Curtains for the Chancellor?

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Afternoon all,

British economic policy making is in one of its chaos phases. I’d like these to come a bit less often.

‘I wouldn’t start from here’ isn’t generally the most helpful response to a request for advice. But don’t discount it in all circumstances. There are times when it’s more useful than others i.e. when not starting from here is still an option. Luckily for the UK this is (at least partially) one of those times.

The intense market focus on UK fiscal policy, and the political reality of a Conservative Party/public that won’t vote for another phase of large spending cuts, means that there was simply no credible route for the PM and Chancellor that involved pressing ahead with their tax cuts. While still theoretically possible, this approach would be political and economic suicide. Fudging the fiscal arithmetic and pencilling in spending cuts for the late 2020s just won’t work – you can’t be a confidence trickster once everyone’s lost confidence in you. That’s why today’s mini-Budget major U-turn was inevitable, and why it’s curtains for the Chancellor (see COTW). Obviously our main thoughts are with the Chinese tourists who had already booked their visit to Bicester Village

Those of you adopting the increasingly popular position of hating being told technocratic policy truths shouldn’t give up on TOTCs just yet – this week we’ve got some astrology for you and a lesson in how difficult collecting economic data (that technocracy relies) upon is.

Have a good weekend, whatever your star sign.

Chief Executive
Resolution Foundation

Assessing astrology. People believe all kinds of nonsense – Elvis lives, man never went to the moon, and large unfunded tax cuts will boost growth. Then there’s astrology. Maybe there’s something in it, according to the headline of a new study assessing whether the astrological idea that the Mercury retrograde (when Mercury – associated with the god of finance/commerce – appears to be moving backwards in the sky for a few weeks, 3 or 4 times a year) is bad news financially. After studying stock markets in 48 countries, the authors show returns are 3 per cent lower during these periods. Now maybe you believe the planets are directly affecting the stock market, but the researchers argue it’s humans who are to blame, acting on our beliefs however barking they are: countries with more astrology belief go on see the biggest fall in stock market returns as investors stay away. So astrology goes on the list of nonsense beliefs that we can’t totally ignore because they have real world effects.

French firms. The US totally dominates economic analysis – including on inequality trends – so we always like to share work that goes wider. This week it’s France, with a new report examining falling wage inequality there between 2002-2016, which the authors say is important as it bucks the advanced economy trend for rising inequality. It shows that while France has shared the US trend for higher-paid workers to be increasingly concentrated amongst higher-paying firms (pushing up wage inequality), this has been outweighed by falling wage inequality within firms (driven in large part by the minimum wage requiring faster pay rises at the bottom). The authors are right that this is very different to the US situation, but note that actually this is not that far off the UK’s story. Wage inequality between individual workers has been flat or falling for the past two decades here – see figure 17 of our latest Living Standards Audit.

Revising R&D. Britain just doesn’t do enough R&D has been the accepted wisdom in economic policy circles forever. It’s driven big policy choices: the Government to set a target in 2017 for the UK to invest 2.4 per cent of GDP in R&D and a major ramping up of public funded R&D since then. The only problem? It turns out we may have just been missing out lots of R&D taking place in our official measures. New work by the ONS examining claims for R&D tax credits implies R&D may actually be a massive 60 per cent higher than previously thought = we’re already hitting the 2.4 per cent target. For a good summary of what’s going on and what it might mean read this blog from Josh Martin. Does this mean we shouldn’t bother about trying to encourage more R&D? Nope because we’ve still got stagnant productivity that R&D must be part of the answer to.

EU (self-)Evaluating. For a change from pure economics, it’s worth a read of a very unusually honest/interesting speech from the EU’s High Representative, Josep Borrell, to EU ambassadors. It’s big picture and admirably frank. The message? The EU was wrong to think it could build its prosperity on cheap gas from Russia and cheap goods from (and exports to) China – and wrong to outsource its security to an America that could elect another madman sometime soon. We need more of this kind of pondering in politics: it demonstrates well that what you gain with a bit of honesty is the ability to actually think through the strategic challenges we face.

Prized professors. It’s Nobel Prize week for economists (shhh those pedants amongst you who love noting it’s not actually a Nobel Prize). This year’s winners are Ben Bernanke, Douglas Diamond, and Philip (half man-half lion) Dybvig). For a summary of their work you can read the official summary from those awarding the prize – or this blog from Noah Smith that takes the understated position that Bernanke/Diamond/Dybvig saved the world… these ‘avengers’ developed a model of banking crises which explains the basic reason why banks tend to collapse, which turned out to be quite helpful ahead of a global banking crisis (when Bernanke was obviously Fed chair).

Chart of the Week

So… a lot’s happened in the last few weeks. My eyes are only just open after day after day of economic madness. But policy-wise – with big U-turns on tax cuts about to be announced – we’re basically back to square one plus a huge battering to Britain’s economic reputation. And, according to journalists, minus a Chancellor. This week’s chart (updating this Guardian effort) puts Kwasi Kwarteng’s tumultuous 38-day tenure in office in historic perspective. The silver lining for him is he’s been saved by the 10 days of national mourning from not being the shortest-serving Chancellor since the start of the 20th century – that honour goes to Ian ’30 days’ MacLeod in 1974. But what the chart also shows is the state of British politics – this parliament has managed to squeeze in three of the four shortest-serving Chancellors. It’s almost like this has been a phase of political and economic chaos.