Economy

As the Biden administration prepares to toughen air quality standards, health benefits are weighed against the cost of compliance.The U.S. Environmental Protection Agency is about to announce new regulations governing soot — the particles that trucks, farms, factories, wildfires, power plants and dusty roads generate. By law, the agency isn’t supposed to consider the impact on polluting industries. In practice, it does — and those industries are warning of dire economic consequences.Under the Clean Air Act, every five years the E.P.A. re-examines the science around several harmful pollutants. Fine particulate matter is extremely dangerous when it percolates into human lungs, and the law has driven a vast decline in concentrations in areas like Los Angeles and the Ohio Valley.But technically there is no safe level of particulate matter, and ever-spreading wildfire smoke driven by a changing climate and decades of forest mismanagement has reversed recent progress. The Biden administration decided to short-circuit the review cycle after the E.P.A. in the Trump administration concluded that no change was needed. As the decision nears, business groups are ramping up resistance.Last month, a coalition of major industries, including mining, oil and gas, manufacturing, and timber, sent a letter to the White House chief of staff, Jeffrey D. Zients, warning that “no room would be left for new economic development” in many areas if the E.P.A. went ahead with a standard as tough as it was contemplating, endangering the manufacturing recovery that President Biden had pushed with laws funding climate action and infrastructure investment.Twenty years ago, generating electric power caused far higher soot emissions, so “there was room” to tighten air quality standards, said Chad Whiteman, vice president of environment and regulatory affairs at the Chamber of Commerce’s Global Energy Institute, in an interview. “Now we’re down to the point where the costs are extremely high,” he said, “and you start bumping into unintended consequences.”Research shows that in the first decades after the passage of the Clean Air Act in 1967, the rules lowered output and employment, as well as productivity, in pollution-intensive industries. That’s why the cost of those rules has often drawn industry protests. This time, steel and aluminum producers have voiced particularly strong objections, with one company predicting that a tighter standard would “greatly diminish the possibility” that it could restart a smelter in Kentucky that it idled in 2022 because of high energy prices.Technically, there is no safe level of particulate matter, and ever-spreading wildfire smoke driven by a changing climate and decades of forest mismanagement has reversed recent progress.Max Whittaker for The New York TimesNew factories, however, tend to have much more effective pollution control systems. That’s especially true for two advanced manufacturing industries that the Biden administration has specifically encouraged: semiconductors and solar panel manufacturing. Trade associations for those industries said by email that a lower standard for particulate matter wasn’t a significant concern.Regardless, public health advocates argue that the averted deaths, illnesses and lost productivity that air pollution caused far outweigh the cost. The E.P.A. pegs the potential benefits at as much as $55 billion by 2032 if it drops the limit to nine micrograms per cubic meter, from the current 12 micrograms. That is far more than the $500 million it estimates the proposal would cost in 2032.So how are communities weighing the potential trade-offs?On a state level, it depends to a large degree on politics: Seventeen Democratic attorneys general wrote a joint comment letter in support of stricter rules, while 17 Republican attorneys general wrote one in favor of the status quo.But it also depends on the mix of industries prevalent in a local area. Ohio offers an illuminating contrast.Take Columbus, a longstanding hub of headquarters for consumer brands that in recent years has leaned more into professional services like banking and insurance. The Mid-Ohio Regional Planning Commission, a coalition of metropolitan-area governments, called for the E.P.A. to impose the nine-microgram standard.“There may be some economic costs to major polluting industries, but there’s real health and environmental costs if we do nothing,” said Brandi Whetstone, a sustainability officer at the commission.Columbus would incur fewer costs from tighter regulation, having enjoyed strong job growth in recent years driven by white-collar industries. But local leaders also think that clean air is a competitive advantage, with the power to draw both new residents and new businesses that value it.Jim Schimmer is the director of economic development for Franklin County, which includes Columbus. He has been pushing a plan to turn an old airport the county owns into a low-emissions, power-generating transportation and logistics hub, complete with solar arrays and electrified short-haul trucks, and he thinks stronger rules on particulate matter could help.“This is such a great opportunity for us,” Mr. Schimmer said.The E.P.A. is about to announce new regulations governing soot — the particles that trucks, factories, wildfires, power plants and dusty roads generate.Mikayla Whitmore for The New York TimesThe Cleveland area is a different story, with a high concentration of steel, chemical, aviation and machinery production. Its regional planning council declined to comment on the prospect of stricter air quality rules. Chris Ronayne, the Democratic executive of Cuyahoga County, was cautious in discussing the subject, emphasizing the need for financial assistance to help companies upgrade to lower their emissions.“I think there is an attitude of ‘work with us, with carrot approaches, not just the big stick,’” Mr. Ronayne said. “Come at us, in a manufacturing town, with both incentives to help us get there as well as the regulation.”Ohio has an entity to help with that. The Ohio Air Quality Development Authority was created 50 years ago to clean up the brown clouds that came out of smokestacks, using a combination of grants and low-cost revenue bond financing to help businesses fund upgrades like solar panels and scrubbers that filter exhaust from industrial facilities like incinerators and concentrated animal feeding operations.Now, more funding than ever is available — through the Inflation Reduction Act, which set up a $27 billion “green bank” at the E.P.A. to finance clean energy projects. Christina O’Keeffe, the executive director of the Ohio agency, said she hoped that would allow her to get into direct lending as well when more companies needed her help to meet a stricter air standard. There are also billions in the offing to help heavy industries retrofit to lower their carbon emissions, which tends to help with particulate matter as well.Public health advocates argue that the E.P.A. should set its standard regardless of the assistance available to cover the cost of compliance.California, for example, has spent more than $10 billion to help factories and farmers pollute less. The state’s Central Valley is still the only area that is in “serious” violation of meeting the set standard of 12 micrograms per cubic meter of particulate matter. The country’s six most polluted counties, which include the cities of Fresno and Bakersfield, have annual readings above 16 micrograms.The Central Valley Air Quality Coalition, an advocacy group, has been pushing for more aggressive enforcement for decades. The group’s executive director, Catherine Garoupa, points out that despite the persistent air problems, the federal government has not imposed strict curbs, like holding back highway funding.“One of the huge imbalances in our region is that the trend has been to cater to industry, treat them with kid gloves, give them billions of dollars in incentive money for them to continue their practices,” Dr. Garoupa said. “They’re generating wealth, but not for the people that actually live in the valley and are breathing the air.”California has spent more than $10 billion to help factories and farmers pollute less.Max Whittaker for The New York TimesThe San Joaquin Valley Air Pollution Control District, which includes four of the country’s six most polluted counties, has a different take. It filed a comment letter warning of “devastating federal sanctions,” including financial penalties, if the standard was toughened further.The chair of that air district is Vito Chiesa, a Stanislaus County commissioner who grows walnuts and almonds and used to lead the local farm bureau. His operation has to comply with any limitations on agriculture that might be imposed, like the prohibition on open-air burning of farm waste that the air district adopted after years of demands from public health advocates. He fears that further curbs without adequate support for smaller farmers would jeopardize his employees’ jobs.“I have like 15 employees out here, and I feel completely responsible for their families,” Mr. Chiesa said. “So how is it going to affect them? Our charge here on the air board is not to do death by a thousand cuts.”One point of agreement between proponents and many foes of a stronger standard: If the E.P.A. moves forward with tougher rules, it should also crack down on pollution sources, including railroads, ships and airplanes, under its sole jurisdiction. (The agency has proposed a stronger standard for heavy-duty trucks, around which a similar fight is playing out.)Rebecca Maurer is a City Council member representing a Cleveland neighborhood that has some of the area’s worst pollution. Her office frequently hears from constituents seeking help with housing that is safer for children with asthma, which occurs at alarming rates. The district encompasses an industrial cluster that includes two steel plants, an asphalt plant, a recycling depot, rail yards and assorted small factories.That’s the most visible source of emissions, but Ms. Maurer thinks her district’s many highways — and the diesel-powered trucks driving on them — offer the greatest opportunity for cleaning up the air, which requires state and federal action. And light manufacturing jobs are needed to employ the two-thirds of the county’s residents who lack college degrees, she said.“What we don’t want is another asphalt plant, and we don’t want e-commerce,” Ms. Maurer said. “We want something in between. We’re trying to thread this needle between these hugely polluting plants and low density, low-wage warehouse jobs.” More

Last Hope Distillery is one of the only real cocktail bars in Puerto Natales, a horseshoe of a city that wraps around a windy inlet in Chilean Patagonia. To enter, visitors buzz, speakeasy-style, then hang up their coats and settle in at the bar. A server sets a glass down.“Hi,” the server says. “Have you ever tried gin?”The question can surprise international visitors, most of whom, familiar with the juniper-flavored spirit, have come for a hike in nearby Torres del Paine National Park. But gin is new to some Chileans, so Last Hope’s servers don’t make assumptions.The approach started out of necessity, said Kiera Shiels, who moved to Chile from Australia with her partner, Matt Oberg, and opened the bar. Guests would turn up, unsure of what to expect. “They hadn’t had gin,” Ms. Shiels said. “They’d barely had cocktails.”Last Hope, which began selling gin in 2017, was one of the first gin distillers in Chile. But in the past few years, the country’s gin industry has exploded. From Last Hope (in the south) to Gin Nativo (in the north), there are now about 100 gin brands across the country. And many are winning international recognition.Botanicals prepped for use at Gin Elemental’s distillery on the outskirts of Santiago.Tomas Munita for The New York TimesJust last year, a gin made by Gin Elemental, distilled on the outskirts of Santiago, was awarded a gold medal at the SIP awards, an international, consumer-judged spirits competition, among others. Gin Provincia, made in Chilean wine country, earned the second-highest score at the London Spirits Competition, just one of its honors. And Tepaluma Gin, in the Patagonian highlands and rainforests, won a gold at the International Wine and Spirit Competition, one of several awards.“You will see a lot more coming from Chile,” said Andrea Zavala Peña, who founded Tepaluma Gin — one of Chile’s first distilleries — with her husband, Mark Abernethy, in 2017.“Whether the world knows it or not,” she said, “we’re coming.”Camila Aguirre Aburto, a brand ambassador for Gin Provincia, prepares cocktails at a bar in Santiago.Tomas Munita for The New York Times‘The wild has a particular taste’Fifty years after a coup established a brutal 17-year dictatorship, and just four years after an eruption of mass protests, Chile continues to struggle with deep social divisions. But the country is also working hard to remake its international reputation.Long known for its wine, Chile is now an established destination for adventure travelers after it expanded its natural parks and enticed more visitors to Patagonia. Chilean gin, its makers say, can act as a bridge between these two marketing pitches, building on Chile’s reputation for producing distinctive alcohol and effectively bottling its wilderness.“We have one of the last wild areas of the world,” Ms. Zavala Peña explained. “And the wild has a particular taste.”Capped by the Atacama Desert, shod by Patagonia, and squeezed between the Andes and the Pacific, Chile has no shortage of natural diversity. The country’s gin distillers aren’t only interested in making the best London Dry, said Teresa Undurraga, the director of the Chilean Gin Association. Instead, they are also trying to make gins that taste like Chile.“This is why we are using native herbs,” said Ms. Undurraga, a founder of the distiller Destilados Quintal. “We want to spread our flavors.”A tray of botanicals used to prepare gin at Destilados Quintal, in Santiago.Tomas Munita for The New York TimesGin is an ideal base; the neutral, juniper-based alcohol takes on the flavors of added ingredients. Chile’s distillers hope that the herbs and berries they infuse can serve as a passport — an invitation to visit, taste and see. In fact, many Chilean distillers import the alcohol. It’s easier and cheaper. The add-ins, they say, are what counts.“It’s like a painting,” said Gustavo Carvallo, the co-founder of Gin Provincia, looking out at the famous Colchagua Valley, which surrounds his distillery. The corn alcohol, which he imports from the United States, serves as the canvas. “All the botanicals are the colors.”Beyond the ‘Ginaissance’Chile’s booming gin industry comes at what might be the tail-end of a global revival, sometimes called the “Ginaissance,” which began in Britain over a decade ago, partially under the influence of the American craft distilling movement.The spirit was once seen as fuddy-duddy — a relic of colonial Brits trying to dodge malaria. But international experiments have aired out its reputation. There are distillers in Spain, India, South Africa, Australia, Brazil and Vietnam, among a slew of other countries. And gin is now seen as sophisticated, even worldly. The old-world quinine chaser has been reinvigorated by its new cosmopolitan devotees.Like many alcohols, gin can “capture a sense of place,” said David T. Smith, the chair of the World Gin Awards and the author of several books about gin, including “The Gin Dictionary.” But it’s often easier — and cheaper — to make gin than it is to make many other spirits, Mr. Smith said, which is partly why the industry in Chile grew so quickly.Jorge Sepulveda, who created the recipe for Gin Elemental, at his distillery on the outskirts of Santiago.Tomas Munita for The New York TimesJorge Sepulveda, who created the recipe for Gin Elemental, which also won gold at the London Spirits Competition this year, learned the basics on YouTube in just a few hours, he said. He started in the early days of the coronavirus pandemic after being encouraged by a friend, Ariel Jeria, who works in advertising and noticed the rising interest in Chilean gin.Mr. Sepulveda was already a talented cook, he suggested. Why not give gin a try?But Mr. Sepulveda had barely tried gin before. So, in lockdown, he began experimenting in a tiny countertop still. “I studied for two days,” Mr. Sepulveda said, standing near the still in his distillery. “I said: ‘OK, I can make it.’”The first few tests, he admits, weren’t perfect. So Mr. Sepulveda reassessed, settling on a method that uses the Fibonacci sequence to determine the ratios of his ingredients.“That is the number of God,” said Mr. Sepulveda, a geophysicist, who has since made other gin recipes using a similar philosophy. “Nature is physics. So it has to work.”Gin vs. pisco, whiskey and wineChilean gin faces stiff competition with the country’s three most beloved alcohols: pisco, whiskey and wine. But the production of gin has practical advantages.The first is accessibility. Pisco comes from specific regions of Chile and Peru. (In that way, it’s a little bit like Champagne or Parmesan.) Gin doesn’t. It is an everywhere alcohol, which makes it an anywhere alcohol. Anyone can make it.“The recipe for gin is endlessly adaptable, so you can do whatever you like,” said Henry Jeffreys, a British drinks writer.The second is time. Whiskey, which is considered the most high-end alcohol by many Chileans, takes years to mature in barrels. But gin can be ready days after it’s made.Visitors to Last Hope Distillery, for example, can sip Last Hope gin cocktails while bending over oak barrels out back to sniff the first batch of Last Hope whiskey — which has years to go before it’s on the market.The third is a lack of pretension. Wine, like whiskey, demands refinement. Only a drinker with a certain training can tease out the differences in origin from a single sip. Not so for gin. The botanicals are hi-hats, neons, easy to recognize and understand. Even the most unstudied reporter, drinking a gin and tonic after a days-long Patagonian backpacking trip, can taste the different flavors — many of which come from ingredients that were grown near the distillers’ homes.Mr. Carvallo, of Provincia, harvests boldo from a shrub mere steps from the distillery. (Chileans use tea made from boldo leaves as a folk medicine to soothe a range of ailments, including stomach aches.)“This is what moves us,” he said, rubbing a leaf between his fingers. “We’re trying to show what Chile has in botanicals and in its culture.”The botanicals used to make gin at Zunda.Tomas Munita for The New York TimesUrban flavorsIn the heart of Santiago, Eduardo Labra Barriga is trying to make a gin that tastes like the city itself: “A Santiago gin,” he said. “An urban gin.” He called it Pajarillo, named for a little bird that flies everywhere in the city. And he relies heavily on lavender, rosemary, pink pepper and cedron leaves, which grow in bushes across the capital. He and his wife have set up a trade program: Neighbors exchange leaves for a cheaper refill.Elsewhere in the capital, artisanal gins are still just starting to catch on in the hottest bars. Even among the city’s social elite, many prefer to stick with the familiarity of a high-end pisco or an imported whiskey.As a result, some distilleries are hiring representatives to help promote their products.Camila Aguirre Aburto works as a brand ambassador for Gin Provincia. Before she designs a custom cocktail for a bar, Ms. Aguirre starts with a lesson; she knows that for Chilean gins to catch on, bartenders need to teach people about the gin’s terroir.First, she shares samples of dried juniper, to explain the gin’s base flavors. Then she shows off the botanicals, like boldo, that give the gin flavor. Only then does she allow her clients to taste the spirit.“Close your eyes, smell the gin,” says Ms. Aguirre, who learned English by watching the “Scream” movies and speaking to friends. “Feel the forest after the rain.”At first the invitation feels like a tease. But then, just maybe — is that a lush valley at the roof of one’s mouth? Or, maybe, in the tickle of a nostril, the winds of Patagonia? Is that Chile on the tip of a tongue?Follow New York Times Travel on Instagram and sign up for our weekly Travel Dispatch newsletter to get expert tips on traveling smarter and inspiration for your next vacation. Dreaming up a future getaway or just armchair traveling? Check out our 52 Places to Go in 2023. More

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This article is an on-site version of our Unhedged newsletter. Sign up here to get the newsletter sent straight to your inbox every weekdayGood morning. The retail price of beef in the US has hit a record, driven by droughts across American cattle country. We have tried to stay calm about inflation over the past few years, but if steak becomes unaffordable, the Unhedged team is going to succumb to economic panic (more rational thoughts on the link between inflation and sentiment can be found below). Email us: [email protected] and [email protected]. Bad consumer sentiment is not surprisingA common complaint among Democratic partisans is that Joe Biden and his party do not get credit for a strong economy, which features employment and real growth levels ahead of those seen in the rest of the developed world. And sentiment is not getting any better even as the inflation rate grinds down and markets stage a recovery. The preliminary November reading for the University of Michigan consumer sentiment survey was 60.4, the lowest since May and consistent with the miserable sideways trend that extends back almost two years:At Unhedged, we don’t find this surprising at all. Prices are up almost 20 per cent since the pandemic began; the price of food is up 24 per cent, energy 37 per cent. That this should make the world feel malign and unpredictable is only natural. It doesn’t matter that wages have, on average, kept pace. If I get a raise, I earned it; it is not a mere symptom of a strong national output. If the price of food is spiralling upwards, that’s a bad economy, or the government’s fault. Nor does it matter that the rate of inflation has fallen. People don’t see the rate of change on the side of a gallon of milk. They see a price that is vastly different from what it once was.  Even so, one might ask why sentiment has not improved even as arguably the most important price of all — petrol — has come down in the past six weeks. That can be explained by the fact that while consumer sentiment can fall quickly, it is slow to recover. It is like a personal reputation: built slowly, gone in an instant. Notice how sentiment (the blue line in the chart below) fell very quickly in the recessions of 1991, 2001 and 2008, but then took its time coming back to a consistently high level.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The current moment can seem a bit odd inasmuch as consumer sentiment and changes in real spending (the pink line) seem to track one another historically but are now coming apart. How can people feel that times are bad, and yet keep spending merrily? Well, if you accept that people believe that changes in nominal prices are something bad in and of themselves, whatever nominal incomes are doing, that mystery goes away. Sentiment and spending do not have to travel together. Yield curve control: a lesson (or warning) from Japan Last week in Unhedged, Jenn Hughes asked if yield curve control might reach the US. This would be an extreme outcome, but it takes only a little imagination to see how we’d get there. A historically large peacetime fiscal deficit is suddenly paired with significantly positive real interest rates; politicians remain hostile to tax increases or spending cuts; bond investors grow nervous, and an external shock sends yields soaring. The central bank concludes that monetising the debt is the least-worst option.Does that make you feel anxious? Fiscal doves have a calming response: Japan. There, public-sector debt runs above three times GDP, and the Bank of Japan has bought most of the government bonds for a decade without causing a disaster. And now Japan’s economy is finally experiencing inflation and nominal wage growth, while corporations are slowly reforming themselves. Real GDP is on track for 2 per cent growth this year, projects Marcel Thieliant of Capital Economics. Extraordinary fiscal and monetary interventions appear to have bought Japan the time it needed. But a new paper by YiLi Chien of the St Louis Fed, Harold Cole of the University of Pennsylvania and Hanno Lustig of Stanford, suggests that Japan’s example is not as encouraging as it appears. Chien, Cole and Lustig argue that Japan has staved off a fiscal crisis by, in effect, running a massive carry trade to finance itself over the past three decades.In a standard yen carry trade, investors take advantage of low Japanese rates by borrowing yen, exchanging them for dollars, and investing the dollars at higher US rates. This is risky, because either currency can move against you. But it can be lucrative. The Japanese authorities have done something similar by financing risky investments with artificially cheap financing provided by Japan’s households, using the banking sector as a middleman. The authors (hereafter abbreviated CCL) see two problems. Japan’s fiscal and monetary set-up acts as a giant transfer from the young, poor and financially unsophisticated to elderly pensioners, the financially savvy and the state; and the trade might ultimately fail. CCL present a composite balance sheet for the Japanese public sector, including the central government, the BoJ and the state pension fund. It has changed a lot since the 1990s (all figures are a share of GDP):Note, on the liabilities side, the roughly 100 percentage point increase in bank reserves and, on the assets side, the rise in equities and foreign securities. CCL offer the following theory of the case:The Japanese public sector borrows at shorter durations, via bonds and bills (average duration of seven years). Most importantly, the central bank issues bank reserves in return for bonds, keeping interest rates low as part of quantitative easing. This is debt monetisation.Through the state pension fund, the public sector invests in longer-duration risky assets such as equities and foreign securities (average duration of 23 years). These positions are not hedged for interest rate or FX risk, letting the state “harvest carry trade risk premia”.The BoJ’s QE pins government bond yields, keeping government borrowing costs low. This lets the government issue overpriced bonds to raise fresh debt, because private investors know they can simply turn around and sell them to the BoJ.The public sector is levered long duration; it gains when rates go down. This trade pays a lot: as much as 3 per cent of GDP a year. This roughly matches the gap between taxes and government spending promises (excluding interest payments), around 3.5 per cent of GDP.It is a carry trade where the investor sets their own funding costs. The additional fiscal capacity created by cheap funding — and the fiscal penalty if funding costs rise — gives the public sector a strong incentive to peg real rates low.But while the public sector gains, many Japanese lose. Most households, especially younger ones, barely own financial assets. Wealth is disproportionately kept in bank deposits, to the tune of 200 per cent of GDP, which have no duration and pay essentially nothing. Some Japanese do invest in stocks (38 per cent of GDP) or have a private pension or insurance plan (98 per cent of GDP). But overall, surpluses are being moved from deposit-holding Japanese to the state and pensioners.Is this set-up stable in the long run? We put that question to Stanford’s Lustig, who argues it is not. He draws an analogy to underfunded US pension schemes which, to improve funding ratios, take more risks on the asset side of the balance sheet in the hope of better returns. The danger is that mandatory liabilities are being matched with assets that can lose value. “The Japanese government has made all these risk-free promises to pensioners and issued bonds that are supposed to be risk-free. But on the asset side they’re increasing equity exposure quite dramatically,” he says. “This doesn’t end well unless you’re extremely lucky. You could get a bad draw of equity returns, and end up with an even bigger shortfall.” Asked what lessons he draws from Japan for a US context, Lustig added: “Central banks can flatter your estimates of fiscal capacity quite a bit. But when they step back, you realise it’s much smaller than you thought it was.” (Ethan Wu)One good read“Far from being an equity game, private equity is a debt game in which the economics are driven by the cost of money.”FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, hosted by Ethan Wu and Katie Martin, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youSwamp Notes — Expert insight on the intersection of money and power in US politics. Sign up hereChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up here More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Mike Harris is the founder of Cribstone Strategic Macro, and an adjunct professor of finance, economics and management for Syracuse University in London.BoE Chief Economist Huw Pill’s comment that it wouldn’t be unreasonable for rate cuts mid-2024 was as reckless as it was truthful. With so much collateral mortgage damage from rate hikes, the BoE needs to avoid using more firepower. However — as George Soros knew in 1992, and Liz Truss painfully learned last year — when you have a vulnerable currency, and you’re an island economy that imports inflation, your central bank doesn’t get to have the final say.Unlike the Fed or the ECB, the BoE can’t be currency agnostic because the (relatively) tiny UK is a price-taker. Devaluation stokes inflation. If macro funds pile on sterling shorts, it won’t be long before we start once again hearing provocative calls for dollar parity. If sterling devalues too much, the BoE has to raise its voice and the cost of everyone’s mortgage. It’s a lesson our previous PM painfully learned. So long as things seem calm, we can pretend we are in data-dependent mode under BoE leadership. But the reality is very different as virtually all UK mortgages reprice every 2-5 years while German and US mortgage holders see zero change in cashflows from rate changes.  Just as tumbling rates during QE proved a windfall to UK mortgage holders, higher rates are a lagged but substantial cash drain. With the UK already facing stagflation, throw in the possibility that currency weakness alone can force more UK rate hikes, and the conclusion is we’re in the nail-biting phase of our quantitative tightening vulnerability. Why would macro traders bother to attack a seemingly undervalued sterling? Because policy makers failed to recognise the stagflation risk inherent in the UK’s absurd short duration mortgage market.While two-thirds of homeowners sitting on vast piles of mortgage free housing equity will enjoy higher rates, those are mostly 1 & 2 person older households that are economically less relevant. By contrast, the vast majority of the 7.5mn mortgages — equal to 65% of GDP — are held by working age Brits, or those who rent houses to them. The Resolution Foundation estimates that of the £15.8bn of higher mortgage costs projected from 2021-2026, fully three-fifths had yet to be realized by mid-2023. Almost everyone in the UK who has a mortgage knows their personal inflation could go much, much higher in the coming years, and renters can expect to be passed a portion of this pain. Few other countries have this level of future inflation awareness among the population. That’s a wage expectation driver like no other. Throw in interest-only mortgages for well-off Brits tripling in cost, and you’ve got plenty of richer senior executive types that are suddenly sensitive to the cost of living plight of lowly subordinates. The result? A stagflationary, wage-driven shitshow. Even high-earning sectors are seeing remarkably generous pay hikes, with Finance and Services up 9.6% June-August and Manufacturing up 8.0%. This isn’t a simple tight labour market that can be cooled with rate hikes. Don’t tell Turkey’s president, but UK rate hikes may actually be raising wage expectations. Hedge funds love a vicious spiral.  In 2017, I wrote to Pill and 70 of his BoE colleagues about this looming train wreck. I got a polite reply that implied I had emailed 71 people too many. With a bit more curiosity, they may have been less excited about the UK’s hyper-efficient monetary mechanism, and more worried about extending mortgage duration. Oh, and they wouldn’t have sent me this letter in 2021 admitting they didn’t even have basic mortgage duration data.  How can the UK reduce its vulnerability to a stagflationary attack on sterling? First, everyone on the MPC should do as Governor Bailey did yesterday and hawkishly contradict Pill and anyone else who speculates on when rates might fall. The most dovish thing the BoE can do is to sound more hawkish than the data. Who will attack sterling if they fear the BoE could quickly hike? Second, if wage inflation remains sticky, we need some heroes at His Majesty’s Treasury to build policies that specifically target wage inflation without hitting jobs. In a world where orthodoxy insists the only tool is rate hikes that seems anathema, but the UK can’t afford more hikes. My two pence: if necessary, tax private sector employers (not employees) on any inflationary wage hikes (say above 4 per cent). It’s the equivalent of a higher national insurance rate, but instead of on all workers, just on those whose pay hikes are entrenching inflation. Keep the punchbowl, just dilute the punch.Finally a call to all heroic Treasury officials. Use the eventual anchoring of inflation expectations to shift us to longer duration mortgage fixes. That’s not just to avert a future crisis, there is a big cyclical plus. The long-bond will come in before the BoE starts to cut. If UK mortgage holders can tap this, housing recovers sooner. For any policy maker who figures this out, you’ll deserve a stonking (and, in a small way, inflation-stoking) pay rise. Oh, and your boss might actually keep his job. Further reading— So long, and thanks for all the fixed-rate mortgages?— Britain, land of the eternal mortgage More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.What should fiscal policy target? A debate has recently emerged over the merits of focusing on debt and deficits, as now, or a broader measure of public sector net worth, which includes assets and liabilities. So, which is superior? It depends on the question.In its latest Green Budget, the Institute for Fiscal Studies examines these alternatives and concludes that “the benefits of moving to balance sheet targeting would likely be insufficient to justify the potential costs involved”. Making this the sole target of fiscal policy might be foolish. But so is focusing solely on debt sustainability. Government is a complex activity. Simple targets are dangerous.A necessary condition for successful government is to avoid a fiscal crisis. For this reason, it makes sense to assess sustainability. Yet even here it is essential to look beyond debt and deficits. Assets matter, too. It is vital to know what they are, not least because better management could improve government income, either directly or via higher tax revenues. This is one of the points made in a forthcoming book, Public Net Worth — Accounting, Government and Democracy, by Ian Ball and several co-authors.As the IFS itself admits, a focus on deficits and debt can lead to bad decisions. In the UK it led, for example, to selling off the student loan book, merely to lower reported debt, even though the value of the loan book to the government was higher than to private buyers. It led to the mistaken decision to slash public investment after the financial crisis, despite exceptionally low long-term interest rates. It justified the private finance initiative, which replaced visible debt service obligations with invisible (and costlier) future spending.Some argue that the focus on net debt and deficits forces the government to concentrate on something vital. But too often it has just found costlier ways around its own rules. When it cannot do that, it changes them: according to the Institute for Government, the UK has had nine sets of fiscal rules and 26 specific rules since 1997. This is a joke.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Yet there is a far bigger point, which the IFS ignores. Yes, the government needs to survive financially. I agree. But that is just a means. It is not a government’s end. That is to govern well and so help create a more prosperous society. In order to do this, it has to pay close attention to its own balance sheet as well as that of the country.Government is a steward. As Oxford’s Sir Dieter Helm argues in his new bookLegacy, it should protect and develop a country’s natural capital, alongside its physical and human capital. Underinvesting, as both the state and the UK as a whole have been doing for far too long, is terrible stewardship.To do its job properly, the government — the country’s most complex, largest and most enduring organisation — needs at the very least the information a private company would possess and publish about its own financial position. In 2021, for example (according to the IMF), the UK public sector’s net worth was minus 96 per cent of gross domestic product. In the G7, only Italy’s was worse. Surprisingly, Japan’s latest figure (for 2020) was far better, at only minus 16 per cent. The IFS suggests, rightly, that such figures can mislead. But so can a narrow focus on debt and deficits alone. We should be discussing public sector net worth and the national balance sheet, along with debt sustainability. If we did this, we would necessarily discuss many, though not all, of the important political choices. Moreover, we would be doing so quite naturally, as we would be trying to measure reality.The invention of modern accounting is among the most important advances in human history. Without it, today’s complex economies would be impossible. Its application to national income has immeasurably improved our understanding of economies, too. But we persistently refuse to focus on what such accounts tell us about our governments. We concentrate instead only on the question of whether it is on a path to default. Our ambitions must surely be greater than that. Moreover, even if one focuses only on sustainability, non-debt liabilities — such as public sector pensions — cannot be ignored. These, too, must be included.In the foreword to Public Net Worth, I argue that “if something is to count, it must first be counted”. Moreover, “it is always far better to be roughly right than to be precisely wrong. Ignoring reality because it is hard to take everything into account, is a big mistake.”Instead of trusting simple rules that embarrassed governments then change, we must confront reality. Governments do need to survive. But they must also do their job. Without using fuller accounts, they will [email protected] Follow Martin Wolf with myFT and on X More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is founder and president of MacroPolicy PerspectivesHigher for longer has become the mantra in bond markets this year. Mostly it echoes central bankers’ strategy in tackling high inflation — raise short-term interest rates high enough and keep them there long enough that they cool economic activity and bring inflation back down to target. Factors other than monetary policy are also often cited in explaining why inflation and interest rates may remain higher this cycle. They include higher government budget deficits around the world and fragmentation in global supply chains as rising geopolitical tensions alter trading relationships creating a higher underlying run rate on inflation. These factors are only the dark side of the story: The surge in longer-term bond yields that started this past summer came first and foremost as the US economy proved more resilient than expected while inflation cooled notably faster than anticipated. This was in direct contradiction to the macro narrative that a recession would be required to bring inflation down. This outcome stems from the reappearance of the holy grail of economics — productivity gains. Productivity facilitates economic growth without inflation since you are combining resources in ever more efficient ways. It can also be associated with higher equilibrium interest rates, since the economy does not rely on low interest rates to grow and thrive.Economists generally assume a growth trend in the US around 2 per cent that embeds an assumption that productivity will grow at about 1.5 per cent a year and population growth will be in the neighbourhood of 0.5 per cent. In the year to September 30, non-farm business sector productivity grew 2.2 per cent after an abysmal performance the year before, twice the 10-year trend before the pandemic of just 1.1 per cent per year.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Some of the bounce-back can be traced to recovering global supply chain operations. Pandemic-related frictions were a major source of sand in the gears of business operations in 2021 and 2022 and inflation in consumer and industrial goods prices. This year has seen a rapid normalisation in supply chain operations and an attendant cooling in goods inflation. This source of productivity improvement could be shortlived, since recovering supply chains won’t continue to lower unit production costs.The real question is whether productivity can continue to grow at a healthy pace. There are two reasons to think the productivity performance could improve on the lacklustre performance following the financial crisis of 2008-9.The first has to do with the sizzling hot labour market recovery. Record amounts of people quit their jobs in the past few years. This was a challenge for companies but quit rates have come back down toward pre-pandemic levels which can provide a near-term boost to productivity as the costs of hiring and training new workers comes down. The churn of workers in recent years could also pay longer term dividends as it may mean that workers are matched up with employers who are a better fit. In a recent poll from the Conference Board, 62.3 per cent of US workers said they were satisfied with their jobs in 2022 — up from 60.2 per cent in 2021 and the highest level recorded since the survey began in 1987.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Another byproduct of a hot labour market — as well as the unique operational challenges of the pandemic — is that we had the first recession without an extended fall in business investment, a hallmark of most downturns. Businesses kept investing in equipment and intellectual property at a historically high rate to meet the needs of remote work, as well as offset some of the need for workers amid a very tight labour market. The technological tools companies have at their disposal to re-engineer business processes and realise efficiencies have arguably never been more abundant. If they realise anything close to a historical average return on investments made over the past few years, we may very well be in for a better productivity trend this cycle.The proof will be in the pudding as to whether inflation can continue to cool without pronounced economic weakness. If we are not on an improved productivity trend then rates may not stay higher for longer. Central bankers would be forced to bring inflation down the hard way through a recession which would likely drive longer-term interest rates back down at the expense of risky asset prices. The current constellation of higher longer-term rates and higher housing and equity prices effectively banks on a better productivity trend, and there are at least a few reasons for some optimism. More

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