Contagious theories – and proof that poverty is not failure

Top of the Charts 'Hidden gems' round-up: July 2020

The latest from Resolution Foundation Chief Executive Torsten Bell’s weekly Observer column, Hidden gems from the world of research and academia. Read more of the latest economics and policy research in our weekly reading email, Top of the Charts.

Proof that poverty is not failure but a trap

Poverty matters and it lasts. It reduces wellbeing today and limits life chances tomorrow. That’s why it’s a disgrace that in the UK the incomes of the poorest families actually fell in the pre-crisis years, leaving them no higher in 2018-19 than in 2001-02. That’s not what progress looks like, but is what big benefit cuts produce.

For developing countries, the big question is why poverty lasts. That’s true between countries, where economic theory tells us incomes should converge but economic reality shows huge, lasting gaps. More than 700 million people lived in extreme poverty in 2015.

But there are also debates about why poverty lasts for individuals in poorer countries when opportunities exist to earn more. Now innovative research on poverty in Bangladesh debunks the idea that individual choice or failure is the explanation. Instead, it is a poverty trap. Brilliantly using data from a programme that gave significant resources to poor families, the authors show there is a tipping point at around $500 (£391) under which people cannot sustainably break into higher-income opportunities. The idea of a poverty trap is far from new, but such clear evidence that big pushes are needed to break out of poverty traps very much is. As the authors write: “It is not their intrinsic characteristics that trap people in poverty but rather their circumstances.”

The lesson? If circumstances are the problem, then those circumstances can and should be changed.

Originally published in The Observer.

What’s the big idea? Theories are contagious

Ideas matter. They shape not just how we think, but what we do. And economics ideas matter more than most, given the central role they play in our politics, especially at times of crisis. I thought the idea that the UK was facing bankruptcy, supposedly like crisis-stricken Greece, played a major role in the speed and scale of austerity after the financial crisis, despite being nonsense. Others said it was pure politics, not ideas, that mattered.

Luckily, more conclusive evidence is available. A fascinating recent study examined the impact of US judges attending a controversial two-week economics course, which was criticised at the time (the final decades of the 20th century) for its bias towards conservative economics. The paper shows that judges who attended the course tended to use more economics-related language in the years that followed, including phrases such as “efficiency” in their judgments. They were also significantly more likely to deliver conservative verdicts in economic cases, ruling against government regulators and delivering harsher criminal sentences. So far, so worrying. And these ideas spread. Other judges “exposed” to the attendees of the course were also more likely to start using similar language.

The rightwing bias in economics is far less evident today, but there are lessons for us. It’s not just viruses that are contagious – economic ideas are also easily spread. Let’s make sure we spread the right ones during this crisis.

Originally published in The Observer.

Egalitarians be warned: wealth begets wealth

Wealth matters in 21st-century Britain, in part because there’s lots of it around. British household wealth was three times GDP in the 1970s. It’s seven times today. Falling interest rates are the main cause, pushing up prices of existing assets. Resolution Foundation research shows the result is bigger pounds and pence gaps between the richest and poorest 10th of households, which increased by £400,000 since the mid-2000s to £1.4m. With these gaps being many times even high incomes, you can’t earn your way to being wealthy – you have to marry wealth or be born with it.

Even ignoring inheritances, evidence shows those with wealthy parents tend to be wealthier. Why? Well there are eugenicists out there who think wealthy families produce successful children because “one is the subject of one’s genes”. But thanks to recent research from Sweden, we can politely put that nonsense to bed.

It comes out firmly on the side of nurture, not nature. The study examines outcomes for adopted children, comparing their wealth with that of both their biological and adoptive parents, and finds that environmental, not biological, factors are crucial. Once we add inheritances back in, the role of ability (inherited or otherwise) is even smaller. As the paper puts it: “Even in egalitarian Sweden, wealth begets wealth.” In less egalitarian Britain, this should equally alarm socialists on the left and meritocrats on the right.

Originally published in The Observer.

We might never get over the fear that the pandemic induced

When things get back to normal” was almost as common a phrase as “shall we Zoom?” in the early days of this pandemic. We’ve since been on a steep learning curve. Not a soul thinks that the thing missing in their life is another video conference, and our expectations have caught up with the reality that we’ll be living with the effects of Covid-19 for years to come.

In the economics sphere, this has seen confident predictions of immediate V-shaped recoveries give way to a focus on the damage that high, lasting unemployment might do. Ongoing social distancing will mean that many firms will be smaller or not viable until a vaccine turns up.

But the economic impact of this crisis will last even once a vaccine prevents Covid-19 doing fresh damage. New research argues that this is because, while no one started 2020 expecting a global pandemic, we’ll all now think another one is around the corner, just as everyone kept predicting another banking crisis after the financial crash.

The good news is that it will make us better prepared – countries affected by Sars in the 2000s have generally done better at suppressing this virus. But a more cautious world is not a good one economically. Researchers suggest that it will make us overestimate risks, leading to lower investment and a long-run economic hit of many times the immediate damage we’re living through. Covid-19, and its effects, are here to stay.

Originally published in The Observer.