UK Pensions Crisis and Central Banking: Dr. Steven Klein interviews Prof. Martin Weale

On this week’s episode of the Governance Podcast, Dr. Steven Klein interviews Prof. Martin Weale from the Department of Political Economy at King's College London. This episode is titled “UK Pensions Crisis and Central Banking”. This episode discusses the pension funds sell-off that occurred following the UK government's mini-budget in early October 2022 and which led to the Bank of England's intervention.    The Guest Martin Weale is Professor of Economics at King's Busines School. Martin graduated in 1977 in Economics from Clare College, Cambridge. On graduating he took up an Overseas Development Institute Fellowship at the National Statistics Office in Malawi. He returned to Cambridge in 1979 to work on economic modelling projects directed by Sir Richard Stone and Professor James Meade, before becoming an Assistant Lecturer in 1987 and subsequently a Lecturer in the Faculty of Economics and Politics. He was elected a Fellow of Clare College in 1981.   Martin is an applied economist with an interest in macro-economic and micro-economic problems. Recent work includes exploring the effects of the Bank of England’s asset purchase programme and an exploration of the relationship between the education of parents and that of their children. In 2016 he joined the Office for National Statistics Panel of Economics Experts and he is currently developing work on democratic measures of economic performance. 

 

Episode Transcript

Steven Klein (00:01):
Welcome back to the governance Podcast. Today
we'll be talking about themarket reaction to Liz trusses
mini budget, and what it saysabout public debt, the housing,
market pensions, and democraciesrelationship to central banking.
I'm Steven Klein lecturer ofpolitical theory in the
Department of Political Economy.I'm very pleased to be joining
joining this conversation byMartin Weil, professor of

(00:22):
economics in the Department ofPolitical Economy, as well as
the business school professorwheel. In addition to being a
prolific researcher and regularpublic commentator, he served on
the Bank of England's MonetaryPolicy Committee for two terms,
from 2010 to 2016. I believeit's an external member, is
there a specific position thatyou're in or was an extra? Okay,
very good, which means he'sextremely well equipped, I

(00:46):
think, to discuss some of thethings that have been happening
in the last few weeks. SoMartin, thanks so much for being
here and joining me for thisconversation, but it's a
pleasure.
So I want to just start bythinking a little bit about and
talking about sort of whatspecifically has happened and
helping our listeners understandthe specific mechanisms and

(01:07):
dynamics that led to us beingwhere we are today. So maybe the
place to start is, with you justsaying a little bit about why,
in your view, the mini budgetcause such concern and panic in
financial markets. And why wasthis sort of different from, for
example, the additional spendingwe saw during the pandemic or
even with the announcedsubsidies for energy costs?

Martin Weil (01:29):
Well, when governments borrow money, it's
the same as when people borrowmoney, those who lend to them
worry about whether they'regoing to be able to repay it.
And, of course, a key guide tothat is whether your debt is
rising faster or slower thanyour income in the medium term.
If debts rising faster thanincome, then you're doing too

(01:52):
much borrowing. If incomesrising faster than debt, then
things are under control. Now,the problem with the mini budget
was that the government didn'tproduce any projections about
what was likely to be happeningto debt and income in the medium
term. And that was theirdecision. So as a result, the

(02:14):
markets decided to jump to theirown conclusions. They couldn't
see how the tax cuts were to bepaid for. And they were worried
that no, this was perhaps goingto mean more inflation in the
future or that, well, that wouldhave been the easiest way of
managing it. Or they were justvery uncertain about the

(02:35):
framework for policymaking. Whywas this different from
additional spending during theepidemic, or though the energy
price cap? And I think theanswer is that, in the short
term, markets can absorb quite alot. The concern is about the
path of debt relative to incomein the medium term.

Steven Klein (02:56):
Great. And so that's super helpful. And so,
you know, as people, you know,as the crisis was unfolding,
there were these largerconcerns, but it's playing out
in particular, in markets forwhat are called gilts, and
increasing yield on long termgilts. So maybe it'll be helpful
to say a little bit sure aboutwhat gilts are, in case people

(03:18):
don't know, and what their yieldsignifies about investors
perceptions of the UK climate.So why did this perception lead
to increase in in the yield ofguilt or this perception that
there's going to be anunsustainable path of debt in
government spending?

Martin Weil (03:35):
Well, when you and I borrow money, we take out a
mortgage or a bank loan orsomething like that. When the UK
government borrows money, itissue securities called
government debt, gilt edgedsecurities and gilt edged,
because they were assumed to becompletely safe. The rate of

(03:56):
interest that is has to pay onthose depends on the market
appetite for them. And in theuncertain situation created by
the mini budget, this questionof how debt was going to be
managed in the future? What wasthe government's economic
framework? And was it coherent?Given all that uncertainty,

(04:17):
people wanted a higher return ontheir investments than would
otherwise have been the case?Because they felt they were
running extra risk?

Steven Klein (04:25):
Very, and so I'm curious, I mean, this is very
hard to judge. But to whatextent do you think this was an
issue ultimately about thegovernments of the fact that
they didn't get the budgetforecasting done by the Office
of Budget management, theuncertainty that produced versus
sustain itself? Do you thinkthere's a world in which if they

(04:45):
had gotten they'd gone throughmore regular procedures, the
GOP, the markets would havereacted less aggressively, or do
you think ultimately, this wasjust I mean, I know this is a
hard question to answer becauseit's a hypothetical. Sort of, I
guess I'm curious about how muchthis is about the NS certainty
that just announcing a budgetcreates versus the actual
trajectory that the budgetsignifies? Or is it just

(05:07):
inevitably going to be a mix ofboth of those things?

Martin Weil (05:10):
Well, I think if the government had produced a
report from the office forBudget Responsibility, it would
have shown debt rising relativeto income. And that would have
alarmed market. So I don't thinkit was the absence of a report
showing that there was noobvious mechanism for managing
government borrowing. It was thefact that market met people

(05:32):
investing in government debt,believed there was no mechanism
for managing governmentborrowing. And in my view, they
were right to believe that

Steven Klein (05:41):
I should I think I call it the Office of Budget
management, which is an Americanoffice in the White House. So
yeah, the Office of BudgetResponsibility. Very good. Yeah.
So then what are some of theimplications of increasing in
gilt yields and the increase ininterest rates that receive both
for the government'spolicymaking, but also for the
economy as a whole?

Martin Weil (06:02):
Well, I think it's bad news for both the government
and for the taxpayer. And forthe economy as a whole. If
Britain is regarded as a riskycountry in which to invest, then
the government has to pay ahigher interest rate when it
borrows. And that, of course,means that the taxpayer has to
pay more tax to pay the intereston government debt. Secondly,

(06:25):
the interest on government debtdefines the market for borrowing
in the UK. So it also means thatpeople who take out mortgages
are going to have to pay morefor their mortgages than would
have been the case without thepolicy fiasco.

Steven Klein (06:42):
Good.

Martin Weil (06:44):
And so yeah, so it leads to an increase in the cost
of borrowing. It can it cannot,it can itself contribute to an
economic slowdown in the economyas a whole if it's perceived now
that there's a riskiertrajectory of government
spending as part of what you'resaying. Yes, indeed, what it
means is that, no, if thegovernment is borrowing more
than taxes have to be higher inthe future, which undermines the

(07:05):
entire point of the Mini, whichundermines the entire point of
the mini budget, which was totry to spur growth. Well, in
taxes, the government believedthat the mini budget would spur
growth in the medium and longterm, and no one else swallowed
that.

Steven Klein (07:21):
Good. And so I want to turn now to thinking or
talking a little bit about thesort of specific turmoil and how
the change in these interestrates on government bonds or
gilts lead to potential largerrisks than maybe people fully
anticipated in differentsegments of the UK economy. So

(07:42):
there's a lot of coverage overthe last few weeks of what
happened at pension funds in theUK, as their interest rates on
government bonds started goingup existing government bonds, so
the yields on the gilts went up.So why were these pension funds
particularly exposed to anincrease in gilt yields? Why did
it start leading to turmoil inthe pension funds?

Martin Weil (08:04):
Well, pension funds, make promises to pay
pensions in the long term in thefuture. The cost of those
depends on the interest rate.And pension funds had been very
concerned about the long periodsof falling interest rates that
we had from about 1980. Untillast year, that was adding to

(08:25):
the cost of providing pensions,and putting pension, no the
ability to pay those pensions atsome risk. So what pension funds
did was to buy derivatives whichwould protect them from that
risk. If interest rates fellfurther, then the pension funds

(08:46):
would be compensated for that.If interest rates it No. And by
contrast, Rose, then the pensionfunds would face a loss. But the
argument was, that wouldn'tmatter, because the future
pensions that they were going topay would in effect, get
cheaper, become more valued.Now. It's the pension funds had
enough money at the moment tomeet all of their pension costs,

(09:09):
then that would have been theknow the end of it, but at least
they wouldn't have beenparticularly exposed. But the
problem they faced was that knowquite a lot of pension funds are
in deficit and their assets,their liabilities now exceeded

(09:29):
their assets. But even for thoseactually for those funds that
weren't in deficit, as theinterest rate in the gilt market
rose sharply, the people whowere providing the derivatives
essentially asked for margincalls. They wanted to be sure
that pension funds could meetthe losses. And the only way in

(09:52):
which the pension funds wereable to do that was by selling
things that they could sellquickly. And those are done
securities, there's a very bigmarket for them. They're much
easier to sell than other thingslike shares, let alone of course
building Yes, yes, as thepension fund was selling these

(10:13):
government securities, notsurprisingly, the price of them
fell, a fall in the price ofgovernment securities is
effectively an increase in theinterest rate on them. So, as
the pension funds were sellinginterest rates in the long term
market, though, the cost ofborrowing for 20 years or 30

(10:34):
years was rising, and thattriggered further losses, and
triggered the need for moresales. So there's what you're
talking about was the doom loop.This was the so called doom
loop. So the only way out ofthat, or at least not the only
way out of that, but the way outof that, that the Bank of
England adopted was to intervenein the market for government

(10:57):
securities to buy gilt so as toprovide the pension funds cash
without letting the price ofguilts fall further.

Steven Klein (11:06):
Yeah, I have a question about that. But before
I just want to make sure that Iunderstand this is something
I've been trying to sort of makesure I'm clear on. So the the
relationship between theinterest rate on a gilt and its
current value, because when youwhen the government issues,
gilts, they pay at a fixedamount at an interim periods,
right. So the interest rate caninitially get set. But the

(11:27):
market interest rate isdetermined by the actual how
much you can sell that guilt fortoday. So if the value of the
guilt falls by 10%, thensuddenly those payouts are worth
more, and so the actual yield ofthe guilt goes up. Is that
correct? So the reason that kindof the current value of the
guilt when it drops, its yieldgoes up is because there's the

(11:48):
ratio of its current price tothe fixed payments you get over
time has improved. And so youknow, because I can imagine a
world in which people sort ofsay, well, why wouldn't a higher
interest rate on a gilt meanthat it's worth more, but in
fact, what's really going on isthat the current market value of
those gilts is dropping, becausethe debt is seen as less
valuable or less reliable. Soit's, there's a premium if you

(12:10):
want to sell a bond today. Andso the future period of those
bonds become more valuablerelative to its current price.
Is that right? Is that a usefulway to? Or am I getting it
correctly?

Martin Weil (12:21):
I think I think that's correct, I think perhaps
the best way of understanding itis with a simple example.
Suppose the government issues asecurity that promises to pay
three pounds a year forever. Ifthe interest rate on that
security is 3%, then thatsecurity is worth 100 pounds, if

(12:42):
the actual market interest rateis 6%, then that security is
only worth 50 pounds.

Steven Klein (12:48):
So the current value of the of the government
bond can go up or down dependingon how it compares to the
prevailing market interest rate,which is precisely what led got
pension funds in trouble sellingthese bonds, the value of the
bonds dropped relativelyrapidly. And so when they're
trying to sell them to acquiremore liquidity, they're
certainly worth less than theyinitially were. And so they have

(13:09):
to sell even more to acquire thethe amount of cash that they
need to meet these margin calls.

Martin Weil (13:15):
So that was exactly what was happening. Yeah. And I
mean, it's also worth pointingout that the movements in the
long term interest rate wereextremely large compared with
historical experience.

Steven Klein (13:27):
So it's, it's not it's not just the quantity of
change, but also the rate ofchange the fact that it was
changing so quickly, so muchleft these pension funds
particularly exposed to,

Martin Weil (13:36):
yes, they were getting very sudden calls,
right, a lot of money.

Steven Klein (13:41):
So and so this is what you're talking about
earlier, is what people oftendescribe as liable are the
specific products that they werebuying, right, where I, as I
understand called liabilitydriven investment products that
BlackRock and other assetmanagement companies were
selling. I guess one questionis, do you think that this was a
situation where the pensionfunds were taking on excessive

(14:02):
risk? Or were unaware of therisk that these liability driven
investment models where you takeout these derivatives were
giving or was it kind ofunderstandable behaviour, given
the long period of low interestrates? Sure, they've been
anticipating more, that therewere going to be rate increases
coming over the next few yearsand maybe unwinding some of
these sorts of exposure, thesethese hedging against low

(14:26):
interest rate?

Martin Weil (14:27):
Well, it's important to remember that the
liability driven investment wasto protect the pension funds
from the risk that interestrates would fall further. And as
I think I explained, if interestrates rose rather than falling
further, that actually makes nomakes the cost of providing

(14:48):
pensions come down. So theargument was, even though you
get a loss on your liabilitydriven investment that's matched
by a reduction in the cost ofproviding the pensions and In
that sense, it was a hedge. Now,obviously, if the pension funds
had known that there was goingto be such a sharp increase in

(15:08):
interest rates, they wouldprobably have wanted to be
owning different things. Andequally, though, had people
thought that likely, then theywould probably have been
requirements on them to holdcash, no, give it a minimum
amount of cash in normalcircumstances, to protect
themselves from margin call.Yeah. So we have learned a bit

(15:30):
more about the vulnerabilitythat we didn't know they had.
But the fundamentals ofliability driven investment to
protect pension funds fromfalling interest rates, I think
will probably sound

Steven Klein (15:44):
very good. And so I want to then ask you a bit
more as well, but the Bank ofEngland's intervention into the
gilt markets in response to thisturmoil? So you know, I think
some people found thatsurprising, given that. So we
had, as you know, because you'reon the brink of a monetary
policy board a decade ofunconventional monetary policy
of quantitative easing, wheregovernments or the banks were

(16:05):
repurchasing government bonds insecondary markets. And then as I
understand more recently,they've been indicating that
they want to engage in withquantitative tightening where
they start to sell those bondsback onto the market. Now, of
course, what the Bank of Englandhad to do was now reopen it to
build its purchasing of thesebonds on secondary markets to
help the pension funds. So whatwere some of the potential

(16:26):
risks, or, you know, issues thatthe Bank of England had to think
about when it was making thesedecisions to buy repurchase?
These guilts? I mean, part ofwhat I'm thinking is like,
what's the balance betweenhelping these pension funds, but
also not reopening? The sort ofgeneral support for guilt
markets that would thenpotentially undermine or stop

(16:48):
the right, the general rise ofinterest rates, which the Bank
of England also seems to thinkis necessary at this moment?

Martin Weil (16:54):
Well, that's what exactly the challenge that they
had decided that the MonetaryPolicy Committee meeting at the
end of September to reduce thebanks owning the banks stock of
government debt, and instead thebank found itself increasing.
It's now it that I'm sure waswell, that that tension, I'm

(17:14):
sure was an important part ofthe reason why it said that the
policy was very much timelimited, that it was giving time
to the pension funds to sortthemselves out, and they'd
better use that time sensibly.But of course, a separate issue
was that the Bank of Englanddidn't want to be seen as No, a

(17:35):
sort of backstop that was alwaysprepared to bail out the
government. If it made badpolicy decisions. The Bank of
England, I'm sure was veryalarmed at the idea that it
might be seen as a sort offunder of last resort for
government borrowing when thegovernment didn't like the
interest rate it was having topay in the market. So those were

(17:58):
in the background. But the sortof basic resolution of that was
very much the limit to theintervention. And of course,
they talked about being preparedto make 65 billion of purchases,
and in the end, I think boughtonly 19 billion.

Steven Klein (18:15):
Yeah, yeah, this is a lot like in some ways when
the ECB was bringing some of thebackstops, often they weren't
actually utilised, the existenceof the backstop is more
important than the actualexecution because it's itself
going to calm the the pressureon guilts. Is that right? It
came stabilises the market evenif it's not being utilised, or
is it just that maybe the scopeof the problem wasn't as large?

Martin Weil (18:35):
Well, if they anticipated? Well, there was
considerable volatility in themarket, even after the Bank of
England started itsintervention. But, though, what
we have seen that what'sfundamentally come to the market
is a belief that economic policyis now going to take account of
the arithmetic of governmentborrowing.

Steven Klein (18:57):
Well, I want to get back to that. But before I
feel like before we turn to thekind of general political
situation. The other part ofthis that obviously is very
significant for British politicsand society is what are the
effects going to be of theselarger interest, higher interest
rates on the economy as a whole?And so I wonder, well, first of

(19:17):
all, if you just explain verybriefly, why does the change in
the yield on government debt inthe secondary markets, the
increase in interest rates theretranslate, for example, into
higher interest rates forhomeowners if they're on a
variable rate mortgage or iftheir mortgage is up for
renewal? What's the kind oftransmission mechanism between
the Bank of England's decisionsand then the rate of interest

(19:39):
that ordinary consumers orordinary citizens pay on
something like a mortgage?

Martin Weil (19:44):
Well, essentially the interest rate on government
debt provides the referencepoint for interest rates
throughout the economy. So ifpeople are thinking about a two
year mortgage to fixed for twoyears, then it will be the
interest rate on two year agoFrom the debt that determines or
is the major determinant of howmuch they're going to have to

(20:06):
pay. If they're thinking of afive year mortgage, it will be
the interest rate on five yeargovernment debt. So this
increase in interest rates ongovernment debt does feed
straight through to the interestrates on new borrowing for the
housing market.

Steven Klein (20:23):
And so and what do you think some of the
implications of this might thenbe? I mean, we're coming off of
a decade of very low interestrates, which enabled all sorts
of which shaped especiallyhousing markets. And so I just,
I'm curious if in your if youhave a sense that maybe housing
is more vulnerable to thesesorts of volatility today than
it has been in the past. And ifthis in some ways constrains

(20:44):
like what the government can doin terms, you know, if it is
going to put a lot of politicalpressure, for example, in the
government to really ensure thatthey can moderate increases in
interest rates. And so there's atension between, say, the tax
cutting aspect of what they wantto do and preserving or
moderating the effects ofinterest rate increases on

(21:04):
ordinary people, or has thisalways been the case that this
is just one of the ways in whichhigher interest rates affect the
economy as a whole is thatpeople suddenly might face
larger mortgage payments?

Martin Weil (21:15):
Well, John Major famously said, if it isn't
hurting, it isn't working, whenhe was talking about interest
rate increases in 1990, as faras I remember. So that is the
mechanism by which interestrates work. What I do expect,
know is that there'll be adownward adjustment in house

(21:35):
prices, and probably more than atrivial one. Yeah. I mean, the
sort of tension that that'slikely to create is that people
will be saying, and this is, tosome extent, correct, that this
is a consequence of theaftermath of the mini budget,
and therefore the government'sdirectly to blame for it. And

(21:56):
you could imagine that now,okay, young people don't vote as
much as they should. But peoplewho've lent their children or
given their money, children tobuy houses, and then see their
children getting intodifficulties with their
mortgages won't look very kindlyon the government.

Steven Klein (22:14):
This is this is something else I just wanted to
mention. I mean, in yourexperience, is there ever been
such a clear cut instance wherea single government decision has
led to such turmoil anduncertainty in financial
markets? Like it was somethingsomehow unusual, but how
directly? There seems to be arelationship between this one?

(22:36):
This is part of what I was alsoasking earlier about kind of the
difference between see thespending for the pandemic, the
short term spending? And itseems like it was a kind of
unusually direct reaction to agovernment policy announcement.
Is that your perception of it aswell?

Martin Weil (22:48):
Well, I think it was an unusually direct
reaction, what? No, we have seenas the same sort of thing the
other way round, when GordonBrown announced that the Bank of
England was to becomeindependent, that led to a sharp
fall in the interest rate ongovernment debt. And even before
the mini budget, of course, thegovernment had been sniping at

(23:12):
the Bank of England, sniping atthe office for Budget
Responsibility, and so on. Andthat had probably had some
effect in pushing up long terminterest rates, or the

Steven Klein (23:23):
one of the things I found very confusing is I felt
like the supporters of the primeminister who were attacking the
Bank of England, were criticalof it for being somewhat dovish,
on monetary policy. So theyoften were saying that they
didn't raise interest ratesquickly enough, which seems that
complete cross purposes, withwhat the mini budget was about,
which was kind of lowering taxesto, to spur growth. So it seems

(23:48):
sort of somehow confusing thatthey were both very critical of
the Bank of England for keepingrates so low through the end of
the pandemic when inflation wasstarting. And yet, we're so you
know, didn't want their moneybudget to lead to this spike of
interest rates?

Martin Weil (24:02):
No, I think that's a perfectly fair point that
governments typically do wantthings that are inconsistent
with this government probably isno different in that respect.

Steven Klein (24:14):
Yeah. And so what so I want to turn now a little
bit to talking about some of thebroader political kind of
questions that this raises. Andin particular, I think what, you
know, there's this long runningdebate that was occurring
throughout the post 2008financial crisis, and that I
think this is kind of anothermoment in, which is really about
how should we think about therelationship between fiscal and

(24:35):
monetary authority. So the siteyou know, when branch of
government that is in charge ofmonetary policy and setting
interest rates and the otherthat's in charge of fiscal
decisions, taxation andspending, and yeah, I'm curious
maybe if you can, sort of,again, maybe just very briefly
explain sort of what is thetypical view of that
relationship and and in what waydoes that do we see that

(24:56):
relationship playing out again,in the the way that it, for
example, the governor of theBank of England reacts to things
like the mini budget wheresuddenly he is very aware that
to maintain his own credibility,he has to signal that he's going
to raise interest rates, whichcan undermine, say, the fiscal
goals of the government. Yeah,maybe just to kind of very brief

(25:20):
explainer of sort of how thosetwo sorts of authority relate.

Martin Weil (25:24):
Yes, well, certainly the argument for an
independent monetary authorityis that if you set up an
independent body and give it thejob, the primary job of keeping
inflation under control, thenworkers, people, negotiating pay
rises, businesses, setting theirprices, will do so on the

(25:47):
assumption that inflation willbe kept under control. Whereas
if you have a political bodymaking the decisions, then
people will think that they'relikely to be influenced by short
term political considerations.Now, of course, you might say,
Why doesn't that apply to fiscaldecision making as well as
military decision making. And Ithink the issue is, rather that

(26:12):
with fiscal decision making,you're imposing taxes on people.
And the view is that only anelected body should be doing
that only an elected body hasthe authority to do that. That,
of course, means that you could,in principle, have the monetary
authority and the fiscalauthority operating at cross

(26:36):
purposes, that typically hadn'tbeen the case, until the mini
budget, when just as the Bank ofEngland was talking of putting
up interest rates in order tobring inflation under control.
The chancellor and the PrimeMinister, were talking of the
need to cut into the need to cuttaxes in order to get growth

(26:58):
going.

Steven Klein (26:59):
Now, good. And so in the tricky one question I've
been wondering about, I see alot of people questioning this,
you know, the typical model,then of how this goes is the
worry is that fiscal policy willoverheat the economy. So
governments have this incentiveto stimulate the economy to get
reelected. There'll be twobooming economies, but that will

(27:22):
be a kind of artificial boom,and that will then generate
inflation, and then the centralbank needs to kind of adjust or
prevent that by raising interestrates independently of the
government. Of course, rightnow, you know, it doesn't feel
necessarily like the Britisheconomy is booming. And if you
look at growth, you know, it'sbeen relatively weak, you see,
compared to the US or othercountries coming out of the

(27:42):
pandemic. And so it's an unusualsituation where it seems like
the Bank of England is raisinginterest rates with a lot of
economic headwinds. So you know,so it's a kind of more of such
and so I wonder how that factorsinto Bank of England decision
making about monetary policy? Soif you have, I can't follow up
is there's I've read argumentswith people who are essentially

(28:05):
wondering about the wisdom ofraising rates, if inflation is
primarily a supply shock drivenphenomenon, rather than a demand
driven phenomena. So I'm curioushow you think about some of some
of those dilemmas?

Martin Weil (28:17):
Well, first, I'd say on the question of whether
the Britain's economy isbooming, if you look at the
labour market at the moment isis extremely tight, that
unemployment is at its lowestfor 50 years, the level of
vacancies is extremely high.Now, the economy isn't growing
very rapidly, because at thesame time, people are leaving

(28:39):
the labour market. And in thatsense, the United Kingdom is
different from I think all theother OECD countries, people are
leaving the labour market. Sothat having the effect of
depressing output, but the Bankof England still needs to worry
about the balance of demandrelative to supply. And it looks

(29:00):
to many people, including methat there's quite an imbalance
there, that demand is highrelative to supply. Now,
separately, of course, theeconomy isn't growing very much,
because productivity growth isvery weak. But that's not
something that can be resolvedjust by having a higher level of
demand.

Steven Klein (29:17):
Yeah, yeah. So in some ways, it's a bit of a, you
know, there's a way in whichthere's some real challenges in
reconciling some of the, youknow, because when we're it
could be that higher interestrates, could, you know,
undermine certain forms ofdemand driven investment that
can increase productivity,right, and this is kind of a
Keynesian story that you needdemand induces some of those

(29:41):
investments. But it sounds likeI'm just curious about this kind
of the unique situation that theUK maybe not unique, but the
distinctive situation the UKseems to be in where it's, in
some ways, it seems like caughtbetween a rock and a hard place
where it has high inflation, butyou see a very tight labour
market, but these other forcesthat are undermining economic
and so it's not You can see thetypical story where you have a

(30:01):
kind of generally boomingeconomy, that interest rate. And
I feel like this is part of thetension that the fiscal
authorities find themselves in.Now, obviously, they have very
strong electoral incentives toencourage growth. But if you
have all these structuralfactors that are undermining
growth, and you have highinflation, it seems like they
have very limited space toundertake policies that might

(30:26):
have those sorts of effects.

Martin Weil (30:28):
Well, no, Britain has had a number of experiments
of trying to run a high level ofdemand in order to get
investment rising rapidly, andin order to get productivity
growing rapidly, and none ofthem have worked. And I think
they tend not to work in othercountries either.

Steven Klein (30:45):
And this was kind of this was a little bit leading
to where I thought, you know,what will potentially be our
sort of last line of discussion,which is so you know, the mini
budget was a very clearproximate cause to a rapid spike
of interest in interest rates.But, um, you know, I think
there's a question about whetherthe larger inflationary
environment, the things we'resort of talking about, would

(31:06):
have meant that some sort offiscal or monetary crisis like
this could have also occurredunder a Labour Government, if
they introduced some of theplans that they seem to be
committed to in terms ofinvestment, and also having
supported some of these taxcuts. And so that's kind of the
question is, is whether the minibudget was just like a proximate
cause for something that wasultimately being driven by some

(31:27):
of these deeper structuralissues in the British economy?
And if so, does what does thatsay about the possibility of
democratic choice or controlover government spending in in
this sort of environment?

Martin Weil (31:38):
Well, I mean, I think you're absolutely right,
that the fiscal position hasbeen shown to be extremely
tight. And what we've also seenis that, just as the
Conservative government can'tignore markets, so it seems very
unlikely that the Labourgovernment would be able to
ignore market. And it seems tome very unlikely that a labour

(32:01):
market, a Labour governmentwould be able to make convincing
promises that their policieswould lead to faster growth.
Whereas, though the marketdidn't believe, though the
promises from all the statementsfrom the Conservative Party, so
I think it does leave the LabourParty very constrained in what
they are, let be able to do ifor when there is a Labour

(32:24):
government, they will of course,have the option of increasing
government spending by puttingup taxes. How far that will
appeal to their voters andvoters more generally isn't
clear. But the fundamental issueis that government spending has
to be paid for, and the way inwhich you pay for it is through

(32:45):
taxes.

Steven Klein (32:47):
Well, that might be a good point to to wrap up
the conversation, because I feellike we've covered many of the
issues that we want to discuss.And, you know, rather than
saying there's a easy solutionout there, I think, just helping
our listeners be aware of someof the dilemmas and tensions
that either party or whoever isin government might face in this

(33:07):
current environment is a usefulexercise. So I just wanted to
say thank you very much for yourtime, and I really enjoyed our
conversation.

Martin Weil (33:15):
Well, thank you very much.