Random Comments

We had the October budget, thankfully with most of the worst ideas, such as raising capital gains tax, not present. However, I’m a bit wary of calling this budget a success for Burnham. In the short term, it’s probably a good political move, especially if he does call an election. By not making any drastic changes, Burnham and Healey avoid losing precious political capital. But they are locking themselves into a long-term bind and dependence on benign macro events.

I think Burnham will call an election; otherwise what’s the point of standing for Prime Minister but holding to the 2024 manifesto. If that happens, we should then see the ‘real’ budget emerge. Furthermore, we keep seeing this talk of his “10 year plan” consistently talked up and yet it fails to materialise – does he know what he wants and how to go about it?

This week we have links about the chaos in France, an article about British institutions and mass immigration, and a thought-provoking piece on AI and how it resembles the anxiety around early capitalism.

https://open.substack.com/pub/unchartedterritories/p/why-is-france-in-chaos?r=22u0c&utm_campaign=post&utm_medium=web

• Tomas Pueyo investigates why France has been experiencing riots recently and looks through some of the reasons given.
• To begin with, the protests began over education. Specifically, according to Pueyo: funding, discrimination, and justice (or police brutality). He then delves into each in turn.

So whatever the cause of this unrest, it can’t be the total spend on education: Other countries are spending much less, but these countries aren’t up in flames.

Similarly, despite the numbers above, France doesn’t stand out dramatically in class sizes, teacher absenteeism, teacher shortages (0.4%), attrition (1.9% vs 6.4%)

• There are some good charts here, including that France and the UK spend roughly the same % of GDP on education, and this has been fairly consistent in French history. He then argues that the funding may not be going where it should be, and looks into pensions.

Indeed, French pensioners are among the most highly paid in the world. They make 90% of the average worker—similar to public school teachers. But public school teachers are paid more than the average worker, so the result is that the average retired teacher makes more money than the average pensioner, or even the average French worker!

• Some further facts – teachers in France retire at 62, when the average French person retires at 64, which is pretty astonishing given the French life expectancy is about 83 years. Taking away pensions from education spending brings education down from 5% to 4.3%, according to Pueyo, closer to the EU25 average.
• There are other issues, including free handouts for meals and other subsidies. Ultimately, Pueyo doesn’t think there’s a real problem – France needs to raise the retirement age, and this sorts itself out. Obviously, however, the French will not accept this.
• Pueyo then turns to discrimination as something fuelling the protests and riots:

42% of French students report that classmates do not listen to the teacher, compared with 30% across the OECD. French teachers spend 20% more time maintaining order, they are 10% less satisfied with their jobs, lose 10% more of their time to student interruptions. French public schools see 4x more serious incidents than private schools.8 20% of teachers are apprehensive about going to school every day, 47% don’t think school rules are respected. Just last week, unrelated to the riots, a 14 year old shot a principal and a teacher.

• I had no idea about the difference in French schools compared to the rest of the OECD, nor about a shooting in a French school. Pueyo looks into the data about immigrant students:

There is a serious problem around 1st and subsequent generation immigrants in Europe in general, and France in particular. It starts with a lower human capital from some specific countries and ethnicities, which makes them commit more crime and contribute less economically, but kicks off a vicious cycle of underperformance, racism, violence, discrimination, more crime…

For the Left, the entire problem is discrimination and lack of opportunities, and it’s true, but not all the truth: These minorities are overrepresented in all crime and economic statistics across all of Europe, and how immigrants from other countries (even poorer, like Vietnam decades ago) don’t have this problem

• Pueyo notes that Chinese and Vietnamese immigrants, who were as poor as North African and other immigrants, performed much better in education, and increasingly economically as well. Part of this is that the French immigration system seems to select those who are overrepresented in crime and poor economic outcomes, but then the state / French society is unable to integrate them. This has been present for some time, but undoubtedly has accelerated in recent decades.
• Pueyo looks into the violence, and how much of this was down to the police vs protestors vs infiltrators into the protestors movements:

Until October 14th, the list of injured included 937 policemen, 250 students, and 150 education professionals. That means over 70% of those injured are policemen.

I think it’s important to have a measured reaction. The police can’t use overwhelming force against pacific demonstrations, but there are not all pacific demonstrations. But after looking at all this footage, I think it’s possible that the police is not violent enough: Demonstrators don’t appear scared of them, rioters attack people, buildings, and the police with impunity, they loot and destroy… That’s at least what the police union Alliance thinks, as it will sue the French state for risking lives due to unclear and contradictory guidance on how to react to the violence.

• To some extent this shouldn’t be surprising – whenever the state loses monopoly on violence, we see violence beget violence, like in London in 2011. Obviously French political culture does have more of an emphasis on protest than elsewhere, but it does seem that French police were unable to enforce order.
• Furthermore, he notes that the courts have been playing a significant role in this:

What does surprise me is that there are a lot of recidivists here receiving very lenient sentences. Studies show that the vast majority of crime is committed by recidivists, and that it’s hard to get them to stop, so you simply want them off the streets for as long as possible.

Also, why aren’t illegal aliens who commit additional crimes expelled?

• This isn’t only in France – we see this plenty in the UK as well. We seemingly do not recognise the 80/20 rule – namely, that 80% of the crime is done by 20%, and that there is no point trying to rationalise this behaviour. Individuals are who they are, and if they have constantly committed criminal acts, the state must remove them. Finally, criminals committed by illegal aliens who are allowed to remain is just begging Le Pen into power – if you are truly dedicated to the liberal order, or consider her party that of the far-right, you’d be best trying to actually deal with these underlying issues.
  

https://sfhwebb.substack.com/p/a-period-of-silence-on-your-part?r=22u0c&utm_medium=ios

• Stephen Webb goes into detail about the Treasury, and how their unchallenged assumptions fundamentally shape the British economy.
• Webb focusses on immigration and notes the following:

The OBR assumes a new migrant pays the same tax as an average UK adult, perhaps £19,500 a year. Most can’t claim benefits for five years, and none will draw a state pension within the forecast period. So an extra 350,000 net migrants cut borrowing by about £7.4 billion by 2028-29. Over five years, extra people look like free money.

There are two critical assumptions here. First, the short time horizon. A five year period will see government collect taxes paid by a young worker, while ignoring everything that follows: settlement, family reunion, the NHS in old age, the pension.

The second is even more bizarre. The OBR is instructed to take the Treasury’s departmental spending limits as given, fixed in cash and not adjusted for population. In theory, even if millions of new people arrive, the Treasury assumption is that the NHS budget will remain flat, meaning inevitably worse service per capita for everyone else. In the Institute for Fiscal Studies’ deadpan phrase, the forecast assumes the government “will allow service quality to change rather than budgets to change” (IFS Green Budget, September 2026). Hold spending per head constant and a third of the ‘gain’ disappears: borrowing falls by about £13 billion rather than £20 billion in the OBR’s high-migration scenario. The OBR’s own box notes that real public service spending per person has fallen since October 2021.

• Interestingly this leads to quite pernicious effects for budgeting in the UK, as technically, by reducing immigration, Labour are cutting the fiscal headroom in the next 5 years. This naturally makes their spending plans even more dicey – but as we can see above this is just artificially gamed anyway.
• Naturally, the best way would be to do a detail lifetime earnings and financial costs of immigrants by jobs, sectors, ethnicities, country of origins etc so you would know the likely fiscal impact, as we have seen in Denmark. But given it’s such a political dividing line, even within the Labour Party, I doubt this will happen anytime soon.

But ‘Treasury Orthodoxy’ in microeconomics is a thing, and putting the department publicly in its place would send a powerful message to the public that they are now being listened to

The Treasury has a big enough job getting the public finances back under control, which is what it exists to do. Since Gordon Brown, it has grown used to the idea that it also knows best about welfare, industry, public services and, latterly, the size and composition of the population. A public clipping of its wings on immigration would do more to rebalance the argument in Whitehall than any amount of tinkering with departmental responsibilities.

• As Webb notes, historically it hasn’t gone well when the Treasury department was broken up. Furthermore, we do need the Treasury’s scepticism over spending, particularly given our ever growing welfare state and lack of economic growth. What we do need is to empower the ONS to research costs and benefits – and present these to the public without fear of backlash.
  

https://open.substack.com/pub/contraptions/p/cognitive-mercantilism?r=22u0c&utm_medium=ios

• Lastly a quite different, but very timely piece on AI by Venkatesh Rao, and how the panic around AI is similar to the panic around early capitalism.

the mercantilist worldview that preceded capitalism rested on roughly four interlocking beliefs.

First, wealth was fundamentally scarce and finite. It consisted primarily of land, the agricultural produce of that land, and the precious metals it contained, accumulated through mining, trade and conquest

Second, ordinary people could not be trusted with much freedom

Third, economic thinking was overwhelmingly oriented toward supply and its control. Wealth came from controlling productive resources and commanding high prices for their output.

Fourth, there was little reason to imagine most people doing anything other than agricultural labor. If something like 80% of the population was engaged in inefficient subsistence farming, that was simply the natural order of things

• You can see immediately the comparisons to the AI revolution at the moment, which Rao does later make. For me, his second and fourth points are the most pertinent and interesting – we see this right now with the Anthropic IPO, and the public pronouncements about how AI safetyism is everything. But surprise surprise, the only ones to be trusted are Anthropic themselves, and nobody else.
• The last point is the most interesting and obviously we take it for granted now, but look at our present day. 80% of us are working in office jobs / service jobs, and that has been broadly stable for decades. The idea that this will go is understandably quite terrifying, as we don’t have a model for what comes next. This is where Rao gets really interesting:

I don’t know how to farm. I can barely keep a houseplant alive. Yet I can obtain an astonishing variety of foods, in quantities that would have seemed fantastical to an early modern peasant. My inability to produce food is economically almost irrelevant. What matters is that I can consume it, enjoy it, develop tastes for it, and devote my energies to other things.

The analogous possibility with AI is that most people will no longer need to be significant producers of intelligence in order to become significant consumers of it.

• This frames the next section of Rao’s argument, namely that humans constantly show an ability to unlock new desires, and work towards these new desires. Interestingly, the number of days worked went up before the Industrial Revolution took place, as workers wanted to acquire new goods and services.

We are moving toward a world in which an ordinary person can command quantities and varieties of intelligence that would previously have required teams of highly trained specialists. Just as I can enjoy food without knowing how to farm, I can increasingly enjoy the products of intelligence without knowing how to produce them myself.

The crucial economic question then becomes not how much intelligence people can produce, but how much intelligence they can find uses for.

• Intelligence being a commodity is such a material game changer that it seems likely to take years to be fully realised. Right now we are in that early phase of people using AI to automate parts of their lives that they can conceive of. For instance, programming, excel, reading documents and pulling together recommendations. What happens next when intelligence is unlocked?
• I should emphasise here that the rise of early capitalism and the Industrial Revolution were transformational to mankind – obviously. They also did require (or perhaps more accurately to say helped create) terrible wars, social upheaval, the collapse of nations and empires before we ended up in this equilibrium. Undoubtedly there is a risk that AI can do the same to us, and indeed will to some extent. I am still optimistic though – this is being spread democratically (in that nearly anyone and everyone can use it, without gatekeeping), we have demonstrated an ability to adapt accordingly, and we are far less violent than we were centuries ago.

the most important consequence of the AI revolution may not be that intelligence production becomes more efficient. It may be that most minds, human and eventually artificial, are liberated from the necessity of producing intelligence merely to survive, and become free to discover what they actually want to do with it.

• What an inspiring and optimistic view of the future, and I wonder what society will emerge.

Apologies for the lack of posts these last few weeks – two links this week, but they are both quite substantial articles. Hoping to get back into a regular cadence again; may publish more frequently but shorter posts. More as we get it.

In the UK, we continue to build up to the budget, with the latest being that the Chancellor has rejected attempts to raise Capital Gains, which is something to be grateful for. On the other hand, we’ve seen Andy Haldane, previously one of Burnham’s closest advisors, heavily criticise Burnham’s economics. Listening to the Times The State of it podcast reinforced the sense that Burnham wants to be a government similar to the 1970s, at a time when we don’t have the finances to do so, and we need far more deregulation and lower taxes than ever.

On that cheery note, here are the links for this week:

https://substack.com/inbox/post/218012659

• I thought this podcast with Logan Wright on his new book was essential listening for anyone interested in China’s economy or macroeconomics more generally. Most Western politicians should be aware of what he is describing in here to inform our China policy.

After the global financial crisis, China saw the largest single-country credit expansion the world has seen in at least the last century, possibly many centuries. China added a third of global GDP to its bank assets in just eight years. We’ve never seen anything remotely like it.

First, there was a deliberate attempt to provide countercyclical support in response to the global financial crisis. The extension after that was essentially path dependence. Growth was strong, it was dependent on investment, and it became too difficult for authorities to shut down without imperiling the overall economy. That facilitated the growth of the shadow banking system, and credit growth became increasingly disconnected from the real economy. A lot of it went into the property sector and local government infrastructure.

The number one cause of the rapid decline since 2021 was the collapse of the property sector. It’s critical to understand that as a proximate cause, not the ultimate cause. After the deleveraging campaign hit developers’ shadow financing channels, the property sector was reinflated by borrowing from households in the form of pre-construction sales.

The other underappreciated part is how the slowdown in domestic demand is directly related to the rise in China’s external surplus and supposed competitiveness. It’s a byproduct of falling prices, but also of continued production across industrial sectors that used to find demand in residential construction in China. Now there’s none, so they need to find markets abroad, typically by cutting prices. This has produced persistent deflationary pressure and a weakening of the real exchange rate. The domestic slowdown and the external surplus are very closely linked, but people still treat them as distinct — they argue the economy is K-shaped — when in reality these are the same phenomenon.

• Apologies for the heavy amount of quotes, but these are needed to understand what has happened to China, and why we in the West must be paying full attention, and how our initial policy responses (particularly in Europe) fail to grasp the challenge. China’s formidable exporting machine is in part due to its genuinely superior manufacturing ability, but also because its financial system has failed and domestic demand is nowhere near enough for China’s economy.
• As we know, China is fully willing to use economic weapons against the West, such as reducing rare earth exports or cancelling investment if it perceives itself under attack. However, as we are now seeing in Europe, failure to act against Chinese imports just dooms your own industry, and there is nothing that you can do to make your manufacturers as competitive as China’s – it’s not a fair fight.

Decay is an easier political choice for China’s leaders — accepting slower growth and inefficient policy tools rather than risking crisis. The path to crisis is not an external shock in China, where everyone assumes the government will provide support. The path to crisis is reform.

• This is also crucial for our understanding of China. For all of this talk about Chinese leaders thinking in decades, they are also just as prone to our own short-term thinking. This has been known about in China for decades – see speeches made by prior Presidents referring to over-investing, and yet nothing has been done about it, as the political cost would be far too painful.
• Now we are at a stage where China cannot bring itself to reform, but the rest of the world no longer can absorb its gigantic surpluses. The USA under Trump, and under Biden previously, have recognised this, and are no longer willing to act as the consumer of last resort. We will see the rest of the world follow suit.
• Interestingly, they say that Japan is the closest analogy in recent history, but note that Japan had 0% monetary policy and needed fiscal stimulus, whereas China can still do some more with monetary policy. But the broader point, of there being a generalised crisis, rather than an acute one, remains.

That pie shrinks further if China’s export prices keep declining and drive disinvestment in the rest of the world, which means your customers, who are largely outside China, are increasingly unable or unwilling to afford everything you’re producing. Those are the limits of the model.

• China, for all of its superior industrial capacity, is fundamentally limited by being dependent on the outside world, and in particular the USA. (Which perhaps does make the bet made by American administrations to entwine the Chinese and American economies to prevent war look a bit better in hindsight). But this is the key advantage that Europe still has over China – we still have the consumption demand that China does not. This will be costly should we choose to use it, namely higher-priced goods, Chinese retaliation to our industries, and a worsening of relations. Europe needs to follow the American lead and arguably go further – import controls, and demand localisation of Chinese goods. Of course, this also must be tied to domestic reform across Europe, in particular its hiring and firing practices, along with energy.
• An interesting problem is that Chinese youth unemployment is being ignored by the main leadership – we’ve seen this in the past with Xi’s comments about needing to maintain discipline in tough times, but apparently, according to this interview, leadership believes that industries simply haven’t adopted AI yet, and once they do so it will be fine. Again, if I were a Western policymaker, I would be thinking about how to accelerate this problem for the CCP, or at the very least be aware of how sensitive this area is to senior leadership.

The trend now is more party governance of the financial system and treating finance as a utility.

The net result is: lend to state-owned enterprises and go home.

• Incentives are everything – in finance, you should be guided by your rate of return. China’s political economy does not operate in this way. Consumption will not grow for the foreseeable future until the underlying political economy changes.
• An interesting comparison was made here to the Brezhnev era of stagnation and decline:

Brezhnev chose decay. He chose decay, the scientific-technical revolution, and cybernetics, because the Soviets thought technology would work for them — we’re better planners, so we’ll use technology to allocate resources effectively. Kevin Rudd has recently published on how China thinks about AI the same way: AI is the way we get out of relying on markets, because AI will tell us how to allocate resources. It’s ideologically where they’re coming from.

• Therefore, is it strategically imperative for the USA to continue to be at the frontline of AI research? Probably so, but it seems the AI companies and hyperscalers are doing that for the USA already. Arguably, here the USA should continue to be hands off with its approach to its technology giants, given the overwhelming lead it seems to have in this space.

The net result: China has not been successful with this model, and is under more pressure than everyone thinks to maintain access to open markets for its manufactured goods. The rest of the world has a lot more leverage over China than it is currently using. That leverage is best delivered collectively, because China is less vulnerable to trade restrictions from any individual country, including the United States.

• The obvious forum for this would have been the G7, but given the USA’s erratic leadership, this is (for now) unlikely, though we are seeing European movements towards restrictions on Chinese imports. From a UK perspective, I’m highly concerned by recent moves to continue Chinese car imports – great for consumers, dire for our car industry, which is already under significant strain. This is where I would suggest some alignment with Europe, for our own domestic interests.
  

https://www.lrb.co.uk/the-paper/v48/n17/arthur-downing/asset-sweating

• This piece in the LRB by Arthur Downing focused on Britain’s new energy crisis and how we have ended up here. Starting with this shocking quote:

Others were concerned about the potential impact on prices of future shocks. In 2010, the energy industry regulator, Ofgem, concluded a major study into the resilience of the system. One of the scenarios it tested was a Russia-Ukraine conflict. The resulting report, Project Discovery, warned that ‘consumer bills rise in all scenarios due to the levels of new investment required … and especially so if oil and gas … prices spike sharply.’ Project Discovery was swept under the carpet then and is almost never mentioned today. To remember it is to admit that the British state lacked the capacity to do anything about the crisis it correctly predicted would happen.

• It’s quite incredible that we were able to anticipate a potential conflict’s impact on our energy situation, but could do nothing about it. I’d be interested to see what current UK energy ministers and civil servants make of it.
• As we know, we have some of the highest electricity prices globally. What is more interesting is how much of this is down to renewables, how much of this is down to gas prices, and how much of this comes from elsewhere. Downing writes:

There are elements of truth to both positions. A third of the increase in the average electricity bill between 2016 and 2026 was due to the increase in gas prices. But another third was due to increased subsidies for generators (resulting in part from higher interest rates and the growing cost of equipment and labour). A further 20 per cent was due to rising electricity network charges following a wave of construction after decades of underinvestment. Whatever the reasons for rising bills, the bigger problem for renewables is trust. For at least a decade, the British public has been told that renewables are cheap and will bring down bills. Between 2000 and 2025, the share of electricity generated by renewable and clean sources (wind, solar, hydroelectric, nuclear) rose from 24 per cent to 50 per cent. But this has failed to translate into stable or reduced electricity prices.

• This latter point is absolutely crucial to our situation. We have been repeatedly told that renewables would lead us to energy security, a green boom, plentiful jobs, and low prices. We can argue, technically, that we do have a green boom and plentiful jobs, even if this is on net worse for the UK. What we cannot dispute is our lack of energy security and low prices, the two essentials for any government.

One important metric is the share of final energy demand serviced by electricity: it has barely increased over the last two decades, going from 19 per cent in 2000 to 21 per cent in 2023. Between 2000 and 2019 electricity consumption per capita actually fell by 22 per cent. Only Yemen, Zimbabwe, Jamaica, Tajikistan and Syria have had greater drops.

• That list of countries should be part of the energy consensus epitaph from 2008 to 2026. What a damning indictment of UK energy policy.
• Downing goes into this in further detail in the article. Initially, energy policy was set by the market – the UK government, as per Nigel Lawson, was to set a framework for the efficient production and consumption of energy. What is quite interesting is that this was abandoned under the Cameron government in the mid 2010s, through the contract for difference for renewables.

But its real purpose is to protect the generator. Renewables have no fuel costs, so they bid into the market at close to zero, and because they generate at the same time – when the wind blows, for example – they drive down the wholesale price at the very moment they are most productive. Wind cannibalises wind: each new wind farm erodes the price the others earn. The contract for difference takes that risk off the investor and puts it on the bill-payer. A second protection is built into the market design. Britain runs a single national wholesale price, the same across the country, so a generator is never penalised for its location.

• The initial thinking for this was to encourage investment to get the renewables industry off the ground, but this has never been challenged. If the renewable sector in the UK, after 20 years still cannot stand on its own, it’s time to cut loose and go back to basic principles. I would prefer us to move to zoning, to better align supply and demand. But if we wish to continue the nationwide price, we need to adjust our subsidies accordingly.
• Downing notes how the renewable industry actually fought back against proposed reforms:

In summer 2025, the government decided to abandon a set of major reforms to the electricity markets, after facing bitter opposition from the renewables industry. These reforms were called ‘zonal pricing’, and would have replaced the single national price with regional prices. A wind farm in a remote corner of Scotland would have earned a lower price if its output depressed prices and would no longer be paid the national price to switch off when the network was congested. Having built such assets on the promise of national pricing, the industry fought hard against the reform. The government claimed it was giving ‘certainty to investors’. This contradicts the notion that under capitalism investors earn their returns by taking risks. It also makes clear that the role of the British state is now to ensure ‘investability’ by ‘de-risking’ projects. In this new world, critical infrastructure is perpetually financially reconfigured so that it will generate dependable returns for investors.

• We have got our energy strategy the wrong way around – we are seeking to serve investors, under the guise of this misguided Net Zero view. By leading with a legalistic view (i.e., Britain must reduce its carbon emissions), and not a strategic view (what best serves British interests, including present and future), we have created a monstrosity of an energy system.

f Britain’s political classes genuinely believed in markets, they would have pursued something like the Texan model, with limited subsidies and markets relatively free of government interference. If they genuinely believed in the power of central planning and statism, they would have pursued the French, Norwegian or Chinese model, in which the state owns power stations and electricity networks, and funds their construction through a combination of taxation and bills. Britain has private ownership while making the state responsible for planning via subsidies. The result is a zombie system, a muddled and dysfunctional hybrid of state and market, with the benefits of neither and the costs of both.

• Absolutely no argument from me here. Naturally, I tend to prefer the market-led approach, but it’s foolish to deny alternative approaches in this area, particularly given the security concerns. Downing actually writes later on about the successes of nationalisation in the UK – but the key is that we have eliminated state capacity and rely on legal approaches to solve our energy issues.
  

We had Andy Burnham’s big conference speech, which by all accounts went down exceptionally well in the Labour Party. Most pundits seemed to think it was some of the best oratory we’ve had since Blair, which is welcome. Given the weaknesses of Starmer, Sunak, and others, a politician seemingly comfortable in their own skin and willing to communicate their ideas is most welcome.

Unfortunately, I found his ideas and vision for the country to be almost absurdly nostalgic, and strangely detached from the immediate issues facing the UK. There are significant problems coming down for the UK, and he didn’t address them. The worry is that he and the wider Labour Party are in denial about the problems we face, or are unwilling to truly address them.

His ideas:

• Believing that for 40 years Britain has been on the wrong path: why has this only seemingly shown up in the last decade or so? Growth at the end of the Major government and throughout the New Labour era was heads and shoulders above what we have now, with real sustained improvements in living standards. Was that all entirely fake, or not worth it?
• An emphasis on council homes being the method to solve the housing crisis, and giving councils the ability to buy unused homes. I found this extraordinary. We have some of the lowest levels of unused homes in Europe. To me, this betrays a lack of political imagination and unwillingness to confront the deeper issues around our planning rules, which makes me nervous. The private sector can deliver houses, we have seen it before in our country, and across the rest of the world too. It requires significant planning reforms, and regulatory changes, not just public investment.
• His comments on public ownership of utilities, and how British energy is some of the highest in Europe – this doesn’t address the fundamental issues around economic incentives. Rearranging who owns which assets will not do much when the underlying incentives favour intermittent energy supplies and don’t capitalise on our existing energy resources (though I welcome his comments about the North Sea).
• Major social care reform. As I noted on a prior post, I do appreciate Burnham burning political capital on social care reform, but the lack of political imagination or deeper curiosity about our systems alarms me. Our NHS system has perennially struggled, due to its structure, as I noted in a previous post. A social care system built along the same lines will encounter the same issues.
• Open to rejoining Europe. This seems in conflict with Burnham’s complaint about Britain being on the wrong path for 40 years – why was being in the EU the exception? Furthermore, this struck me as unwilling to see what is in front of him. The EU right now is significantly different to the one we voted to leave in 2016; so are we. Are we willing to once again, having left officially in 2021, go through the entire process of rejoining, and more importantly, would the EU member states be as well? Areas like finance and AI, real strengths of the UK, would lose out if we were to rejoin as we would be required to align with EU regulatory frameworks, and areas around the rebate and the euro would be far worse than before. Again, this struck me as something you might do after a decade of strong domestic growth and reform. At the moment, in this horrendous economic bind, it just seems like lazy thinking.
• Electoral reform: It seems odd to me that a party that massively benefited from FPTP only 2 years ago now wants to remove it and bring in a new system. Said new system, PR, is unlikely to benefit left-wing parties such as Labour, if we go by other nations in Europe’s results. Again, it seems a luxurious thing for government to be focussing on, and I am sceptical about how much PR leads to economic growth.
  

So, a worrying amount of Labour nostalgia, that will (and has) played well to the party faithful, but probably doesn’t actually address the UK’s issues. It’s also worth noting in this speech what was left out – defence was completely absent, as was crime. Immigration too was loosely addressed, perhaps an electoral calculation given Labour will not compromise in this area, given the risk of voters defecting to the Greens or Liberal Democrats.

Given the above, I’m actually more bearish on Burnham than I was at first. However, given the split between Reform and Conservatives on the right, and the weakening of the Greens, it may still be viable for him to form another government in 2029. Unfortunately, based on these ideas, it’s unlikely to lead to a stronger UK.

So, we have Burnham’s biggest announcement to date: an overhaul of the social care system, based on NHS principles (though not necessarily in the same way we pay for the NHS). On one hand, I’m glad it is being talked about, given how poor the current setup is, and in particular how it both discriminates based on illness and how it dominates local councils’ budgets. However, I’m sceptical of this announcement, given it’ll be discussed only at the next general election, with nothing substantial beyond an announcement. Furthermore, once again we seem to have decided on a system that ignores pricing and incentives and will almost certainly run into the same issues as the NHS. As I mentioned before, an insurance-based system would be far preferable.

This week we have a links about Poland, and how it has seemingly surpassed the UK, the breaking of the welfare state, and the Chinese stock market.

https://danlewis8.substack.com/p/polish-progress-and-the-poverty-of?r=22u0c&utm_campaign=post&utm_medium=web

• Dan Lewis writes about his experiences in Poland and how the Poles have caught up to Britain and, in many ways, have surpassed us.
• I think most of us are aware that Poland liberalised rapidly after communist rule, with major financial and education reforms. What I think is more interesting is their social policy – Poland took no Muslim refugees from the EU refugee quotas (as of 2018), but did accept Ukrainian refugees.
• A couple of things that Lewis noticed include:

the city is completely clean, everywhere you go. I remarked to my friends on the single piece of rubbish spotted in the four-day trip.

throughout every part of the city we went, we saw no obvious disorder, rough sleeping or high-street decline (eg betting shops, vape shops, bizarre concentrations of empty barbers).

the city seemed to work on a high-trust basis, the type I hear my parents describe in Britain of the ‘60s with people leaving their doors unlocked. The museum of the Warsaw Uprising had unguarded racks for coats and bags, as if no one considered they could be stolen. Similarly, going to the top of the magnificent Palace of Culture and Science, (pictured above), we bought our own ticket and headed up, with no one checking purchase, and no hovering staff to monitor health and safety.

• One of the areas where I despair with the more liberal consensus in the UK is this view that life is getting better – you are far less likely to be murdered or assaulted, etc. The problem with this is a) nobody particularly thinks that’s a high bar, b) the chance of a random attack was very low, and c) people’s day-to-day lives in the UK are clearly worse than they were a decade ago. We have bin strikes in major cities, homelessness is worse than ever, and for too many, the high streets consist of these vape shops and American candy shops that are almost certainly fronts for money laundering. Until you address these areas head on, including understanding that this needs major enforcement, not just laws, don’t expect people to be grateful.
• This piece has made me realise I need to update my knowledge on Poland. Though it is still a fair bit smaller than the UK’s economy, or France’s, it is clearly becoming a heavyweight in the EU. The UK should be cultivating deeper ties with them wherever possible.
  

https://restate.substack.com/p/how-we-broke-the-welfare-state?r=22u0c&utm_campaign=post&utm_medium=web

• Re:State discuss how the welfare state was broken in Britain in this punchy piece. They start with assessing the original vision for welfare in Britain under the Beveridge model:

In other words, the individual must work where they can, and pay in so that they may take out when they can’t, with an expectation that all efforts would be made to get back into work as quickly as possible. In return, and as part of that social contract, the State should endeavour to ensure the conditions for a strong labour market in which people can participate for decent wages. The universalism of Beveridge was made possible by that contributory principle, and an expectation of full employment.

Today we have almost entirely undermined the contributory principle, with just 6 per cent of working-age spend going on benefits reserved for those whose eligibility is based on what they paid in. And for those who have paid their national insurance, and who find themselves in need of temporary aid from the system they have funded, the income replacement rate is shockingly low. Across the OECD, a single homeowner who loses their job will, at least initially, receive on average 55 per cent of their previous earnings. In the UK it is 12 per cent. That is far from a safety net, it’s a catastrophe for anyone earning much more than the minimum wage – and would leave most people asking what on earth they had paid in for.

• It’s shocking when you compare what we have now to what was envisioned. No wonder why we have such a crisis around welfare, and yet such little political incentive to tackle it.
• Beveridge’s view of universalism clearly only worked in a fairly homogeneous society that shared social obligations, particularly one that had just been through another World War. When you consider how much more individualistic we have become, and our changing demographics due to immigration, this isn’t a sustainable view to hold.
• The second part, though, about a strong labour market is still true, and it’s why Labour’s changes to employer taxes were so damaging. Further distortions, such as raising the minimum wage yet again and high levels of low-quality immigration, further damage our labour market. The record amount of 1 million NEETS should prompt a radical rethink: abolish the minimum wage (so that we are similar to most Scandinavian countries), introduce similar hire-and-fire practices that the USA has (with notably much higher wages than us and similar unemployment levels), and reduce immigration for the care sector.

To put that in context, we spend more on non-pensioner welfare payments than we do on defence of the realm, or policing our streets, or educating our children. In fact, taking that 2024-25 figure (the latest outturn figure for benefit expenditure) we spent more on benefit payments to working-age people and children than we did on the defence and schools budgets combined.

• As the article notes, the benefits system entrenches itself by incentivising dependency – better to say you have no capability at all to get the allowance, rather than risk nothing at all. This, in addition to our tax base becoming ever narrower, calls the whole system’s legitimacy into question. Luckily, Re:State shows that this is not inevitable.

But we are an outlier in the welfare implications of these since the pandemic (the period in which these trends have accelerated), with the IFS calling it “largely a UK phenomenon”. They found that of the 11 countries for which there was comparable data, eight saw a decrease in benefit claims, two saw a small increase, and just Denmark saw a notable increase – which was still less than half the rate of the UK’s increase. That implies the design of our system itself is contributing to high dependency rates.

• In their full report, Re:State note that Britain has a very low bar for incapacity benefits, and no alternative for those with temporary conditions. Furthermore, other countries such as Canada, the Netherlands, and Denmark are much more stringent about checking individuals’ needs.
• This continues into work – the report notes the Netherlands and Denmark specifically have strong incentives to encourage work in the first two years of incapacity benefit. This encourages people to get back into the workforce, without penalising them for trying to better themselves in trying times.
• Given the dire economic situation in Britain, tackling welfare is a must for any government. As Re:State note, doing so will undoubtedly create “losers”, which will have a political cost. This is probably going to be immensely tough for the Labour Party to stomach, given their inability to articulate why we need the cuts so far. But it has to be done, and perhaps the Labour Party may note that if they don’t do it themselves, it is far more likely to be done by a right-wing party who are unlikely to be as sympathetic towards benefit claimants.
  

https://richardc145655.substack.com/p/will-the-chinese-stock-market-become?r=22u0c&utm_campaign=post&utm_medium=web

• Back to China for this last link, from Richard Conrad of Dollars & Sense. Here he examines if the Chinese stock market will ever be a compounding machine, and concludes the answer is no.
• Conrad starts by examining how China set up its banking system under Deng Xiaoping. State-owned banks were created, allowing China to lend the savings pool to Chinese companies at extremely low rates. As Conrad notes, this gave Chinese companies a major advantage – their cost of capital was well below that of their Western counterparts. However, as Conrad notes:

The weakness of the Chinese non-market financial system was that the SOE banks never were equipped or gained the ability to lend money on a risk adjusted basis. The outcome is that China wasted unimaginable amounts of capital, and their banking system is sitting on mountain ranges of bad debts today. What looks like an economic miracle was, to a fair degree, massive borrowing of growth from the future.

• Indeed, the banks were never designed or incentivised to consider capital risk – it was all about relationships and fulfilling your 5-year plan. This was fine in the early years of the Chinese boom, when your return on invested capital was very high due to the lack of existing infrastructure, but increasingly, as time went on this became worse and worse.
• Conrad considers the stock market to be the same, and notes that incredibly, the market has gone nowhere for 20 years – compare that to the USA.

The stock market was a brilliant idea where they would sell shares in (mostly) SOEs and allow the people of China to buy. This provided a new source of capital for Chinese companies and shifted some of that bad debt burden onto the public. The chef’s kiss was in 2006 (look at the chart above) when they listed the big four state owned banks and shifted some of that bad debt burden onto foreigners.

• Unsparingly, the stock market has failed to compound. The underlying financial system still has no incentive to reward efficient capital allocation, and therefore the stock prices will remain stagnant. Until these banks and the wider financial system are reformed, this will continue. However, in order to do so, the Chinese Communist Party would have to recognise huge economic costs from overinvestment, and also recognise that consumption is healthy for an economy. Given Xi’s remarks about needing to suffer, this is unlikely to happen any time soon.
  

I mentioned a while ago doing 10 things Burnham should do in the October budget. Now that we’ve had a few weeks of Parliament, I thought I should come up with a list.

You will note that I haven’t mentioned national reforms to energy, planning, tax reform, and other critical areas the UK is struggling with. Frankly, I’ve seen no evidence that Burnham or those around him are willing to alter the current framework. All I can do is try and think through what he might do, even if I’m sceptical about how much he’s thought about governing.

Anyway, here are said thoughts:

• Recognise that growth is integral to a democracy, and focus on driving that at all costs. Look, it’s not exactly earth-shattering or a unique take. But in a democracy, we consistently see ever-greater demands on the state: national defence initially, pensions, healthcare, and more. Growth makes paying for these possible. Right now, the UK has consistently struggled to accept this tradeoff – voters despise growth policies, but they absolutely hate having to ration and share the pie.
• Tradeoffs are also inevitable, and Burnham needs to drop his “good growth in every postcode” shtick as quickly as possible. It is a meaningless slogan and shows a lack of serious thinking behind his government’s purpose. What is good growth, and how would this be done in every postcode – why has it not already been done? Can this be replicated successfully? Do all areas have the same needs or strategic objectives?
• If Burnham is serious about devolution, he needs to embrace it fully. To which – allow regions the right to cut taxes / cut spending, and remove as many statutory obligations as possible. This includes: adult social care, special needs provision, homelessness, roads, etc. Let each region decide for itself what it wants and do so in response to voters’ concerns. Allow them to cut taxes and cut back on spending too if their voters wish. Also, let these regions and cities change local laws – planning is a priority, energy is another, transportation too, and so on. The aim is to allow a wide range of approaches to governance in the UK and to allow the ones that do well to grow, and to reduce the ones that fail.
• Unfortunately for Burnham, this will lead to unfairness and unequal outcomes. Different regions will have different performances. The test is whether he is truly willing to accept that about devolution.
• Defence has to be sorted out, and his comment about defence being behind welfare in Parliament was highly alarming. We have a massive land war in Europe, with huge innovation in drone warfare, and we still seem to be treating defence as a luxury, or something that can be put off till later. No more of this. The procurement issue at the MoD needs to be sorted one way or another. Eat the cost if needed, and move on.
• As an island nation, our navy is the most important part of our defence, followed by our air force. These two parts of the armed forces have to be prioritised. And unfortunately, this is going to have to come at the expense of welfare spending. Sorry, but a nation cannot survive on universal credit.
• Welfare naturally is going to be a brutal fight, especially for the Labour Party. Given what happened under Starmer and Reeves, I understand Burnham will want to run a million miles from touching this again. Labour MPs will be highly unwilling to commit to cuts given their rhetoric about austerity and their backgrounds from the charity and think tank sectors.
• I think there is a potential area for him to look at, which is the Triple Lock. I don’t think he can simply propose abandoning it, even though on a variety of metrics the UK is pretty good for pensioner welfare. But perhaps if he rolled into welfare reforms around younger people, and linked any Triple Lock growth back to real wage growth, this could realign incentives. Also, the ones most likely to vote against this, the over-55s, are already considering voting Reform or Tories anyway. There may be a way to square this circle, but I appreciate it is very high risk.
  

It’s relatively thin, but until I get more of an idea about Burnham’s philosophy, this is the best I can do. I think the more optimistic takes about major reforms to the UK under his leadership are already very unlikely. Leaders who know their own minds, such as Blair and Cameron, set the agenda from the first day in office. The fact that we are still waiting for Burnham to articulate his worldview makes me think we are back to drifting once again.