Britain’s big search for profits, puffers and prisoners

Afternoon all,

The G20 in India will get all the weekend headlines, but without sounding too parochial we shouldn’t be moving off the story of Birmingham quite so quickly. Way too many people in Westminster sounded surprised the city council’s declared bankruptcy. And there’s been no discussion of the city’s even more important deficits on employment (which is staggeringly low, and not all about its ethnic mix before someone says that) and productivity (see COTW). England, never mind Birmingham, can’t afford its (joint) second city being in this position. It’s too big to fail.

I suppose the optimists among you might say this is progress – Birmingham going bust is better than Britain trying hard to do so this time last year as Liz Truss become Prime Minister… But we’re presumably aiming higher than that.

Have a great weekend escaping from prison the heat.

Torsten

Money moves. There’s a big row in economic Twitter land about whether the profession has become more accurate/technical but less useful, shifting from asking big, important questions with imperfect research methods towards smaller questions suitable for more confident answers. A nice article by Harvard’s David Deming does a good job of making that debate less abstract by focusing on a great paper asking a very big question – why are some places rich and others poor? Or more specifically, do people earn different amounts in different places because of a) different skill levels or b) other factors. The neat idea is to look to see how people’s wages change when they move to a different country. If they don’t budge much at all, salary differences must reflect human capital differences. But if the same person earns a very different salary after moving, income gaps are about far more than a worker’s skill-level (e.g. firms’ ways of working/capital). The paper finds that migrants to the U.S. from poor countries get a wage boost of about 40 percent of the average gap in GDP-per-worker gap vs their home country, leaving 60 percent of the wage gap chalked up to ‘human capital’.

Quiet quitting. I used to stink. Not generally, but after shifts working in pubs as a youth. So for some good health/nose news it’s worth a peak at the latest ONS puffing data. The falls are huge – 12.9 per cent of adults smoked last year – down from 45.6 per cent in 1974. The geographical/educational variation isn’t surprising – 19 per cent of people in Hull and Blackpool still smoke, as do over a quarter without any qualifications. I was slightly surprised how few of the over 65s were at it (8.3 per cent) vs twice as many of the smokiest age group (25 to 34 year olds). Less good news? The youth loves the vaping. The proportion of 16-24 year olds looking ridiculous vaping more than tripled to 6.7 per cent between 2021 and last year.

Risky rates. The big story in monetary policy land is central banks signalling they are either done or almost done on rate rises. The BoE joined the bandwagon this week. This shift partly reflects labour markets cooling and (mainly in the US) some swift inflation falls. But there’s also angsting about quite how long lasting the negative impact of rate rises on the economy can be. An admirably short note from the San Francisco Fed gives you a flavour, looking back at a century or so of fiscal tightening to rubbish the theory that monetary policy has no lasting effects on the real economy. The headline = “a 1 per cent increase in interest rates [leaves]… output…about 5 per cent lower after 12 years than it would otherwise be”. Note the effect is asymmetric i.e. cutting rates doesn’t have the opposite, positive effect on long run GDP… so no pressure central bankers but get this wrong and you can’t undo the damage latter.

Chinese concrete. The actually big global economy story of recent months is the inability of the Chinese economy to get into recovery mode post-Covid. You can bet other G20 leaders will spend the weekend calling on China to pull its finger out stimulus wise. But park the macroeconomics, and read this short and interesting blog on the sheer scale of the Chinese construction boom of recent decades (China’s now has eight of the top ten biggest subway systems in the world and produces half the world’s steel and concrete). The writer notes that countries’ have historically gone through these sharp phases of infrastructure growth and it’s normal for it to slow considerably. Ideally it wouldn’t have slowed quite so much ground to a halt in the UK, given the Victorians did their stuff well over a century ago now…

Pricey profits. As inflation surged, initially most central bankers talked oddly as if only wages could put medium term pressure on prices. More recently people have grown up, recognising pushy capitalists can be as dangerous as pushy workers – with IMF/ECB seeing evidence of that in the US/EU. An engaging/techy BoE blog shows 1) the central bank gets that profits could cause problems but 2) largely thinks they aren’t a big part of the UK story. The headline finding = excess profits have fallen, albiet with huge variation across sectors and in large part because higher rates have hit firms too. There are big mark ups if you’re extracting things from the ground, while profits are taking more of a hit in sectors that are competitive/higher energy intensity. Greedflation is a real thing, but that doesn’t mean it’s always happening.

Chart of the Week

Greater Manchester and the urban area around Birmingham have a population of almost six million. They are England’s twin second cities and all of us need them to succeed. There’s two arguments I hear that badly distract from attempts by local leaders to make that happen – veering between the fatalistic and the complacent. The fatalists say there’s nothing to be done – Birmingham will just stay poor. Others, mesmerised by the sight of a crane in central Birmingham or Manchester, say it’s job done – let’s worry about too much progress leaving other areas behind. COTW shows why both takes are very wrong. Contra the fatalists it shows the centres of these great cities show signs of operating like the centres of highly prosperous cities elsewhere: with knowledge-intensive sectors clustering, and more productive activity than takes place elsewhere in the region. The growth potential is there. But for the crane confused types it spells out the problem: these city centres are just far too small to make their cities as a whole prosperous. Despite central Manchester’s renaissance only one-in-eight of the area’s workforce actually work there. Tackling this requires big changes to land use, transport, housing, and the size of the workforce – detailed in two major upcoming Economy 2030 Inquiry reports (come to Birmingham on the 14^th and Manchester on the 19^th to hear more). When it comes to our twin second cities, let’s have less fatalism/complacency and more of the Gillian Keegan vibe: time to get off our effing arses.