Zoomshocks, hot economists and the luck of the Irish…

Expectations matter it turns out. If you’d told anyone this time last year the economy would shrink by 10 per cent in 2020 they’d have predicted riots on the streets, but today’s stats confirming 2020 saw the worst annual performance in 300 years have ended up being labelled “better than expected” (because the economy grew in December). If you’d told me a year back I’d only see my parents a handful of times in a year I’d have been depressed, but with the father-in-law vaccinated this morning and both parents booked in for tomorrow I’m moderately perky.

This measuring of outcomes vs low expectations isn’t a great way to judge how things are actually going (objectively the end of 2020 was an economic disaster), but I suspect this is the main coping strategy to get through 2021 so fair enough. So, my recommendations for the weekend? Enjoy the reads below and celebrate the small improvements on a catastrophic situation. You can start by being grateful that no-ones having to go out for very expensive/socially awkward valentine’s night dinners with recently acquired/soon-to-be ex-partners.

Have a great weekend all,

Torsten
Chief Executive
Resolution Foundation

Shocking Zoom. Now I feel a bit cheap including this read. It’s a dive into how the pandemic-induced shift of the middle-classes to homeworking changes our economic geography, noting that the shift of professionals from offices into their homes takes their demand for “locally consumed services” with them (think lunch-time haircuts – when legal – or coffee breaks). Blindingly obviously, this benefits local high streets in residential areas, and decimates those in city centres that provided for commuters. You know all this. But it’s still worth a read for three reasons: some useful quantification of the change (concentrated losses in some places and more diffuse gains), some pretty maps, and a name for this trend that I’m jealous I didn’t come up with: the Zoomshock.

Inflating research. Stateside everyone is rowing about how worried we should, or shouldn’t, be about inflation in the context of Biden’s massive stimulus plan. The inflation focus on economic policy stems from the experience of policy makers struggling to control it during the 1970s. The oil price shocks (1973 & 1979) tend to be seen as the drivers of that inflation, but a new paper notes price rises were getting going before oil prices soared. Instead the authors point the finger of blame at the plumbing of the financial system. The problem? Regulation Q – which capped how much interest you got on your savings. The result is that when the Federal Reserve raised rates in the face of higher inflation, it did not encourage people to save more/spend less (and thereby cool the economy) as intended. Instead, higher inflation ate into those savings, encouraged households to spend more, further stoking inflation. When Regulation Q was abolished in the late 70s, interest rates on savings soared, people saved more and inflation fell. There is an important broader point here that we shouldn’t engage in theoretical discussions of inflation risks without setting out the detailed financial and labour market mechanisms though which any inflation would emerge.

Sibling spillovers. This read combines great research with a great title. O Brother, Where Start Thou uses data from Chile, Croatia, Sweden and the US to show that a large chunk of younger siblings follow their older brothers/sisters to college and university. Younger siblings are between 4 and 17 percentage points more likely to enrol in their older sibling’s college (unless the older one has a rubbish time and drops out). I suppose the good news is this speaks to strong relationships with your siblings, whose views/input we respect. Less positively it helps explain stubbornly huge differences between which groups go to which colleges. Doing what your parents and siblings did isn’t great for equality if the starting point is a very unequal world.

Loaded Ireland? A new paper asks a great question: is Ireland really the most prosperous European country? Ignoring Luxembourg, Ireland has the highest GDP per head in Europe. What’s going on? Foreign multinational corporations booking lots of activity in Dublin wreaks havoc with the GDP calculations. While GDP isn’t a useless measure, despite what some hipster economists say (on which subject Chris Giles had a column last week), it is less use for considering Ireland’s relative prosperity. On consumption levels (which is what income is ultimately for) Ireland looks much more like Italy and New Zealand, than Norway or Switzerland. Which still isn’t bad if you remember all the pieces writing the place off during the financial crisis.

Chart of the Week

When the ONS confirmed this morning that our economy shrank by almost 10 per cent last year it meant it was the largest contraction since the Great Frost of 1709 (when it was even colder than this week). This has been a disaster for British business, as revenues plummeted. But something odd is going on with firms’ bank accounts. Normally revenue falls lead to firms getting into cashflow problems. That’s why in all recent recessions we’ve seen big falls – by around £40 billion on average – in companies’ cash holdings. But the opposite has happened this time – companies have increased their cash holdings by £100bn. What’s going on? The good news is this reflects the success of government policy to support firms – via £59bn of furlough and £100bn of cheap loans. The bad news? Firms aren’t holding all this cash because things are going well or to invest – they’re doing so as insurance in the face of massive uncertainty of what’s to come… And while on average firms are awash with cash, in some sectors the opposite is true. 53 per cent of hospitality firms have fewer than three months’ worth of cash reserves left. That tells you a lot about where the Chancellor should focus support in the upcoming Budget.