Young German radicals and misleading comparisons with Romania Top of the Charts 23 June 2023 Torsten Bell Afternoon all, I’m on the way to a big cliff. Hopefully to climb up, not jump off, but that was yet another terrible week for the British economy. Starring out at a never ending and choppy Atlantic from the top of jagged Cornish granite seems an appropriate response to the latest dollop of doom. Rishi’s promises that “it’s going to be okay” and “we are going to get through this” aren’t helping my mood, due to the whole it won’t be okay thing. I’m with the PM on the we’ll get through this bit – but people also get through lots of things that aren’t okay. Like syphilis. Moving swiftly on… If you want the Resolution view on what the government can actually do I wrote a short note yesterday, but I appreciate the gap in none of your lives will be more on inflation/rates/mortgages, so this week’s reads steer well clear. I’m confident you can get through them, and doing so will be more than okay. Have a great weekend, Torsten Social solidarity. What motivates people to be nice – or more specifically generous? There’s been an ongoing row about whether levels of inequality affect “pro-social behaviour” – like charitable giving – especially among the rich. A new contribution suggests that rather than focusing on the national (or state in the US) level, we should think about the impact of inequality at the very local, neighbourhood level. The researchers find richer Americans are more likely to give to charity and give more if they live in high inequality areas. The second of these is also true in the UK (where it remains the case that poorer people donate more to charity as a share of their income). Seeing/living high inequality does seem to drive some form of social solidarity. My takeaways? High inequality is bad but, for any given level of inequality, so are gated communities. Confused cohorts. The German election in 2021 was a big deal – deciding the country’s post-Merkel direction. The results reinforced patterns seen across advanced economies of increasing splits between types of areas (urban vs rural) and ages (think Brexit). But an interesting new note brings those two trends together with a clear conclusion: the urban/rural divide in Germany is within the young and doesn’t exist among older voters. Basically young urbanites loved the Greens, who were notably unpopular with the rural young (who were much more likely to favour right-wing populists AfD). So younger cohorts can’t blame the boomers for the culture wars when it’s the youth fighting them. And the best thing about the paper? The charming measure of urbanity: the number of freelance artists in a neighbourhood. Zeitenwende zacrifices (zorry). While we’re on Germany, read this German Council on Foreign Affairs’ briefing on the country’s much discussed ‘Zeitenwende’ (historical turning point away from Russia and towards greater defence spending). There’s enough Zeitenwende hot air talked to solve the European energy crisis (zorry again), which is why this note is useful in pointing out the inevitable tensions hidden beneath lots of wishful thinking. Domestically higher defence spending means tougher fiscal choices (as an aside this is why our government’s 2.5 per cent GDP defence spending policy is an aspiration not a reality). And internationally, while allies welcome Germany pulling more of its weight geopolitically that’s because they seem to think the Zeitenwende will make German foreign/defence policy align with their own. A particularly rude awakening is coming for the US as they try to unite the west against China. Germany doesn’t just have funny/long words – it also has its own interests. Pension problems. Everything’s relative in life – so Brits fed up of being reminded of our world leading inflation rates should focus on something where others come off worse. Paying for state pensions for example, where new work (summary) returns to the ‘more pensioners need pensions but we’ve got fewer workers to tax’ issue. The value added is a framework for thinking about where the challenge may bite first, which involves asking where is it likely that a strategy of raising income taxes to fund rising pension costs will run out of road first. Looking across 12 advanced economies the answer is Italy and France. The UK? We’ve got more breathing space than most on this measure because 1) our income tax levels are lower than most 2) our state pension is basically flat rate (so not as generous to mid/higher earners as most European systems). The paper also touches on potential coping strategies: raising consumption taxes, cutting pension levels or raising the retirement age… on second thoughts maybe reading this isn’t the pick-me up I hoped. Irish illusions. Everyone’s used to some shade being cast on Ireland ludicrously good GDP figures (hello profit shifting). But further doubt on the country’s success was raised by new Eurostat data (headlines in map/chart form) on what different EU countries’ citizens actually get to consume for their income – not as much as you might expect in Ireland. The data shows the Irish consuming as much as Germans in Euros, but having slightly lower living standards than the average Romanian (the implication being because of higher prices). This got a lot of attention, but is probably somewhat misleading so we’ve included it as a word of warning about the trauma of interpreting international comparisons of living standards. The result vs Romania will have surprised many – not least anyone whose recently visited/lived in Ireland. What’s going on? Well a clue comes from a techy blog back in 2020 which explains (at some length) that the method for measuring relative costs places too much weight on rising rents (basically because it assumes owner occupiers face them). Ireland is doing fine actually. Chart of the Week The UK’s acute economic problem is dominating our thinking right now. So, for light relief, COTW brings you… a slow-burn economic problem: the long-term failure of UK firms’ to invest. This really matters – if UK firms invested like their French/German/US competitors (ie 20 per cent more) since 2005, our economy would be 4 per cent bigger and wages up £1,300 a year. We’ve proposed some solutions, but in doing that work the team produced a truly great chart that I had to share. British firms don’t want to invest enough – but even when they do it’s too hard to get that investment to happen due to our planning system farce (most investment is either a building or something that goes inside one). The big picture result is that the UK has seen no increase in the amount of built-up land per person since 1990 – in stark contrast to every other G7 country (and even other relatively densely populated countries like South Korea and the Netherlands). Obviously there are trade-offs, and no-one wants to concrete all of our green and pleasant land, but if we continually obstruct the building of new offices, labs, train lines and the rest don’t be surprised when our economy – and our wages – struggle to grow.