Afternoon all,

First up – strong recommend for Pembrokeshire. Forget the sun I was pre-boasting about – it’s all about the puffins. There’s thousands of the cuties on Skomer.

Staycation advice done, now back to the economics. The big news is Labour backing off the idea of spending £28 billion on green stuff in every year of the next parliament. Politics aside, the substance of this one feels overdone – I never thought they’d get that amount spent from day one of a new government anyway. Even with big subsidies, gigafactories don’t just pop up overnight.

But apart from confirming the blindingly obvious, there are two wider lessons. First, the fiscal arithmetic of the next parliament has gotten a lot harder, whoever governs. Debt interest costs are crowding out priorities, be they tax cuts for Jeremy Hunt or rebuilding public services for Labour. Second, both parties’ binding fiscal rule to have debt falling – which treats investment identically to tax cuts/consumption spending – is doing what it always does: driving cuts to investment plans. Which is a bit more than a shame when low investment by the private and public sectors is THE British problem. Sad.

Enjoy our reads on what different firms do with their tax cuts and why you shouldn’t marry your cousin. Have a great weekend.

Torsten
Chief Executive
Resolution Foundation

Understanding Unions. Higher wages is what people generally say unions get you, but a great new study from Norway gives us much more detail – showing how their impact goes beyond pay, and varies by age. Youthful workers get large union wage premia, which declines and disappears by age 45. But before us middle-aged write the whole thing off, note that as workers age their benefits change rather than end – instead showing up in job security and better progression. Tory pro-union types should note that the paper also finds union membership sees workers less dependent on the social security system. Labour market institutions matter, and for more than just pay.

Snubbing skills. Britain has a productivity problem, but how do we fix it? An interesting blog from Sam Dimitru argues that the role of higher skills is overdone. The simple version of the argument is that we look relatively normal skills-wise (lots of high level qualifications, spend more per-pupil on education than Germany/France, are above the OECD average for Maths, Reading and Science). Instead, the bigger problem is that we don’t build enough stuff – houses, roads, trainlines, labs and factories etc – to allow our workers to be remotely productive enough. Worth your time on the big picture nationally, while (reasonably for a blog) underplaying distributional aspects where skills problems will really matter in some places and for some people. Let’s build for a better Britain.

Igniting innovation. That’s building in general, but what about building something specific? A college. A new paper endorses the popular idea that the location of educational/research institutions matters for driving local innovation, but argues it’s not for the obvious reason. Comparing places which got a new college to those that narrowly missed out, the author finds a big (62 per cent) increase in local patenting that persists (only peaking after 50 years). But this isn’t a simple story about the college itself doing all the innovating (only 12 per cent of patents in the winning areas were college-related). Instead, the author argues a lot of the impact is indirect. How? From the investment supporting greater population growth (areas that got a college saw 65 per cent more population growth vs. the runners up, including from inwards migration) – with other forms of institutional investment having some of the same impacts. It’s an interesting argument, even if it won’t be a popular one.

Cashing in cuts. This is very relevant to Britain – a services superpower currently debating how to change corporate taxes to boost investment (Resolution paper on this topic forthcoming). It’s generally recognised that well-designed corporate tax cuts can encourage firms to invest, even if their role is overstated compared to other drivers (such as certainty and demand). The value added of recent US research is to see how this varies between manufacturing and service firms. Looking across American firms in the second half of 20^th century, it finds the variation is large. Basically manufacturing firms respond to tax cuts by investing more (8 per cent more for a 1 per cent marginal tax rate cut). Service firms? They use the tax cut to boost dividend payouts (by 5 per cent for the same 1 per cent tax cut). Ending Britain’s investment drought it going to require a lot more than corporate tax cuts.

Kissing cousins. I didn’t see this one coming… It turns out that cousins holding back from marrying each other isn’t just a good idea for the famous reason (children of first cousins have double the risk of birth defects). It also boosts economic development. A new paper (free version) looks across US states during the 19^th and early 20^th centuries and finds that bans on such marriages reduced their number (in the late 18^th century almost 7 per cent of marriages in the US were between first cousins) and raised the incomes of those in families where such marriages were common. How? Not because of the genetic benefits, but more directly via making it more likely men moved away from farms to urban locations and into higher paying jobs (the authors find a 4 per cent income gain). So those of you still single should remember that not marrying your cousin is good for the economy, not just your children.

Chart of the Week

As a governor of a small primary school there are two things that keep me awake at night. The trying not to go bust thing obviously, given unfunded pay rises turning up left, right and centre. And then there’s the big and terrible legacy of the pandemic: high pupil absences. COTW shows the scale of the challenge. Absence rates at secondary school are 50 per cent higher post-pandemic. Persistent absence rates have more than doubled. These are staggering rises. Yes, the DfE and Ofsted are offering guidance on the problem. But we’re already far too long into it to be able to tell ourselves real damage hasn’t been done. And you can guess who is being most affected – as this blog from our friends at the Centre for Education Policy and Equalising Opportunities shows, it’s the most deprived pupils, and those with Special Educational Needs. The effects of this disaster will last – the link from absences to educational outcomes and on into the labour market is painfully strong (Resolution research this week highlighted a doubling of the number of young people economically inactive due to ill-health over the past decade, with four-in-five of those affected having only GCSE-level qualifications). This is what disaster looks like, and it deserves far more media and policy attention.