Explaining economics through rivers, mountains and concrete Top of the Charts 11 September 2020 Torsten Bell Afternoon all, Lawbreaking aside, the big news this week is that the rule of six is on, and Christmas is off. The kids are going to riot when someone tells them what’s going on, but the upside is a notably lower turkey-related divorce rate this year. That today’s GDP stats also followed the rule of six – coming in at 6.6 per cent growth in July – is pure coincidence. Don’t get overexcited. The economy is still almost 12 per cent below it’s pre-pandemic norm. What we’ve really learnt this week is that we’ve had the low hanging fruit of being able to switch economic activity on without restarting the spread of the virus. Obviously TOTCs has always been sticking to the rule of six with its highly imaginative five reads, one chart format. This week we bring you news that someone at least has followed our fiscal stimulus via vouchers advice. If any of you happen to live in the economic powerhouse that is Jersey, you’re welcome. Get spending. Have a good weekend, Torsten Chief Executive Resolution Foundation Free Pass. Doing someone else a favour is generally viewed as a good thing – even if it involves rule breaking (in a ‘limited and specific’ way, of course). But a new study suggests harmless acts of kindness do not escape from issues of inequality and disadvantage. The paper used a simple social experiment: testers were given a bus travel card with zero balance and instructed to ask a bus driver if they could have a free ride. The good news was there was lots of generosity around – two thirds of drivers offered free rides. But… bus drivers were twice as likely to give white testers a free ride than black testers. The painful conclusion? These informal interactions saw greater evidence of racial discrimination than we tend to see in formal interactions (think job interviews) that most economic research focuses on. Competitive concrete. Ready-mix concrete doesn’t get the attention it deserves from economists. But it can provide a lot of hard (sorry) evidence about a long-running economic puzzle: what drives the fact that productivity is higher in competitive markets? There are two main explanations: first, that competition makes firms focus on their performance and improve, and second, that in more competitive markets rubbish firms go out of business. A recent paper quantifies the role of these two effects across lots of local markets for ready-mix concrete. It comes down firmly on the “firms improve in competitive markets” rather than the “rubbish firms go bust” side of the argument. I see this as showing the softer side of ruthless capitalism… Fractured land. The whole Brexit thing is nothing new. There’s a rich literature on Europe being politically divided into lots of individual states (in stark contrast to other large areas of the world, such as China). Going back to the whole competitive thing, lots of economic historians think Europe developed economically precisely because of the competition between lots of different political units. And in Guns, Germs, and Steel (seriously, read it if you haven’t) Jared Diamond argues that the cause of those divisions was… geography, reflecting the fracturing of the continent by mountains and forests. But modern academia wants data and models to support arguments, so some fascinating work (free version) lends support to Diamond’s argument by building simulations of the impact of geography over the centuries. They find that it’s not the existence per se of mountains that is the issue (China has lots), but the existence of a core and uninterrupted region of productive agricultural land between the Yangtze and the Yellow River that pre-disposed China towards being a unified state. It’s like a much longer-term version of the argument that the Alps stuffed the Holy Roman Empire and the Channel gave us Brexit. A treasured committee. For a quick summary of the economic impact of covid so far, check out today’s Treasury Committee report. As well as noting who has been hit hardest so far (the young and lowest earners), the Conservative-chaired committee rightly says that as we enter the next stage of this crisis (the bit where unemployment goes up), the Government should provide a ‘targeted extension’ of the Job Retention Scheme and (obviously) not go ahead with big cuts to Universal Credit next April (see our take on the positive impact of the Government’s support schemes here). There’s also a worthy, but important, reminder to the Treasury not to repeat the Summer Statement practice of announcing policies without the accompanying forecasts. Jersey Stores. It’s all kicking off in Jersey (the island, not the ‘Shore’…) with September marking the start of the Government’s ‘Spend Local’ voucher scheme, announced back in July. Every resident receives one of over 100,000 pre-loaded cards with £100 to spend on economy-stimulating activities like high street shopping or zoo visits. It’s a strong commitment to fiscal stimulus and to (rightly) targeting that stimulus spending directly to the ailing high street and leisure industries. The approach is similar to the £500 voucher scheme we’ve recommended. Clearly this approach has to wrestle with the dual (and at times contradictory) aims of stimulating the economy, while controlling the virus. But our view is this broader and less time-limited model does a better job of doing that than ‘Eat Out to Help Out’, which crams everyone into restaurants for a few weeks. Chart of the Week So, the economy bounced back in July. But what matters is how far back we bounce. As Chart of the Week shows, we may have had the easy wins from reopening. Recreational and retail mobility (ie how much Google has tracked us moving around for these activities) has recovered, but in most countries is then plateauing in the region of 10 per cent below pre-pandemic levels. We got there by the end of August – we were doing a lot of eating out to helping out after all. Workplace mobility has stalled and at much lower levels, remaining 40 per cent down on pre-covid times. What does this mean going forward? As Summer turns to Autumn, covid-cases are rising and restrictions are tightening again. That means we’ve used up our budget for the amount of activity we can have without the virus ticking up. It’s time to wake up to the fact that the economic effects of this crisis will be far from short lived. That’s tough news for all of us, either in hitting out employment or restricting our freedoms. For the Chancellor it means reconsidering his plans to swiftly withdraw economic support. The summer bounce back was badly needed, but a tougher autumn lies ahead.
