276. Will bond market vigilantes see off Starmer’s rivals?

23:12Robert Peston:And there were a ton of things that it could have done when it was elected to get the growth rate up. then we would not be in this painful position or not nearly to the extent that we are if we had regained the confidence of lenders to the uk that the growth rate was going to rise or was rising and thereby was generating additional tax revenues to pay for public services was boosting living standards you know the government would not be in this mess and you know you know in the end It's quite hard to feel sorry for this government being in this position because they knew that growth was the challenge.

23:52Robert Peston:And they didn't. I mean, you say that the government failed, but it failed because it didn't have a credible, coherent growth plan. And just hammered businesses. It wasn't by accident that it failed. It's because, you know, it faced in two directions. It taught the language of growth and then did a ton of stuff that undermined growth. And that was a huge strategic error. Yeah.

24:15Steph McGovern:And I'm really seeing that, see that play out locally in terms of businesses closing down because of the business rates and the employment costs and everything else. It really, you know, it's not just, I heard this brilliant German minister speak last week and he was talking about, and I literally sat there going, come to the UK, you've totally got the vision. And he talked about how when you look at business, you cannot just look at them in the context of jobs and the money they bring in. You have to look at what they do in terms of community cohesion, what they do for when, you know, these jobs are not just jobs for money, they're jobs for people's mental health.

24:53Steph McGovern:And he had this, I mean, he had a background in retail, so he had genuine experience in business and literally the room erupted with his, and it was a room full of people from all over the world. It wasn't just Germans. It wasn't just British people going, I wish he was one of ours. It was a room full of people going, yes, he gets it because he talked about how actually growth and it doesn't just come from thinking about business in a monetary sense. It's about thinking about everything else they bring to the party in terms of work and mental health and public health and even communities providing, they contribute to the infrastructure of areas.

25:33Steph McGovern:And I really listened to him and thought, this is what we're not doing. we're not thinking about the bigger context of what making money brings. It isn't just capitalism. It is about all the social stuff it brings and the pressure that reduces on welfare and everything else. And we don't think of it like that. I think in this country, we think too much like it's vulgar to make lots of money. Like, yes, okay, there's too many very, very powerful rich people who maybe have too much control and get too much money. But for people, for entrepreneurs and things, there's a sense of, yeah, we want you to do well.

26:09Steph McGovern:But when you get to the, when you actually start making money and doing well and providing for your local economy, you just get hammered by the government on taxes. And, you know, where's the incentive then? Anyway, that's a bit of a mini rant, but it was really inspiring to hear a politician talk about like the economy in a way that was not about taxes. And it was instead about all the good things that can come and someone who actually genuinely knew what they were talking about because they had business experience.

26:39Robert Peston:That is important. And in a minute, I want to also talk about something else that's positive because it's quite striking to me the number of economists and commentators who are positing that maybe AI can actually be a job creator, certainly in the sort of shorter term. So we're going to talk about that after the break. But just one final thought on this debt trap problem for politicians. it's quite striking that those on the left and you know the the the you know mayor of greater manchester who i think you know if you can if you can get a seat and there it looks to me as though there are moves um afoot to get him a seat in parliament andy burnham um i think he's the most if he gets a seat in parliament he's definitely the most likely to succeed kia starmer as leader and prime minister and i think you know that's not an unlikely prospect at the moment um but we'll see.

27:32But he has been flirting with the idea, given that we have to increase defence spending

27:39Robert Peston:to, you know, first 3 % of GDP, then 3.5 % of GDP. And we're looking at tens of billions of pounds of more spending. If you're on the left of the party, you don't want that additional spending to come from, you know, at the cost of less spending for schools, hospitals and public services. So on the left, people like Andy Burnham are looking for ways to pay for defence that doesn't lead to cuts elsewhere. And so, you know, he's mooting. Well, maybe you could take that defence spending out of the fiscal targets, out of the fiscal rules, have the defence spending not add to the official, you know, targeted national debt.

28:19Robert Peston:I have to say that I think if any prime minister of the UK does do that, they will be hammered by investors because debt is debt. The idea that somehow a hedge fund based in America or some kind of money manager in Singapore are going to essentially take a patriotic view that it is their duty to lend to the UK at lower interest rates to fund defence spending in the UK is pretty absurd. anything that adds to the national debt will be seen by investors as bad for the credit worthiness of the British government and the British government will be penalized for that so I'm afraid to say there is no easy fix by reworking the fiscal rules if you know we are going to meet that you know if we're going to increase defense spending in the way that you know essentially does, I'm afraid, look very important, then the government is going to have to find savings elsewhere.

29:21Robert Peston:And there is no alternative. And, you know, obviously, where, you know, all the right wing parties, right of center parties reform and the Tories say it has to come from is from welfare reform. And I'm afraid to say, you know, you know, and, you know, we've even had the former defense secretary, former head of NATO, George Robertson, member of the Labour Party say it has to come from welfare restructuring. It is quite difficult to see where you would find the money, if not from a reform of the welfare system. But my goodness, reforming the welfare system is not easy. And at the end of the day, obviously, as we've talked about before, the rational place to start is actually on support for those who are retired.

30:06Robert Peston:But there is no government at the moment, or I'll put that another way, You know, there doesn't appear to be any political party brave enough to look at changing the so-called triple lock when it comes to the state pension. But there will have to be, you know, inevitably, I'm afraid, very painful decisions taken, you know, if we're going to hit those defence spending targets.

30:31Steph McGovern:And then on top of that, you know, when you're thinking about people going to vote in the elections, they're hearing things about how, you know, how much of a stress welfare is. At the same time, as reports coming out from, you know, this Tory analysis was put out saying that there are more than 600 ,000 households getting more in benefits than the average worker's salary. so it's showing that they were these households were given more than 32 000 pounds in welfare payouts last year and the average annual salary of a british worker after tax you know is around that and so you've got that coupled with the welfare budget's too big and then you know the working poor hearing that there's people on benefits getting more money than them from not working and obviously that's a very divisive thing to put out because lots of people on benefits have not made that choice that they're there because of whatever circumstances are going on in their life.

31:30Steph McGovern:But that really then focuses the mind when they're going to the polls to decide, well, do we need change? Do we need to bring in these people who are going to cut that welfare fund and, you know, make it more fair for people? And so that's the, that really plays on people's minds, I think, at this time. That's what people are, you know, when people are talking to me about voting reform or whatever, they're saying it on the basis of, well, what about all the people on benefits? Well, we're grafting and they're not doing anything which is obviously you know not the story for lots of people but um but it but it does put pressure on when it comes to this and shows

32:03Robert Peston:that we do need to get on top of the welfare fund apart from just the fact that the you know the bill for those who retired has has gone up and up and up you know the other side of it is that the number of people uh who are disabled and the rise particularly of mental ill health uh that has also contributed to a massive explosion in the disability benefits budget. And, you know, that is the biggest challenge when it comes to reform. Incredibly hard to do, both from the point of view of, you know, obviously in the Labour Party, it absolutely split the Labour Party, which is why, you know, Rachel Reeves had to abandon her plans to reform the welfare budget, you know, now over a year ago or around a year ago.

32:50Robert Peston:Very difficult politically to do. But nonetheless, many would say absolutely essential. So look, let's take a very quick break. Because we had Tom Bromfield, who was one of the founders of Monzo, come on the programme and say, income tax is going to disappear because nobody's going to be in jobs as a result of AI. There are other people, as I say, right now, making a sort of counter-argument about how AI certainly in the short term is going to be creating jobs. So let's look at that after the break.

33:25Steph McGovern:This episode is sponsored by Starling, the bank that helps you organise your money, build great habits and stay in control of your spending. Now, I talk a lot about financial literacy and its importance in our economy, you know, giving people knowledge, but also confidence with money too. And Starling reckons anyone can be good with money and you can start simply by checking your balance. daily. It gets easier every day and it takes the mystery out of it. And then the real value comes from digging into the details with tools like Starling Spending Intelligence. So this is an AI powered search bar within Starling Current Accounts where you can ask a question about your spending habits and get an instant answer in app.

34:09Steph McGovern:It helps deepen your knowledge and make more informed money decisions. It's a little like having a financial co-pilot in your pocket, mapping out exactly where your money goes. Search Starling Bank to find out more. Good With Money starts here.

34:29Steph McGovern:Welcome back to The Rest Is Money with me, Steph McGovern.

34:32Robert Peston:And with me, Robert Peston. Now, I was just really struck over the last couple of weeks. Every time I looked at views of an economist on Substack or in some of the financial press, there was one very interesting piece, for example, in the FT. I kept seeing people refer to this very powerful theory of a really important 19th century British economist.

35:01Steph McGovern:Just love it when we're, you know, you go a 19th century British economist. Go on. What did they say? Why is it relevant to my life now?

35:08Robert Peston:An amazing man, actually. He's called William Stanley Jevons. And his life story is extraordinary. Comes from a reasonably humble background, goes off to Australia, comes back, teaches at University College London, dies. He drowns off the coast of Hastings at the age of 47. In a relatively short life, he builds up this enormous body of really important economic work, work in economics, and even designs of sort of prototype computer. Right. So he's one of those absolute sort of polymath, amazing Victorian figures. But he came up with this sort of theory is not quite the way I'm putting it, but principle of economics called and it's called Jevons's paradox.

35:52Robert Peston:And he was looking at why as steam engines became more efficient, i.e. they produced more power with less coal, why it was that consumption of coal was going up. Right. Because you assume if steam engines were using less coal to produce the same power. Yeah. You know, demand for coal would fall. But of course, what was actually happening was that the output of steam engines was becoming cheaper. So people wanted more steam engines. And the rise in demand for steam engines meant that even though these steam engines were way more efficient than the ones that had come before, the amount of coal that was needed went up and up and up.

36:39Robert Peston:Right. Because consumers and businesses wanted all this cheap output, whether it was in factories or to drive trains or whatever it is. Everybody wanted cheaper train travel, more stuff being produced by steam-driven factories. So demand for coal increase. That's the paradox, right? A machine becomes more efficient, but rather than it meaning that it consumes less of the energy or commodity that it requires, it actually ends up – the development means there's more consumption, right? And it's been a really, really, really important. It's been a really important theory in economics. So, for example, when there have been these rows about how you tackle climate change, there are the techno optimists, people like Bill Gates, for example, argued that actually restricting our lifestyles doesn't need to be that dramatic.

37:34Robert Peston:don't have to restrict how much we fly because technological change will mean that everything becomes more efficient and you know uses less carbon uh and all the rest of it and as a result of of of that the world will naturally emit less and so the example people always use is when the led light bulb um became you know proliferated people thought oh well that will mean we'll you know use you know leds will use way less power because they do use way less power than traditional light bulbs and we'd all be way better off in terms of climate, you know, CO2 emissions and all the rest of it. But of course, because LED was so much more efficient, people bought millions more of them.

38:13Robert Peston:We lit up all the centres of our cities and so we just went wild. And so actually getting rid of the traditional light bulb didn't lead to the reductions that people hoped for. So, you know, so that's why some people continue to argue you've got to have lifestyle changes. Now, artificial intelligence, because I've lost count on a number of articles recently have said Jevons paradox means that actually there'll be more employment because the whole point about artificial intelligence is it reduces the cost of intelligence, right? And if you reduce the cost of intelligence, and the argument is you basically give you and me AI help, we become way more intelligent for less cost, And therefore, the argument is you get millions more people like us and you get millions, much more employment because everybody wants more intelligence and you employ way more people.

39:09Robert Peston:Right. And it does work as a theory. You know, if AI is simply making all of us more efficient, but as we have discussed on this program many times, this is, we think, the first industrial revolution in history where what's happening is not that humans are becoming more efficient. They are being replaced. Right. So if AI was simply about augmenting what any of us can do, fine. Then it would be the same as the steam engine. But it isn't the same as the steam engine because the whole point about artificial general intelligence, and I say this as somebody who yesterday was working with Anthropics Cowork to basically automate some of the things I need in my daily life and was just staggered by how efficient Cowork is.

39:59Robert Peston:Some of what I'm doing is, well, most of what Cowork is doing is actually at the moment is making me more efficient. But you can just see the potential of something like co-work to replace lots of us. I hope it's not going to replace you and me, but you just can't take that for granted, can you?

40:14Steph McGovern:Yeah, that's really interesting because you're right on that paradox. It would suggest that then we'll just employ way more people and do way more stuff because we'll have more people who are really efficient.

40:26Robert Peston:And all the outputs will be cheaper and we'll all be spending more money on the things that we want, you know.

40:30Steph McGovern:Yeah. And I don't know, maybe there is an argument for that because just coming back to this event, I was at this retail conference. It was interesting to me because I thought, you know, a room full of C-suite level people in retail from all over the world would be talking about volatility and talking about supply chain disruption and talking about how do we weather this storm of what's going on in the Middle East. And actually, that was just a tiny part of it. Everything was about AI, you know, and they were talking about how in retail now it's totally past the experimentation phase. And it's now being used in this disciplined way.

41:10Steph McGovern:You know, agentic AI is everywhere in these retailers now, not just for chatbots, but for search and discovery and personalization and, you know, predicting customers, you know, I don't know, statistics to get products that are right for them. And, you know, pricing logic, customers journeys, the supply chain, how they, you know, deliver all that. and they were you know talking about how this is there was this great uh guy who's the ceo of a company called tendam which is this big huge european based in spain's retailer he sounded like antonio banderas so when he delivered it sounded like it was a hollywood movie star singer but he was like this isn't a wave this is a tsunami that's going to change everything we do but you cannot lose the emotional connection of people and the bricks and mortar of retail and that is going to go hand in hand with ai it's just that it's going to enhance all that it's not going to mean we you know that the suddenly it's in fact it's the opposite of we've talked about for years in terms of the high street it's that the high street and those physical outlets are going to be more important than ever because people are going to be desperate for that human connection but they'll just want everything delivered in a way that is easier for them.

42:28Steph McGovern:So the boss of Ikea was talking about how instead of people now, you know, coming to them and saying, what's the best bed? They now have people going on to whatever, ChatGPT, whatever you use, to say, how can I sleep better? And then they're looking at how do I connect to that? So then the answer for that question is you go to Ikea, that's how you sleep better. or if it's you know lululemon we're talking about how for them it's like people might this is a weird way of phrasing it but this is what the woman from lululemon said she said you know people will ask out people in our stores where's the best place to sweat and so that's the question now i was like you can't say that in many stores in middlesbrough uh but but how is the question sorry that's how she framed the question yeah she said that on stage where people go in and ask where's the best place to sweat i was like yeah yeah the point she was making was now lululemon huge you know brand for athletic wear and and athleisure and all that but their connection their ai is used so much in the business but on a delivery point it's them in areas where they know they'll that you know their store will be in a place where they know everything about that area so they'll know like where the best gyms are what kind of classes there are people will like so if people come in with that question of or you know people ask a chat but whatever they're not a chat but they ask chat gbt or whatever they're using a question like where can i exercise or whatever they will link into it to try and be the ones that then give them the the products or on a human delivery level if someone goes into the shop and says it or while you know i'm thinking about starting yoga let me tell you the five best places around here where uh you can do yoga and here are the perfect pants for it.

44:15Steph McGovern:It's thinking in that more, yes, AI is going to make everything on a level easier to deliver, more efficient with more personalization and everything else, but it's got to be connected to humans, knowing the area, knowing the people and that localization and emotional connection will be just as important. But I think the thing for me that I took away from all of this was if you look at like e-commerce it's it's barely changed for years has it you you go online you essentially get a catalog and you choose from there but what retailers who are going to do well are now is is have that connection so they're they're not it's not even about going

44:52Robert Peston:to websites it's just all within ai challenge for retailers will be i mean look i know and everybody listening will do the same i'm sure you know if i'm unsure about you know what brand or what product or what retailer to use i will ask claude or gemini um and the and the and you know and i'll give them a locality um and one of the things i did yesterday which was um very impressive is again I asked I was thinking of going to a particular you know island for a holiday and I just said you know draw you know can you come up with an itinerary places to stay this is my budget can you can you look at Airbnb for me and find out you know what's available and it produced you know a three-page document that was really impressive right and you know you know why would I go unfortunately to a sort of tour guide you know when this was produced for me in five minutes and I have to say look pretty robust similarly so I think so I think I think part of the problem for you know obviously um if you are uh in retail you've got no option you've got to use ai but i think the problem with many of the ai services is they are to use an expression disintermediating the traditional retailer because um you know you can just do it at home or on your phone um without stepping foot in the shop but that's where the retailers

46:37Steph McGovern:as a saying they have to you know they're the ones that are going to survive and do well are the ones who are going to be embedded in that so doing deals with um so you know some of these brands were talking about the deals that they've done with chat gbt or have done with gemini and that's or like for example sephora the beauty brand was talking about deals with uber eats so now when you order a pizza you can order a lip gloss as well and so you know they were talking about how you can't exist on your own i know probably that's more common than you think

47:06Robert Peston:that's a natural pairing oh i fancy a pepperoni thing in me oh let's have some let's have some

47:11Steph McGovern:apple lip gloss with it i mean yeah but just on the on that sephora point because it's obviously you know like this is where a place where when they open a shop somewhere it the hype is unreal there'll be queues for miles of particularly young women wanting to go there and and but what they were saying they're now doing is for example in their stores they want to bring people in so they can give them that experience of skin matching and using it agentic ai to like analyze a person's face so that they can then uh you know get the right products for their skin and and that's where the the bricks and mortar is going to be really important because people are going to enjoy that experience of going in with their friends with their girlfriends or whatever and doing uh doing these things together and and then that and then that leads into a loyalty because that will go to the app and the app will then tell them well this works with this skin tone and so you can see how people will still want that that it that because you know i remember as a kid i used to get a fiver get the bus into town i bloody loved it in meddlesbrough town center back in the day with a fiver it wasn't just about what you bought it was just that whole experiential level and that's what they've got to got a play to and that is why slime is a key part of all of this

48:24Robert Peston:let's promote your own brand but yeah no no i i i look i think look obviously as you say the experience of shopping um is something that is is you know valuable to people and so one's certainly not arguing that ai can't be used to enrich that experience of course that's of course that's right but i was quite struck um one of our producers chris when i was talking about essentially whether what was going to drive what the big economic impact of AI would be. And I certainly think in the short term, Jevon's paradox does hold because I think so much of what's going on in AI at the moment is making individuals more skilled, more intelligent, as it were.

49:15Robert Peston:But I am afraid somebody who thinks, you know, the rate of development of AI is really breathtaking. And I do believe that a lot of what humans do will be replaced by effectively by robots, whether they're, you know, virtual robots or actually real material, physical robots. But, you know, a lot of jobs will disappear. And as I've said many times on this podcast, it is worrying to me that the British government, in fact, no government, is making preparation for that, you know, essentially world of AI plenty that involves, you know, human incomes disappearing. And the analogy, therefore, that maybe this is an appropriate place to finish that Chris came up with is because I was talking to him about the LED case.

50:07Robert Peston:And he said he said he feared that humans. unfortunately were the filament light bulbs and that we were all going to disappear because ai was the led but there we are i think that probably on that very gloomy note that is uh we'll switch

50:25Steph McGovern:off the light now shall we of course that's it from us on the rest is money turn out the light

50:31Robert Peston:and your way out yeah goodbye see you soon