A key priority for the government is to revive the fortunes of Britain’s old industrial towns. Boris Johnson promised to bring jobs and skills directly to these areas, so people no longer need to leave in order to prosper.
The economic revival of regional cities in the past two decades or so has put even more pressure on the satellite towns which surround them.
The growth and energy of cities such as Leeds, Manchester and Newcastle has created new opportunities for skilled young people in the satellite towns not just to work in the city, but to live there. By moving, they reduce the value of what economists call the human capital of their home towns. And human capital is crucial to economic growth and productivity.
Manchester is the classic example. Twenty five years ago, there were essentially no private homes at all in the city centre. Now, 80,000 young people live there, and their numbers are growing.
A fundamental problem for most of the regions of the UK is that they are in a monetary union – we all use sterling – with the high productivity regions of London and the South East.
The lower productivity areas suffer a drain on resources because they are unable to compete on efficiency grounds. And because they are in a monetary union, they do not have the option of a currency devaluation to help offset this. So such areas suffer from lower growth of their economies and higher unemployment.
The same thing happens at a more finely grained geographical level. The satellite towns suffer a drain of productive resources to their high productivity cities in the centres of their regions.
The raft of measures to develop skills in the Queen’s speech are very welcome. But skills take time to build up.
The proposed shake up to the planning system can have a much more rapid impact.
The changes are intended to make it more difficult for existing owners to block new development schemes.
Though the government’s purpose seems to be simply to increase home ownership, this can actually be a powerful and effective way of increasing the competitiveness of satellite towns.
As published in City AM Wednesday 12th May 2021
Image: James Johnstone via Flickr
Subsidies continue to flow from the English taxpayer to the devolved nations of the UK.
Boris Johnson is reportedly considering a further massive programme of infrastructure spending to convince the Scots of the benefits of being in the Union.
The so-called Barnett formula, put together in the 1970s, already ensures that Scotland always gets more public expenditure per head than England.
The shaky state of the Scottish public finances, even before Covid, was well known. Member states of the EU must run public sector deficits of no more than 3 per cent of GDP. In 2019, Scotland’s deficit was getting on for three times that amount.
In comparison to Wales, however, the Scots are frugal. According to Welsh government figures, before the pandemic the public sector deficit of Wales was a staggering 19.4 per cent of GDP.
If the UK as a whole had a similar proportion, the fiscal deficit in 2019 would have been £425 billion – larger than it was last year, even after Covid took hold of the nation.
Yet support for Welsh independence appears to be rising strongly.
The seemingly endless subsidies from England have had a decidedly mixed outcome in terms of stemming the nationalist tide. The Barnett formula, developed almost half a century ago, has worked for many years. Despite scares, Labour held on to its Scottish fiefdom. Until 2015 that is, when the SNP took 56 out of the 59 available seats.
The situation is now similar to that of Ethelred the Unready in the classic parody of history, “1066 And All That”.
The real Ethelred did indeed try and prevent the Vikings from invading by paying them off with what was known as the Danegeld. But as the authors state “the Danes had very bad memories and often used to forget that they had been paid the Danegeld and come back for it almost before they had sailed away”.
In the same way, the Scottish and Welsh governments are very happy to accept ever increasing sums from the English. It is just that they take credit for the spending themselves, with gestures such as a four per cent pay rise for NHS staff in Scotland.
In both Wales and Scotland, actions of successive UK governments have made it entirely rational for voters to express support for independence. That way, the English will always cough up more cash.
Rather than attempt to persuade people of the benefits of the Union by spending more and more, it might be better to show the consequences of having them withdrawn.
Wales would be a useful testing ground for this experiment.
The government should announce that subsidies will be withdrawn over a period of, say, three years so that by then the public sector deficit in Wales is the same as in the UK as a whole.
At the same time, the Welsh government should be given new powers to raise taxes if they wanted to sustain the current levels of expenditure.
Paying Danegeld to the Scots and the Welsh simply does not work. Time to concentrate their minds on economic realities.
As published in City AM Wednesday 5th May 2021
The frantic furore over the European Super League killed off the proposal before it had a chance to get off the ground. But this is likely little more than a pause while the football community regroups and puts together a better PR strategy. Some form of consolidation around elite teams is inevitable.
Professional football clubs in Europe are an unusual sort of beast from the perspective of economic theory. Companies act to maximise profit. But that concept is not defined neatly: a pricing policy which exploits customers and increases profits in the short term may still prove disastrous.
But clubs have not traditionally even tried to maximise profits, the primary motivation seems to have been the opposite – maximising costs.
Spending more money means getting better players. The correlation between how much a team spends on its players and its league position is not perfect, but it is very high. It is the principal reason for success.
The new generation of American owners of England’s top clubs bring with them a completely different attitude, one which is completely normal in corporate life.
Success continues to be vital, as in any sphere of business activity. But a key purpose in America is for the club to treat it like any business and generate a profit.
This profound cultural difference does not mean football fans embrace socialism. Fans have few qualms about the stupendous amounts of money handed out to the top players. For example, Marcus Rashford of Manchester United has a contract reportedly of £10 million a year.
American economist Sherwin Rosen, writing before the rise of the internet, explained the curious economic phenomenon behind activities such as watching a sport or going to a film. They all involve what economists call “joint consumption”.
If I am watching United on the television, it does not matter how many other people are viewing at the same time. The game is still available for me to watch. In contrast, if I book a table at a popular restaurant or a particular seat on a flight, no-one else can use it.
Rosen argued that advances in communications technology such as radio and television increased enormously the potential size of markets involving joint consumption.
Being physically present at a live performance, whether opera or sport, is a different experience from watching it live on TV or streamed. True fans value the former, but the producers make money from the latter. It is the physical fans who cut up rough, but ultimately the global audience is far more important.
These fundamental points in economic theory mean that the pressure to form organisations such as the Super League will grow rather than decline.
Poor King Canute is wrongly believed to have tried to order the tide to stop coming in. Attempts to suppress some form of elite soccer competition emerging will eventually prove just as futile.
As published in City AM Wednesday 28th April 2021
Image: Emirates Stadium via Flickr
There are high levels of business optimism. Survey after survey has told us this, from reports from Deloitte on large companies to evidence from the Federation of Small Businesses.
Consumer savings are at an all-time high. People are itching to get out and spend the money they have been forced to accumulate. All in all, a very bright picture. But things might not quite be as they seem at first glance.
Sanjeev Gupta’s problems in the GFG Alliance are putting some 5,000 jobs at risk in the steel industry following the collapse of Greensill Capital. A credit crunch threatens the future of Britain’s second largest oil refinery at Stanlow in Cheshire, owned by Essar Energy.
These could be put down to problems specific to the complex structures and dealings of the conglomerates behind these plants – a mere splash of gloom in the overall rosy picture.
But, a vignette from the opposite end of the scale to these giant producers suggests that not everyone has got the message of optimism.
A small London-based consultancy I am working with is expanding. The recession has indeed been good to some. They placed an advert on their website for an additional office manager. The response was overwhelming. So much so that the ad had to be taken down within 24 hours of it appearing. The existing volume of applicants was already too much to cope with.
This was completely unprecedented. Even in this prosperous part of London, there seems to be either a lot of hidden unemployment or fear of being made redundant in existing jobs.
In the wider labour market, British Gas has created a furore over its plans to change the longstanding contracts of some of its engineers, worsening the terms and conditions. Hundreds of employees who refused to sign up to the new terms have lost their jobs, though most have gone along with the changes.
British Gas is by no means alone. The Trades Union Congress claims that almost one in ten workers have been subjected to fire-and-rehire practices, driving down pay and lengthening working hours.
Official data from the Office for National Statistics indicates that the Covid crisis did indeed weaken the labour market. Compared to just over a year ago, employment levels have fallen by over 1 per cent, though still not quite as much as during the financial crisis. Unemployment has also gone up by 0.9 per cent.
The latest data indicates that the labour market is stabilising. Unemployment, for example, is marginally down in the current quarter compared to the previous one.
But there seems to be real concern in the workforce about the viability of many businesses once Rishi Sunak’s various job preservation schemes come to an end.
In these circumstances, a vacancy in a small business which is growing looks super-attractive. Skilled workers accept a worsening of their terms and conditions which they would otherwise reject out of hand.
Business surveys have proved as unreliable in the past as economic forecasts. There are indeed reasons to be optimistic, but a strong dose of caution is needed.
As published in City AM Wednesday 21st April 2021
The campaign for regular, mass Covid testing has begun in earnest. From last Friday, everyone in England has been eligible to access lateral flow tests for free. The government would like people to test themselves twice a week.
Under the slogan “Hands, Face, Space, Fresh Air”, the public is being urged to use the NHS COVID-19 app when checking into outdoor hospitality, hairdressers and the like.
But just how effective will either of these be?
The NHS app does not have a good track record. True, it was downloaded some 21 million times last year, but the majority of these took place very shortly after its launch and it never obtained real traction.
The number of downloads seems impressive, but it is only around 40 per cent of the adult population. The low proportion has been driven by both social norms and deliberate choices by individuals.
The percentage of the population with the app never quite reached the critical point at which people felt obliged by peer pressure to download it themselves. Definite improvements have been made to it over time and there is little doubt the government is hoping that many more will take it up to facilitate entry into leisure and retail outlets.
However, the government’s own website makes clear that the option of simply leaving your details manually remains valid. Last year, there were a great deal of examples of people taking creative license with their name and contact details.
For many people, there was a positive disincentive to register on the app. You might have been on the other side of the pub or restaurant from an infected person, with very little chance of picking up the virus, but the app could still tell you to self-isolate by virtue of being in the same premises.
This disincentive still remains with the free lateral flow tests. Of course, the tests tell you not whether you merely might have it but that you probably do. But for those who are self-employed or who need to actually turn up to work to get paid, the immediate risk of losing out on a pay-cheque can feel greater than the reward.
The very success of the vaccines means there is much less incentive to have a test done. Even amongst the very elderly, the hospitalisation rate amongst those vaccinated appears, in real-life data not just in small-scale trials, to be essentially zero.
It also seems possible for people to fraudulently enter negative results in the app without ever taking a test. For some desperate to return to normality, the temptation might prove to great. There may be ways of checking up on this, but rather like the speed limit on unrestricted motorways, the chances of being caught seem slim.
The same system this time last year would have been introduced with massive popular relief and approval. Now, it seems unnecessary and costly. Cases, hospitalisations and deaths are so low, and vaccines so effective, the government would do better to follow the data and open up the country quickly.
As published in City AM Wednesday 14th April 2021
Since last summer, Starmers have been the stock to short.
In June, the Leader of the Opposition enjoyed a net approval rating of plus 31 per cent. The latest polls show this has fallen into negative territory.
But as with all stocks, past performance is not necessarily a guide to the future. In terms of medium to long term planning, a Labour government in 2024 cannot be written off.
In 1959 the Tories won with a majority of 100. A year later, polls were still giving them double digit leads. Labour went on to win, albeit narrowly, the 1964 election.
In 1987, Mrs Thatcher won a landslide majority. In early 1989, the Conservatives still held a poll lead of some 10 percentage points.
This collapsed dramatically. By the spring of 1990, Labour led by incredible margins of over 20 per cent. The April 1992 election saw the Conservatives squeak back with a small majority.
In short, polls years out from the next election are a poor guide. But there are some key predictors which can give us a taste for Labour’s performances in general elections.
Whenever the Left has been strong within the party, Labour has lost. A year on, facing down the Corbynistas remains one of the crucial battlegrounds for Starmer. The performance of the government is obviously relevant, but it is less about hitting objective targets and more about the overarching narrative.
For example, during 1992-97 John Major’s government oversaw what was arguably the most successful five year period in post-war economic history. The economy boomed, unemployment fell and at the same time inflation was brought under control for the first time in 20 years. At the beginning of the 1990s it was still 7 per cent. By the middle of the decade it was just 2 per cent.
But the Conservatives never recovered from the damage to their reputation for competence caused by the ejection of sterling from the Exchange Rate Mechanism, the precursor to the Euro, in the autumn of 1992. It was, in fact, a pivotal reason for the economic boom, but it was perceived as a disaster.
Starmer has an opportunity to shape the Covid story to suit him. A task he has tried to knock on the head at every Prime Minister’s Questions with little success so far.
Labour needs to work its own positive narrative which relates to the future and not the past, where Jeremy Corbyn seems to have lived ever since the 1970s. Major Attlee in 1945 pledged the welfare state and the NHS. Harold Wilson in 1964 eulogised the “white heat of the technological revolution”, and Tony Blair had Cool Britannia. The reality may have proved very different to the vision. But it was the vision which captured imaginations.
Starmer has plenty of time to craft one. No one in 1997 or 1964 remembered what Labour had said in 1993 or 1960.
His main task is the dull and dirty one of infighting, to rid Labour of the Corbyn legacy in its staff and candidates. Only then can he start to create the positive message which Labour needs.
As published in City AM Wednesday 7th April 2021
Image: Kier Starmer via Flickr
The strength of the economic recovery as Britain emerges from lockdown is a hotly contested subject among economists. Some believe there will be a massive surge in demand as consumers celebrate their freedom, others argue it will take time to claw back confidence.
Economic forecasts are subject to the same faults as any projections, as we have seen over the pandemic, and will differ for two main reasons. The same model will give different outcomes depending on what assumptions are made about key variables, for example, how long it will take trade patterns with the EU to return to normal.
The other point of discrepancy is more fundamental: assumptions about how the economy actually works. Even with the same assumptions, different models will give different results.
At the moment, those who think inflation is primarily a monetary phenomenon are projecting quite sharp upturns in inflation not just in the UK but across the West as a whole. Other economists place less weight on money as a cause of inflation and so see less of an increase.
Economists have appreciated this for a long time. A substantial amount of research effort has been devoted to comparing different models so that the differences between them can be better understood. The first systematic steps on this were taken as long ago as the 1970s.
In just the same way that economic forecasts differ, the pandemic has revealed that different groups of epidemiological modellers also produce varying forecasts about how many cases of Covid there will be, the rate of hospitalisations, and the number of deaths.
What is missing in the countless scientific models used to justify decision making during the pandemic is transparency over how heavily ministers are relying on any particular model.
For example, at the end of October 2020 Patrick Vallance, the government’s chief scientist, predicted there would be 4,000 deaths a day by the end of the year. At the same time, other modelling groups were projecting daily numbers of between 1,000 and 2,000.
As it happens, they were all too pessimistic. Even though the new virulent Kent variant had taken hold, which the forecasts made in October may well have not taken into account, the highest rate was observed on New Year’s Eve itself, with some 750 deaths.
This is by no means the only example of substantially inaccurate forecasts made by epidemiologists during the pandemic.
But the point here is not the forecasting errors made by epidemiologists. It is that their forecasts differ for exactly the same reasons as economic ones. Different groups both have different models and make different assumptions, such as the effectiveness of vaccines.
Epidemiology is not like Newtonian physics applied to straightforward everyday problems. With the latter, all physicists will give the same answer to a question. The model is agreed upon, and has been subjected to stringent empirical tests of validation. This is not the case with epidemiological models.
There is an important policy implication which follows from this. When politicians say they will “follow the science”, the question is: which science. Which model, and which set of assumptions will be followed?
Economists have already set the example. We need a proper audit of the epidemiological models. Their black boxes need to be opened so that the “science” behind which they have sheltered can be made public.
As published in City AM Wednesday 31th March 2021
Image: Chris Whitty via Flickr
In 1993, economics Nobel Laureate Daniel Kahneman published a paper with the enigmatic title “When More Pain Is Preferred to Less”.
He and his colleagues conducted two experiments with the same group of people. In the first, the participants had to hold their hand in cold water for a specified time.
They had to keep it under cold water for longer in the second experiment. But towards the end the water was gradually warmed up.
Which would they prefer to repeat? The subjects were, rather surprisingly, much more inclined to choose the second, even though the bad part of the experience lasted for longer.
Kahneman rapidly thought up a series of similarly imaginative experiments. He organised interviews of patients who had undergone painful medical procedures. The evidence led him to formulate the “peak-end” rule.
Many of our experiences have well-defined beginnings and ends. We set off on holiday and then come back to normal life. We go into a restaurant, eat our meal and leave.
In such circumstances, Kahneman argued that our memories of them are not driven by how we feel about them on average over their entire duration. Rather, we judge them by a combination of how we felt when the experience was at its most intense, the peak, and right at the end.
This peak-end rule explains the otherwise puzzling current popularity of Boris Johnson and his government. Over 125,000 people have died from Covid, giving the UK one of the highest per capita death rates in the world. Billions of pounds have been wasted on useless test and trace schemes and defective PPE equipment.
But the government has surged ahead in the polls. The Prime Minister’s personal ratings eclipse those of the Leader of the Opposition. The peak experience was in the novel circumstances of the first lockdown which started a year ago. We faced an unknown and dangerous threat.
Policy advisors worried that we would soon get fed up of lockdown. Instead, it created a feeling of national solidarity. As during the Second World War, we were all in this together. Perceived breaches, such as those ascribed to Dominic Cummings, were greeted with huge outrage, regardless of the justification.
The end is of course not quite here yet. Just over half the adult population has been vaccinated. But this is by far the most vulnerable half, and there is a palpable feeling that the end is here. Not just that, but Britain has performed exceptionally well in creating and delivering vaccines.
The government needs to tread carefully and it could still fall victim to boasting and over-promising. There is, however, a handy scapegoat in the form of the grossly incompetent EU. For those wanting a quick end to lockdown, the peak-end rule has a sting in the tail.
The evidence from real-life events when people experience pain from surgery, for example, suggests that they prefer pain to gradually disappear rather than vanish abruptly.
Perhaps Boris is a secret devotee of the scientific work of Kahneman. Either way, he is the beneficiary of its discoveries.
As published in City AM Wednesday 24th March 2021
Image: Boris Johnson via Flickr
In the early days of the pandemic obesity was identified as a key factor behind hospitalisation rates and deaths from Covid. The Prime Minister knew this personally, from his own brush with mortality last April.
This is on top of the already well-established links between obesity and other life-threatening conditions such as Type 2 diabetes, cancer and heart disease.
The government’s strategy to combat obesity, published at the end of July last year, is full of earnest intentions.
Weight management services by the NHS will be expanded, with evidence-based tools and apps being made available. Calorie labels are being added to food and drink in more and more situations.
Yet the sheer scale of the problem is not really grasped. It is not just the numbers. Nearly 30 per cent of all adults are obese and some 33 per cent of school children.
The phenomenon is without precedent in human history.
Indeed, for most of the existence of humanity, most people lived close to starvation levels. Only the very rich could ever get fat.
Historically, and even today in poor countries, there is a strong positive correlation between obesity and income.
In the last three decades, this has been dramatically reversed. It is the poor who are fat.
In America, for example, in 1990, Mississippi had the highest obesity rate of any state, at 15 per cent of the population.
The inhabitants of any such state now would look exceptionally svelte. The lowest obesity rate is in Colorado, at 24 per cent of the population. In no fewer than 12 states, more than 35 per cent of all adults are obese, and all of them are poor by American standards.
Simply providing more information about the dangers of being obese is unlikely to prove very effective.
A fundamental challenge to reducing obesity arises from what economists call hyperbolic discounting. The concept was initially developed by David Laibson of Harvard in the 1990s and has strong empirical support.
The issue is straightforward. You do something you enjoy today, but which has costs in the future. How do you compare future costs to current benefits?
Hyperbolic discounting simply means that you place huge emphasis on the present and the immediate future. You discount any costs beyond this short horizon heavily. It does not mean you are unaware of them. Even if you know, you just do not pay much attention to them.
The same problem arises with climate change policies. Yes, you know the risks. But they are in the future and right now it is cold, so turn up the central heating.
From the decades long campaign against smoking, it seems that promoting the idea that peer groups are giving up can be effective.
Whatever route is chosen, obesity will not be solved by gimmicks such as NHS apps and sugar taxes.
It is a problem without precedent and needs serious scientific study in just the same way that monies have been poured into Covid vaccines.
As published in City AM Wednesday 17th March 2021
Image: Leon Brooks on Pixnio
If done right, Rishi Sunak’s towns fund will reap huge rewards and end decades of top-down strategies
Nurses’ pay has been one of the biggest flash points of last week’s budget. But, the Chancellor also stirred up lesser, but no less important, furores.
One of these was the list of places which are set to receive money from a whole string of new initiatives for the regions.
For example, under the Towns Fund, 45 towns will receive cash. And 40 of these have at least one Conservative MP (for transparency, since last May I have been pro bono Chair of the Rochdale Development Agency. Rochdale borough has one Labour and one Tory MP).
Perhaps the cynics are right, this is politics. Governments are more inclined to reward their own supporters. Labour Prime Minister Harold Wilson, for example, agreed to build the notorious white elephant Humber Bridge simply to secure a Labour victory in a by-election in Hull.
But there is sound reasoning behind the government’s strategy – endowing towns with the resources to build themselves up will reap more rewards than throwing money at the problem, across the board.
The real meat of this blueprint was buried deep in the catalogue of accompanying documents to the budget, rather than the speech of itself.
One of these in the current batch sounds as dull as dishwater. The National Infrastructure Commission has received terms of reference for a study on “Infrastructure, Towns and Regeneration”.
But, they mark an important intellectual shift in policy towards the regions.
Over the decades, since Harold Wilson was Prime Minister in the 1960s, many billions of pounds have been spent under the umbrella of regional policy by both Conservative and Labour governments.
But despite this, the gap between London and the South East and most of the rest of the UK has grown rather than narrowed.
Much of the spending has lacked focus, being top-down and driven by Whitehall. The projects have been huge, but have achieved little.
In more recent decades, an emphasis on cities in particular rather than “the regions” in general has paid dividends.
In the mid-1990s, for example, there were still bomb sites undeveloped since the Second World War within half a mile of the centre of Manchester. It was not possible to buy a house in the city centre because there were virtually none. Now there are 80,000 mainly young professionals living there, and the city has boomed.
The regeneration of cities like Manchester, Leeds and Liverpool provides examples of successful partnerships between the public and private sectors.
It is the satellite towns which surround these cities where problems have become further entrenched. The drain of talent to London has been around for a long time. But the recent success of their nearby cities have put the towns under even more pressure.
The government wants to focus attention now specifically on towns.
Crucially, the emphasis is on projects which are locally-owned. In the jargon of economics, growth in these towns has to be endogenous. It cannot be imposed from above. That particular approach has been tried and it has largely failed.
Towns need to innovate in how to do innovation. Beyond the politics, the government is carrying out an exciting intellectual and practical experiment. The economics ministers deserve plaudits not brickbats.