"The next 30 to 40 years are going to be very difficult," the influential economist Charles Goodhart warned recently.
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economist → go → ?
"Those who lived primarily in the years between 1950 and 2020 — those 70 years — those were probably the best years in terms of growth, living standards, [and] conditions that not only the UK but effectively the Western world has ever seen.
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UK → live → that
"We didn't know how lucky we were, and many of the conditions that gave us that magnificent period are over," he said.
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he → know → period
He is famous for his adage, called Goodhart's Law, that an observed statistical relationship will tend to collapse once you try to target it for policy purposes.
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you → call → purposes
He turns 90 next month, and to mark the occasion, the Financial Times published an article last week that discussed some of his contributions to economic thought.
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that → turn → thought
But Goodhart's warning, at the top of this piece, was made in July and is worth exploring.
Long-term economic trends
He was appearing as a guest on the Peter McCormack podcast (a British podcast).
Peter McCormack is a bitcoin enthusiast who describes his personal politics as "small-c conservatism with a strong bent toward libertarianism", and he has had extremely controversial figures on his podcast, including Tommy Robinson and Curtis Yarvin.
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he → make → Robinson
But he has had some economists on his podcast too, such as Ann Pettifor and Steve Keen, and his conversation with Goodhart stuck to economics.
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conversation → have → economics
If you are unfamiliar with Goodhart's approach to life, he made this observation at the start of their conversation (while smiling wryly):
"I've always been a pessimist, partly on the grounds that if you're wrong, you're happy, because things are actually better than you feared.
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you → make → grounds
"But if you're an optimist and you're wrong it's doubly awful, because not only were you wrong, but things are worse than you expected."
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you → expect → ?
He then spent an hour talking about some macro-economic trends that are making life increasingly hard for British workers, which sounded very familiar to Australian ears.
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which → spend → ears
And he said people ought to prepare for a future that would be increasingly difficult to navigate.
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that → say → future
According to Goodhart, the early decades of the UK's inflation-targeting era, which began in the early 1990s (like Australia's), coincided with a period of globalisation in which Western countries increasingly pushed manufacturing industries offshore and shifted domestic production to services.
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countries → accord → services
He said that period saw nominal and real interest rates falling in multiple countries simultaneously, which made it "very easy" for central banks for a while.
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it → say → while
"Central banks were doing exactly what governments wanted [by] making life easier for them by lowering interest rates," he said.
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he → do → rates
"It was a temporary fortunate period, but people didn't realise how temporary and how fortunate it was, partly because they thought it was all due to the brilliance and expertise of the central banks in maintaining these inflation targets.
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it → realise → targets
"But the central banks didn't have any difficulty.
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banks → have → difficulty
"Indeed, if you take the period after the Great Financial Crisis … the problem that central banks had was easing monetary policy sufficiently to bring inflation back up to target," he said.
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he → take → target
And unfortunately, he said, that long-term decline in interest rates from the 1990s onwards contributed to the housing anguish younger people feel today, because asset values rose so quickly relative to incomes during those decades.
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values → say → decades
"As interest rates decline, asset values rise,"he explained.
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values → decline → ?
Tax systems will have to be overhauled
Jump forward to 2026, he said, and younger people are living in a very different world.
He said living standards are still rising, but much more slowly than society was used to.
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society → have → world
He said the environment for younger people trying to enter the workforce today was incredibly tough.
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environment → say → workforce
"I think the conditions for young university leavers at the moment are considerably worse than they would otherwise have been because of AI," he said.
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he → think → AI
"And again, add the problem of [how] you can't afford housing, [and how] it's increasingly difficult to get a job, and the young potentially white-collar workers are certainly joining the blue-collar workers in feeling that … the conditions have moved against them."
In coming decades, he said, aging populations would also put younger workers under an increasing tax burden, and the UK government would have to overhaul its tax system to adjust to some serious demographic and fiscal realities.
"It ought to shift away from taxing incomes and profits to taxing assets, particularly land and property," he argued.
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he → add → assets
"We've got to shift taxation away from the producers — the workers and businessmen — and put it on those whose assets have increased dramatically in value.
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assets → get → value
But of course, he warned, any attempt to tax assets and land more heavily would upset some very wealthy people who would fight the changes.
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who → warn → changes
Growing political polarisation
McCormack asked Goodhart if he thought that was why more people were supporting socialist ideas today.
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"I think there's a lot in that, yes," Goodhart replied.
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"And one of the difficulties [for] somebody my age is that in the old days you always had effectively a two-party system where the difference between the 'left' of the Conservatives and the 'right' of Labour was pretty small.
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difference → have → Labour
"[But] now we've got increasing political polarisation with the parties both of the Right and of the Left … becoming more extreme, and for somebody who was brought up essentially to be a centrist like myself, [it] feels as though this polarisation makes things more difficult."
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things → get → myself
McCormack then wondered whether today's political polarisation reflected the fact that the "middle ground" had failed in a policy sense.
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"Good question," Goodhart said.
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"But when you say 'the middle ground having failed', it's not entirely clear to me what else could, or should, have been done.
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"If you look at the economics, a combination of the decline in the birth rate everywhere [which has been] very sharp, the rise of China, and the end of the Soviet empire and the inclusion of eastern Europe into the world's trading system, it was inevitably going to reduce real wages in the advanced economies because it was a huge supply of additional cheaper labour elsewhere.
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"So it was inevitably going to reduce equality [in the UK] to some extent," he said.
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he → go → extent
Look on the bright side
Altogether, he said he wished more people understood how much the world had changed.
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He said we had to accept that we could not vote our way back to the "magnificent period" from 1950 to 2020.
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Falling birth rates, aging populations, rising dependency ratios, the need for more expenditure on defence and climate change, and rising debt levels were creating a fiscal crisis that governments still could not face, he said.
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"I've just written a book, called The Unanchored Central Banker, which is really saying that because the politicians have not dealt with the severely worsening fiscal position, it's going to be very difficult for central banks to maintain the inflation target and monetary control," he warned.
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Can we become prosperous again?
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"Oh yes, you never say never about anything," he said wryly.
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he → say → anything
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