Pocket-Money Economics vs. Real Prosperity
Why transfer payments can’t fix inequality and what an ambitious political strategy would do instead. It's time to take The Sniff Test
Multicultural and Unequal
There is short section in Bill Bryson’s Notes From a Small Island that haunts me. He gazes across Teesside from the North Yorkshire Moors at a grey carpet of works and housing. He wonders what all those people will do when the mills and chemical plants close? What indeed.
The answer is a policy choice. Government could invest in the region, sponsoring research and development at universities, relocating civil service jobs and boosting transport links. It could leave it to individuals to find new work and pay welfare to those that don’t. Or it could go further, as it chose to do, and introduce an appraisal method for government spending, which concentrates investment in already successful regions down south.
The resulting social security payments that prop up below average wages on Teesside do nothing to address long-term inequality. Transfer payments are not designed to make a lasting difference. They are akin to giving a child pocket money. It gets spent and the next week they are back for more.
In 2016, a French geographer called Christophe Guilluy published Twilight of the Elites. He argued that knowledge work turned France into an American economy, multicultural and unequal. He warned of fuel tax riots, foreshadowing the Gilets Jaunes protests and predicted the voting patterns we see today in France. The academic attacks on his scholarship at the time were fierce. Nonetheless he was right.
The critics, members of elites themselves, hone in on a lack of data. The same year, Philip McCann published The UK Regional-National Economic Problem detailing a similar, yet more extreme economic divide in the UK. Data-heavy and shorn of the Marxist undertones, McCann’s tome dovetails with Guilluy’s polemic as powerful evidence of a failure of political leadership. Powerful enough to move leaders in Silicon Valley.
Why Robots Matter
Marc Andreessen cofounded the eponymous Andreessen Horowitz. The venture capital business is successful enough to be known by a moniker, a16z. There are sixteen letters between a and z in the company name.
Andreessen backed Airbnb, Facebook, Instagram, Lyft, Oculus, Roblox, Skype, Slack and many more. His name on your term sheet is a guarantee of funding success. Speaking at the first annual Ronald Reagan Economic Forum, set up to rival the World Economic Forum at Davos, he took the unusual step of repeating himself. Twice in his interview with Joe Lonsdale, he noted he’d been oblivious to how much the coastal elites despise Midwesterners. Until, that is, his journey from rural Wisconsin to become one of them.
US cities comprise an elite of knowledge workers and a servant underclass. The elites work in finance, law, the media, higher education and software. The serving class are nannies, cleaners and an army of restaurant and other service workers, housed in social projects.
Middle class workers, such as police, fire service and school teachers, face long commutes each day. This is the only way to afford a home large enough to raise a family. The American Dream has become drudgery as a direct result of policy choices.
Andreessen argues that clever kids from the middle of the country have no chance of attending an elite coastal school. Three obstacles stand in the way. The first he calls DEI for white people, or the places reserved for donors, alumni and anachronistic sports scholarships. The second is the DEI of race. This does not help African Americans, because schools meet quotas by admitting the children of wealthy overseas families. The third obstacle is a more general influx of international students paying premium fees.
The way to address inequality is to reindustrialise. This does not mean repatriate ageing industries that long ago ceased to be economic. Rather it is to invest in new industries. These need supply chains of thousands of businesses to support them, which in turn generate millions of jobs. This requires policymakers to want to reindustrialise and to root out past legislation that makes manufacturing borderline illegal. Reindustrialisation means robots.
This week Nvidia became the first company valued over $4 trillion. It is one of a handful investing fortunes assuming there will be a billion robots worldwide by 2040. Many people cannot imagine this. Meanwhile, the future is made by those who take action.
It’s important to emphasise why robots matter. If artificial intelligence is merely software then it will concentrate rewards in San Francisco, New York, Paris and London. When it is embodied in hardware, the rewards will spread in search of space for factories. It requires political will to make this happen.
Andreessen’s America looks similar to the picture painted by Guilluy and McCann of France and the UK. The service economy replaced manufacturing and brought success at national level. The resulting concentration of activity in urban areas has, however, left millions feeling letdown. These people vote for Trump, the National Rally, Brexit and Reform.
Similar combinations of planning and environmental laws squeezed the three economies into their current shapes. The loss of traditional manufacturing was always going to happen. The speed and consequence of the subsequent decline was not.
Teesside lost almost half of its manufacturing employment in the decades either side of the turn of the century. Jobs paying twice the national average gave way to white collar work in Newcastle and Leeds to the north and south. Today, median weekly pay on Teesside lags the national average by 10%1. Bryson stood on a North Yorkshire escarpment and foresaw an outlook as bleak as the view.
London Calling
Between 2010 and 2022 the UK created 4.6 million jobs2. 30% were in London. The value of new jobs in the Greater South East is 1.2 times that of elsewhere. Across the country, two-thirds of gross value added comes from 9% of the land area. That land is urban and mostly in the south. The Office of National Statistics says that labour productivity is below average in all major conurbations in the north and midlands of England.
If you move from a town to a city you will earn more for doing the same job. It’s a powerful incentive, provided you can afford the housing. That’s getting harder as the gap between the regions grows.
McCann’s book is full of examples, but two conclusions stand out. The prevailing academic wisdom is that cities allow faster growth than towns or countryside. McCann shows that it matters where the city is located. The ONS backs this up in a study of 363 towns, showing that over 70% of those with above average productivity are in the South East and East of England. The success of cities in these regions, London in particular, spills into the suburbs, but no further.
London’s wealth generates taxes to be spent elsewhere. Like a child’s pocket money, this needs regular top-ups. Taxes redistributed as welfare payments do not address inequality. The money spent finds its way back to asset owners in London. This is the problem with all income redistribution. It meets an immediate need to feed and clothe people but it leaves the underlying disparity unresolved.
If London melded with the regions more it would help. Yet McCann’s second conclusion is that the capital is more self-contained than other parts of the country. Link Manchester to Birmingham and you will generate benefits for both. Improve connections from Manchester to London and you may make little difference. This has profound policy implications, not least for the disaster of the HS2 high-speed rail.
Not that all is great in London, however. The ONS reports it is the only UK region to experience an annual decline in productivity since 2019. Blaming Brexit and trade friction only gets you so far.
The unwinding of the debt mountain after 2008 hit London’s financial services hard. For years, the wealthy ploughed investment into commercial property at the expense of research and development and intellectual property. Too little went into housing, which now means more remote work than in the rest of the country. The human capital that does travel to work stagnates, because young talent no longer migrates south. These are the consequences of poor choices.
Education, Healthcare and Manufacturing
Chinese entrepreneurs are restricted by sanctions from accessing the latest AI chips. The country has 15% of global AI compute compared to 75% in the US3. To compensate, companies create solutions for specific industries rather than competing to have the biggest all-purpose model.
Azeem Azhar argues that the winners in AI will be those that deliver tangible benefits in education, healthcare and manufacturing. Practical application matters more than vast data centres and massive models. The UK could take a leaf from China’s book and apply it in all three areas.
Education in the UK has been captured by elites in a similar fashion to the one Andreessen describes in America. AI offers a way to redress the balance. Redesigning the curriculum to encourage curiosity, persistence and enthusiasm over rote learning, would level the playing field among students. Introducing friction into the application of technology avoids the pitfalls of overusing AI.
Preventative medicine can stop the inexorable rise in healthcare spending becoming unaffordable. This will disrupt the powerful in the drug, food, grocery, university and media industries. The political will to do this will only come from someone with the genuine best interests of the majority at heart. Someone who wants to do more than increase income handouts, which fuel inflation and do nothing about inequality.
The fourth industrial revolution will be physical AI. Andreessen argues that participating is a matter of national security, economic growth and employment. Ignore this, or strangle the idea through regulation as the EU has done, and we’ll live in a world of Chinese robots.
The UK must invest where it has a realistic chance of exceling. Its standout manufacturing industries are food, pharmaceuticals and aerospace. Construction is essential for the infrastructure and housing investment the economy needs. Transport and storage matter when activity is spread across the country. In contrast, belated attempts to manufacture electric vehicles or solar panels on top of Chinese supply chains will change nothing.
The Easy Option
There is a long history of criticising capitalism for neglecting those left behind. This is not the fault of free markets, because no such things exist. It is, however, a consequence of governments that intervene in our daily lives, while claiming market forces are beyond their control.
The easy option is to redistribute income. This is a policy choice that avoids addressing the root causes of inequality. There will always be geographic differences in wealth, and cities have long been an effective way to concentrate economic activity. What matters is how smart is the spending that seeks to redress the resulting imbalances.
The government is lurching left towards more redistribution. It is gripped by ideologues arguing that if something did not work, the answer is to do more of it. There is no solution here for the English regions. That’s why 30 years on, Bill Bryson’s words still haunt me.
https://www.nomisweb.co.uk/reports/lmp/lep/1925185563/report.aspx
https://www.centreforcities.org/reader/cities-outlook-2024/how-places-have-fared-since-2010/
https://epoch.ai/data-insights/ai-supercomputers-performance-share-by-country?