High and dry January

Afternoon all,

Three big happenings this week. The Chancellor’s speech delivered a few more concrete steps on the road to growth, but here at RF Towers we’re curious to hear more about rebuilding relationships with Europe – or their Euro-vision if you will (¬‿¬).

In news close to my heart, the new fiscal rules were enshrined in law by Parliament. We can probably stop speculating about whether the Chancellor means what she says about meeting them on 26th March – she’d have tweaked them if she didn’t.

And lastly, I chaired my first Resolution Foundation event! It was a cracker of a discussion (even if I say so myself) ranging from markets to monetary policy to (much anticipated) March forecasts. Catch up here in case you couldn’t join us live.

Keep reading for reads ranging from Ripon to robots.

Have a great weekend,

Ruth

Chief Executive
Resolution Foundation

Smug students. In case you, dear TOTC reader, need a reminder – studying economics is good for you. At least in one respect: it makes people less susceptible to the sunk cost fallacy. For the uninitiated: the sunk cost fallacy refers to the mistaken belief that unrecoverable costs should be taken into account when deciding whether to continue with certain actions. The authors of this paper found that on average students become 15 per cent less susceptible to the fallacy after learning about it in class, and that any students who had previously taken another economics class were *even more* resistant. Bit worried others take their education more seriously than me, as I still can’t stop a book/film I’ve started*.

De-centralisation drive. We all know the North is poor(er than the rest of the UK), but can you explain why? Don’t worry, Tom Forth has done it for you. The late arrival of universities, post-war nationalisation and the hollowing-out of local government from the 1980s onward has led to an over-centralisation of power in Westminster (check out the chart which visualises this) and the prioritisation of investment in the South East. As far back as 1831, the South got nearly five MPs for every 100,000 residents – the North got less than three. The fact that the North of England went from being one of the richest areas in the world to one of the poorest regions in Europe over the space of 120 years is a timely reminder that progress is not a given.

Tortured tech. This analysis is eyebrow raising – you don’t often come across people tormenting robots for science. But this frankly unhinged research experiment pressured its participants to “harm” an AI while it pleaded with them to stop. The good news? People showed both a persistent belief that the AI’s pain was fictional, *and* a hesitation to inflict it, even when offered monetary incentives. The bad news? Our robot overlords sure are going to be pissed when they do finally inherit the earth.

Overdraft options. It’s always worth remembering, in times of strained household budgets, that the markups for overdrafts (the most common kind of consumer credit) are three times higher than for credit cards. But we can protect vulnerable consumers. This analysis assesses the effectiveness of “just-in-time” text messages that warn bank customers who are approaching their overdraft. It worked. Customers who opted in to the scheme were able to reduce their overdraft spend by 17-19 per cent. If that were applied worldwide it would imply annual savings ranging between £170 million and £240 million. And while only 8 per cent of customers chose to opt-in to the alerts, only 1-5 per cent opted-out once enrolment became automatic. Another win for nudges…

*Most recently, Matt Haig’s The Life Impossible got more and more weird

Something for the Weekend? | The Bank of England’s Monetary Policy Report

Next Thursday the Bank of England will decide whether to cut interest rates. Here’s what you need to know. At the MPC meeting in December they voted 6-3 to maintain the 4.75 per cent rate they implemented in November, and sounded a note of caution around strong wage growth and persistent services inflation. Check out my colleague James Smith’s deep dive on their line (which they’ve used from September through to December): they’re favouring “a gradual approach to removing monetary policy restraint”. Eagled-eyed monetary policy fans will be watching closely for any new turns of phrase (and facial expressions obvs).

What’s changed? Market expectations for interest rates in the medium term are up. That means average annual mortgage increases of £2,700 for people coming off five-year fixed rates in 2025 – £280 higher than they would’ve been if rates had followed the OBR’s forecast. Wage growth has also defied expectations, with 2024 likely to be the best year for wage growth since 2005. Pulling in the other direction is a welcome (long-awaited) dip in services inflation – a key indicator for the Bank – which fell by 0.6 per cent in November to reach 4.4 per cent, surprising on the downside.

New MPC member Alan Taylor (who voted for a cut in December) had this to say: “we are in the last half mile on inflation, but with the economy weakening, it’s time to get interest rates back toward normal to sustain a soft landing”. Markets expect a rate cut down to 4.5 per cent. Watch this space…

Chart of the week

Congrats for those of you doing dry January – you’ve only a few hours to go… It’s not for me but as COTW shows, it’s catching on as an increasing number of us (you) choose not to drink. Back in the late 1990s, when Oasis were last singing about needing Cigarettes & Alcohol, Britain took heed – buying more than twice as much of the stuff compared to last year. The subsequent fall in alcohol has been starkest among the young (aged 16-34) who are a third less likely to have had a drink in the past week compared to those in the late 90s. Special shout out to the boozing boomers, who are bucking the trend are drinking more. Why should economists care about this? Sin taxes raise lots of revenue, and that tax base has shrunk as Britain has become more abstemious. If alcohol duties had stayed at their late 90s share of GDP, HMRC would collect £3 billion more this year. We’ll need to find new sins to tax (here’s looking at you Teslas).