Empty offices and living standards struggles on Mars

Top of the Charts

Afternoon all,

Sorry to miss you all last week, but I’d be lying if I didn’t admit that a week checked out from British economics/politics was very pleasant indeed. Flying back from Greece on Monday was suspiciously smooth so I’d largely discounted all the headlines about British transport/political chaos. But we landed just as four-in-ten Conservative MPs noted they didn’t have confidence in their own PM and now the OECD’s decided we’re a stagnation nation. The holiday zen feeling hasn’t lasted long.

Yesterday the PM had a go at promising more people they can own their own home, to help him stay in his Downing Street one. I’m broadly in favour of the policies floated – although the lack of detail on the one that will make a big difference (mortgage market reform) and the ignored policy design challenges on benefit changes make it painfully clear how rushed the whole thing was.

Why does this matter? Because the Thatcher lesson is that voters’ gratitude is for the speech actually getting a home part of this process. As COTW shows, that’ll involve turning around some big trends.

Have a great weekend,

Chief Executive
Resolution Foundation

Miserable Mars. Paul Krugman’s got a great blog this week pondering the economics of Elon ‘cold feet’ Musk’s’ plan to get a million settlers onto Mars asap. The big problem (after getting them there/breathing etc)? They’ll be really poor, because the whole globalisation/ specialisation/ economies of scale thing that’s raised our living standards requires shed loads of people to do that specialising and then trade with each other. A million people on Mars is like putting a huge wall around Somerset (population just short of a million) and seeing how they get on trying and failing to produce everything the residents currently consume (Taunton isn’t going to be churning out iPhones at their current prices, even if the raw materials were suddenly found under Glastonbury Tor). As Krugman points out, this is why the smaller a country, the more it needs international trade to sustain higher living standards.

Industrial illusions. It’s fashionable in some circles to say levelling up is impossible, with the north/south divide a deeply entrenched feature of Britain. But that nihilism oversimplifies the history. Regional gaps closed for decades post-WW2, and an interesting new paper (free version) examining the mechanisation of the textile industry in the 18th Century reminds us that the North led the way. There’s a long-held view that the UK’s Industrial Revolution was spurred by the incentive to substitute a more expensive source of power (workers) with a cheaper source (coal) via mechanisation, but this work pours cold water over this theory: rather than high wage areas industrialising first it was low wage ones in the north that did so. Why? Because being bad at agriculture not only made them low wage but meant they had already begun to specialise in mechanical work – and the availability of artisans with those skills was the key to progress. The result? The North industrialised while the South actually deindustrialised and saw wages fall. Levelling up (and down) in action.

Massive minorities. I enjoyed Noah Carl’s pithy examination of a news story this week claiming that the public consistently over-estimate the size of minority groups because… they’ve been brainwashed by woke diversity promotion into thinking that everyone’s gay, from an ethnic minority, or (scariest of all) a vegetarian. He’s not taking issue with the fact that people overestimate the size of minority groups – but with the nonsense about why they do so (noting that those on the left often make the same mistake, e.g. saying high-volume migrant bashing is why the public hugely overestimate migrant numbers). Instead, the issue is that when asked about percentages we seem hardwired to guess closer to 50 per cent than something actually is “regardless of what is being estimated”. So, if the true proportion of something is over (under) 50 per cent we think it’s less (more) prevalent that it actually is. We haven’t been brainwashed by the woke police, we just can’t think straight.

Giant gaps Educational and employment gaps between different ethnic groups have narrowed in the UK, but our own research shows wealth gaps are large and persistent. A new paper (free) on the US takes a much longer view. Equipped with 160 years of data, the authors identify three phases in the history of wealth gaps between Black and White Americans: rapid convergence immediately after the civil war; slowing but continued convergence from 1910s onwards, and stagnation since the 1980s at very high levels (White Americans have six times the wealth of Black Americans). The lack of progress relates to income convergence grinding to a halt and Black households’ wealth being relatively housing heavy, while White households hold more stocks, which have increased in value by five times more than housing since the 1950s. The starting point for a country marked by slavery is of course huge wealth gaps, but at current rates of progress it’ll be many centuries before anything like wealth equality is reached.

WFH woes. Remote work is definitely good for the wellbeing of those with small kids or who don’t like smelling someone else’s armpit soon after waking up. It’s (a lot) less good news for those owning offices concludes new work that tries to quantify the obvious point that fewer office workers means less valuable offices. The authors conclude the lasting effect is to knock 28 per cent off office values which is… huge (and I’d take it with a pinch of salt – their data on leases only ran to December 2021). The damage is done from more vacant properties rather than rents falling – and all happens among lower quality offices because firms want good offices to tempt us back. So, hope your pension fund isn’t big on commercial property.

Chart of the Week

Operation Big Dog Reset III, or whatever yesterday’s speech was called inside No10, had the benefit of being aimed at a big public policy challenge – the huge decline in youth home ownership, as Chart of the Week shows. Sometimes numpties (usually homeowning ones) defend this trend by saying it reflects the youth’s changing preferences towards footloose and fancy-free renting – but renters are as keen as ever to own.  The chart also shows that there’s some case for the PM’s focus on poorer households’ ownership given where ownership falls are greatest. Back in the 90s, there was barely any difference between the home ownership rates of young (well-paid) managers and (lower-paid) sales workers. Today, the gap’s ballooned to 30 percentage points. But the scale of that decline is also a warning about how much difference yesterday’s announcements about being able to use housing benefit to pay a mortgage can make. For those able to take it up it could make a typical new owner on Universal Credit up to £6,300 a year better off (assuming housing costs of £150/week), but our recent work has shown the biggest barrier to them being able to do so is finding a deposit. That’s why ultimately the biggest part of yesterday’s speech is the promised review of the mortgage market – who knows what it’ll deliver.