Does Technology improve productivity?

No.

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Productivity isn’t everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”  Paul Krugman

This is why I think that Paul Krugman is wrong, despite his Nobel prize.  People value human contact and personalisation more than economists do:

Productivity is rubbish. Inefficiency rules. Why Craft Gin is better than United Airlines.

 

Talking ‘Bout My Immigration: Baby Boomers and Immigrants

Bloody immigrants eh? Coming over here, driving down wages, destroying terms and conditions of employment.  

Over the last few days British politicians have debated Brexit in the House of Commons, while their parties respective spin Doctors have filled the airwaves and provided content to partisan websites with endless drivel.

The arguments about Brexit are tangled up with a debate about immigration.  No-one wants to make the case against immigration on the straight forward grounds that they don’t like foreigners and so the discussion is always put in terms of:

  • There are lots of people in this country who are disadvantaged by immigration because it makes it harder for them to find jobs, drives down wages, and damages working conditions
  • The only way to reverse these trends are through ending free movement of people, tightly controlling immigration at lower skills levels, and therefore we must leave the single market/EU/EEA [tick you pick which one]

As you might have guessed by the title I am a bit sceptical about claims that immigration has been the cause of recent low levels of wage increases.   That doesn’t mean that no-one is negatively impacted by it, just that immigration has become a catch all explanation for all kinds of things which have nothing to do with it

My scepticism about the link between immigration and wages goes back to the 1992 General Election.  I was in Quarrington with some local Labour Councillors talking to prospective voters.  One of the electorate expressed the view that if Labour got in Quarrington would be flooded with immigrants, driving down wages and marrying all of the most attractive women.  The Local Councillor expressed severe scepticism explaining that from the Souks of Kandahar to the beaches of Jamaica there was absolutely no-one who wanted to come and live in Quarrington, and maybe a bit more competition for women might encourage some of the men to smarten up a bit, trying shaving once in a while.   The argument got more and more heated and sweary until the Local Councillor pointed out that the angry voter was themselves an immigrant having moved to Quarrington from Coxhoe.

Labour lost the 1992 General Election and Quarrington was saved from a mass influx of foreigners.  

I tell this story because both the voter and the Councillor believed themselves to be good solid, Labour chaps, but with completely divergent views on immigration.   The voter was expressing a long held belief that immigration drives down wages, destroys working conditions, and benefits the bosses not the workers.  This view has existed as long as there has been mass immigration into the UK.  Immigrant workers are shipped into the UK by wicked bosses to undercut good honest Brits. 

This hasn’t changed much.  This is Corbyn on the Marr show last year with some hard Brexit anti-immigrant rhetoric. (from 2 mins in)

https://www.youtube.com/watch?v=K7vVxHrJ6uI

I could share with you some right wing politicians talking rubbish about immigration, but why would I do the Daily Mail’s job for it?

I suspect that blaming immigrants for slow wage growth or poor terms and conditions is nonsense.  

To illustrate why it is nonsense let’s start by looking at different parts of the labour market.  If we start at the very top of the labour market we find high levels of labour mobility, high levels of immigration and very high wages.  The influx of foreign workers into Law Firms, City Banks/Financial Institutions and Premier League Football clubs hasn’t reduced wages at all, in fact the exact opposite has occurred. 

Football is a good example of this – over the last few decade the rules on clubs bringing in foreign players have got looser and looser, and more and more foreign players have come to the UK.  Sometimes Premier League clubs field teams without any British players at all, which I always find a bit sad although I am not sure why.   

This hasn’t led to a reduction in wages – far from it – wages for domestic and foreign players have rocketed.  Either supply and demand isn’t as big a factor in setting wages as simple Labour market models would suggest, or immigration is actively driving up wages.   At clubs like Sunderland it’s not hard to find examples of immigration led wage increases.  Sunderland has to offer higher wages to immigrant players to persuade them to move to the North East, in turn talented young UK players like Jordan Pickford demand parity. 

If immigrants really are driving down wages as a simplistic supply and demand labour market model would suggest then how on earth is Jack Rodwell earning £65,000 a week?

If we then look at the bottom end of the Labour Market there is no evidence at all of immigration affecting wages because market forces don’t determine wages – the Government does through the National Minimum Wage.   Changes in supply of workers at the lowest pay rates have no impact at all on people on low wages.   Different parts of the UK have different local labour markets – in the North East the difference between a free market clearing rate for unskilled labour and the NMW is very big.   If you take the number of jobs which pay less than NMW either legally or illegally the actual market rate is a long way below the rate the Government sets.    This affect of distorting local Labour Markets isn’t an accident- it is the very essence of what the NMW is meant to do. 

It is of course worth noting that there are in increasing number of people who are being moved into forced self employment, which removes them from the NMW rates, and about which we know very little.   If there are negative impacts from immigration it is in this group, the least studied, and the hardest to get data about, where we should be looking.

Industries with high levels of Immigrant Employment

For the rest of us  – those who aren’t on NMW and aren’t playing for Chelsea  – a great many of us aren’t impacted by supply and demand in the labour market either. 

The largest employer of immigrants in the UK is the NHS, with other public sector employers not far behind.  In the public sector wage rates are set nationally, and don’t change based on shifts in supply and demand.  Increasingly most large private sector organisations are the same.  Our business culture across public and private sector is bossy centralised HR Departments setting national pay scales and employment contracts which don’t vary in response to changes in supply and demand.    

It’s worth remembering that centralised standardised pay and conditions was a key demand of Trades Unions over the years, who aren’t the first people who should have been a bit more careful what they wished for.

This doesn’t mean that there are no industries where supply and demand impact on wage rates, just that it is a much narrower range of employment types than a crude model of supply and demand would indicate.   My peer group might be a misleading as it contains a high proportion of middle class college graduates, but hardly anyone I know has a job in which labour supply and demand have a big impact on their wages. 

As well as Healthcare there are 2 other sectors with very high levels of immigrant employment: Food and Drink/Hospitality and Food processing/Agriculture.

Roughly a quarter of all jobs in food and drink and hospitality are filled by immigrants, much higher in places like London.    Mainly these are jobs which are unattractive to UK workers, either because of poor working conditions, low wages, or because they are based in parts of the UK which are expensive to live in long term.    

If the supply of migrant Labour falls dramatically some of these employers would have to raise wages and improve conditions, and accept lower margins or higher prices. 

Many employers are already incredibly squeezed on their margins, and increased costs would cause many of them to go out of business.   The recent problems that Jamies Italian, Prezzo, Byron etc. have experienced show how tight margins now are in the middle and lower ends of the market.   The  expansion of restaurant and casual dining options in most towns and cities has been driven by migration – at the higher end of the market where margins are higher a reduction in the supply of labour might lead to higher wages, or it might simply lead to fewer food and drink outlets, fewer hotels. 

In many parts of the UK immigrants are highly likely to be the owners and founders of food and drink businesses not just their employees.  Restricting immigration won’t mean that those businesses will hire non-immigrant staff on higher wages.  Those businesses just wont’ exist. 

I have a confession to make that I know less about food processing and agriculture than I should, and the view I do have is coloured by my upbringing in the North East.  The majority of food picked in the UK is picked by immigrants, mainly from Eastern Europe, at any one time there are 10,000s working in the industry. 

I started to ponder the obvious question – who picked our fruit and veg before the Eastern Europeans did?

The answer is…. more Eastern Europeans.  The first seasonal immigrant labourers from Eastern Europe arrived in the UK in 1945 under the Seasonal Agricultural Workers Scheme (SAWS) set up by the Attlee Government.  This scheme was only scrapped in 2013 when Freedom of Movement made it irrelevant. Before WW2 Irish picking gangs dominated the industry.   Around the North East Irish picking gangs were known as Tatty Howkers. 

The industry was also dependent on large amounts of child labour.  October half term in the North East historically was tatty picking week, while fruit picking and hop picking in the South were heavily dependent on children working in their school holidays, often as part of family groups.  If this sounds like a long time ago it was  – children picking hops in Kent ended in the 1960s, tatty picking in the North East in the 1970s.  That’s how long we have been using migrant labour

Although there have been Eastern European fruit and veg pickers in the UK for the last 70 years there has clearly been an increase in numbers over the last decade or 2.  The biggest factor driving this increase is the squeezing of margins by Supermarkets.  We have come to expect a huge range of fruit and vegetables at very low prices, and this means a big increase in demand for labour and low wage rates.  There is an irony that many Brexiters claim that one of the benefits of Brexit is more locally grown fruit and veg rather than imports from around the EU.

There hasn’t been a time when seasonal agricultural labour paid enough to make it attractive to British adult workers, and there is no sign of that changing.  If we want more locally grown fruit and veg we need more immigrant labour

I don’t mind Pick Your Own Strawberries in the summer, but I don’t much fancy picking my own cabbages.

Stock and Flow

So if the traditional way of thinking about immigration and wages is wrong how should we think about it?

In order to illustrate how immigration has impacted on the Labour Market the best way to do it is to think about a basic Stock and Flow model.

Anyone who has worked with me will know that I love a stock and flow model. Anything from hospitals beds, child maintenance cases,  to gin bottles

Reducing the movement of people in and out of the Labour Market is a very crude way of looking at it, but it does allow us to look into the supply of Labour and how it has shifted over time

Lets start by looking at the number of young people entering the Labour Market.  I contacted DfE and ONS and neither of them had a proper data set to cover this, so I had to build my own, which was loads of fun.   I used the cohort of live births, adjusted the deaths in childhood, and then looked at what happened to them when they left school – how many left at 16, for example vs how many went on to HE.

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The shape of the curve is caused by shifts in the birth rate but also by an increase in people staying in at school.  For example in the early 80s there is a big increase in youth unemployment which is followed by a big increase in the numbers staying on at schools and going into HE.

If we adjust for relative population sizes the decline in the number of school leavers is even starker.

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The most notable thing about the data was the huge shift in the numbers leaving school without any qualifications up until the 1970s vs today.   Lets look at 2 similar size cohorts from the 1970s and today.  The school leavers from the 1970s will be starting to retire right now, and the school leavers in the 2nd chart are replacing them.

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Lots of people are happy with highly skilled immigrants coming to the UK but would support controls on those without particular skills and qualifications.  What is clear from the data is that the people leaving the labour market through retirement are large numbers of experienced male workers who entered the workforce in the 1970s without qualifications, while the new entrants into the Labour Market are less experienced, graduates, and equally male and female.  While the UK has less demand for unskilled but experienced Labour than it once had the large numbers of unskilled workers coming to the UK makes perfect sense if you look at the people leaving and joining the Labour Market

Once we have the flow into the workforce lets have a look at the flow out of the workforce – the number of people leaving the labour market, through retirement or by death and disability.  Once again there isn’t a ready made data set for this from ONS or from DWP, so I took birthrate 65 years previously, adjusted for those who never entered the workforce (died in childhood), and the adjusted for people leaving early due to death or disability.  The proportion leaving the workforce due to death and disability has been similar over time, but with fewer deaths and more disability.

That gives us this graph:

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The odd looking drop in the numbers retiring in the late 70s and early 80s is the WW1 and Spanish Flu cohort.  The big peak over the last few years are the baby boomers reaching retirement age.

This lets us look at the way that flows in and out of the Labour Market relate to each other:

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Hopefully this picture is reasonable familiar.  In the 1950s and 1960s there is a big shortage of labour.  This is the era of the Windrush Generation, and when my In-Laws came to the UK from India to work for the NHS.   It is also an era when wages rose rapidly as shortages of Labour strengthened the hands of Trades Unions.

As the Baby Boomer generation enter the workforce labour shortages start and disappear, the position of Trades Unions weakens, and industrial relations gets a lot nastier.   The flow out overtakes the flow in again when the Baby Boomers retire, which co-incides with recent waves of immigration, however generally flow in exceeds flow out, which is why wage increases have been modest over recent years.

This however misses out one key group, which is very hard to track – the early retirement cohort.   Up until the 1980s early retirement wasn’t common, except in certain industries like the Fire Service, which had a limit on the number of years of service.   Starting in the 1980s as heavy industry closed employers started to offer early retirement packages to encourage expensive older workers to leave.  Since then this has become a regular phenomena  – every time there is an economic crisis employers public and private offer packages to go early.   I used this technique to slim down my team in the Civil Service during the austerity fad, before taking redundancy myself.

Pretty much every sector public and private and every skill level has been through these experiences.   As some who has just turned 50 and is frankly full of vigour and vitality I think this is awful.

OK.  That last bit might not be true.  I do like an afternoon nap.   

Sadly we only have a couple of decades of data on early retirement, which peaked at over 1.5m after the Credit Crunch:

Lets see what that looks like on a graph shall we?

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We can pretty crudely add the early retirement cohort into the numbers leaving the labour market and then compare that to the flow in:

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What this leaves us with is a lot of mostly unqualified, but very experienced workers leaving the Labour Force all at the same time as the Baby Boomers retire early.   The Baby Boomers on the whole entered the workforce when wage rises were higher, and tend to be more expensive and have better terms and conditions than the generations which came after them which entered the Labour Market when the flow in was higher than the flow out.

The Baby Boomers are also less well qualified than every generation which came after them.

Over the last few decades we have been encouraging these highly experienced, expensive, but less well qualified workers to leave the workforce in their 50s to be replaced by cheaper younger workers.  These cheaper, younger workers, however tend to be very different to the ones they are replacing, they are much more highly educated, and often have very different aspirations about the kind of work they want to do.   

The increase in migration over the last 20 years corresponds pretty neatly to the retirement and early retirement of this cohort, while the long term excess of flow in over flow out explains why wage increases have been suppressed.  It also explains they the mix of people coming into the UK has so many manual workers.

I realise that I have been a bit cheeky in that I started this blog by criticising simplistic models of how supply and demand set wage rates in the Labour Market, and then I have created a simplistic model all of my own.

Apart from the rather obvious thing that my simplistic model better reflects how actual employers view the Labour Market, more than anything I am sceptical about a free market view of the labour market.   I don’t think that widgets, or craft gin, and people behave in the same way.  People are sometimes perfectly rational, but often not, and their shift from rational to irrational in the way the make job choices

There is no traditional supply and demand based labour market model which would predict why I would decide to run a Distillery rather than take a more lucrative job as a management consultant.    There is no supply and demand based labour market model which explains Jack Rodwell.

Jack. Fucking. Rodwell.

The views expressed by Corbyn in the clip above, and by the angry voter in Quarrington are based on a very simple free market supply and demand view of Labour Markets.    This view has become so prevalent that even the left seem to have adopted it, if only the give a false appearance of intellectual sophistication.  

The demographic changes which drove the last round of immigration are coming to an end, and immigration is falling too.   Government is keen to claim credit for recent falls in immigration, but in my view the current era of high immigration was coming to an end anyway.  The falls in immigration, just like the falls in teenage pregnancy, are driven by bigger forces of demographics rather than any particular genius by Government Ministers.

This doesn’t mean that immigration will stop completely

Businesses need a regular flow of new workers if they are to expand, and the wider the choice they have the easier it is to grow.  As customers we want an economy with high levels of customer service, and labour intensive craft products.  We want barrista coffee, craft gin and artisanal cheese rather than Mellow Birds, Gordons and plastic Cheddar.  We also want a greener economy with less resource intensity.  

And we want our children to go to University, and compete for the best jobs.

This means that we are unlikely to ever go back to little or no immigration.  If we want to have free movement for the goods we buy on Ebay, and free movement for capital investments, and free movements for ourselves we will have to accept that some people will move to our country too.

Shutting off that flow completely will be about as easy as closing down the flow of goods on Ebay.

Postscript

Regular readers have probably noticed that the sections on rising wages in industries like food and drink retail are at odds with my usual views.   Normally I am sceptical that changes in government policy which increase wages have a big impact in sending businesses bankrupt, or increasing unemployment.

When we look back at reforms like Equal Pay legislation or the National Minimum Wage the increase in wages encouraged people into the Labour Market, and increased the pool of applicants for employers.  While businesses had to pay a bit more in the short term in the long run having a wider pool or flexible workers more than outweighed this.   Flexible labour markets which give employers the widest range of workers are a good thing for businesses, and reduce unemployment

Restrictions on immigration are different imho.  While they might increase wages they do so by making Labour markets less flexible and by reducing the pool of workers available.  Businesses have all of the costs, but none of the benefits.   For this reason increasing wages by restricting immigration is likely to be more destructive to businesses and employment than previous legislation like Equal Pay Acts

References

http://www.educationengland.org.uk/documents/dearing1997/dearing1997.html

https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/livebirths/articles/trendsinbirthsanddeathsoverthelastcentury/2015-07-15

https://www.gov.uk/government/statistics/participation-in-education-training-and-employment-2016

http://webarchive.nationalarchives.gov.uk/20160105160709/http://www.ons.gov.uk/ons/rel/pensions/pension-trends/chapter-4–the-labour-market-and-retirement–2013-edition/index.html

https://www.ifs.org.uk/uploads/BN234.pdf

https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/datasets/labourmarketstatistics

https://www.ifs.org.uk/elsa/report10/ch2.pdf

http://www.data-archive.ac.uk/

https://www.ifs.org.uk/uploads/publications/comms/r95.pdf

https://www.ftadviser.com/pensions/2018/03/21/early-retirement-to-disappear-by-2035/

How GDP varies between Regions: Inequality, Life Expectancy, Happiness, Austerity, Referendums, Experimental Statistics, and lots more graphs

I hope that people aren’t getting too bored with discussions of inequality, because this is another blog which touches on 2 familiar themes; how income is distributed; and how governments produce the statistics that we use to inform political and economic debates.

There is a common assumption that over last few decades the economic performance of different parts of the UK has diverged, with London and the Home Counties out performing the rest of the Country.   I wrote recently about income inequality and I wondered if the picture would look different if we thought about it geographically – rich areas and poor areas rather than rich people and poor people.

Lets start with Gross Domestic Product (GDP).  It is the most commonly used measure of how the economy is performing and allows international and historical comparisons, although it does have it’s critics.

David Cameron flirted with the idea of measuring happiness, but abandoned it when it turned out that no-one was happy, and lots of people blamed their unhappiness on his Government:

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I like the way the Guardian’s photo editor picked a photo of Cameron with a sad face to illustrate the story.

Most people will have gathered from the Media that growth in GDP has been slowing since the Brexit vote.   This from the BBC recently is typical:

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In fact while it is true that GDP growth is lower than it was before June 16 it has actually been slowing since David Cameron announced there was going to be a referendum:

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This isn’t a surprise.

The referendum increased uncertainty for businesses, which in turn reduced investment, which impacts on the rate of growth.   This is however part of a longer term trend in GDP, as this graph from the ONS shows:

 

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GDP growth has been slowing for decades, although it has become more consistent with smaller peaks, but fewer troughs.  The cycles of boom and bust may not have actually ended (as Gordon Brown foolishly claimed) but the busts have got much less frequent.

If we try and make sense of the squiggly graph we can break up the last 60+ years into a number of periods and see some patterns.

Eden-MacMillan-Hume 1955 – 1964

Nearly 10 years of Conservative rule, and GDP grew by an average of 3.1% per year. Wage rises for working class jobs were still low, but if you were middle class you hadn’t had it so good for a very long time.  Growth was patchy as this rather odd set of results from 1958 illustrate:

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Patchy growth was the consequence of the Government trying to grow the economy without letting the trade deficit get too big.   At one point exchange controls were so tight that the Treasury had to approve the transfer of Jimmy Greaves from AC Milan to Spurs because the fee – a colossal £100,000  – might affect the delicate balance of trade.

Wilson – Heath – Wilson – Callaghan 1964 – 1979

A mix of Labour and Conservative administrations on either side of the oil price shock and the economic turmoil of the 1970s. Despite all of this GDP grew by an average of 2.96% a year.   GDP growth is very bumpy, with big swings from growth to contraction; 1965, 66, 68, 69, 70 and 71 all saw 3 quarters of growth and 1 quarter of contraction.   Both Labour and Tory followed variants on “stop/go” policies trying to balance growth, inflation and a trade deficit.

The Thatcher years 1979 – 1992

I am afraid that this is more bad news for the remaining Thatcher fans.   GDP grown was markedly lower in her years in office.  Despite the boom years under Lawson in the mid-80s GDP growth averaged 1.83%.  Given that Thatcher reaped the benefits of the oil boom this is a dreadful set of results.

Major and Blair 1992 – 2007

Major comes into office with continuity Thatcherite policies, but a sharp recession and Black Wednesday soon change his mind.  From Black Wednesday to the Credit Crunch GDP growth is back to 3% a year on average.  Unemployment falls during this period, and inflation is low and stable.  Blair even manages to reduce Government debt as well.  This is the era of NICE economics (Non-Inflationary Consistent Expansion).

Brown-Cameron-May 2007 onwards

GDP Growth is sharply negative in the immediate aftermath of the Credit Crunch, and recovers only slowly.   Average GDP growth is a 1.9% a year, only slightly better than the Thatcher era.  Inflation is low, but unemployment also low.   If we split out data from after the Referendum we growth is even lower – a meagre 1.5% –  like the early 80s but with worse pop music.

This, however only really tells us about information at a National level, it doesn’t tell us much about what is happening in different parts of the Country.

To work out what is happening regionally we have to use the ONS Gross Value Added (GVA) dataset.  This is a new way of looking at Regional economics and until a couple of years ago was treated as an experimental statistical method, although the data exists right back to 1999.  It takes a long time to produce and we won’t see the 2017 data until the end of 2018.

Experimental statistical methods – does it get more exciting than this?

We can start by looking at GDP growth by Nation:

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England and Scotland are growing much faster than Scotland and Northern Ireland.

We can break down England further into Regions:

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Since the records started all English regions have below average GVA growth except London. If we look at the post Credit Crunch years the variation is even larger:

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This is total GVA not per capita, and it is also a chained value series so inflation effects have been adjusted out to show actual change.    The results for the North East and for Yorkshire and Humber are shocking.

There are 2 other things we can do with the data.  We can look at GVA per capita:

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This shows that disparities in wages between London and the rest of the country reflect that the GVA per capita is  much higher in London than the rest of the country.  In fact the gap between London and everywhere else is great than the gap between the areas of the UK excluding London with the highest and lowest levels of GVA.

The second interesting thing that we can do is  look at changes within Regions by zooming in on data at Local Authority level.  At this point you should notice that the data changes, and the differences between London and the rest the UK doesn’t look as stark.   That’s because we are no longer dealing with a chained value series, so inflation effects are included, and because we are looking at GVA per capita, so population changes have an effect.  The growth in population in London balances out some of the total increase in GVA.   This is the Income based approach to GVA.

This is the data for Yorkshire and Humberside which shows how GVA per capita growth fell after the Credit Crunch.  The period 1998 to 2007 showed healthy levels of growth well above inflation right across the region.   Post Credit Crunch growth levels are well below inflation which means a real terms fall in GVA, and a real terms fall in average income.

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The numbers for areas like North Lincolnshire are shocking – a fall in GVA before inflation adjustments.  I think of York as a pretty place full of tourists, but in terms of GVA it has more in common with the stagnant Northern Cities than the more dynamic bits of the North.   Or maybe an economy based on tea shops doesn’t create as much wealth as we thought?

These are the same numbers for the North East:

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It’s not hard to see a pattern of big falls in growth in places like Newcastle, Redcar, Barnsley, Sheffield, and Doncaster.

This is the data for London:

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Not only are the affluent parts of London a lot richer to start with, but the falls in GVA growth overall aren’t as stark as their Northern Cousins.  Overall however London’s average is held down by the huge disparities between the more prosperous and fast growing Boroughs and the worst.   Which leaves the obvious question:

What the fuck is happening in Croydon?

Now we have the Local Authority level GVA data some interesting correlations start and emerge.

There is a clear correlation between GVA growth at Local Authority level and the EU Referendum results.  I can’t claim credit for this analysis as it came from the Financial Times.  This is their rather nifty graph:

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I am sure that there are cultural aspects which underpin the Leave vote too, but the link between Regional GVA and the EU referendum is pretty stark.

There is however another link that stood out to me – the link with life expectancy.  While life expectancy across the UK continues to improve the rate of improvement has slowed noticeably, and in some parts of the country it is starting to reverse.

I blogged about these falls in life expectancy and the relationship with austerity economics a while back:

Does Austerity really kill? If so how many? How can it if we are all living longer?

It isn’t an exact correlation but there are clear signs that the areas which show the biggest growth in GVA are among the areas where life expectancy is increasing the fastest, and the areas where GVA growth is lowest are the ones with the slowest growth in life expectancy or even falls.

These are the tables for the same regions showing changes in life expectancy.

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Life expectancy across the region is still increasing,  but the rate of increase is slowing, and in some areas is starting to decline.

The North East is even worse:

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Life expectancy at birth is falling, but is only increasing for women at age 65.

Where there are declines it is the familiar list of names: Middlesbrough, Newcastle, Redcar, Barnsley, Doncaster.

The data for London is predictably a lot better, with increases in all catagories

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If you squint carefully you will see that the awful GVA data for Croydon is reflected in a declining male life expectancy at birth.

We need to be a bit careful in describing a rigid relationship between economic change and life expectancy; while Scotland’s economy is growing faster than Wales and Northern Ireland it’s life expectancy is the lowest of all the Nations, and the gap is getting bigger:

Screen Shot 2018-05-16 at 22.47.37Too many deep fried Mars Bars.

It is also clear that it takes a long time for economic changes to feed through into changes in life expectancy.  Sadly this probably means that even if things start to improve over the next few years it will take a long time for this to reverse the trend in health status.

There are some pretty easy conclusions that we can draw from all of this.

The period up to the credit crunch saw growth in GVA and life expectancy across the UK.  London did better than parts of the North, but not at the expense of the North.  Since the credit crunch not only has growth been lower, but the balance of growth has been much more uneven, and the gap between London and the rest of the UK has been much more severe.

Some of these changes in GVA have clear links to the austerity policies of the Cameron and May Governments.   I haven’t gone through the Industry by Industry data here but the cuts in Government spending were a major cause of changes in GVA in the North.  It is harder to map the impact of QE and low interest rates through the data, but it does look rather like lots of the extra money that the Bank of England printed didn’t get much further than the M25.

It is also clear that the prolonged slump in GVA and GDP growth in the North is having an impact on life expectancy.   These are small changes, and they are forecasts, but they are driven by an increase in mortality rates over the last few years.

We have been used to being told that we are all living longer.   For some of us this is no longer true.

What all of this reminds me of is this paper by on mortality and morbidity in the USA by Deayton and Case:

http://wws.princeton.edu/faculty-research/research/item/rising-morbidity-and-mortality-midlife-among-white-non-hispanic

I’m not too bothered about inequalities in income.  I am bothered more by poverty.  I would rather live in a country where no-one is poor but someone people have gold hats, than a country where no-one has a gold hat but there is lots of poverty.

But these regional datasets really bother me.  It looks like parts of the North of England are starting to follow the pattern of economic decline, falling life expectancy and political volatility which we have seen in big chunks of the States.  Trump was driven to victory by white voters in areas with declining economic fortunes and sharply declining life expectancies.   

We are creating the exact same explosive mix in the UK too. 

And just like America the people living in these areas are largely absent from the national debates about politics and economics, and are cultural invisible to lots of people.

“Two nations between whom there is no intercourse and no sympathy; who are as ignorant of each other’s habits, thoughts, and feelings, as if they were ….. inhabitants of different planets.”

https://www.ons.gov.uk/economy/grossvalueaddedgva/bulletins/regionalgrossvalueaddedincomeapproach/december2016

https://www.ons.gov.uk/economy/grossvalueaddedgva/datasets/regionalgvaibylocalauthorityintheuk

https://www.ft.com/content/37944828-e586-11e7-8b99-0191e45377ec

https://www.theguardian.com/inequality/2017/dec/23/health-gap-between-uk-rich-and-poor?CMP=twt_gu&__twitter_impression=true

https://www.theguardian.com/politics/2010/nov/14/david-cameron-wellbeing-inquiry

https://www.ft.com/content/cf51e840-7147-11e7-93ff-99f383b09ff9

Thanks to the Health and GVA team at ONS for pointing me in the right direction for some of the data.

 

 

 

 

Why unemployment might be worse than we think (again)

I have written previously about why the current system for measuring unemployment might not giving us an accurate picture:

Unemployments rising in the Chigley End of Town

People will have read in the media that UK unemployment is at it’s lowest since the 1970s.    This from the BBC is typical:

Screen Shot 2018-04-18 at 15.25.22

 

I thought that it might help to share the actual definition of unemployment being used to measure this huge fall:

Screen Shot 2018-04-18 at 15.21.34

One hour.

https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/methodologies/aguidetolabourmarketstatistics#employment

 

 

PFI: Risk and Reward

Another micro-blog, this time on PFI, and a not very hot take on Carillion and Capita.

I was going to avoid talking about the collapse of Carillion.  I get a bit frustrated talking about PFI because lots of people strongly dislike it without knowing much about it, which makes for a less than fun debate.   The same is true of Government outsourcing, which isn’t the same as PFI, but tends to get bundled together with it because lots of PFI schemes involve the outsourcing of some or all facilities management services as part of the PFI deal.

I’m not as hostile towards PFI as some people, partly because I worked on a couple of Hospital PFI schemes.   It’s not a bad capital sourcing route when the Treasury cost of capital is very high, but when the interest rates the Government can borrow at are as low as they are right now there is no point in PFI at all.

I do however have a big problem with off balance sheet accounting, which is a technique associated (but not the same as) PFI where Governments hide the amount of debt they have run up.  The reason why PFI and other off balance sheet wheezes continue to be popular with Labour and Tories is because Politicians don’t want to be honest about the amount of debt they want to incur.

I don’t have a problem with outsourcing either – I just believe that there are some bits of the public sector like basic administrative tasks which work well on an outsourced model, and lots of bits of the public sector which should never be outsourced; including all of Criminal Justice.  I also think that there are lots of parts of the public sector where the costs of administering outsourcing are so high they outweigh any advantages outsourcing might have – the NHS for example.

One of the main factors with PFI and any kind of outsourcing is the extent to which the Government or the NHS transfers risk to the Private Sector.   There a lots of good reasons why the State would outsource work or sign a PFI deal – they need short term but not long term capacity, or they want specialist skills in building or managing a project.  Whatever the reason for the PFI project or the outsourcing decision the contractual arrangements should always show a transference of risk.  The private sector takes on work because it wants profit, and any profit/reward should reflect the degree of risk the contractor takes on.

While I was sad that Carillion collapsed this is essentially the consequence of PFI working properly.  It’s not meant to be risk free.  The problems with Carillion aren’t a sign that PFI has failed. The show that it is working.  Carillion either got greedy, or it failed to appreciate the degree of risk it was taking on over the 400+ Public Sector contracts they took on.

This is a graph showing Carillion’s income from PFI contracts when they went bankrupt:

Screen Shot 2018-03-05 at 14.15.48

This is a graph which shows total PFI payments past and present across the whole industry:

Screen Shot 2018-03-05 at 14.16.10

The 2 graphs aren’t exactly the same shape, but the similarity is striking.  Carillion was pretty typical slice of the PFI market.

All this really tells us is the size of the reward. The question is – did Carillion simply have more risk than other companies?  Was it just badly run?  Or is there more systemic risk in the PFI market than we thought?

I changed my mind about writing about Carillion because I saw the headlines on Capita.   They issued another profit warning this week, disclosing a £513.1m pre-tax loss due to £850.7m of “specific non-underlying items” which dragged on its performance.  This compares with an £89.8m loss in 2016.    Capita have over 1000 public sector contracts and their collapse would be much messier.

I visited some of Capita’s outsourcing sites a few years ago when I was assessing potential outsourcing partners for the DWP Quango I was working for.   They have lots of high profile, mission critical, outsourcing work, including the Congestion Charge, Teachers Pensions, TV Licensing and lots of NHS back office work.  Some of their work in criminal justice is scary stuff – offender tagging, and 999 systems.    Notably they haven’t been awarded any new Government contracts this year, which suggests that there is a growing reluctance to give them work.   Knowing a bit about the rigid thinking of public sector procurement teams there must be something very scary in the financials to put them off.

The shape of the 2 graphs above and the scary state of Capita suggests that Carillion’s problems might actually be systemic across the industry, rather than just the result of poor risk management.

When Carilion went under there was an obvious solution to their problems.  HMG could have borrowed cheaply, bought out the PFI contracts from Carillion.  This would have given the remaining private sector division of Carlillion enough capital to keep it afloat, while cutting the long costs (because the PFI contracts would effectively had been refinanced more cheaply).  A clever person would have taken over all of Carillions PFI division and used it as a state owned infrastructure company which could have taken over other expensive or problematical PFI or outsourcing contracts from other contractors.

But that would have been ideologically impossible to either Political Party.

Billy Bragg Mini Blog

I was a Miner, I was a Banker/I was a Quantitative Analyst/Between the Wars/I played at Glastonbury/In time of austerity

A bit of a follow up from last weeks look at the ways property wealth, property tax and pension wealth interact and how monetary policy can change how wealth is re-distributed.  

While I was writing it Andy Haldane (did I mention he was my favourite Central Banker?) invited Billy Bragg to give a lecture on Monetary Policy at Threadneedle Street. This is the video of it:  

https://www.bankofengland.co.uk/events/2018/april/one-bank-flagship-seminar-billy-bragg

Just to manage your expectations he doesn’t do “Levis Stubbs Tears”.    Billy Bragg at the Bank of England may sound odd, but it was meant to expose Central Bankers to a broader range of views outside of their own bubble.  There was a predictably mixed response, with people liking or disliking his speech based mostly on where they were politically before the speech rather than the actual content of it.

Billy’s big point, I think, is that the lack of accountability by Institutions is driving support for authoritarianism.  This is spot on. This lack of accountability is a huge problem for public institutions and faith in democratic politics – politicians are mired in scandal and yet no-one resigns.  Since Gordon Brown made the Bank of England independent in 1997 there has been an assumption that interest rates and monetary policy are politically neutral, but when decisions are taken that re-distribute wealth that can’t be apolitical.   It’s worth reflecting on this next time someone suggests taking the NHS out of political control in the same way as the BofE.

He also talks about the way that the money spent on things like QE could have been spent more usefully on building schools or hospitals.  I think that Billy is actually describing 2 similar but subtly different approaches.

The first is that the Government could borrow money very cheaply and spend it doing things that would help improve society and the economy.  This is spot on.  Over the last few years we could have borrowed cheaply, fixed every pot hole, every leaky classroom roof, bought a brand new set of state of the art NHS diagnostic kit.  Not only would this have saved money in the long run, but it would have helped grow the economy too.

We could also have bought out any PFI deals signed at high interest rates before the Credit Crunch with a long time left to run on them.   A couple of the NHS Trusts I worked for have done just that, using low interest rates and some of the financial flexibilities available to Foundation Trusts to buy out historic PFI:

https://www.ft.com/content/490d42ae-2f0c-11e0-88ec-00144feabdc0

https://www.theguardian.com/healthcare-network/2011/feb/03/pfi-nhs-trust-paid-off-tees-esk-wear

https://www.ft.com/content/cc4f10b2-4951-11e4-8d68-00144feab7de

https://www.independent.co.uk/life-style/health-and-families/health-news/northumbria-nhs-trust-saves-67m-by-freeing-itself-from-pfi-deal-9517844.html

I like the way that the FT describes both of them as the first.   Just goes to show that even the best newspapers struggle to follow the boring detail of public borrowing and PFI deals. 

The second approach is the possibility of using QE style asset purchases to do something more ambitious than buy Bank Bonds.   We could, for example, issue Local Government Bonds, which the Bank of England could buy, and use this money to build Council Houses.  This idea was promoted by John McDonnell under the heading of Peoples QE.

I’m a bit more sceptical of Peoples QE.  The most obvious reason is that we could just use conventional public sector borrowing to achieve this, particularly when interest rates are low.  It’s a solution to a problem which doesn’t need another solution.   The reluctance to use cheap borrowing is because politicians don’t want to be honest about how much they are borrowing, and that doesn’t help improve accountability.

Both plans – traditional Government borrowing and Peoples QE – share some similar problems.  When the Government spends capital it almost always needs a flow of revenue to go with it.  A new Hospital needs on-going spend on Doctors and Nurses, Schools need Teachers, Roads have pot holes.   The only areas of Government capital spend which don’t have this problem are things like Council House building where the capital spend brings in rent.    

Having run public services myself there are very few uses for capital which doesn’t come with revenue consequences if only to fund the interest payments.

There is also an even nerdier problem with using Government spending or Peoples QE rather than traditional QE.   The traditional QE model benefits from the magnifying effect of fractional reserve banking.    The size of the lending that Banks can release into the economy is much greater than the size of the asset purchase. 

But peoples QE has a more profound problem.  While the Global economy is dependent on QE no-one knows when or whether it has negative long term consequences.   It may be that it distorts capital markets, increases volatility, or decreases long term growth.  It might even be that Andy Haldane is wrong and it increases inequality.

With conventional QE it is easy to reverse the process.   The Bank can sell off the bonds it purchased and reduce the amount of QE.   With unconventional or Peoples QE it is much harder to reverse the process if you need to reduce the amount of QE in circulation.  If you have used the funds to build Council Houses the only way to reduce the QE is to start selling off the Council Houses.   If you have used the funds to build Hospitals then they will have to be sold too.

It’s easy to see how this produces an almost impossible dilemma for a future Government.   If QE is causing inflation, or making the poor into paupers but the only cure was selling off Council Houses or Hospitals how would a Government act?  How would a Corbyn led Government survive this kind of dilemma?

This is a more conventional clip of Billy:

https://www.youtube.com/watch?v=wWjO9BTJhPc\\

More to come tomorrow….

https://www.theguardian.com/music/2018/apr/08/billy-bragg-to-give-speech-on-how-to-build-a-better-society-at-boe

https://www.opendemocracy.net/neweconomics/alternative-qe-billy-bragg-right/

http://www.cityam.com/284358/bragging-rights-city-heavyweights-flummoxed-popstars-bank

The biggest stealth tax cut in British History: Quantitative easing, Pensions and my flat in Leeds

Last month I wrote about attitudes to inequality specifically why I think that recent headlines about Rampant Inequality are way off the mark.  The belief that we live in an era of great inequality is so prevalent that a lot of people reacted with disbelief when I wrote that wealth inequality in the UK was at a historic low, despite recent small rises.  For me it is poverty that matters more than inequality. 

The Golden Age of Equality

I wanted to balance that by writing about the changes in the way that the distribution of different forms of wealth accumulation – property and pensions  – has changed over the last few decades. 

Since the Credit Crunch there has been an accumulation of property wealth in fewer and fewer hands.  In the immediate aftermath of the Crunch house prices fell sharply but the lack of liquidity in the financial system made it difficult for anyone without a big deposit to get a mortgage.  First time buyers who would normally have benefited from cheaper prices were squeezed out, while people who could access lots of capital found it easy to amass big property portfolios.  That’s why they call it capitalism.

I will admit that I was a beneficiary of this.  I took a job in Leeds just after the Crunch and rather than sleep in hotels I bought a flat, whose value had fallen significantly, and which was conveniently situated near the bars on Call Lane.  In the years up to the credit crunch large numbers of flats were built in and around Leeds City Centre, possibly as many as 20,000.  By 2009 when I was shopping for a flat 10% of them were empty, many for over a year.   

These flats saw very big falls in value, in developments like Aspect 24.  As I travelled around the City viewing flats whose occupiers had bought them new and which had lost over 20% of their value, wiping out all of the cash buyers had put in.  People like me who could access capital were able to buy choice properties cheaply, with mortgages at very low rates.   

A recent speech by Andy Haldane from the Bank of England sets out the economics behind these experiences.   Andy is my favourite Central Banker.  I realise that having a fave Central Banker is an unusual thing, and marks me out as a bit of a policy nerd.

The Bank of England, like most Central Banks, reacted to the Credit Crunch with the most expansionary monetary policy in history.   Interest rates were cut to their lowest ever levels, close to zero.  Additional stimulus was provided through asset purchases – so-called Quantitative Easing or QE. These asset purchases by Central Banks are currently running at around a cumulative 15% of annual global GDP.  

This pushed an awful lot of money through the Banking system and into the economy, to counteract the affects of the Credit Crunch.  Bit by bit monetary policy changes helped to reflate the economy, and restart the housing market.  By 2010 house prices were rising again, and continued to rise in areas like London all the way through to the Brexit vote.  Those who had acquired additional properties during the Credit Crunch accumulated wealth as monetary policy pushed up prices. 

It is a common assumption that the people who made money in the years following the credit crunch were the top 1% with gold hats, but a much broader group of people with plenty of capital, a property portfolio or stocks and shares benefitted too from expansionary monetary policy.

Despite this Andy Haldane argues that 10 years after the credit crunch Bank of England actions hadn’t made inequality worse – income distribution and the Gini coefficient today are the same as they were 10 years ago. 

I am sceptical about some of the claims made about inequality but even I am baffled by Haldane’s views.   He argues that the impacts on jobs and wages in lower incomes groups balances the increase in property wealth, and he has lots of graphs to prove it:

Screen Shot 2018-04-22 at 11.03.25

There are 8 pages of graphs to illustrate his point.  I do like a good graph.

No matter how good the Bank of England’s graphs department are they can’t touch this graph from the Resolution Foundation, which is by far and away my favourite graph at the moment.  Yes, I know that having a favourite graph is as odd as having a fave Central Banker.

Screen Shot 2018-04-22 at 11.07.44

You can find this graph and a great money other fine diagrams in this report:

http://www.resolutionfoundation.org/app/uploads/2018/03/Council-tax-IC.pdf

When Harold Wilson became Prime Minister total property wealth was worth 3 times annual GDP.   Total wealth taxes brought into the Government a sum equivalent to just over 2% of GDP.   

Today total property wealth is 7 times GDP, but the taxes on property still only bring in just over 2% of GDP for the Government.

Without being hyperbolic this has been the biggest stealth tax cut of all time.   The tax cuts is partly caused by Governments fiddling with property taxes for political gain, but mostly due to the failure to reform or even rebase Council tax.  This failure to update Council tax is a wholly regressive policy which gives an effective tax cut to those in the most expensive properties

If the Government take from property taxes had kept up with the increases in property wealth there would have been no need for the age of austerity.

I have long advocated using the accumulated property wealth of richer older cohorts to help fund the care costs of the baby boom generation.   This is very unpopular, particularly where the care costs are as a result of an illness like Dementia.  The Conservatives proposed some moderately progressive proposals to use property wealth to fund care at the last general election.  Labour made hay opposing the “Dementia Tax” even though it put them in the position of defending inherited wealth.

Both parties in their own way are committed to defending inherited property wealth, largely because both main political parties are largely made up of people with property wealth.   Looking at the graph above not only has the property market been a source of widening inequality since the Credit Crunch, but this as actually been going on for a very long time, Labour and Tory.   

Even an inequality sceptic like me can see that housing and other assets like stocks and shares have become concentrated in fewer hands since the credit crunch.   Rates of home ownership are back were they were before Margaret Thatcher started selling off Council Houses, and rates of share ownership are back where they were before the same Prime Minister sold off shares in public utilities.  Stealth tax cuts just make this worse.  

At this point I had convinced myself that there was something I was missing about the view of wealth and inequality.    I am a big fan of Andy Haldane, but the size of wealth accumulation from property since the Credit Crunch, facilitated by BofE policy, must have increased inequality.   I couldn’t see how he could be right.

I checked his findings against the latest data from the Office of National Statistics.  This shows that even the recent rises in inequality has come to an end, and the current gap between rich and poor is static.  The BofE were right:

https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/wealthingreatbritainwave5/2014to2016

What the ONS data sets shows is that the rise in wealth inequality due to property wealth is being offset by changes in pension wealth – over the last few years nearly £1tn has been added to the value of private pensions. Given that the total GDP of the UK is just under £2tn this is a huge amount.   

For most people of my generation the most valuable things we own are our homes and our pensions, given that our collections of rare Morrissey solo records are plummeting in value.   We tend to track the value of our houses much more carefully than the value of our pensions, despite the fact that as we get older some of us will have pension funds worth a lot more than our houses.  Senior Doctors in NHS Super An can easily hit the £1m tax free limit.

Most people I know didn’t really notice the 2008 pensions act when it was passed, or when it was implemented a few years afterwards   I certainly didn’t spot it, and I was working for a Quango sponsored by DWP.   Frankly pensions are boring and complex, and even I struggle to keep track of it.   For those who missed it the 2008 Act requires all employers to set up an occupational pension scheme, which employees are automatically enrolled in unless they opt out.  The Act also established the National Employee Savings Trust, a public pension provider for those who do not have an occupational pensions, which functions as a low-fee pension scheme in competition with existing funds.

Part of the reason why the 2008 Act passed un-noticed is because most of the people who I know work in big companies or the public sector where access to good quality pensions is still widespread.   We have grown used to reading pension horror stories, many of which are true, about the closure of final salary schemes .  This has created the impression that whole pensions system is in crisis, but for most of my generation we are still in really good schemes.   The people who are benefiting the most from the 2008 Act are low paid workers in the private sector, who for the first time are benefiting from the kind of occupational pensions that white collar public sector and private sector employees take for granted.

The impact of the increase in pension wealth for people on lower incomes following the 2008 Act is as great as the increase in property wealth for people on higher incomes since the Credit Crunch.   This is a huge and progressive re-distribution of wealth, which will continue for years to come.

The generally accepted story of the New Labour years is that they did lots of stuff about tackling poverty but largely didn’t really do much on inequality, despite passing progressive legislation like the National Minimum Wage.    Peter Mandelson’s view that he was intensely relaxed about people getting filthy rich as long as they pay their taxes” has come to define our view of the New Labour era as one where tackling inequality wasn’t a priority.  

In retrospect the  2008 Act may well turn out to be one of the most significant pieces of redistributive legislation of the last few decades, worth more in total than the NMW.   I honestly find it incredible that such a huge change in wealth distribution could have happened without my noticing, but I don’t think I am alone.  After all pensions are boring, and most people I know aren’t affected by the changes in the 2008 Act.

In the meantime I new set of developers have announced another round of flat building in Leeds.  9,000 more flats on the Quarry Hill site, with unrivalled views of Britains finest example of neo-Stalinist architecture.  

What could possibly go wrong?

Screen Shot 2018-04-22 at 12.00.58

https://www.ft.com/content/4c5ce3fc-0753-11e8-9650-9c0ad2d7c5b5

https://www.bankofengland.co.uk/-/media/boe/files/speech/2018/how-monetary-policy-affects-your-gdp-speech-by-andy-haldane.pdf?la=en&hash=FCBD26BEE0C888B53856C099796780DED35190A4

https://www.bankofengland.co.uk/speech/2016/the-distributional-implications-of-low-structural-interest-rates-and-some-remarks-about-monetary

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/691917/households-below-average-income-1994-1995-2016-2017.pdf

https://www.theguardian.com/commentisfree/2018/apr/09/dementia-sell-home-britain-health-lottery?CMP=twt_gu&__twitter_impression=true&__twitter_impression=true

https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/methodologies/wealthandassetssurveywaswave5validationoffiguresagainstexternalsources

https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/articles/earlyindicatorestimatesfromthewealthandassetssurvey/previousReleases

https://www.opendemocracy.net/neweconomics/time-call-housing-crisis-really-largest-transfer-wealth-living-memory/

https://www.theguardian.com/social-care-network/2018/mar/21/jeremy-hunt-social-care-reform

http://www.resolutionfoundation.org/publications/home-affairs-options-for-reforming-property-taxation/