There’s much to admire about the German economy. But its massive trade surplus is not one of them

Even stopped clocks are occasionally right, albeit by accident. Donald Trump has been complaining that Germany is “very bad on trade” and that the country’s whopping current account surplus (which hit $294bn last year, the biggest in the world) is a problem.

He’s right. Germany’s surplus really is economically harmful for the US. And, indeed, the surplus is a drag on the wider world too, not least the other members of the eurozone. But it’s not for the reasons Trump articulates.

For Trump and his advisers the surplus is evidence German politicians have been unfairly boosting the German export industry at the expense of US manufacturers. Yet that boost is really a by-product of large domestic imbalances in the Federal Republic, rather than the protectionist trick Team Trump imagines.

Here’s why. German households spend a relatively low proportion of their collective income. Private German businesses, in aggregate, invest considerably less than their collective profits. The German state’s infrastructure spending is also exceptionally weak as a share of GDP.

This economy-wide underspending means there is a chronic excess of national domestic saving over domestic investment in Germany. It follows as a simple accounting identity that this excess has to be exported abroad. There’s nowhere else for it to go. So Germany, through various means, acquires foreign currency assets on a massive scale every year.

For the likes of the US this pushes up the value of the dollar relative to the euro, imposing a headwind against growth in America. The same happens to the other countries whose currencies the Germans buy, including Britain. If the capital-absorbing countries want to offset that drag they have no choice but to borrow and spend more than their aggregate incomes, running current account deficits.

One of the consequences of those deficits and the undervalued euro is that demand for many German manufactured exports is artificially stimulated. Many German exports are, of course, famously high quality. But what matters is that the international demand for them is higher than it would be if Germans were not running such a large current account surplus.

The crucial point to recognise is that, as the economist Michael Pettis has long argued, outward capital flows predominantly drive the surplus nation’s net export performance. And it’s the domestic under-consumption that drives the capital flows. In the case of Germany this isn’t about rigged trade deals, as Trump seems to believe. It isn’t about crude protectionist currency manipulation either. It’s about too little spending within Germany.

Does it really matter though? Not in the near term. And it’s not plausible to blame economic weakness everywhere in the world on current account surpluses in Germany (and also China and Japan). There are plenty of other things going on too, not least excessively contractionary fiscal policies in many countries.

But those surpluses do encourage unbalanced growth, both in the deficit and surplus countries. In deficit countries sectors such as real estate are artificially boosted, while in Germany, China and Japan the manufacturers get a lift. The imbalances also lead to excess financial indebtedness in deficit countries, raising the risk of a messy unravelling down the line – if, say, foreigners suddenly attempt to deleverage all at once, or they lose the confidence of their overseas creditors.

Martin Sandbu, an economics writer at the Financial Times, has pushed back at multiplying complaints about Germany’s large surplus by pointing out that as long as the German current account surplus is stable, rather than growing, it is not subtracting from demand overseas. While narrowly true, this glides over the fact that Germany’s surplus has been rising steadily as a share of its GDP for almost two decades, shooting up from a deficit in 2001 to an 8.3 per cent surplus in 2016, and thus imposing a serious drag for much of the time.

And while it may not be subtracting from growth at this precise moment, the sheer size of Germany’s surplus represents the extent of economic benefit in terms of stronger demand and rebalancing that ought to flow to countries overseas. Some of the primary beneficiaries of healthier German domestic consumption would be its still-struggling eurozone neighbours such as Greece, Italy and Portugal. Every year the German current account surplus remains so high, means more debt has to be accumulated overseas.

So why is Germany underconsuming and underinvesting? Part of the answer is that the admirable consensus approach between workers and employers in Germany that I mentioned last week has actually worked too well. Workers have accepted extreme pay restraint since the advent of the single currency in 2000 (often settling for awards below productivity growth) thus helping to squeeze down the share of wages in German GDP.

An outbreak of social anxiety about the ageing profile of Germany has also encouraged households to save well in excess of what is needed to meet the actual fiscal challenges of retirement. Weak household consumption has discouraged German firms from investing at home. And the German government has compounded this savings frenzy by taking fiscal prudence to a fault, running an absolute budget surplus, ignoring its responsibilities (and indeed long-term self-interest) to help keep demand strong and balanced in the eurozone overall.

German politicians often look on their large surplus with a sense of pride, seeing it as a symbol of national prudence and export success. Germany’s consensual post-war economic and political institutions do indeed deserve the world’s admiration. But its chronic underconsumption and large surpluses deserve to be buried, not praised.

INTERVIEW: Gertjan Vlieghe

On the floor of Gertjan Vlieghe’s wood-panelled Bank of England office sits a small doorstop in the shape of a hedgehog – an animal not renowned for its speed. And its patient owner is certainly in no hurry to put up interest rates.

Mr Vlieghe, 46, who joined the Bank’s Monetary Policy Committee as an external member in 2015 has established himself as the most dovish member of the rate-setting committee.

Even before the Brexit referendum Mr Vlieghe was publicly fretting about the fragility of the UK economy and even floated the possibility that interests rates might need to pushed by the Bank into negative territory.

And so when the Leave side unexpectedly prevailed last June, prompting widespread fears of an imminent recession, Mr Vlieghe voted for an immediate cut in rates to 0.25 per cent. The eight other members of the Monetary Policy Committee wanted to hold their fire until they saw more data, although they joined him the next month in sending rates down to a new record low.

But now many of Mr Vlieghe’s colleagues are breaking the other way. In June, three external MPC members voted to increase rates back to 0.5 per cent, reversing last August’s cut, and creating the biggest split on the committee since 2011.

And since then, significantly, Andy Haldane, the Bank’s chief economist, has signalled that he is ready to join the hikers. If the arch-dove Mr Vlieghe were also to switch sides many financial traders would probably assume an August rate rise from Threadneedle Street was nailed on.

But not so fast. This dove is not for turning – at least not yet.  

“I haven’t really changed my mind,” he says.  “This is an environment where a premature hike would be a bigger mistake than one that turns out to be slightly late because of the asymmetry around risk.”

That risk, in Mr Vlieghe’s view, relates to the fact that rates are currently so close to zero. If the Bank raises rates and then has to reverse course because the economy falters it has much less room to cut.

“Our ability as a central bank to stimulate spending is...smaller than our ability to restrain spending,” as he put it in an unusually wide-ranging speech analysing the major structural economic forces acting on the UK economy in 2016.

Though he admits that inflation, which hit 2.9 per cent in May, is “uncomfortably high” he sees that primarily as the natural pass-through of the slump in the pound in the wake of the Brexit vote.

And he’s more concerned about the underlying weakness of the economy. Though the UK did not go into recession last summer, many see Brexit-related chickens coming home to roost now in the form of dwindling consumer confidence.

 “I think the consumption slowdown is here, it’s not over,” says Mr Vlieghe, adding that he does not see investment and exports taking over the baton and driving growth.  

“Of course if the data turns out stronger I do agree that a higher rates is warranted but my central forecast is that’s not going to happen in the near term.”

So would he be happy to vote in a minority to keep rates on hold, while the rest of his colleagues wanted to hike? Mr Vlieghe is unperturbed by the thought.  “I will do whatever my reading of the data tells me is the right thing,” he says, matter-of-factly.

One gets the impression that the intellectually self-assured Mr Vlieghe, who traded in a partnership at the hedge fund Brevan Howard to join the MPC, would rather relish the prospect of arguing his corner against the odds.

 “I spent ten years trying to forecast what central banks, including the Bank of England, were going to do next,” he says.  “Having the opportunity to actually make the decision, rather than forecast it, was for me both fascinating and an honour and a privilege. The closest thing you can compare it to is if you sit in the football commentator’s box and someone says ‘do you want to go down on the pitch for a while?’”.

Mr Vlieghe’s office neighbour at the Bank, until this month, was fellow external MPC member Kristin Forbes. She has now left the Bank and in her final speech she suggested modern central bankers’ high profiles were making them too reticent to “take away the punch bowl” by raising rates.

 “I completely disagree with that,” says Mr Vlieghe.  “All of the decisions that have been made over the last few years have related very clearly to the data. We have been in an environment where, despite record low interest rates, growth has been subdued, inflation pressures have been weak everywhere, wage pressure is still very weak – that tells you those very low interest rates were entirely appropriate. If they hadn’t been we would have seen a lot of overheating…which we just don’t see." 

 “That period of low rates had nothing to do with reputation or political pressure or anything like that.”

For Mr Vlieghe, who was born in Belgium but now has dual UK citizenship, Brexit has personal repercussions. But he’s tight-lipped about how he feels personally about the vote, insisting his only focus as an MPC member is considering how it will impact the economy.

But how does the committee go about forecasting that given the immense political uncertainty?

“It’s very difficult to get your head around because it doesn’t matter what we think about Brexit, it matters what everyone else thinks, and the extent to which it influences their demand today,” he explains.

If firms start worrying about a cliff-edge Brexit in two years, he says, there could yet be a big damaging pullback of investment. On the other hand, if the UK seems to be heading towards a “lengthy transition deal” after 2019, effectively remaining in the single market and the customs union, things could perk up.

“That would be a very positive thing for business and investment and would therefore influence our interest rate policy,” he says.

Even hedgehogs can move rather rapidly when they want to.

This article appeared in The Independent on 3/7/17 

TRANSCRIPT

Given you voted for rate cut in July 2016 – going out on your own against the the rest of the Monetary Policy Committee – you’ve obviously got a reputation as a dove. Are you still towards that end of the spectrum?

I went back and looked at the last time I spoke on the record, which was April, and I haven’t really changed my mind since then about anything.

The point I made in April was that this is an environment where a premature hike would be a bigger mistake than one that turns out to be slightly late because of the asymmetry around risk. I thought that the consumption slowdown, which initially didn’t materialise after the referendum even though we thought it would, that it was starting to happen around the turn of the year.

I thought that it would, if anything, be more likely to deepen than improve and that I was still very cautious about the outlook for investment. One of the things that we thought would happen…was that there might be a pullback in investment. In the end there wasn’t, but some of the feedback I got from going around the country and talking to lots of companies was that it wasn’t that they weren’t worried about a potentially big change in their business environment but that it’s basically too far away and [they] can’t sit on [their] hands for that long.

But now that the deadline’s approaching, it’s less than two years, it might start to come into firms’ planning horizons, so I do think that’s a meaningful downside risk and already a headwind to investment. I haven’t really changed my mind. I think the consumption slowdown is here, it’s not over.

I don’t there’s going to be a sufficient offset from investment and net exports to compensate for that. But of course if the data turns out stronger I do agree that a higher rate is warranted but my central forecast is that’s not going to happen in the near term.

Andy Haldane said global growth is coming in stronger and that was a reason why he was shifting in favour of a rate rise…

I pay a lot of attention to what’s happening in the global economy because what’s happening in the UK tends to be well correlated and it’s important to look at that.

And it’s true that our trading partners’ growth has improved.

In the eurozone its been quite a bit stronger over the past six months than we would have expected.

But it’s also true that you can’t just literally read from that that things must be improving in the UK because you have these two very specific domestic stories – you have very weak real wage growth for households and still substantial uncertainty about the shape of the final Brexit deal and then the implementation deal and how firms are thinking about that over the next few years.

Do you dissent slightly from the Bank’s Inflation Report relatively optimistic view on investment?

I agree that the outlook is a little better than it was six months ago.

But I just don’t think it’s enough to offset what’s happening in consumption.

And one of the things I look at is investment intentions and you look at that for the manufacturing sector and that is indeed quite strong – those firms have responded to the weaker exchange rate and stronger eurozone growth.

But if you look at investment intentions for the services sector, which is much, much, bigger than the manufacturing sector, actually it remains very subdued. So if you take them together I don’t see the evidence that it’s about to take off.

How much stimulus is the Bank giving at the moment at these current rates?

It’s hard to tell. Previously I put some estimates on it, with large error bands.

I thought that a reasonable estimate for where the natural rate is, it’s about zero [per cent] in real terms. Therefore about two [per cent] in nominal terms.

So clearly with rates at 0.25 per cent there is some stimulus, but not nearly the amount of stimulus you might have expected if you were still carrying in your head a natural rate of 4 of 5 per cent, which is what people thought before the financial crisis.

You’ve spoken about asymmetric risks about raising rates. Has you view on that changed?

My view on that hasn’t changed.

What I want to emphasise is that I don’t think there is no risk from keeping rates on hold.

I just think that we are still in an environment where one of those risks is bigger than the other one.

And the risk that is still bigger is that putting rates up a little too soon in an environment where the economy is already slowing and it’ll slow further and where, it’s true, inflation is uncomfortably high, but we think most of that is exchange rate driven, that’s ultimately temporary.

Kristin Forbes said there was a risk that policymakers were concerned about their profiles and that might make them un-inclined to take away the punch bowl…

I completely disagree with that. All of the decisions that have been made over the last few years have related very clearly to the data.

We have been in an environment where, despite record low interest rates, growth has been subdued, inflation pressures have been weak everywhere, wage pressure is still very weak – that tells you those very low interest rates were entirely appropriate.

If they hadn’t been we would have seen a lot of overheating, built up pressure, which we just don’t see. That period of low rates had nothing to do with reputation or political pressure or anything like that.

The MPC is more split than its been since 2011. Are you willing to stand out as you did last July in voting against the majority?

I will do whatever my reading of the data tells me is the right thing.

In way it’s not surprising that there’s more dispersion of views on the MPC now than there was a while ago.

Because if you look at all the news we had it is kind of pulling in different directions in monetary policy terms. I mentioned weakening of growth, but activity surveys are still OK and the unemployment rate is very low. Inflation is well above target, but wage inflation is still very subdued.

Depending which of all these things you put more weight on you could easily pull in direction of wanting rates up sooner or wanting to wait longer. It’s only natural that people put different weights on and come to a different conclusion.

Do MPC meetings become fraught at these inflection points?

I haven’t found that. For the last few years I’ve sat next to Kristin Forbes – we share that internal door over there.

She knows I have a very different view of the economy from her.

But we respect each others’ views and we talk about it all the time. I lay out my case and she lays out her case and in the end we agree to disagree. It doesn’t at all damage the committee dynamic. It doesn’t become personal. I think it’s just a healthy economic debate.

Do you think you’ll leave the MPC after only three years like Kristin Forbes?

I haven’t given it any thought. I’m not even two years in.

You come from a hedge fund, Brevan Howard. What made you want to join the MPC?

I spent ten years trying to forecast what central banks, including the Bank of England, were going to do next.

Having the opportunity to actually make the decision, rather than forecast it, was for me both fascinating and an honour and a privilege.

The closest thing you can compare it to is if you sit in the football commentator box and someone says ‘do you want to go down on the pitch for a while?' of course that’s tremendous.

You’re a dual Belgian-UK citizen. How does Brexit affect you?

My personal views about Brexit should remain personal because it’s not appropriate as an MPC member to be talking about that.

The only thing that is the MPC’s business is what the impact is going to be on the economy and therefore on monetary policy, rather than what it does to our emotions.

Do you see yourself going back to Brevan Howard or fund management? Or might you stay in the policymaking realm?

I could go either way.

I really enjoyed my time in the financial sector and I don’t rule out going back there. But I’m also really enjoying policymaking.

Are you confident about the amount of slack in the economy? Or is there a case for running the economy hot to see if we can get back on the pre-crisis trend growth?

I think the extent to which I take factors like that into account is that I’m extremely open-minded about what the amount of slack in the economy might be.

And rather than say “I know” or “it’s closely linked to the natural rate of unemployment and I know what that is” (which I don’t at all) I say I want to see evidence in the data that tells me whether we have used up slack or not.

That’s one of the reasons why me and other members on the committee pay so much attention to wages.

Wage growth is not the target per se, but we think it tells us about how much slack there is in the economy.

And so far the indication just based on wage growth is that there still is slack, despite the fact that the unemployment rate is at record lows.

So I’m trying very hard not to make that mistake of assuming there is no more slack because of certain historical relationships because I’m very well aware that those relationships change and may have changed in quite a material way.

You gave a speech about debt, deleveraging and income inequality as big structural drags and that policymakers should take more account of them…

What I was trying to lay out was a framework for thinking about what actually drives [the natural interest rate]. Because it’s one thing to say it’s probably a bit lower than before the crisis, but that doesn’t tell you what’s going to happen in five, ten, 15 years.

Is it just a crisis effect like a Reinhart/Rogoff deleveraging thing and after five or ten years after deleveraging is over you go back to normal?

There are other factors as well. It is possible that the deleveraging part of the story is coming to an end, but this demographic and income distribution affect is very big too and that doesn’t look to be coming to an end for perhaps a long time.

Do you still think that inequality is a break on monetary policy?

There is quite a bit of research that’s been done on that just in the past few years and it seems that everyone who looks into it finds that it’s potentially a very large effect. People at different points in the income distribution respond very differently to income and interest rate shocks.

So it’s not surprising that if over a long sweep of time you change the nature of the income distribution that changes the way the economy responds to interest rates. This had very little to do with the crisis – changes in the income distribution took place well before that. Income inequality was low in the 70s and went up and stayed there.

One of the things people do when they estimate the natural rate is they look at historical averages. My point is you have to be very careful which bits of history you use because if things like the amount of debt and the income distribution are very different then the [natural rate of interest] is likely to be very different.

The Bank’s main forecasting model uses a representative agent – is that something you’d like to see reformed?

The Bank is doing a lot of work on that, specifically using demographics and on deleveraging and trying to get some estimates.

What we’re not doing is having one gigantic model that has all these things in it. That’s not really a reasonable request. We have a model [Compass] that has some equilibrium values in it – the unemployment rate, real interest rates.

We can move them for reasons that are based on analysis outside the model.

It’s exactly what we did to the natural rate of unemployment – we lowered it. Our model itself doesn’t tell us anything about where it should be. It’s just something you put it. We changed the parameter in the model.

On Brexit, do you in the MPC discuss possible scenarios?

We discuss what are the possible mechanisms by which it could affect the economy.

We discuss where one would one look for evidence on whether it’s happening or not. But it’s very difficult because in the end what really matters for the country is the long-run economic impact of Brexit.

That’s mostly a supply side thing. It’ll turn out to be very important over the next few decades. But it’s not really important for what happens for monetary policy right now. What matters right now is whether people’s expectations of that long-run supply effect has an impact on demand [today].

It’s very difficult to get you head around because it doesn’t matter what we think about Brexit, it matters what everyone else thinks, and the extent to which it influences their demand today. That’s what we’re trying to gauge, just asking companies, going around, looking at what’s happening to consumer confidence, spending, housing, cars. People tell us by their actions.

So if a sense crystalises that we're heading for a transition deal that could feedback into your monetary policy decisions?

Absolutely. Initially after the referendum we thought there were indications of a big pullback of investment.

Uncertainty spiked, activity surveys went down very sharply. In the end it didn’t happen.

One of the reasons it didn’t happen is there was a sense it was just too far away.

So now as it gets closer there is a risk they start worrying again. But if a very strong sense is established that there’s going to be a lengthy transition deal then we go back to that previous regime where [firms think] it might all change but it’s not going to change for a long time so I can just get on with my business and not worry about it.

That would be a very positive thing for business and investment and would therefore influence our interest rate policy.

Would that sense come from the Bank’s regional agents’ reports?

It’s from a whole range of things. The agents are very important. We also have this thing called the “decision makers’ panel”.

We also look at lots of other people’s surveys of investment intentions, confidence and activity.

So you don’t really use your own judgement about what sort of Brexit we are heading for?

You have to be open minded. Even if you have a view that it’s doing something to the economy but you see that nobody else thinks that you say ‘well, maybe at some point they’ll come round to my view, but maybe I’m wrong’. You can’t keep that gap for very long.

So I’m trying to understand what everyone else thinks about it rather than to come to some really strong conclusion myself.

It’s incredibly uncertain, these negotiations fluctuate all the time. There are so many variables that come into play. I’m really focusing on what everyone else thinks.

People are allowed to change their mind. I just need to respond to how they’re behaving at the time.

In the immediate aftermath of the referendum spending was much stronger than we thought. More recently it’s pretty clear the economy is slowing and the response has begun and I want to see how that plays out.

There continues to be a risk that as we get closer to the deadline, unless there is really good news about a long implementation period, that you see further weakening [in business investment].

Could there be a further cut in rates, as you once mooted?

At this point the range of possibilities I’m considering is that we stay on hold longer or that we start removing some stimulus. If something much more material happens to the outlook then we have some room for stimulus.

There isn’t much room to cut. I’ve talked about negative interest rates as a hypothetical thing.

What’s important is that you’ve got to look at whether it’s appropriate for the financial system of a particular country.

For the UK we’ve discussed this at length on the MPC and we’ve concluded that for the UK it’s not a good idea and that you’re more likely to damage. If we need to we can do a lot more on asset purchases.

How alarmed are you by the savings ratio hitting a record low?

It’s the mirror image of the fact that consumption was so much more resilient than we thought.

We didn’t think that people would dip into their savings to the extent they did. We though there would be an earlier response to the income changes.

Of course if people keep spending while real income is going down…it’s certainly not something that I’d want to see continuing – neither the fall in the savings rate not the acceleration in credit growth that we saw in the second half of the year.

That’s not a sustainable basis for a recovery. If anything if that persists that’s one of the indictors that tell you maybe interest rates are too low because we don’t want to push that hard. But actually now, it is starting to come round – mortgage credit growth has gone to below 4 per cent, consumer credit growth has gone from 11 per cent to 10 per cent. It is slowing a little bit. I would be concerned if we saw it re-accelerating.

What about the flipside that indebted households are fragile to a rate rise?

That’s a very important consideration but for most of the last six years we’ve been in an environment where household balance sheets have been repaired.

We’ve seen deleveraging. Relative to income the debt burdens have come down – not because people have reduced debt but because income growth has been strong.

That’s a very healthy development. You see that in the average and also in the tail, the households that are in the part of the distribution that has the highest debt. There are fewer households now than four or five years ago that are so vulnerable. We wanted that to happen.

Last year that process of repair came to an end and looked like it was maybe starting to re-leverage which would not be a welcome development.

But it’s very early days.

People get confused because they see reports about debt levels in billions or in trillions but actually matters is the debt burden – how high is the debt relative to your income.

Are you worried about the current account deficit?

I would expect that to change. When you have a close to 20 per cent depreciation you would expect that to change from the net trade side but also from the income side.

Our trade deficit is not that large – it’s only in the order of 1 to 2 per cent of GDP. The rest is the income deficit.

There’s a lot of talk of fiscal policy being loosened…

Right now you hear lots of debate.

We’ll wait for the Chancellor to show us in a Budget what the numbers are.

When the numbers change that does change the outlook for the economy and interest rates as well.

Before you joined the Bank what was your view on monetary and fiscal policymaking in 2010-2015.

It was necessary to have a long term plan to reduce the deficit.

But it was also important for us forecasters to realise that it was going to have an affect on growth.

It reinforced our view that it was going to be a fairly subdued recovery until that process of repair was achieved. Broadly speaking that was the right call in forecasting terms.

Were the fiscal multipliers underestimated?

It’s easy for me to say because my forecasts at the time were not published. But we were mostly at the pessimistic end of UK forecasters. It sounds like hindsight now…

Do you think the Banks’ multipliers are right now?

In the last Budget and Autumn Statement we did see quite a meaningful change in projected future spending which we took into account.

In a way the tone has already changed.

I’m probably on the side of slightly larger multipliers [than the Bank’s staff] but then I want to emphasise that I treat that very symmetrically.

[So] when we were getting news that there was going to be ongoing further austerity that would make me therefore a little more pessimistic.

But now that we are getting news that there is less austerity that conversely makes me think there is a bigger boost relative to the previous outlook.

What I’m saying is that I’m not cherry picking – I’m treating them symmetrically.

The truth about your housing wealth? You didn’t earn it

Way back in the mists of time when "Red Ed" Miliband proposed a tax on homes worth more than £2m, no less than Michael Caine considered the idea terribly unfair. "I feel sorry for all the older people who've worked hard all their lives and their London suburban house falls into this category," the actor told the Daily Mail in 2014.

Sir Michael spoke for Middle England. The link between the price of one's house and one's personal effort in the eyes of most homeowners is as strong as tungsten.

But that doesn't mean that the link actually exists. According to a new report by the Resolution Foundation around 80 per cent of net property wealth growth since the early 1990s has been a consequence of a rising housing market, rather than active savings decisions by households.

This equates to around £2.3 trillion of windfall property value appreciation. For homeowners born in the Forties and Fifties the average "passive" benefit is around £80,000. For those born in the Sixties the average windfall is £60,000. The Resolution Foundation report makes it clear that UK overall wealth accumulation is considerably driven by property, which has been largely inflated by a housing boom. If we're serious about tackling high UK wealth inequality (which seems to be rising still further) we can only do so by tackling housing.

There are a multitude of reasons why UK house prices are so high relative to incomes and homeownership rates are falling. Excessively rigid supply-restricting post-war planning controls, particularly the misnamed "green belt", around big cities, are a major culprit. Indefatigable nimby campaigns of opposition by existing homeowners when new developments are proposed also harmfully suppress supply.

Sclerotic local authorities that no longer build social housing, big corporate builders with little interest in constructing new homes in sufficient volume, a financial system set up to lend for residential property purchases but not business investment, politicians who offer cynical subsidies to demand: all these contribute to the mess.

But a significant driver is our irrational and grossly distorting property taxation system. The council tax is inexcusably regressive. Stamp duty is only levied on transactions, discouraging people from moving when they otherwise would. There is no VAT on newly built housing.

High-value property is undertaxed. Homeowners face no capital gains tax. And David Cameron and George Osborne removed family homes worth up to £1m from the inheritance tax net.

Bank of England chief economist Andy Haldane got into trouble last year for pointing out what everyone knows to be true: that you'll tend to get better returns from property than from a pension.

Given such obvious financial incentives, it should come as no surprise that so many of us are obsessed with property as an asset class, that we are so prone to boom-bust cycles, where we bid up prices ever higher and stretch the link with economic fundamentals to breaking point.

As the Resolution Foundation report shows, while residential property wealth has been spiralling as a share of GDP, property taxes have been flat. The problem with Ed Miliband's mansion tax is not that it was unfair, but that it wasn't fair enough. The regressive council tax system should be reformed so that all property - not just £2m houses - is taxed at a flat rate on its market value.

The Grenfell Tower tragedy has exposed the property inequality gulf that exists in modern Britain with brutal clarity. We see unsafe, overcrowded and oversubscribed social housing lying next to under-occupied multi-million pound Kensington townhouses whose value has exploded in recent decades.

Ed Miliband's 2015 crucifixion over his mansion tax proposal seems an aeon ago. In the wake of the conventional wisdom-scrambling following the General Election, there appears to be a healthy new willingness among the political classes to consider solutions that were for so long written off as economically logical but electorally impractical.

But as the "dementia tax" property-based backlash showed, the argument still needs to be made, the case laid out persuasively. "You didn't build that," cried Barack Obama during the 2012 Presidential election, making a point about the degree to which private US businesses rely for their economic success on stateprovided infrastructure such as roads and bridges.

"You didn't earn that," could be an equivalent progressive rallying cry when it comes to the long-overdue reform of the taxation of British housing wealth."

There appears to be a healthy new willingness among the political classes to consider solutions that were for so long written off as economically logical but electorally impractical

Populists are a grave threat to democracy – and Jeremy Corbyn is no populist

Jeremy Corbyn is a populist: that seems to be the emerging consensus across the political spectrum.

"Corbyn was the torchbearer of British populism," writes Freddy Gray in the Tory-supporting Spectator, who goes on to liken the Labour leader to Donald Trump. Conservative MPs are reportedly thinking of swapping Theresa May with Boris Johnson on the grounds that "to beat a populist, you need a populist".

Corbyn fans seem pretty comfortable with the idea of their leader as a populist too. His lieutenants are said to have embraced the concept last year. Corbyn has presented a "positive version of populism", one of his supporters wrote for The Independent last week.

But it's wrong. Which is to say, this is a terminology that's, at best, empty of content and, at worst, dangerously misleading.

What theory of populism are those who describe Corbyn as a populist using? How would they define it? That populists enjoy mass support? Any successful politician has that. It's the objective of democratic politics, after all, to win the most votes, to whip up the most enthusiasm. That populists are charismatic and inspire an unusual level of devotion? Again, this is what all politicians hope to achieve.

That populists pose as political outsiders and insurgents, decrying economic elites and the political establishment? Such rhetoric is the staple of many mainstream campaigns. US presidential candidates almost always promise to shake up Washington. And when was the last time any political party adopted a platform (rhetorically at least) of looking after the establishment?

Is it that populists pledge to divert money from the well-off to the common man? This doesn't really work.

Was New Labour, which performed considerable redistribution, a populist movement? Was the welfare state founder Clement Attlee a populist? Was the former French President François Hollande, who put up taxes for the highest earners, a populist?

That populists offer simplistic solutions to complex economic and social problems and make incredible promises that are bound to disappoint? The sad reality is that all politicians do this to some extent or other, particularly during election campaigns.

To get a serious, rigorous, theory of populism it's necessary to consult an expert. Professor Jan-Werner Mueller of Princeton University, synthesising the consensus of political science, says modern populists have two essential characteristics.

First, they conceive of "the people" as a unified and morally pure whole - and claim for themselves the exclusive right to speak for this group. Second, they are intrinsically anti-pluralist, meaning that they don't recognise opposition as legitimate and have little respect for democratic norms.

They act as if those who are not part of "the people", as defined by them, are corrupt enemies to be vanquished rather than reasonable citizens to be persuaded. If they fail to prevail in elections it's never because they have lost the people's confidence but because they have been thwarted by nefarious elite conspiracies.

Neither characteristic is sufficient on its own. Stalinists and religiously inspired authoritarians don't respect democratic norms or democratic opposition, but that doesn't make them populists because they don't claim to speak on behalf of a morally pure people.

And Corbyn doesn't satisfy the latter condition. Yes, he inveighs against elites, complains about a "rigged system" and places a heavy emphasis on his own definition of an oppressed British majority. "For the many not the few", as the party's election slogan put it.

But he's never threatened to lock up Theresa May. He doesn't claim that it's illegitimate for the Liberal Democrats or the Greens, for instance, to challenge him. He doesn't hint at armed revolt in the face of electoral setbacks. Indeed, Corbyn's final Twitter message on election night was the benign observation: "Whatever the final result, our positive campaign has changed politics for the better".

Boris Johnson, of course, isn't a populist either by this rigorous definition. But someone like Nigel Farage, with his sinister talk of the "real people" of Britain, his intolerance towards any opposition to Brexit, his weakness for conspiracy theories and his dark allusions to impending popular violence can fairly be so described.

Farage's friend Donald Trump is plainly a populist for all the same reasons. Think specifically of Trump's pledge to prosecute Hillary Clinton if he won the presidential election and his refusal to say whether he would respect the result if he had lost. Contrast that behaviour with that of Bernie Sanders, the Democratic primary challenger to Hillary Clinton who, despite often being described as a populist, respected the result and even urged his supporters later to vote for Clinton.

This isn't a left-right distinction. The left-wing Five Star Movement in Italy has the characteristics of a populist movement under its demagogic leader Beppe Grillo. The late Hugo Chavez, in Venezuela, was plainly a populist, consistently seeking to shut down opposition. The Islamist Recep Tayyip Erdogan in Turkey is manifestly a populist, as is the secular Viktor Orban in Hungary and also Marine Le Pen in France.

The crucial point is that populism is a profoundly anti-liberal political style, not a specific economic or social programme. Populism is a description of how political actors conduct themselves, not the nature, or breadth, of their support base.

Depending on your judgement, one can legitimately call Corbyn an existential threat to the economy, a socialist saviour, or a bog-standard European-style social democrat who is likely to prove a crashing failure if he ever accedes to power. But populist isn't right, because populism is a very specific category, a distinct threat.

Democracy provides a framework for peaceful power struggles between vigorously competing parties with divergent views of the good society. The values of pluralism and tolerance lie at the system's heart.

Disagreement over the appropriate distribution of economic resources is the normal substance of democratic political debate.

But populism is something different. It is a political virus that attacks the very core of the system. "A danger to democracy" is how Professor Mueller sums it up. Definitions matter. Open societies need to have an unclouded view of their true enemies.

Why did we really get this shock general election result? Answer: it’s complicated

They say we're intelligent apes. But to read some commentary on the shock election result we're not just intelligent but we each have a mental calculating capacity that surpasses the most powerful supercomputers and a forecasting ability that puts Nostradamus to shame.

"Voters found a way to deliver the outcome they wanted," argued the Evening Standard's editorial on Friday, saying that what voters "wanted" was to deliver a vote of no confidence in all of the main parties.

We heard similar talk after the 2010 election surprisingly delivered a hung parliament. This unexpected result, we were told, signalled the fact that the eminently sensible British public were not convinced by any of the main parties and had, yes, "found a way" to say that to politicians.

If that sounds like wisdom, pause to think through the logic. To "deliver the outcome they wanted" in the national vote would require some 30 million voters to cast their ballot not only with a clear view of how their tens of thousands of neighbours would also vote in their particular constituency - and then to calculate how their own constituency's result would interact with 649 others in delivering the make-up of the Parliament. 

This, of course, is quack mysticism masquerading as political analysis. It is an anthropomorphising of the electorate; thinking about a mass of voters as a single individual with a controlling mind. It's akin to the demagogic nonsense about the inviolable "will of the people" that one hears from hardline Brexiteers.

In reality, people took a voting decision based on the information available to them in the (erratic) polls and their own views and preferences. Yes, many may well have voted tried to vote tactically in their own marginal constituency. But the vast majority of voters will not have made a calculation on how their vote would affect the overall result of a hung parliament because it would simply have been impossible for them to do this. There was no "hung parliament" option on the ballot paper.

The outcome of the vote in terms of the make-up of Parliament was an emergent phenomenon . It didn't reflect any "general will" but, like the forces of supply and demand in markets and the prices that emerge from their interaction, it flowed from individual choices and preferences.

Certainly some people might have got what they "wanted" in terms of the overall result. Many people might have been relatively content with the simultaneous humbling of Theresa May and the absence of Jeremy Corbyn from 10 Downing Street. It's undoubtedly true that neither the Conservatives nor Labour won the support of a majority of voters (although in fact they both received very high vote shares by historic standards). But voters didn't personally "find a way" to deliver the headline result because they can have had no idea how their individual ballot would affect the overall outcome.

The twin of specious anthropomorphism in evaluating election results is monocausal explanations. People voted in surprising numbers for Labour, some tell us, because they were mainly pro-EU young people.

Others insist there was actually a Northern swing to Labour because locals were firmly pro-Brexit and Jeremy Corbyn had cannily refused to resist May's EU departure plans.

A red herring, say others, because this election wasn't really about Brexit at all - it was really a judgement on austerity. All nonsense, another group says. It was an election that was essentially lost by the cackhanded Conservatives. People didn't vote Tory because they were put off by the "dementia tax" and the catastrophic manifesto. No, it was the dismal lack of hope in the Tory marketing campaign that did it, say others.

But many things can be true simultaneously. All these factors can play a part - and, of course, others unconsidered. The important question is the relative importance of them. But rather than recognising this profound complexity, many pundits simply stress the factor that reflects their own preferences and values.

Complexity economics is an exciting research field. It aims to move away from the assumptions about homogeneous "representative agents" with fixed preferences and market "equilibrium" used in many mainstream economic forecasting models. Complexity economics seeks to get to grips with emergent, even chaotic, phenomena instead. One branch seeks to gain insights into the real world by running computer simulations of how agents programmed with different and evolving preferences interact and the many scenarios that might emerge through the interplay of individual choices, network effects and feedback mechanisms.

What our political debate could do with is a fuller appreciation of the multi-faceted and emergent properties of democratic elections: complexity politics if you will.