Narconomics, Nazi pilots and NEETS

Afternoon all,

Turns out there are green shoots in Manchester after all. For those in need of a reminder that politics isn’t all there is to life, more millennials can recognise Pikachu than have heard of all but six sitting MPs (of current party leaders only Starmer and Farage have attained Pikachu level-fame).

More seriously, we shouldn’t let by-elections distract from other important news this week. As the number of NEETs rises (again), we show in Chart of the week why a lack of jobs is definitely an important part of the story. Government should tackle rising youth unemployment now – or on Tuesday, or sometime very soon. This matters more than whether we call a particular day in the political calendar a statement or a forecast.

Our reads range from drug smuggling to WW2 fighter pilots this week, so don’t ever say we don’t keep you entertained.

Have a great weekend – I’ll see you on the other side of the Forecast.

Ruth

Chief Executive
Resolution Foundation

Honey, you got a big storm coming. We featured research last week which asked firms how they *thought* AI would affect productivity and employment, but no one can *know* how it will shake out. This thought-provoking paper considers how fiscal policy should respond if ‘transformational AI’ collapses the labour share of output, hollowing out wages and consumer spending. Gulp. The near-term fix would be a shift to consumption taxes (the US would need 37.5 per cent to keep revenue consistent). Further down the line (if AI systems consume more economic output than humans), governments would need to directly tax AI capital at around 4 per cent. Talk about a brave new world. Even tech stocks aren’t safe from spooky substacks giving investors the jitters. If you’re thirsty for more AI insights, friend of the newsletter Tera Allas has a great write up on the ‘productivity paradox’ – no strong correlation between sectoral AI exposure and productivity growth.

Neighbourhoods are for networking. Here’s another corker from Raj Chetty. Best known for his work on the economics of opportunity, he’s looking at whether you can engineer better neighbourhoods instead of moving families out of bad ones. The paper evaluates the US HOPE VI programme, which spent $17 billion replacing 262 high-poverty housing estates with mixed-income communities. Tracking over a million residents, they find the scheme did nada for adult residents’ incomes, but significantly improved children’s life chances: kids in regenerated housing were 17 per cent more likely to go to college and earned 16 per cent more at age 30, while boys were 20 per cent less likely to be incarcerated. Crucially, the gains resulted from new social connections – it only worked where nearby areas were already doing well. Turns out the amenity we all need is a wealthy neighbour.

Room for improvement. This paper has everything – an epigraph from the Cure, statistical justification for handing out “well done” badges, and… WW2 Luftwaffe pilots? The authors examine how more than 5,000 fighter pilots responded to the Luftwaffe’s complicated system of medals. These gongs operated on a tiered system – you had to earn the lower medals to unlock the ability to qualify for higher ones. The longer the war went on, the more pilots earned the lower-rung medals, the more new medals were created. They did this by adding various adornments, including oak leaves, swords and diamonds. The analysis reveals that pilots flew harder and shot down more enemy aircraft as they got closer to earning a medal. Once they received it, their performance dropped sharply – until a new, more prestigious medal was introduced to chase. Talk about a grim escalator.

Blow boom. NPR have done an interesting write up on the economics of the current cocaine boom that’s happening stateside, as well as closer to home. New analysis traces the record-breaking surge back to two Colombian policy decisions around 2015: the end of US-backed aerial fumigation that sought to kill the drug at the source, and a peace deal with Marxist revolutionaries on the ground that left a power vacuum in coca-growing regions. Enter our old friends supply and demand. By 2022, cultivation was more than three times its 2015 level, causing prices to plummet and drawing in new customers to what economists call an “experience good” – a product which has to be tried to be believed. The result? An estimated 1,500 extra deaths a year from cocaine overdoses in the US, and a 500 per cent (!!!) rise in homicides in Ecuador linked to the rejuvenated drug trade. As far as the economics goes, the best place to fight the war on drugs is probably with weed-killer, on a Colombian hillside.

Something for the weekend | Forecasting a forecast

With the smallest ever gap between an OBR Autumn and Spring forecast, and a promise from the Treasury to deliver boredom, what is still worth looking out for on Tuesday? (further details of our own predictions are available):

With no policy to ponder, the OBR’s forecast will be centre stage. We’ll be most keen to see how it treats three key issues: GDP, unemployment, and migration – all of which could reasonably shift. GDP has disappointed since the last forecast, while unemployment – both in outturn and in the Bank’s forecast – has exceeded expectations. Lower migration could also deliver a fiscal hit. But welcome news on lower debt interest costs mean we don’t expect big changes in the borrowing forecast in the key fiscal rule year of 2029-30.

And even without (many?) new policy announcements, we should still learn some detail of announcements already made. Of these, the biggest will most likely be how the extra SEND money pledged for 2028-29 will impact future spending plans.

So, even for a non-event, it’ll still be worth watching. And yes, we will be feverishly crunching the numbers to help you digest it all, despite the lack of red box and red book.

Chart of the week

We had new data this week on one of the most important economic issues facing Britain – the number of young people not in education, employment or training – known as NEETs among us wonks. The total number grew, continuing its climb towards the devastating one million threshold. So, what’s been driving the rise over the past three years? We’ve broken down the rate into whether people are NEET because they’re looking for work (the dark blue line), caring for family (red line), too unwell to work (green line) or other reasons (light blue line). Of these, being unable to find a job remains the biggest barrier facing NEETs: 5.5 per cent of all 16-24-year-olds are NEET for this reason. Next, at 3.4 per cent, is the much discussed proportion prevented from work or study by ill-health. We can also see that the rise in recent years is driven by both these factors, with rising youth unemployment playing an important role. So, how can we support all young people to build new skills and find fulfilling work? For unemployed young people, eligibility for the Jobs Guarantee should be expanded to support those who have been unemployed for six months or more (not 18 months as planned) and to include 22-24-year-olds. The Government should also pause the convergence of the youth minimum wage with the National Living Wage until youth unemployment begins to fall.