Biden, Brexit and the borrowing blues Top of the Charts 15 January 2021 Torsten Bell Afternoon all, This morning brought news that UK economic output shrank 2.6 per cent in November, leaving it still 8.5 per cent below pre-pandemic levels. Output is almost certainly falling again now, but luckily as GDP goes down vaccinations are swiftly going up and indications are the government is doing a good job of further ramping up the pace. Those vaccinations are the prerequisite of our economic recovery, but wider economic policy responses will be needed. The Chancellor wants to wait until his early March Budget to set out his stall, but the centre left on both sides of the Atlantic has been less coy this week. So our first two reads focus on Joe Biden’s huge proposals unveiled last night, and Shadow Chancellor Anneliese Dodd’s first major speech on economic policy here in the UK. Have a great, and safe, weekend all. Torsten Chief Executive Resolution Foundation Biden goes big. Joe Biden set out his, huge, answer to where next for economic policy last night. $400 billion for vaccinations. $2,000 direct payments for each adult. Extending unemployment insurance. Two things stand out. On the macroeconomics, it’s scale. Totalling $1.9 trillion on top of previous packages, this would put the US in a different league fiscally to other countries in 2021. In fact it would significantly exceed the actual fall in GDP. Second, this is Joe Biden going very Gordon Brown by including a child poverty-fighting package, raising Child Tax Credit to $3k and ensuring lower income households benefit by making it fully refundable (so you get the cash even if you didn’t pay much tax). Taken together it’s estimated this could halve child poverty in 2021. The problems? First, these are proposals and what actually gets passed may look very different. And second, these proposals are huge but temporary. The child poverty-fighting measures should be permanent, and the balance of risks mean I’d favour smaller monthly fiscal support if that meant we could have some continuing beyond next September if that’s what economic developments require, Back in Britain. Labour keeps losing elections so gets to talk not act, so the Shadow Chancellor delivered the Mais Lecture this week. Have a read for the nostalgia of a politician giving a serious policy speech. Most reporting has focused on Anneliese Dodds’s call for a more active role for fiscal policy. She is clearly right, as the (too slow) shift in the economic consensus since 2010 with the past year’s experience has shown. Slightly more controversial is her critique of QE. She rightly notes that QE has widened wealth inequality, although a more balanced approach would mean adding that it also reduced income inequality. The degree to which there is a trade off between QE and fiscal policy is also overdone. That was potentially true in the early 2010s, but not during this crisis where QE is a complement to fiscal policy, not a substitute for it. The newer parts of the speech are really two-fold. First, a rhetorical reinvention of the “responsibility” that Labour Shadow Chancellors tend to promise as “resilience”. And second, and most genuinely new, a very welcome focus on value for money. Very appropriate from an accountant’s daughter. What does Brexit mean? This will probably be a rolling series for TOTCs for the next decade or so, but keeping on top of the changes that Brexit brings to our economy and society is crucial though we’re well past the fatigue point regarding it as a country. Maybe listening will help, so check out some recent podcasts – Trade Talks focuses on, you guessed it, the future of trade, while equally imaginatively Football Weekly brings you the impact of Brexit in the world of football. All Greek to me. To (inadequately) make up for the fact that you’re not heading off to the Mediterranean any time soon, read a new paper digging into the area’s ancient history. The authors ask why did certain cities around the Med (like Istanbul, Malaga and Nice) develop to become important hubs of economic activity? Taking the history side in debates about the roles of geography vs. history in shaping economic outcomes, the research argues that the founding of many of these settlements by invaders (Phoenicians, Greeks and Etruscans) was material to their development. Comparing the cities formed by ancient colonisers to other settlements in similar areas, they conclude they are more densely populated, and economically active today. It’s an interesting take on the role of human choices in shaping modern Europe, not (I think) an argument for colonialism… Expensive debt. Over half of the poorest fifth have told us they are borrowing more during this pandemic to get by. We tend to focus on the cost of that debt in pounds and pence, but research from the Financial Conduct Authority rightly focuses us on its wellbeing price tag. Obviously debt significantly reduces life satisfaction – but to give us a sense of scale the paper converts that into a cash estimate of the impact on wellbeing (i.e. how much you’d have to win in the lottery to net out the debt induced fall in happiness). The paper suggests falling into debt could cost you £5,500 in ‘wellbeing terms’, comparable to the impact of becoming unemployed. Importantly, this doesn’t seem to significantly depend on the total level of debt, but is more pronounced for high cost forms of debt or rising arrears – suggesting debts becoming ‘unmanageable’ is the root of the problem from a wellbeing standpoint. Chart of the Week Alongside all the promises of government cash for households, Joe Biden’s new plan reiterated his commitment to a (not risk free) $15 an hour minimum wage. This is huge news for a country where some rich cities are making progress towards that point, but where the federal rate has hardly budged. Underpinning this move is a big shift in the economic consensus about minimum wages, which Chart of the Week (courtesy of leading minimum wage expert Arin Dube) starkly illustrates. Back in 1978, when Chicago was better known for producing economic ideologies than trailblazing Presidents, nine-in-ten US economists believed that minimum wages destroyed jobs. Fast forward to 2015 and barely one-in-four still hold that view. I suspect the figure is even smaller now. So, why the change in consensus? It’s no small part thanks to economists like Arin ensuring that empirical evidence rather than theory drives our views of minimum wage rises. Low-paid workers deserve a better deal in post-pandemic and decent pay is a good place to start.