Catching up with the English, and overtaking the Yanks

Top of the Charts

Afternoon all,

Today is a good day, because today is a sweat-free day. And it’s been a good week if you’re Rishi Sunak or Liz Truss – or at least it probably feels like it has, given that Tory MPs have given them the golden tickets into the run-off to be our next Prime Minister. But they shouldn’t be smiling, because this week’s inflation data shows that whoever wins is in for a baptism of fire this autumn.

Inflation is running at 9.4 per cent – a forty year high. We all know surging energy bills are central to this. The danger, however, is that we wrongly think the pain has already happened despite another massive energy price cap rise coming in October (to over £3,200) and the winter being when we start actually using this extortionately expensive energy. Plus, last month saw food price rises (9.8 per cent) moving ahead of the average inflation rate – which is one of the very few kinds of price rises that disproportionately hit lower-income households even harder than energy bills. You know whose business will be booming come the Autumn? Food banks.

This, rather than basking in the warm glow of announcing large tax cuts, is what awaits our new PM. If that’s the honeymoon, most people would call off the wedding. Given that neither of them is likely to want to do that, how about we at least start being a bit clearer about the difficult times ahead?

Have a good weekend all.

Chief Executive
Resolution Foundation

Horrible Housing. Last week we focused on the UK’s relative decline compared to many similar countries, so to rebuild our national pride I want to be clear that there are lots of things other countries are as rubbish at as us. Housing taxation is one, as a new OECD report spells out. Looking across countries it concludes the big problems are: uncapped tax free capital gains on primary residences (totally uncapped in the UK despite HUGE capital gains); too much reliance on transaction taxes which suppress mobility (we’re definitely doing that in the south of England); and, countries levying taxes on out-of-date home values. It’s obviously nuts we’re using 1991 estimates for property values (credit to the Welsh government for currently trying to fix this), but loony Luxemburg is here to help us feel better about ourselves because they’re still using figures from… 1941!

Boosting business. Calls for a lower corporate tax rate are centre stage in the Tory Leadership race, so check out a ludicrously timely new review of what 42 studies find by way of an impact of corporate taxes on growth. In true academic style those studies find that corporate tax cuts can either increase, reduce, or fail to affect growth. This paper finds evidence of a publication bias towards studies finding growth-enhancing effects, and once that is corrected for conclude there may be… no effect on growth. This doesn’t mean we can’t have a better corporate tax regime, including lower taxes on investment. But it is a reminder that in trying to turn around Britain’s disastrously low growth, only a fool would put all their eggs into the corporate tax slashing basket.

Irish Integration. Our immigration debates are ludicrously focused on short term questions about the number of arrivals, largely ignoring the huge questions about what comes next. So I enjoyed the longer view provided by recent research on the flow of Irish immigrants to the UK (the scale of emigration means the Irish population remains below its pre-Great Famine of the 1840s level even today) and how their families prospered over generations through to 2018. Using the (imperfect) approach of focusing on Irish surnames, it provides some good news: Irish infant mortality converged with English rates from the 1950s (it’s higher rate for the prior century partly reflected Irish immigrants concentrating in big, unhealthy, cities). But, while other studies have shown progress in terms of jobs/incomes, this one highlights that wealth gaps remained big right up to 2018: households with an Irish background remain 30-50 per cent poorer than English households.

Chinese catch-up. What does the overtaking of Britain by the United States have to teach us about American worries about being eclipsed by China today? It’s a great question asked/partially answered by a new article this week. As the US overtook us in the late 19th Century, contemporaries put it down to complacency at home and a preference to invest overseas. But the author argues it was inevitable given technological developments: America shot ahead because it was much better suited to an era of mass production, with large domestic production of key raw inputs (e.g. oil) and a bigger home market. The author concludes this means Americans who think they could have done much about China catching up with them are exaggerating their own agency. Well we all do that.

Partisan Politics. People are idiots much more optimistic about the economy when their party is in power, and this doesn’t just impact their mood concludes new US research (free version) on how political partisanship effects entrepreneurship. Using a sample of 40 million party-identified Americans between 2005 and 2017, the old news is Republicans being 36 per cent more likely to become entrepreneurs than Democrats. The interesting results are that relative entrepreneurship rates shift depending on which party is in power: the difference in firm registrations reduces during Democrat administrations (a fall of 7.4 per cent after Obama’s victory) and expands during the Republican administration (10.8 per cent rise with Trump). So, having Trump in the White House is good for entrepreneurship in Republican areas, even if it’s bad for just about everything and everyone else. Apart from Putin..


Chart of the Week

A conundrum. Everyone says wealth inequality is rising, but it hasn’t been for a very long time. In fact, wealth inequality fell over the course of the 20th century (goodbye aristocrats, hello homeownership), and has been broadly flat since the mid-80s at levels that are middle-of-the-road internationally, as the left-hand side of COTW shows. Why then does wealth inequality feel like it’s become a bigger problem in recent decades? Because the amount of total household wealth has soared, even as our incomes have stagnated. The result is that, despite no change in wealth inequality, wealth gaps in terms of pounds and pence have surged: in 2006, the average family in the top 10 per cent had wealth of close to £900,000 more per adult than a family in the middle but by 2020 that gap was over £1.2 million. When we think about wealth differences in these terms we are second only to the US (see right-hand-side of COTW). These wealth gaps matter. Their sheer size mean it’s almost impossible to purely earn your way towards being wealthy – you need to inherit or marry into it. You know who wouldn’t have wanted a Britain like that? Margaret Thatcher, who was about a lot more than tax cuts.

Chart showing the share of wealth held by top 10 per cent and wealth gap between top 10 per cent and bottom 40 per cent, by country, 2016-2019