Gerald: 0:00

Hello and welcome to Equitile Conversations. I'm Gerald Ashley, and as usual, I'm joined by my good friend and colleague, George Cooper. And today in this episode, we're really pleased to welcome along Doug McWilliams, who's really one of the big names in macroeconomics and forecasting. I would hesitate to say it, but not just economics, because I think it ties into the politic the politics of things as well. So, Doug, welcome. Thank you. Thank you so much for inviting me. The show notes will sh sort of show your full background and everything, and people can take a look at that. But um maybe a good opening point is that you've recently been a co-author of a new book out called Prosperity Through Growth, which is lovely timing because it does seem a good time to be talking about growth uh not just for us on this podcast, but uh really for uh anybody interested in the UK and wet Western uh economies. Um George, I know you've already sort of gone into this book and it's Prosperity Through Growth. Any initial thoughts or comments?

George: 1:14

Yes, I'm I'm about halfway through the book, and I had the the great pleasure of seeing um of seeing Doug and uh Arthur Laffer, who's the other co-author of the of the book, uh, give a talk at the London School of Economics. It was it was really quite impressive. I think uh I think everybody would agree it was quite amazing uh the the energy that Arthur Laffer had. And I've I've never really been a flat tax person up to this point, but I have to say the first few chapters of the book are s um starting to convert me quite powerfully. Uh Doug, what do you want to weigh in on that side of the book?

Doug: 1:57

Yeah, surely. Shall I just say a little bit about the book and then come in and uh answer your question directly? Um the book's Prosperity Through Growth. Um, as you point out, the most famous of the co-authors is uh Arthur Laffer, the Laffer of the Laffer Curve. But it's also uh uh Michael Hintsey, who's the Pope's economic advisor, amongst other things. And uh he um he is a fairly successful hedge fund owner, um, and Matthew Elliott, who made his biggest reputation, I think, by being the guru behind vote lead, which eventually voted for Brexit. And both um uh Matthew, Michael Hinsey and Matt Elliott are now in the House of Lords, and I'm the sort of guy, the workhorse, as it were, who did quite a lot of the putting the stuff together. So that's the book. The subtitle is Raising Living Standards in an age of autocracy and AI. And what we're trying to say is what do you need to do to get growth in a very modern world where the elasticities have changed quite considerably? And um a bit like you, I was not originally a flat tax guy. I got introduced to it by Alistair Heath, who's the editor of the Sunday Telegraph, when he chaired something called the Tax 2020 Commission, on which I sat about, I think, roughly 15 years ago. And um we went through the various options for tax and came to the conclusion that obviously it's politically complicated to get a flat tax, but if you could get a flat tax, there would be fairly considerable economic uh advantages. And in Prosperity Through Growth, we put forward a plan for getting us to a 20% flat tax rate with no national insurance contributions and get there over a 20-year period. And we argue that in total, that plus uh regulatory changes would raise GDP by just under 20%. That is worth having. It would make so many of our problems today so much uh less complicated. And that was our calculation.

Gerald: 4:23

Well, uh that is extremely interesting. Um obviously the the politics behind that sound um murderously difficult, to say the least. Um, I just sort of widen this out in terms of context, which is um we are just assuming that economic growth is a good thing. I know there are flat earthers in the world who think we don't need any more increases in economic activity, but I think that's very much a minority view. Um, the more important point maybe, um, why are we struggling so much in the UK and Western Europe to have anything other than very sclerotic growth?

Doug: 5:03

I'm also a member of something called the Growth Commission, which is an international commission set up to try and raise rates of economic growth, especially in Europe and in the UK. And we've looked quite hard at what is holding back growth. In many senses, trying to understand the impact of policy on growth has been my entire career. I started working for the Confederation of British Industry. I was apprenticed to a man called Sir Donald McDougall, who'd been Churchill's economic advisor. So there's quite a lot of history in there. And I was I eventually succeeded him as the CBI's chief economic advisor. And virtually every year we did an assessment of what tax changes would most boost the economy. Anyway, when the Growth Commission did a lot of work on this, um, what we discovered is two things really have been holding back countries like the UK. Um, the biggest is actually regulation. And um particularly um uh post the financial crisis, where the um financial regulation became a lot more aggressive, also environmental regulation became a lot more aggressive. And the final area, which is especially important at the moment, is planning. Now, a lot of people think that the problem with planning is sort of Tory nimbies who don't want building anywhere near them. But actually, on the whole, it is not. The problem is the whole raft of environmental uh legislation of various different kinds. They're just piled rule after rule after rule after rule. Recently we had a whole new town um banned from being started by the judges because of a spider. And the spider didn't even live anywhere near where the new town was, it was about a kilometer away. But natural England managed to show that the natural habitat of the spider included areas within a kilometer of where the spider actually was, and so this spider prevented a whole new town from being built. Now, when you've got things of that kind taking place, so you've got the planning, you've got the environmental regulation, of which, of course, one of the consequences is very high energy prices, you've got the financial regulation, you have a whole host of regulations that hold things back. On top of that is tax, and we have a whole series of taxes, and they bear much more heavily now than they ever did, because people who are talented, people who are wealthy, people who have capital, people who have entrepreneurial skills, they can move. The modern world makes them much more mobile. First of all, because in the modern world, they tend, even if they're based in one place, to have links with other places. You've got, you know, friends who are professors in London and in Sweden. You've got friends who um are involved in businesses that are in two or three different places. They're no longer just tied to one place. I mean, we perhaps, the three of us, maybe a bit more tied to individual places for historic reasons. But the vast majority of the bright young things of today operate in more than one regime. And what that means is when the going gets too hot in one place, they go somewhere else. So the consequences of all these things is that those places that have the wrong type of regulation and the wrong type of tax, they get really heavily penalized. And that's what we're suffering today.

Gerald: 8:58

So the uh the political challenge is to roll that back. Um, George, you had a comment.

George: 9:05

I was just going to say how how much I agree with what you said there, Doug. And I think there's another aspect that worries me as well, is as a businessman it worries me, and also as a sort of analyst of the economy. And that's it's not just the level of regulation, but the instability and the uncertainty around regulation. And and when I look at what's happened in the uh in the run-up to this latest budget, where we had effectively a whole raft of new taxes threatened, most of which weren't delivered in the budget, but they were threatened. There was the exit tax threatened, there was uh more draconian property taxes threatened, wealth taxes, and things like that. And now that all of these things have been put into uh the sort of public debate, we've got people responding naturally to the prospect that those taxes may come in. So we're we're starting to lose entrepreneurs for something that actually hasn't happened. It's just the threat and the concern of it. I think that's a big issue here.

Doug: 10:09

Part of what we did in the book, because we're conscious that having the right answer wasn't didn't solve the problem. And you need to have the right answer and find a way of making it work analytically, is we interviewed. We had, depends how you number them, because some of the interviews had two people turning up, but roughly 35 interviews with pretty high-powered movers and shakers. We managed to get there are eight living former prime ministers at the moment, which is a record, and we managed to interview five of the eight. We interviewed there were 11 living former chancellors, and we interviewed nine out of that eleven, and then we interviewed quite a lot of the cabinet secretaries and various other people like that to ask them about it and to give them credit. The most impressive interview by far was given by Tony Blair. And Tony Blair said, Just because things play badly in the opinion polls doesn't mean you can't do them. He said Mrs. Thatcher kept doing things that were unpopular, and she kept winning elections, and he said he'd learnt a lot from observing that. And he reckoned that most governments had at least a two-year period where when they came in, if they were doing the right thing, they had plenty of time to do the more crowd-pleasing things towards the end of their term of office. And he said it could be done. He also said that although the civil service is not hugely supported, and especially so at the moment, that may be partly as a result of some of the things that he himself did. But nevertheless, if you give them a good enough lead and you've prepared yourself properly, then you can get them to do it. David Cameron said much the same thing. He said, but you have to prepare yourself. Of course, this was just after Donald Trump had come to office and had his hundred days of large numbers of very early uh initiatives. Um, Cameron was quite impressed, and he said, if you don't plan it before you get into office, you get caught up in the hurly-burly of things and you can never get anything done. You have to come to power. You have to come to power with a sort of sense that you've got a mandate for change. And so you have to make it clear that some of the things that you will do will not be entirely popular. And he said you can get in on that basis. And he said you also have to make sure that you've got your plan prepared. And he said, if you do those things, um, you'll find you can get a lot further than you imagine.

Gerald: 12:44

Yeah, I think there was a comment on a TV show fairly recently, an interview with Lord King, the former governor of the Bank of England, who made this very point that he was somewhat astonished that the current administration uh under Sakya Starmer does not seem to have an overarching plan. They do seem to be um very short-termist and very reactive. Maybe it's not for us to tell the government how to run government, but it doesn't seem to be the bet the best way of going about things.

Doug: 13:17

Well, that was certainly the comment that we got from the politicians that we interviewed. I mean, Tony Blair was quite discreet about making comments specifically about the current government for obvious reasons. But reading between the lines, he seemed to be really critical about the extent to which they A didn't have a plan, and B, were so short-term in their behavior.

Gerald: 13:43

Yes. I mean, I I I think this is a good opportunity here to widen out a little bit the landscape of which uh the UK and indeed a large number of other economies are uh uh occupying now. And this is a favorite topic of George and I. Um, we don't stop people in the street and talk about it, but we're not far from that. And that is, of course, demographics, and the um you could say quite alarming fall um in demographics in terms of uh new births and uh aging population and everything. So against this that background, this is gonna make things worse. It's certainly not gonna help, is it?

Doug: 14:24

Well, I was involved in a book that was written about 25 years ago called The Demographic Investor by a man called Richard Cragg. I don't know if either of you read it. It was published by FT Publications, and we looked at the consequences of the demographics in the West, which are a fall in the number of children, slightly increasing longevity, although it's not in fact increased quite as quickly as it looked as if it was going to at that point, and then trying to fill the hole essentially with immigration. And um, we did argue that um the demographic trends were not going to be helpful for, first of all, economic growth, secondly, investment returns, because presumably the older people are going to be saving, and they're going to be flooding the markets with money driving down yields and various other consequences of that kind. More recently, with the Growth Commission, we got our Japanese commissioner, uh Naira Yahiro, to have a look at how Japan have been coping. Because of course, Japan has been facing the sort of demographics that we're talking about a little bit earlier than us. And also they have rather greater longevity than we have because they they eat better and so on. And uh the conclusion was fascinating. The first thing was that Japanese GDP per capita hasn't done quite as badly as you might have imagined, although I think that uh they may be starting to be found out by the markets and uh their policy may uh uh uh may as yet unravel. The second thing was that uh if you did the right things to increase labor force participation amongst those people who were there, including raising the retirement age and various things like that, you could um to a certain extent assuage some of the problems caused by demographics. But what we've been doing in the UK is the opposite. What we've been doing instead in the UK has been encouraging people of working age not to work. And the combination of adverse demographics and an increasing failure to participate from the working age population is not a policy that's going to be terribly good for our long-term prosperity.

George: 16:52

Yes, and I I think Doug, there's also just recently another angle to the demographic story that's come out, which is quite worrying, and that is the the government's trumpeting a success in reducing inward immigration, but it turns out that underneath uh the that reduction has largely been driven by an increase in emigration from uh from the UK. And we d I don't think we know the details so much, but there's a decent chance that a lot of that emigration is going to be the high skilled, high, high wage earners. So we we may be uh running into yet another aspect of this demographic problem in this country.

Doug: 17:34

George, that's a really important point, but it's actually even worse than that, because there is an age skew amongst the people who are leaving the UK, and we are very much using losing the youngest, and I would assume the brightest, although there isn't actually an IQ test when you leave the country to discover whether you are the brightest or not. But it does seem to be that the ones with the most get up and go have got up and gone.

Gerald: 18:00

And this is shades of exactly what happened um winding back in history. One thinks of the brain drain and the tax regime in the mid-70s. And um, just to keep this a nice pessimistic little podcast, um, we've got a huge problem with government debt, or maybe more precisely government spending. I suppose if there was growth, um it would be much easier to fund uh that spending. Um, we've had this discussion on previous podcasts, and George and I think there's no get out of jail card from all of this, other than possibly inflation. Does that make sense?

Doug: 18:42

Well, cutting government spending would definitely do a lot to improve the situation. You cutting government spending would um uh reduce the deficit, it would reduce the pressure on debt. The markets tend to be quite positive when you've got a government that's cutting spending. You can see this in Argentina. Okay, they've had a uh the the markets have gone up and down a little bit on this, but on the whole, the markets have treated fairly positively the aggressive line to cut spending there. Um, so I think cutting spending, if you could achieve it, you'd get a double dividend. First of all, there would be less pressure on the test market because you wouldn't have to issue so much debt, but secondly, the markets would see you in a more positive light. Because projecting forward, if you think that the the economy is going to grow, you get much less worried about debt than if you think the economy is stagnant. So I think that you you do get a double dividend if you do that. Um is inflation a solution? I'm not convinced. I mean, like both of you, I lived through the 70s, and it didn't seem to me that that was a great time to be uh around. I think inflation is one of these things, it's a sort of trick you can only really. Pull off once in a sense, because the only inflation that actually makes your life easier if you're a government is unanticipated inflation. And once it gets built into expectations, you no longer get any benefits from it. So I don't see inflation as a way out. I'm sorry, I think inflation would actually make things worse. Oh, yeah. And by the way, of course, we already have inflation. I mean, our inflation is roughly twice the average for the uh for the G7. So uh don't we're already inflating our way out.

Gerald: 20:31

I I think I was slightly tongue-in-cheek there, but there's one other little element which I think is uh a primrose path that we wandered down in the 1970s and are doing again, which is indexation. So, you know, we're seeing a lot of indexation of benefits, a lot of um a lot of wage demands coming through and being acceded to. And there's a large part of the price pressure now that is is sort of built in as a ratchet, isn't it?

Doug: 21:00

Um that certainly makes things worse. Although it's hard to avoid indexation once you have a lot of inflation, because otherwise you get really quite dramatic changes in relative prices. It does lock the system in in such a way that it makes it more difficult to get out. I was actually involved in negotiating, I mean, this tells you how old I am. I was actually involved in negotiating pay policy with the trade unions in the 1970s. And one of the things I brought to the party was I persuaded them once that the only way out was to index on the basis of future inflation, not past inflation. Because if you kept on indexing on the basis of past inflation, that you know, the the trend just went upwards and upwards and upwards. And we managed to break the cycle. And I do claim some credit for this. Uh I managed to claim the powers that be in the CBI, who then persuaded the TUC, and we then both persuaded the government, that when we were setting pay policy, pay policy should be based on expectations of future inflation, not just um uh inflation in the past. And that did to some extent help decelerate inflation in the late 70s. But it was always trying to slam a top on a boiling kettle, and it wasn't going to stop the steam coming out eventually. But it did have a little bit of an effect there. Um I just don't see inflation as really the way out on this. Um I think it would just give us a further twist, um, but we would be moving towards banana republic territory if we go in that direction.

George: 22:43

Oh, to to be clear, I don't think either Gerald or I are saying inflation is a solution. We're we're saying it's a likely consequence. It's a it's a sort of um it's a symptom of the disease that we've got rather than a solution to it. Definitely not a solution.

Doug: 22:59

Well, we've we've got some already, and we've got more than anywhere else. And we haven't really I mean, what is fascinating is twice within five years the MPC has let inflation uh uh go rip. The first time it happened elsewhere, although it was worse here, the second time it has not happened elsewhere yet, although I think it may. Um, but um the fact that we have inflation pretty well 4% at the moment, and depends which measure you use, of course, is something that you know the NPC ought to be resigning over this. And they've been cutting interest rates.

George: 23:36

I th I think this this sort of touches on a very interesting thing that's happened in macroeconomic debate, and I think I think in the academic circle as well as the policy-making circle, and that is if we go back to, you know, let's say when Gordon Brown was chancellor, he used to talk about balancing the budget over the economic cycle. Nobody talks about balancing the budget at all, anywhere, anymore. That's just completely gone from the discussion. And I I think a lot of it is uh a lot of it is tied to this idea that's crept into economics or galloped into economics in the last few years, modern monetary theory, this idea that deficits just don't matter. Uh Doug, any thoughts on on why this has this change has come about?

Doug: 24:27

It got worse. First of all, after the financial crisis, when um no one's economy was doing quite as well as it had previously, and of course there's been some slowdown in productivity, partly due to the regulations. You know, they they shut the sable door after the horse had bolted, but shutting the sable door has meant it's a lot more difficult to get the uh to get economies growing. But then, of course, COVID um created a whole new set of unbalanced budgets and almost created a set of situations where governments gave up, really. They borrowed so much at the time of COVID, they couldn't quite see their way back into managing their um their debt ratios down, and in most cases, managing their deficits down. Um, the United States has been able to get away with it because it's pretty huge. The European Union is sort of trying to make itself bulletproof in that way with monetary union and setting up the euro. And that is just, I think, given itself a lot more rope, but it will hang itself just as surely. And in fact, the EU is probably in a worse situation because they are also largely ex-growth. They still have growth in uh parts of Eastern Europe, but for most of the rest of Europe, there isn't a hell of a lot of growth taking place over there. And that means that uh their ability to pay off their debt becomes increasingly less impressive. The money got lent to us, of course, from the surplus countries, mainly the Chinese and various other people in the Far East and in the Middle East. Um, and um they've been quite happy so far, but at some point they're going to become extremely unhappy that they're not getting a decent return on their investment. And I think that's when the bond markets will start to bite. Um, I'd be amazed if we get to the end of this decade without a major bond crisis, which is the market reaction to the trend that you mentioned, George, which is of governments sort of more or less giving up on balancing budgets. And I think the continued increase in debt issuance is going to reach its natural limits.

Gerald: 26:52

Yes, I think one other little sort of factor here, which is probably just a uh a temporary one for political reasons, but uh on the political scene now there's a lot of talk of whether we need to get back being closer to the EU. Some people want to undo Brexit. There seems to be a lot of confusion, as usual, in political circles about the difference between the single market and a customs union. Um, the idea that rejoining the customs union would be a good idea seems rather eccentric to me. Um, is this just a little bit of short-term uh politics, or do you think uh it it's a serious swing back the other way?

Doug: 27:36

I think it is a serious swing back the other way. I've been quite disappointed. Some of the more intelligent people I know have climbed onto this bandwagon. I mean, I like it to kamikaze pilots and the uh I liken it to kamikaze pilots. But the thing about kamikaze pilots is they didn't have passengers on their planes. They were risking their own lives, and you can have a degree of respect for people who are prepared to put their own life at risk. What seems to be happening now is that people despairing of politics are um playing kamikaze pilots with passenger planes, and we are the passengers, and the British economy is the passenger, and some of the risks they're take they're threatening to take are frightening. Now, let me just quote some statistics. I'm sorry to be boring on a Sunday morning, but let me do so anyway. We have the most successful tech sector in Europe. The reason why is we are outside the Digital Markets Act, the Digital Services Act, and the AI Act, which are three European acts which heavily constrain tech growth in the EU. As a result, the thing that I call the flat-white economy, which is essentially the tech sector on a fairly broad definition, about 15% of GDP, the flat-white economy grew by 4.1% in real terms in the year to Q3. Britain's service sector exports, which um are largely driven by this, grew by 6% in real term in the year to Q3 this year, and Britain's plant and machinery investment grew by 9% in the year to Q3. This is the booming sector of the economy. I mean, what we forget is against a fairly flat overall picture, the action is a 15% part of the economy, which is booming. If we were to go to join well, even the single market, I think, would probably, although it's a bit more flexible, but even if we have to join the single market, it would probably mean that the uh acts that make it possible for the UK to grow because we're outside EU rules, these acts would apply to us. And if they applied to us, we would kill growth in these sectors stone dead. I mean, things may be bad, but they can get a hell of a lot worse. And I would argue that if we go back in, that's what the consequence would be.

Gerald: 30:17

Well, I have to say that's um uh not desperately optimistic, obviously. Um maybe to uh George, a few points on the optimistic side.

George: 30:27

Well, I'm gonna I'll pick you up on that, Gerald, because actually what Doug's just said there is that there is a big section of the economy that is booming. And and that's something that we we should be celebrating, and I think we should be trying to learn from. And as Doug says, it if the diagnosis is true, that that's booming because we we can do those industries better with lower regulation, we should be asking ourselves, what else are we holding back with higher regulation? You know, that that I think is a is the to me the big problem. I think we are I see it in in the financial services industry, you know, where our company works, and the the slew of regulation and the constant changes and the constant additions to regulation are a genuine drag on business. So, yeah, so the deregulation I think is the is a key lesson here.

Doug: 31:24

George, I was so can I just very quickly quote a statistic, again, to be boring. I was quoted by a man from Goldman's in the mansion house, that in Hong Kong it cost them $70 to onboard a client. In the UK, it now costs them $10,000 to onboard a client just because of the regulation. And that I think makes your point really well.

George: 31:49

Yeah, I could completely believe that. And in the financial services, it it goes through the whole economy. I mean, one of the things that you hear a a lot about small businesses complaining about, just the difficulty in setting up something very simple like a bank account for a new business.

Doug: 32:07

Yeah.

George: 32:08

It's incredibly hard, it's an incredible barrier to entry. And you know, these things can and should be addressed quite quickly.

Gerald: 32:19

I'm gonna try and say that we should be positive. I know in in past podcasts, uh, I always seem to be uh the half-glass empty merchant, and George is always a little bit more uh optimistic. Um Doug, let's go to a much more optimistic topic, which I'm gonna I know the enthusiasm of both of you for vintage cars and cars of all shapes and sizes, and um, try and restrict you guys from waxing lyrical too long. Um so no book recommendations in this podcast. We're gonna go for favourite cars. As the sort of non-petrol head, Aldo First and duck out the way very quickly. Um, in that my brother was um period of time owned a Jensen Interceptor. Um, many people will remember it mainly for the uh really beautiful lines of the of the car and that fantastic rear curved window. And um looking it up, I had to to chat. It had a an engine size that is um f fairly mind-boggling. Um I think it was six or even seven litres, depending on which version there was. The thing that you don't see in the sort of glossy films about the Jensen was he spent most of his time having it repaired. So it wasn't um it was nicer to look at than to get much driving out of. George, we'll let you go first on your car, and then um we'll give free reign to Doug.

George: 33:47

Okay, well, uh yeah, I th I thought it would be a bit fun, given, as I say, that we're all petrol heads, to to recommend a favourite classic car. And given that the the top topic of the podcast is economics, I'm gonna go with the Mini. I think the Mini is uh a fantastic classic car. I mean, it's still a derivation of it, is still in production now, but in its day, it was a family car, it was a a racing car, it won lots of uh lots of rallies, and it was also a very important economic car in that it was very cheap, very economical, um, and it helped get a lot of society into the the car owning space and gave them a lot of a lot of freedom. So um I'm gonna say the mini for my for my favorite classic car.

Doug: 34:39

I'll hand it over to you, Doug. Well, my mother had a mini, um, but she traded it in for a Trans-Spitfire. I mean, it the Mini was great and it was classics. I really love the car I did the Peking to Paris rally in, which is a Bentley. And my particular one has still got most of the rally changes to it. Um, it's got the rally suspension, it's got the rally transmission, it's got the rally engine modifications. So it is quite a fun car, and it can move a bit more quickly than most of those sort of rather hefty Bentleys. But can I just give a small mention to my convertible Jaguar XJS? I think I've had more fun in that car than in any other car I've owned. It's really great for sort of prancing around, wind in your hair, and it's a very refined and comfortable car. And uh I've driven it all round France, all round Spain, all around Germany. Um, it really is a wonderful tour.

Gerald: 35:43

Well, gents, you've been very restrained there. I thought we were going to have to rein you in on time, but um very, very interesting sort of trio of cars there. Uh Doug, thank you very much for coming along. Both of us, and I know a lot of our listeners are avid readers uh of the material that you put out from time to time on the current state of play. Uh George has got your book, and in fact, he's got my copy as well. So I shall be diving into that soon. So from us both again, thank you very much for today.

Doug: 36:15

Thank you so much for having me. It's a pleasure being on and uh listening to the two of you.

George: 36:20

Thank you, Douglas. It's a pleasure and an honor.

Doug: 36:22

Thank you.