, at least in the short run. This finding suggests that the incidence of minimum wage increases fell substantially on firm profits, at least initially.

More recent UK research finds more nuanced productivity dynamics over longer time horizons. There is some evidence that minimum wage increases have prompted automation investment in manufacturing and logistics, with mixed consequences: aggregate output per worker rises, but employment in affected roles falls. Whether this constitutes a productivity dividend or a displacement problem depends substantially on whether displaced workers find equivalent employment elsewhere.

In the US, Lordan and Neumark published research in 2018 suggesting that minimum wage increases are associated with a shift toward more capital-intensive production methods in food service, as establishments invest in machinery and reduce reliance on routine manual tasks (just pop into your local Maccies and you’ll see this). Again, the productivity effect exists, but this is potentially coming at the expense of jobs for the low skilled. Jobs for the bots rather than jobs for the boys.

We also need to talk about wages. This might seem either silly or completely obvious given that this is a post about the minimum wage. The most direct effect of a minimum wage increase is, by definition, on the wages of the lowest-paid workers, and the literature confirms substantial ‘wage gains”’for those at the bottom of the distribution. The key question is whether these gains propagate upward through the wage distribution, thereby creating a ‘ripple effect’, or whether employers offset wage increases elsewhere.

Evidence from both the US and UK suggests meaningful but bounded ripple effects. Autor, Manning, and Smith’s research on the declining real value of the US minimum wage during the 1980s showed that compression at the bottom of the wage distribution tracked the minimum wage closely, implying that increases would restore some of that compression. Studies of UK minimum wage increases confirm wage gains extending somewhat above the statutory minimum, as employers seek to maintain pay differentials between grades.

The picture on total compensation (wages plus bonuses, benefits, and non-monetary compensation) is more mixed. Several US studies find that firms partially offset minimum wage increases by reducing non-wage compensation: cutting bonuses, reducing employer contributions to health insurance, trimming paid leave, or reducing hours flexibility. However, this is by no means always the case.

In the UK, where employer-provided benefits are less central to compensation, this offset mechanism operates differently. Research by the Resolution Foundation and the Low Pay Commission has found less evidence of systematic benefit reduction in the UK context. However, scheduling practices such as zero-hours contracts exist for a reason and have been used by firms in order to reduce wage costs.

So, what does all of this tell us?

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Across twenty-five years of serious empirical research in both the UK and the US, several conclusions emerge with reasonable confidence. Moderate minimum wage increases (increases that keep the minimum wage within broadly historical ranges relative to median wages) do not produce the large employment losses that the simplest economic models predict. The labour market is sufficiently complex, with monopsony power, search frictions, and efficiency wage dynamics, that employers absorb much of the cost through reduced turnover, modest price increases, and some compression of profit margins.

As such, any future UK government can probably get away with continued modest increases to the minimum wage. This will still have some very negative unintended consequences such as lower profits, a higher cost of living for most households, and the squeezed middle becoming, well, even more squeezed. However, it is unlikely to lead to the job apocalypse feared by some.

What I found interesting in the debate (and I use that word loosely in this context) was a response to a criticism by the excellent Robert Colvile). He’d pointed out that it seems misguided of Polanski to call for a hike to the minimum wage given the high rate of youth unemployment. A Green Party member gave a sarcastic reply: ‘Here’s a policy in isolation, wouldn’t that be terrible, oooh I’m smart’. They are absolutely correct, but not for the reason they might think.

This policy will not come into force in a vacuum. It will come in the context of the Employment Rights Act which makes it far more risky for firms to hire anyone (especially the young) and the increase to Employers’ National Insurance. I’ve written about this before but Employers’ NI is essentially a payroll tax and so the incidence tends to fall on workers in the form of lower wages and fewer job opportunities. Firms may be able to continue to absorb the costs of a higher minimum wage but when this interacts with the NI hike, the Employment Rights Act in the context of low economic growth then we should not be surprised to see unemployment increase, especially among the young.

All this also ignores the fact that £15 per hour is not a moderate or graduate increase. It is a substantial hike. Firms might be able to deal with a modest increase to the minimum wage if this was indeed in isolation. However, they are unlikely to be able to do so in the current climate with so many other measures already in place. They definitely won’t be able to deal with such a massive increase to the minimum wage alongside everything else they have to contend with. The end result will be small businesses going bust and even more young people out of work.

I personally think that it’s none of the government’s business what firms pay their workers. However, I do think firms should do the decent thing and pay their workers enough to live decent lives and I don’t think small increases will be as catastrophic as some of my fellow travellers fear.

However, I live in the real world and, although I agree with the Green Party that all drugs should be legalised, I am not under the influence myself. If we don’t want to destroy the futures of young people by making it prohibitively expensive for firms to hire them, then such a large increase to the minimum wage needs to be ruled out. I would go even further and suggest that there should be no minimum wage for people under 25 and ultimately the government should completely phase out National Insurance by merging it with Income Tax and most of the measures in the Employment Rights Act should be scrapped. Moreover, the government should focus on introducing supply side reforms (such as making it easier to build homes and energy and transport infrastructure) which improve productivity and boost real wages for everyone.

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Thanks as ever for reading. I might write something else this weekend but it’s a Bank Holiday (which should also be abolished), I’m on a train, and I want to spend the rest of the time watching the Snooker and firing up the BBQ.

Some deeply cynical people are exploiting the crisis in the Middle East to push for their pet projects such as rent controls and price caps. You’d certainly never catch myself or any of my friends doing that. On a completely unrelated note, the crisis in the Middle East shows us why we need to reform monetary policy.

I’m writing this on a Wednesday evening and ahead of the MPC’s announcement on interest rates. It is widely expected that the majority will vote to hold Bank Rate but with some members voting for a hike.I think this would be nuts, as I explained the other week. The correct response is to hold for now and to issue a much more dovish statement explaining that this is a supply-side shock, there is practically nothing the MPC can do about it, and is prepared to resume easing policy again sharpish. As part of my role on City AM’s Shadow MPC this is what I voted for as did everyone else apart from the excellent and erstwhile MPC member Professor Jonathan Haskel who voted for a hike. You can read it here.

While I think the hawks are wrong, I do sympathise with them. The Bank’s job is to keep inflation at two per cent and if it fails to do that then it is deemed to have failed.

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Therein lies the problem. The target is far too narrow. Ultimately I think inflation targeting should be scrapped and replaced with nominal GDP targeting. However, that is unlikely to happen anytime soon and so in the meantime a less radical reform is needed. Instead of a target of two per cent the target should be a range of between two and three per cent.

President Lyndon B. Johnson apparently once barked ‘Ranges are for cattle. Give me a number’ at his economic advisers. Despite LBJ’s misgivings about ranges, I think there is a strong argument to be made for introducing one for the Bank of England.

The two per cent inflation target was not actually derived from first principles. It emerged, largely, from convention. It was New Zealand which pioneered explicit inflation targeting, and a figure in the low single digits stuck across central banks worldwide. As Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro noted in their 2010 IMF paper, the pre-crisis consensus around two per cent was built on an era of relative macroeconomic stability.

Blanchard and his co-authors argued that a higher steady-state inflation target, perhaps in the range of four per cent, would give central banks greater room to cut real interest rates during downturns before hitting the zero lower bound. While four per cent remains politically contentious, it opened serious academic debate about whether 2% is too low and whether something closer to 2.5 or 3% might represent a more pragmatic sweet spot.

The most technically robust argument for a higher target concerns the zero (or effective) lower bound on nominal interest rates. When inflation is low, so too are nominal interest rates in equilibrium. This leaves central banks with very little conventional ammunition when recession hits.

The neutral rate of interest has fallen dramatically in advanced economies over recent decades, possibly to as low as zero in real terms. If the neutral rate is near zero and the inflation target is two per cent, the MPC starts a recession with a nominal rate of perhaps two per cent, giving it limited room for cutting.

Introduce a target range of two to three per cent, and, assuming the neutral real rate remains unchanged, the Bank enters each cycle with additional space. In a world where the MPC was forced to deploy quantitative easing, forward guidance, and negative rate discussions during both the Global Financial Crisis and the Covid shock, that extra buffer is not trivial.

A second argument is more subtle but no less important: our price indices probably overstate true inflation by somewhere between 0.5 and 1 percentage point. This is the finding of the Boskin Commission in the United States and corroborated in a UK context by research from the ONS which found that fixed-basket price indices fail to fully capture quality improvements, substitution between goods, and the welfare gains from new products.

If measured CPI inflation of two percent corresponds to something closer to 1 to 1.5 per cent of ‘true’ inflation, then a two per cent target is arguably deflationary in real terms. Targeting 2.5 to 3 per cent measured inflation would deliver a more genuinely neutral monetary stance. Crucially, it would also provide more room for relative price adjustment across sectors without any individual sector requiring nominal wage or price cuts.

This is particularly pertinent in the UK at the moment. The ONS has taken steps to improve its data collection and analysis. I’ve written about this before, but if the data is even slightly off then it leads to bad and economically harmful policy decisions.

There is also a strong argument that a range is superior to a point target on practical grounds. The MPC does not control inflation with precision; it operates monetary policy through blunt instruments with long and variable lags, as Milton Friedman famously observed. Pretending that two per cent is meaningfully different from 2.4 per cent encourages policy overreaction and contributes to unnecessary volatility in financial markets and the real economy.

Adopting a range would bring the Bank closer to frameworks used by central banks in countries such asAustralia, which have operated band-style targets with considerable success. It would also be more honest with the public: communicating that inflation should run ‘between two and three per cent’ is arguably more transparent than a precise target that is structurally difficult to hit.

I accept that some people reading this would view inflation at three per cent as too high. In fact, I’m almost certain that at least one person thinks that the current target is too high. It’s too late, I’ve already depicted you as the angry and bitter hawk and myself as the beautiful and peace loving dove. There are trade-offs in monetary policy (as there are in all policy decisions), but I’m very comfortable with inflation hovering around the three per cent mark if the alternative is high unemployment and stagnant economic growth.

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Thanks as ever for reading. I will finally get around to making the case for a nominal GDP target but I think that should be a long and in-depth piece. In the meantime I suggest you read this IEA report by Damian Pudner which is very good. I’ll probably write another short piece this weekend.

Back in June 2017 I spent a few weeks at the Economics Faculty at Yale. I’d recently started doing some work at the Blavatnik School of Government at Oxford and was invited over for a conference and to stay on as a ‘Visiting Scholar’. I have very fond memories of it and, while I wasn’t initiated into the Skull & Bones, it lived up to the expectations I’d built up in my mind after years of re-watching Gilmore Girls. There was no job on offer or anything but I do often wonder how life would have turned out if I’d found myself there long-term.

I take you on this trip down Memory Lane because the early hours of Friday morning (in this country) saw the NFL Draft. The number one pick was, as expected, Fernando Mendoza. I find him to be an interesting case study and not just because he’s endearingly dorky. He’s managed to leverage his attributes to prepare himself for a career after his NFL career and will no doubt go onto great things.

However, he’s interesting because he turned down an offer to read Economics at Yale in favour of taking a punt on his dream and accepting a ‘Football’ (I hate using that term) Scholarship at a less prestigious college despite being very low-ranked at ‘Football’ when he was younger. This could be a soppy post about how inspirational all this is and why you should never give up on your dreams and if you work really, really hard and have a loving family then you can achieve anything.

While it is an inspirational story (go read about him elsewhere), we don’t really do that type of thing here at Opportunity Lost. It is, however, a very good example of comparative advantage. Economics is difficult and getting into a prestigious university to read it is hard. Relatively few people can do it but if you make the cut then you should do it – that’s your comparative advantage and you can leverage that to hopefully have a rewarding and lucrative career. Not so with Mendoza. He just happens to be uniquely talented in something even more prestigious and lucrative: American ‘Football’. He leveraged this and that’s a good economics lesson in itself.

However, the NFL and the Draft can teach us even more about economics and has some implications for public policy.

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Every April, thirty-two NFL franchises gather to make decisions worth hundreds of millions of dollars. They trade picks, hoard information, second-guess each other, and occasionally strike gold on a sixth-round quarterback who rewrites history. The NFL Draft is, on its surface, a spectacle of sport. But look more carefully and you find something far more interesting: a living economic laboratory, running controlled experiments in market design, information asymmetry, and the limits of central planning that economists have been studying for decades.

The NFL is not a free market in the conventional sense. It is, essentially, a cartel. The draft itself is a mechanism that suppresses player wages during the critical early years of a career, assigning rookies to teams via a reverse-order system that deliberately rewards the worst performers. No new entrant can simply offer a top prospect more money to sign with them instead.

This arrangement would be illegal in virtually any other industry. Imagine if law firms held an annual draft in which law graduates were assigned to firms, forbidden from negotiating their own contracts for four years. The CMA would be in the building before the first name was called.

And yet the NFL has successfully defended this structure, partly on the grounds of competitive balance — the idea that without such mechanisms, rich-market teams would monopolise talent and the league would lose the uncertainty of outcome that makes it commercially valuable. This is a genuine and interesting economic argument, and it has received serious academic scrutiny.

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The economic case for the Draft rests heavily on the assumption that it produces competitive balance. The evidence, however, is weak.

For example, Stefan Szymanski and Andrew Zimbalist, in their comparative study of American and European sports leagues, found that the NFL’s draft and salary cap do improve balance relative to an unconstrained market — but only modestly. European football leagues, operating closer to free markets with promotion and relegation, show more variation in outcomes at the top, yet maintain extraordinary commercial success. The Premier League (one of this country’s greatest exports), with no draft and no salary cap, generates revenues comparable to the NFL on a global basis, suggesting that competitive balance is neither as fragile as feared nor as commercially essential as assumed.

Rodney Fort and James Quirk have demonstrated that reverse-order drafts do not necessarily produce the equalising effect their proponents claim. The reason is that talent is not the only variable — coaching, organisational culture, and front-office decision-making matter enormously. A poorly run franchise given the first pick often remains poorly run.

What the draft does produce is a transfer of wealth from players to owners. Rookie wage scales mean that first-round picks are dramatically underpaid relative to their market value, particularly quarterbacks.

Massey and Thaler also asked in the above linked paper whether teams draft rationally? Their answer was a resounding no. Moreover the implications of this extend well beyond the NFL.

Using data on draft pick values and subsequent player performance, they showed that teams systematically overvalue high draft picks. The surplus value is actually higher for later-round picks than for top picks, because top picks are so expensive (even under rookie wage scales) and so difficult to predict accurately. Teams trade enormous quantities of future value to move up in the draft, acquiring assets that, in expected value terms, are worth less than what they gave up.

This is not merely a quirk of the NFL. It is a manifestation of what Thaler and Daniel Kahneman had long identified as overconfidence bias. NFL general managers, armed with data, film study, psychological evaluations, and millions in scouting resources, still cannot reliably outperform relatively simple statistical models.

The policy implication is profound. If highly incentivised, richly resourced experts operating in a domain they know intimately can’t reliably identify top talent in advance, what does this say about the ability of central planners to allocate resources efficiently across entire economies?

Hayek was right (many such cases).The knowledge required for efficient resource allocation is dispersed across millions of individuals, embedded in local circumstances, tacit, and uncodifiable. No central authority can aggregate that knowledge effectively. Prices in free markets do this automatically, carrying information from buyers to sellers without anyone needing to understand the whole system.

The NFL Draft is, in microcosm, an exercise in central allocation. Thirty-two teams attempt to do what Hayek argued was impossible at scale: gather dispersed information and allocate scarce resources (player talent) rationally from the top down. The result, as Massey and Thaler documented, is systematic inefficiency.

The contrast with free agency is instructive. When players reach free agency after about four years in the league they enter something much closer to a genuine labour market. Teams bid competitively for their services. Prices emerge from negotiation rather than assignment. The results are not perfect (no market is), but they are revealing.

Research has shown that free-agent salaries track player performance statistics far more closely than rookie contracts do. The market, in other words, learns. It processes information about demonstrated performance and prices it into contracts with reasonable accuracy. The draft, by contrast, prices predicted future performance and does so with systematic bias.

This mirrors findings from labour economics more broadly. Gary Becker’s work on human capital established that markets, over time, become increasingly accurate in pricing skills — because employers learn from experience and competition disciplines errors. Planned allocation systems lack this error-correction mechanism. When a Soviet factory manager over-allocated steel, there was no price signal to reveal the mistake. In the NFL Draft, the mistake becomes apparent on the field, but by then the contractual damage is done.

Since 1994, the NFL has operated a hard salary cap. This is a ceiling on what any team may spend on player salaries in a given year. This is essentially a price control on labour. And, like most price controls, it produces effects that were not fully anticipated.

On the positive side, the cap does limit the ability of high-revenue teams to simply purchase championships which can be a problem with proper football (the deeply evil Manchester City is an example of this). The NFL’s relative parity is at least partly attributable to this constraint.

But the cap also distorts incentives in complex ways. Teams engage in elaborate restructuring of contracts such as converting salaries into signing bonuses to spread cap hits across future years. The cap number and the actual economic cost of a roster become increasingly detached. Franchises that are skilled at cap manipulation can maintain apparent compliance while committing future resources in ways that eventually constrain competitiveness (not unlike governments that borrow heavily constrain future fiscal space).

When rules are imposed on markets, agents adapt. The adaptation is often efficient (finding genuine value) but sometimes merely cosmetic (gaming the rule without addressing its intent).

Akerlof’s ‘The Market for Lemons’ is relevant here (and not just because of the shape of the ball). He identified a fundamental problem in markets where sellers know more than buyers: adverse selection. When buyers cannot distinguish quality, they offer only average prices; high-quality sellers exit; quality falls; prices fall further; and the market can unravel entirely.

The Draft faces a version of this problem. College programmes have strong incentives to present players favourably. Teams, as buyers, invest heavily in due diligence (the NFL Combine, private workouts, psychological testing) precisely to reduce this information gap.

The result is an arms race of information gathering that is individually rational but collectively wasteful as resources spent not on producing value but on transferring information that already exists (the player’s true quality) from one party to another. This dead-weight loss is an inherent feature of markets with severe information asymmetry.

What, then, does all of this teach us about economics and public policy?

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First, competitive balance arguments for market intervention deserve scrutiny. The NFL’s elaborate restrictions on player movement produce only modest balance improvements, at significant cost to player welfare. Policies justified on equality grounds such as redistribution, wage controls, market entry restrictions should be treated with similar scepticism. The goal may be legitimate; the mechanism may be poorly calibrated.

Second, expert central allocation reliably underperforms decentralised markets, even when the experts are incentivised and informed. This is Hayek’s argument confirmed empirically, in a domain where the feedback loops are unusually tight and the stakes are high. It suggests caution about technocratic industrial policy.

Third, price controls generate creative compliance rather than genuine compliance. The NFL’s salary cap has produced an entire cottage industry of contract restructuring that achieves the letter but often not the spirit of cost discipline. Rent control, minimum wages set above market-clearing levels, and pharmaceutical price caps all produce similar distortions which ultimately cause more harm than good.

Fourth, and most importantly: free markets are not perfect, but they are better at aggregating dispersed information than any known alternative. Free agency prices talent more accurately than the draft. Competitive bidding reveals value that assignment cannot. Policymakers need a bit of epistemic humility: they need to recognise that the knowledge required to allocate resources well is usually too dispersed, too tacit, and too dynamic for any central authority to master.

The NFL Draft is a story about the limits of planning and the value of prices. Thirty-two teams, spending millions on information, still cannot reliably outperform statistical chance when allocating talent centrally. Free agency does a better job of pricing demonstrated performance. The salary cap, well-intentioned, generates the same creative evasion as any price control.

None of this means that markets are always right or that intervention is always wrong. Akerlof showed us that markets can fail badly when information is asymmetric. The NFL’s commercial success depends partly on regulations

However, the Draft teaches us something Hayek knew and that bears repeating: the knowledge problem is real. Allocating scarce resources efficiently requires information that is dispersed, local, and constantly changing. Prices, competition, and decentralised decision-making aggregate that information better than any committee of experts

Politicians and civil servants would do well to remember it.

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Thanks as ever for reading. I’m still planning on writing something at least once a week and hopefully more frequently depending on a few things. Enjoy the rest of your weekend!

It’s been argued that college students in the US should be forced to study introductory economics as part of their course. The logic behind this is to tackle a (perceived) left-wing bias among students and so learning about the benefits of free markets would sort them out. While students do tend to be more left-wing (I used to be an actual socialist) and while I used to think that young people should be forced to study economics, I no longer think this is a good idea.

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First – and this really is something economists should get – are the opportunity costs associated with this. While I obviously think that economics is fascinating and incredibly useful, for most students it will be a complete waste of their time. In fact, it might be actively harmful for them when they should be studying for the subjects in their major or socialising with their friends.

Moreover, this opportunity cost applies to the colleges themselves. All that time and money being spent on registering the students, providing teaching resources, the extra classes, lecture halls which can’t be used. That is all time and money which can’t be spent on more useful activities.

Second – and relatedly – it’s not fair on students who actually want to study economics (and whose future careers depend on it). The time and reources of their teachers will be taken up teaching economics to students who don’t care meaning they’ll have less time to focus their energies on the students who care about economics. Furthermore, it’s unfair on faculty who would raather teach engaged students and carry out research rather than waste their time and efforts on people who are forced to be there.

Third, having more students study economics is unlikely to improve public life. I offer my own country of the UK as an example here. Most of the country’s elite in politics and the media have studied basic economics as part of their PPE degree. Despite being exposed to concepts such as opportunity costs, the danger of unsound public finances, the damage caused by high taxes, the importance of free trade, and supply and demand, the economy is in a dreadful state mainly because of PPE graduates either championing or implementing deeply damaging policies (which they’d know were damaging if they remembered, or actually understood, basic economics).

Fourth – and finally – the above point could just be a case of a little knowledge being a dangerous thing and so overconfident policymakers thinking they have sufficient economic knowledge to run a major economy. Perhaps.

However, it is also likely related to who is actually doing the teaching. Look at India. After Independence many of its leaders and officials were trained in economics (often to an advanced level) at Cambridge (the proper one, not the one in America). These were very intelligent people who were taught economics at the world’s greatest university. The end result was they went home to India and implemented some of the most damaging policies imaginable which kept millions in poverty and subsistence.

Now, of course, the students could be instructed by brilliant economists who drill into them the importance of free markets. Unfortunately, this is far from guaranteed. For every Milton Friedman there are 100 dodgy economists out there. Ten, twenty, thirty years later, when these young students find themselves running a country and have to make an important policy decision, a memory of some ‘economics’ they were taught by a famous left-wing professor may drift up and they will smile to themselves and say, ‘Yes, rent-controls are a great idea’. To quote my favourite dodgy economist, ‘Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist’.

In short, making students study economics sounds like a good idea in theory. In practice, much like Socialism, it would be a disaster.

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Thanks as ever for reading! Enjoy the rest of your weekend.