Reforming penalties, rising prices and levelling up post-Black Death Britain

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Afternoon all,

Summer appears to be actually here. But if it thinks I’m forgiving it for the last two months it’s got another thing coming. In fact, I’m also slightly concerned that the blue skies are part of some complicated conspiracy to push us all over the edge, as one-by-one we’re pinged and forced to isolate from other people AND the sun’s rays.

At least for those of you unlucky enough to already be locked in your homes, TOTC is here to provide temporary relief from Netflix. We bring news of why you should relax inflation-wise, worry about social care and turn your disappointment about England’s exit into campaigning zeal for penalty shoot-out reform.

Have a great, hot weekend.

Chief Executive
Resolution Foundation

A fix… is what England’s social care system is in, and what it needs. This morning’s Times reports agreement on a tax raising plan to fund that fix. A cap on lifetime care costs is the offer to voters in exchange for this tax rise. Germany was previously considering just such a system, but has recently instead chosen to go for a monthly cap on care costs that becomes more generous the longer you need care for (but never caps the total amount someone might have to pay). For the pros/cons of the two approaches read this excellent blog from our friends at the Nuffield Trust. Personally I’m all for a hard cap on care costs, but the bigger priority is getting more resources into a system that is leaving lots of people without care in the first place. Note too the line about care home costs having risen by 40 per cent in Germany since 2018, as reforms have tried to raise standards. So let’s not kid ourselves that a half decent care system comes cheap.

Problematic penalties. This may be too soon. But TOTCs doesn’t shy away from controversy. If you’re an England fan you’ll be penalty traumatised. But rather than crying, maybe get campaigning for reform! This paper offers a rigorous look at whether penalties are fair – specifically whether going first is an advantage. Examining 1,463 different shoot-outs the authors find that the team that goes first has a 22 per cent higher probability of winning. Apparently this bias would disappear if we shift from an alternating ABAB format to an ABBA order. This has been trialled by IFAB (who set football’s ‘laws’) but was deemed too complicated for spectators. So, get campaigning against racism, and for penalties reform (in that order).

Anxiety inflation. Lots of inflation chat around this week. US prices rose by the fastest rate in well over a decade (5.4 per cent) in June, and we managed an above expectations 2.5 per cent. Even some generally dovish members of the MPC are a bit anxious (see Michael Saunders’ speech yesterday). While things are uncertain, we’re a bit more relaxed.  Yes, inflation could head higher towards 4 per cent later this year but this should be temporary. But don’t take our word for it, read some inflation history courtesy of White House economists. They identify the five years post-WW2 as the high inflation period most resembling ours (ie supply chain disruption + pent-up demand) and argue that inflation can fall away very rapidly once supply chains and demand normalise. And even if they are wrong about developments in the US I’d dial down the comparisons between ourselves and the states: we’ve had a deeper crisis and are more swiftly removing fiscal support.

Saying something. Obviously we’re not including the PM’s levelling up speech as a read because… there was nothing in it. But to remind yourself it’s possible to have substantive things to say about our economic geography, read Anton Howes latest newsletter focused on why English agriculture became much more productive after the post-Black Death population recovery of the 16th and 17th centuries. It’s full of interesting titbits – cockneys was apparently “originally a word for misshapen, useless eggs, so ugly they must have been laid by a rooster”. But the big picture argument is that, rather than improvements in agricultural methods driving up crop yields, it was the growth of London (on the back of international trade and the wool industry) that led to a greater specialisation of agriculture across the rest of England (Middlesex providing pasture for horses, Suffolk poultry, Kent apples etc). Fascinating history, with a broader lesson for economists: don’t always think about productivity gains as always being driven by technological progress. What consumers want to buy is a big deal too.

Diffusing disruption. Taking back everything I’ve just said… technology and the disruption it brings are clearly crucial to the path of human progress. Understanding how innovations diffuse across our economies is far from straightforward, but a new paper attempts to do just this, analysing the text of millions of patents, company reports,  and job postings to study how important new inventions have spread across the US. Lots of interesting findings, but one that stands out for me is how long regions where disruptive technologies first appear benefit in terms of high-skill jobs: they estimate it takes almost 40 years for job postings related to the technology to fully disperse. The fact that high-paying jobs in particular don’t remotely swiftly “trickle out” geographically is another reason to care about how our innovation systems (much of them state funded) contribute to geographic inequalities.

Chart of the Week

Savings are up and house prices are booming. This makes for a very unusual crisis: GDP down, household wealth up (by around £900bn). Our new wealth audit provides the first assessment of this pandemic wealth surge, showing that it’s households in the middle and at the top who have benefitted, continuing the pre-crisis trend of widening wealth gaps. Some argue that because households are flush with savings they’re desperate to spend, it’s right to be cut back support via things like Universal Credit. But as COTW shows, the people with the wealth are absolutely not the same people hit by the UC cut.

The highest-income households have been, overwhelmingly, the beneficiaries of the wealth rise – with average wealth gains of £50,000+. Poorer households meanwhile largely missed out on the wealth surge but are about to have their incomes clobbered. Average wealth gains across the poorest 10 per cent of the population are – at £173 per household  – below the average £810 income loss per household from the £20/week reduction in Universal Credit taking place at the end of September. And remember we’re slightly comparing apples and pears here for a number of reasons, including the fact that the income loss is for each and every year to come for households that remain entitled to Universal Credit… It’s madness not to be taking into account who the winners and losers are from this crisis as we set policy coming out of it. So, while ‘levelling up’ can apparently mean anything to anyone, the Government’s problem is that the ‘levelling down’ policy of cutting Universal Credit is going to crystal clear to the six million households having their support cut at the end of October. Time to change course.