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Don’t allow this man to start planning the economy

It is a truth universally acknowledged that whatever the problem, it is always someone else’s fault. Especially in politics. What, though, if there are some genuinely difficult problems to solve? Like why the north-east of England generates less wealth per capita than the south-east. Why 38% of our children live in poverty.

Because he doesn’t seem to know the first thing about the economy. Lower GDP is not wealth, it’s income. But lower GVA (to give the name for GDP of subnational units) is the reason why the high child poverty rates. So, they’re the same problem.

And no, not in the way you might think. So, wages will be connected with the income to be made from employing the labour. That’s not a controversial thought in the slightest – the workers’ wages will be determined by the average productivity of labour. This is obviously true at the level of an entire economy. Ha-Joon Chang devotes an entire chapter of one of his books to why the Swedish bus driver makes more than the (Bangladeshi, I think?) one. P. Krugman points out that it’s entirely obvious that this should be so. The example of the barber is oft used. Largely the same technology used around the world, chair, comb, scissors, but the incomes diverge wildly. Why? Because the determinant of wages is what could the bloke make in the next job along? That, in turn, defined by how much the capitalist has to bid to gain the labour the bastard can profit from.

This effect is lesser with sub-national economies, obviously. Obvious because migration to higher paying areas is easier. But the effect is still there. So, lower productivity area, lower wage area. Simples.

Another way to approach the same point. A large part of the cost of living is the labour incomes of all those around you who provide the haircuts, bus rides, food and so on that you live upon. If you’re in a lower wage area then the cost of living will be lower by whatever portion of your consumption is delivered by local labour. Servants are, after all, astonishingly cheap in poor places.

Child poverty is measured against *national* median household income. So, therefore, there will be more child poverty in a lower productivity area. Simples.

We can and should go further too. We do not adjust for the cost of living in different regions. We should. We should use some variant of PPP to adjust nominal incomes into something closer to what we’re really interested in – consumption ability. We don’t, but we should. Everything is cheaper Ooop North. Not just housing. A London pint is £6 these days. Try that in Wallsend.

But leave that aside. The reason for the high child poverty rate is simply that we’re measuring regional incomes against a national benchmark.

Now, anyone who doesn’t understand this shouldn’t be allowed anywhere near economic planning, QED.

BTW, the opposite is also true. London poverty is grossly underestimated. True, incomes are higher because it’s a high GVA area. That means that when measured against a *national* median income the number of those more than 40% below it is low. But prices are vastly higher in London (£6 a pint, right?) meaning that consumption poverty in London is very much higher than recorded.

8 thoughts on “Don’t allow this man to start planning the economy”

  1. The £6-a-pint thing is overstated though. Tradable goods (supermarket food, petrol, electricity, cars, smartphones) are broadly the same price nationally. Similar for services: car insurance in Surrey won’t be higher than in Lancashire. Poor people spend more on tradable goods than on services (buying booze at the supermarket, not the pub).

    The biggie is housing costs, obviously. If you make a variant of PPP with rents alone, you might find London has a lot more poverty. But if you narrow it down further by tenure, you’ll find council tenants in London are relatively well-off and mortgage-free homeowners have oodles of disposable income. You can slice the statistics to make whatever point you want.

  2. Andrew got there before me, mainly. However a point that he doesn’t make is that folks on nationally-determined incomes are vastly better off in the poorer parts of the UK, especially because of the housing costs he mentions. Also, if spending the same on a house in the NE, you get a bigger one for the same money than in the SE.

    There used to be a thing called ‘London Weighting’ on those state-controlled jobs. Even in the 1960s it was a joke.

  3. Importing millions of people from poor (in its proper sense) Countries, with little or no education, few or no skills makes calculations about wealth and poverty likely to be unreliable.

    What is the primary factor which decides where a business will start-up/stay, locate, or relocate and where bright ambitious people will want to live?

    Low business rates? Tax incentives? Subsidies? Available labour? Infrastructure?


    It is: do I or I and my family want to live here? Is there good housing, good schools, good health care, plenty of amenities, leisure facilities, pleasant climate, low crime rate, good communications, welcoming & friendly locals?

    When asking why region X lacks inward investment, region Y gets much more, check which you would want to live in. Then you will have your answer.

    It might surprise some, how much influence the proximity of golf courses influenced choice of location for Japanese companies and their executives.

  4. Two friends have paid a couple of visits the NE of England recently, for a few days each time. They were struck by how cheap all sorts of things were. In particular they loved the fish and chips. Cheap as, ahem, chips, huge fish, and – being oop North – far better than can easily be found in the south. The bakery is better too, as presumably everyone knows. They also enjoyed the cheerful brouhaha in restaurants and pubs as whole families ate together. As you’d expect from the stereotype, people were friendlier than dahn saff.

    Wonderful sea views where they stayed, too. In fact if it weren’t so far they’d have loved to buy a weekend cottage there.

    When I lived in the NE a favourite weekend cottage retreat for locals was The Lakes – distinctly pricey I assume, but pretty good if you like looking through the rain at bulky hills.

  5. “Consumption poverty in London is very much higher than recorded.”

    I don’t think you’ve allowed for proceeds of crime and the black economy.

  6. When asking why region X lacks inward investment, region Y gets much more, check which you would want to live in. Then you will have your answer.

    If I could keep the same job and the same income, I’d much rather live in the north than the south, because my money would go so much further. And (as BoM4 has frequently pointed out), the number of jobs for which location is largely immaterial is continually increasing.

  7. A quote from the man himself:
    ‘To start building wealth here that we can keep, we’re creating jobs by repurposing relics of forgotten industries.’ The Newcastle and Gateshead riversides from the Gateshead Millennium bridge.

    Abridge from nowhere to nowhere. Great way to start.

  8. In most cases children cause the poverty. One parent will likely have to either change jobs or cut back etc. Our income dropped significantly once we had kids.

    (We counted as poor one year because neither of us were working, despite having quite good savings. Income isn’t always a good guide to wealth.)

    Then the fact that kids are generally had by the young, who tend to earn less. I wasn’t going to wait until I was 40 and set financially to start a family.

    Chuck in single parents and it’s astonishing that 38% isn’t higher, to be honest.

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