No Country for Young Men (or Women)

How to avoid another lost decade

The gloomy economic news keeps on coming. Ahead of the upcoming Fiscal Statement which is widely expected to contain tax hikes and cuts to public spending, the Bank of England announced that we’re heading for a two year recession with incomes set to fall next year. To make things even worse, the period we’re now living through will likely be known in the future as the Long Recession (unless it’s even worse than expected). The economy is in a mess and, although the measures being introduced by the government are partly in response to the issues caused by the Truss and Kwarteng mini-budget, the problems are deep seated and pre-date the ill fated Truss Premiership. 

Things have never really been the same since the Great Recession. Although economic growth returned and the labour market bounced back, the Great Recession was deeply damaging. Productivity has been stagnant with anaemic economic growth and real wages not returning to the levels forecasted before the Great Recession. We have experienced a lost decade with younger people bearing the brunt of it. Although the upcoming Long Recession will not be as scarring as the Great Recession, it looks as though we’re in for another lost decade with young people once again being hit the hardest.

In some ways things are better now than in the past. For example, I’d  much rather be around today than in previous decades despite my nostalgia for the 60s (largely driven by my love for the music and having watched Withnail and I so many times). Advances in science, medicine, and technology coupled with the fact we now live in a much more tolerant and multi-cultural society means it’s a much better time to be alive than at any other time in history.

However, as already pointed out, things are not good for young people. Younger generations have seen their wages stagnate, were locked away during what should have been some of the best years of their lives during Covid, and are now facing yet another lost decade. To make matters worse the housing crisis means they are spending a significant proportion of their income on renting a room in a shared house with very little prospect of ever owning their own home. This is causing wider economic problems and is also making it impossible for younger people to live the lives they want and so they are delaying important life steps such as moving in with partners or having children. For one of the first times in history living standards are not improving for younger generations and there is little hope that people will not enjoy a better life than their parents. The misery being faced by young people is exacerbated by the highest inflation in decades increasing prices and reducing real wages.

Things look set to get even worse as the country enters the Long Recession. Recessions are, obviously, generally bad news for everybody. However, the impacts are generally felt differently among various groups. The Bank of England has forecasted that unemployment will shoot up from 3.5 per cent to 6.4 per cent. Given the fact that the Great Recession hit young people the hardest with the unemployment rate for young people being twice as high as that of the general population, it is likely that they will again bear the brunt in terms of unemployment with many struggling to enter the labour market or being let go from their jobs.

Such a situation would have a devastating impact on the lives of young people. It could delay their entry into the labour force or mean they accept jobs for which they are not a good fit which will reduce their future earning potential as well as further hamper productivity. As Withnail laments, “I am a trained actor, reduced to the status of a bum”, many young people will find themselves unable to enter the professions they’ve studied and trained so hard for.

It will be particularly bad for young people from less affluent backgrounds. If there are fewer employment opportunities then the jobs which are available may go to those with family connections. Moreover, younger people from wealthy backgrounds will have extra financial support to undertake further study or training and have their incomes supplemented and will generally receive a greater level of protection from the impact of the recession. All of this risks reducing social mobility, something which the UK is already relatively poor at.

The economic situation and outlook is bleak. It’s worse if you’re young. It’s really, really bad if you’re young and poor.

How did we get into this mess?

The Great Recession

As discussed above, the Great Recession has had a scarring impact on the economy. Although many people did lose their jobs, we’ve experienced something of a jobs miracle in the country with the labour market bouncing back relatively quickly which has thankfully meant the UK has been spared the misery of long term mass unemployment. However, workers have still suffered the consequences of the Great Recession in the form of low wages. This looks set to continue even as we head into the next recession with the labour market remaining tight but wage growth stagnant. 

We have also not seen productivity rebound to pre-Great Recession levels. Before the Great Recession productivity was increasing steadily but slumped in 2008 and never recovered.

The exact cause of this is a matter of debate and is often referred to as the Productivity Puzzle. However, it is likely caused by a drop in demand from Europe (the UK’s biggest trading partner) and lower investment in the UK economy. 

What is more, interest rates were lowered as a response to the Global Financial Crisis and subsequent recession. This was the right thing to do and thanks to decisive action by Ben Bernanke at the Federal Reserve probably helped prevent the Great Recession turning into a depression, it has had unintended consequences. For example, there is some evidence to suggest that it has led to the emergence of ‘zombie firms’ which otherwise would have gone bust if it were not for the availability of easy money. These firms crowd out growth opportunities for more productive firms, especially startups, thereby hampering productivity. The loose monetary policy consisting of low interest rates and quantitative easing also put upward pressure on house prices which has contributed to the housing crisis (more on that later).

The political response to the Great Recession must also shoulder some of the blame. The Labour government rightly bailed out the banks. Bailing out companies and industries is generally not the correct course of action but if you’re going to bail out anything it should be the banks. Gordon Brown received a great deal of criticism at the time but if he and his Chancellor Alistair Darling had failed to act then potentially the whole financial crisis would have collapsed, with disastrous consequences for the UK. To paraphrase the hip hop version of James Madison, “I hate to admit it, but they don’t get enough credit for all the credit they gave us”.

However, the rescue package had a huge impact on the UK’s national debt. In response to this, the Coalition government embarked on a program of austerity with tax rises and cuts to public spending. Although there is some evidence which suggests that austerity can restore the public finances and bring about economic growth, a lot depends on what you mean by austerity and the wider economic context (this is an excellent book on the topic). A detailed discussion of austerity and the approach of the UK government goes beyond the scope of this post, but a scheme which included tax increases and which took place at a time of historically low interest rates was the wrong approach to take. The Chancellor at the time George Osborne should not have raised taxes or added extra complexity to the system (more on this later). What is more, although it is irresponsible to use borrowing to fund day to day public spending, the Coalition and subsequent governments should have taken advantage of ultra low interest rates to fund spending on infrastructure projects which would have boosted economic growth.

Brexit

We also need to talk about Brexit (sorry). I don’t want to rehash the old debates and it is a topic which brings out the absolute worst in people on both sides. However, the way it has been handled has been an absolute disaster. Motivated by a long term ambition to clamp down on immigration and avoid being drummed out of office by her ERG colleagues, Theresa May pursued the hardest possible Brexit. Those on the Remain side of the debate also need to accept responsibility for this by pushing for the other extreme of either a second referendum or completely reversing Brexit meant that a more sensible compromise solution was never even seriously considered. The result has been increased trade friction with our biggest trading partner.

Brexit has also plunged the UK into political turmoil. The UK has long been admired for its stability but since the Brexit Referendum it has had four Prime Ministers in six years (at time of writing). We are like Italy but without the nice food and weather. This chaos has meant that investor confidence has dropped and also means our politicians have been too distracted to focus on the important reforms necessary to bring about economic growth.

The NIMBY Problem

The final issue has been the UK’s failure to build enough. In their excellent article, Sam Bowman, John Myers, and Ben Southwood coined the phrase ‘The Housing Theory of Everything’. As you may have guessed, it’s the theory that the housing crisis is the cause of so many of our ills. In our context it is the impact it is having on productivity. In short, it is stopping people from moving to our most productive areas. This prevents people from undertaking roles for which they are a good match and so that role remains vacant, filled by a less productive person, or undertaken by a well matched person but who has a lengthy commute which in turn hampers their productivity.

The Housing Theory of Everything is correct, but it should be expanded to the NIMBY Theory of Everything. The reason we have a housing crisis in the UK is largely down to the fact that supply has failed to keep up with demand. Our failure to build enough new homes is due to the planning system which adds complexity, increases costs, and can be easily gamed by rent-seekers. All of this makes it difficult to build the homes we need in the places where people want to live.

However, it is not just homes. The current system makes it impossible to build practically anything which would boost economic growth. Take energy for example. It can’t have escaped your notice that we are in the midst of an energy crisis. Not only is this causing misery for millions of households, it’s also hampering productivity. Money which could be spent on investment is instead going on energy bills. Increasing supply by building nuclear power plants, wind turbines, and solar panels would help to solve this problem but most attempts are thwarted by local residents using the planning system to block their construction. It’s the same thing with transport infrastructure. Improved transport infrastructure would speed up journeys and connect areas, again helping to improve productivity. Again, transport infrastructure projects are often delayed or cancelled due to the involvement of local residents. The UK is also running out of lab space, again due to the planning system being gamed by NIMBYs. This means groundbreaking research in science and technology is not being carried out and the UK is losing out on investment.

The NIMBYs can be split into two main groups. There are those who don’t want their local area to change because they currently like the way it looks or they don’t want extra people etc. Then there are those who oppose things such as new homes as this will reduce the value of their own property.

This form of rent-seeking behaviour goes far beyond the planning system. We have seen it in London, for example,with Uber being temporarily stripped of its licence. Or take international trade. As somebody who once advised Liz Truss (at the Department for International Trade NOT Number 10) we were frequently lobbied by representatives of certain industry groups. Of course it was right that the views of business are taken into account to ensure they could make the most of the benefits of any trade deal, but they would often push for measures such as tariffs and quotas to remain in order to shield their members from competition.

Competition is a great thing. It encourages innovation and forces businesses to be more productive and keep prices low. Unfortunately, it is all too tempting for incumbents to engage in a bit of rent-seeking to protect their interests and shut out competitors and it’s all too tempting for politicians to enable them as they want an easy life and don’t like headlines accusing them of betraying British farmers (to take a completely random example). Whether it’s in ceramics, steel, or farming the end result is always higher prices for consumers and sluggish productivity.

Covid

The Covid pandemic obviously caused a great deal of chaos and misery with over 200,000 people dying of the disease in the UK, the economy being essentially shut down, and all but essential workers being locked in their own homes. In order to support people and businesses during the pandemic, the government borrowed over £300 billion.

Such packages to support people and businesses are usually inappropriate but when they are forced to not work or open for business by the government then it is the right thing to do. Rishi Sunak should be commended for introducing schemes such as furlough as the alternative would have been mass unemployment and bankruptcy which would have been far worse in the long run. Also, although in many ways far too heavy handed, lockdowns were necessary in order to protect the elderly and vulnerable.

However, they caused problems. Locking down parts of the economy around the world has resulted in supply shortages and this, coupled with the pent up demand of consumers has led to too much money chasing too few goods. Moreover, it could be argued that monetary policy was probably too loose during the pandemic and so all of this, in addition to Putin’s evil and illegal invasion of Ukraine has contributed to the very high inflation we’re currently experiencing.

How do we fix it?

I have painted a very gloomy picture of the UK economy and outlook, and rightly so. However, I am not a Doomster. I don’t believe that we should just accept that the UK is in terminal decline and do nothing about it. If the government introduces certain policies then we have the chance to stop the rot and bring about economic growth.

Supply Side Reform

The main tragedy of the doomed Truss Premiership is that there were a lot of very good policies in the mini-budget, but they were unfortunately overshadowed by the announcements on tax cuts. 

We need to build more homes, nuclear power plants, wind turbines, solar panels, transport infrastructure, labs, and offices. When it comes to housing, this needs to be in places where people want to live. The planning system should be liberalised in and around our major cities to allow far more homes to be built, including on the green belt. As for transport, this can play an important role in Levelling Up left behind areas by connecting left behind towns with major cities and the surrounding areas. It is, for example, a travesty that a city such as Leeds has neither a metro or a tram system. There should also be high speed rail between our most productive cities such as London, Cambridge, and Oxford.

We also need to reduce some of the burdens on businesses such as Sunday Trading Laws so that business can stay open longer.

Supply side reforms such as these will boost productivity and help bring about economic growth. 

Tax Reform

The other tragedy of the Truss-Kwarteng weeks is that it will be almost impossible to have a sensible discussion about tax reform anytime soon. The tax burden, while high, is not the main drag on the economy right now. As such, it was wrong to focus on tax cuts in the mini-budget.

However, the tax code in the UK is far too long and complicated. The UK ranks poorly when compared to other advanced economies in this regard. This creates burdens and added costs for businesses. The officials at the Office for Tax Simplification do great work but have very little clout and are languishing in the basement of His Majesty’s Treasury. We need a Minister for Tax Simplification responsible for removing complexity from the tax system and thereby reducing the burden on businesses. The VAT system, with its ridiculous set of different rates and exemptions, would be a very good place to start. We should have a flat rate with no exemptions but levied at a lower rate.

We also need a tax system which incentivises investment. George Osborne cut the headline rate of Corporation Tax but at the same time widened the definition of ‘taxable profits’ in part because tax reliefs for investment were less generous. The government should introduce a much more generous system for capital investment (how much companies can deduct from their tax bill if they invest in things such as machinery). Making the Super-Deduction introduced by Rishi Sunak permanent would help with this.

Preventing Rent-Seeking

This is linked to supply side reform. People should not be able to block the building of homes or solar panels because they are worried about the impact it might have on the value of their own property. 

This should extend to trade policy. The government should not let trade policy be dictated by those with vested interests nor should it let negotiations be held hostage by powerful lobby groups who attempt to shield a special interest group from competition.

It should also include occupational licensing. If you work in a profession where there is a danger you may cause serious harm to others if you are negligent such as medicine, law, or financial services then obviously some form of licensing is necessary. However, this should not apply for other roles such as hairdressing.

Monetary Policy Reform

As we’ve already seen in this post, the Bank of England plays a vitally important role in our economy. The decisions it makes affect all our lives and its response to crises can either help us to avoid economic disaster or make things even worse. 

The Bank of England’s current mandate of maintaining price stability through targeting inflation at 2 per cent can be difficult. The Bank is often placed in a difficult situation on how best to respond to inflation. Before the Great Recession, for example, high oil prices raised cost-push inflation. In order to meet the two per cent target, interest rates remained high when it would have been far more appropriate to tolerate a level of higher inflation, in order to support economic growth. Eventually, the Bank of England did lower interest rates. The experience of the European Central Bank (ECB) highlights another pitfall with strict inflation targeting. In 2011, the ECB raised interest rates as it was concerned about inflation despite very high unemployment and stagnant economic growth in Southern Europe.

The Bank of England should instead introduce nominal GDP targeting. No system is perfect, but this would give the Bank the flexibility to target the total amount of nominal spending in the economy as well as ensuring stable growth and keeping inflation down.

Increase Immigration

The country needs higher levels of immigration both of high skilled and low skilled workers. Immigration reduces costs for businesses and increases productivity while the impact on jobs and wages is negligible. 

The UK has a relatively liberal immigration system for high skilled workers. However, we can and should go even further. For example, the government should adopt The Entrepreneurs Network’s policy of reforming the High Potential Individual Visa. This would involve adding more universities to the list of ‘Top Global Universities’ to include the universities whose graduates have the highest potential earnings. This would ensure the UK continues to attract the best minds from around the world and reap the benefits of new businesses and exciting products and services being created.

We also need to increase low skilled immigration. We have labour shortages in the UK which the native population is either unwilling or unable to fill. This is putting a strain on businesses and hampering productivity. The government should liberalise the system by granting more visas to low skilled migrants in addition to lifting the ban so that asylum seekers are able to work.

EU

The UK needs to fix its relationship with the EU. The ideal end point in the medium to long term would be the sensible solution which was widely ignored after the referendum, namely the UK rejoining the Single Market. This would remove many of the frictions to trade and massively reduce the burden on businesses.

However, this is not politically feasible at this point and there is very little appetite for what would no doubt be a lengthy and fraught accession process. In the meantime, the government should commit to having a mature and closer relationship with the EU or at the very least not try to antagonise it and trigger a trade war.

Increase R&D

The UK is a science and technology superpower. It is home to a number of world class universities and industry leading technology companies which are undertaking cutting edge research into science, medicine, computing, and artificial intelligence.

The government is rightly proud of this. However, we risk losing our edge if we don’t increase research and development. The UK spends far less as a proportion of GDP on R&D than other comparable economies and this needs to change. The UK should have the ambitious aim of spending 5 per cent of GDP on R&D by 2030.

This will involve the government increasing funding as well as introducing many of the reforms already set out in this post. I’ve set out in more detail what this would like and why it matters. Also, this by Sam Bowman and Stian Westlake is also very helpful.

How can we make the economy work for young people?

The policies set out in the previous section have the potential to boost productivity, increase economic growth, and improve living standards for all people including younger people. However, the government should also implement specific policies to improve things for young people and their families.

Build More Homes

This was obviously dealt with under the supply side reforms but it needs repeating. The biggest single thing the government can do to improve the lives of young people is to liberalise the planning system to allow more homes to be built.

We need to build homes of every type. One bedroom, two bedroom, family homes, flats, studios, houses. We need to build up and we need to build out, including on the green belt. The homes need to be near to where the jobs are, in and around our major towns and cities and close to railway and tube stations.

Building more homes will increase supply and so housing will become more affordable. As a result, young people won’t be forced to spend a significant chunk of their salary on living in a flatshare. Instead they will be able to live by themselves, or with their partners, and start a family of their own if they so choose.

Freedom of Movement

Brexit took away the right to live and work in the EU. This was a freedom enjoyed by many young people. The UK should place mobility at the centre of all its free trade negotiations to set up reciprocal arrangements for under 35s to be able to live and work in every country the UK has a trade deal with, as well as the EU.

This would be a great opportunity for young people to experience working in different countries and to learn the language and about the country as well as expanding their horizons and picking up new skills. It will also obviously improve their career prospects.

Nest Egg

At birth, the government should set up a nest egg for children which they will be able to access when they turn 18. This would be similar to the idea proposed by the Resolution Foundation in 2018. However, it would be less restrictive and so could be used for any purpose. It could be used to fund studies or to start a business, or simply used for everyday spending. It is their money and they can do whatever they want with it.

This could also be used to tackle inequality. For example the money could be based on parental income so that young people from less affluent backgrounds receive more money than their wealthier peers.

Reform the Benefits System

The Coalition government introduced the two-child limit which restricts some benefit payments to the first two children born to the poorest households. This was done in a misguided and poorly thought out way to reduce the number of children born to low income parents. The reform has failed in its intended aim, it has simply pushed young families and children further into poverty.

The two-child limit should be scrapped. This will reduce the financial pressures on young families, stop children falling into poverty, and ensure that children from less wealthy backgrounds do not fall further behind their peers from wealthier households.

Affordable Childcare

After housing, childcare is the biggest expense for many young parents. Not only is this reducing the money young parents have to spend on other essentials as well as nice things such as holidays and meals out, it also has a negative impact on the work opportunities of parents, especially women. Many young parents would like to work longer hours but are unable to as they cannot afford to pay for childcare.

Childcare should be made more affordable by liberalsing the system and relaxing the rules for childcare providers such as staff to child ratios and qualification requirements. The government should also increase funding, especially for low income young parents.

Primary and Secondary Education

The UK already sends more than the OECD average on education and yet educational outcomes are worse than in countries which spend roughly the same or less. This would suggest that there is more going on than just money. Moreover, children from low income households tend to have worse outcomes than children from high income households.

There needs to be radical change in the school system. The government should learn from other countries about what works well and implement similar policies in the UK. We should also spend more money on children from low income households. 

Bold education reforms will ensure that every young person has the best start in life and are able to make the most of opportunities regardless of their socio-economic background.

University

Going to university can improve the life chances of many young people, especially those from poorer backgrounds. A degree is also essential for many roles. 

However, young people are having a sub-optimal experience due to the high cost of living.

The UK should introduce a more generous system of maintenance grants. This will ensure that students can afford to live and make the most of their university experience. 

Students are also having their education disrupted due to industrial action. Low pay for junior academics means that many of them feel they have no choice but to strike. Such a situation is not good for students who are missing out on valuable contact time and it is also bad for early career researchers who are often young and are struggling with low pay. The government should increase funding for universities to ensure young people working in academia receive a generous pay which will help attract the best minds into the profession and ensure that students receive a world class education.

Nightlife

The UK’s cities are homes to many bars and clubs and also hosts some of the world’s greatest bands. Unfortunately, many of them are forced to close their doors relatively early compared to other countries. 

This stops young people from being able to enjoy themselves with their friends. It also means that young people working in the night time economy cannot earn more money by working longer shifts.

This is where the NIMBY problem raises its head once more. Local residents who have chosen to live in the middle of a major city or next to a nightclub or music venue decide to complain to the local authority and prevent the venue from having a late licence or forcing it to close.

The government should take licensing powers away from local authorities in the centre of major towns and cities. There should be a right for venues to stay open all night unless there is a very good reason for them not to.

Drug testing facilities should also be rolled out at venues for young people to ensure what they are taking is not contaminated with other chemicals and the government should look into decriminalising and heavily regulating most drugs. This would help to keep young people safe on nights out and at festivals.

Votes at 16

If we want the government to represent the views of young people then we need to ensure that more of them have the right to vote. Extending the franchise to 16 and 17 year olds will help shift the balance towards young people meaning that the government will no longer be able to favour older people at the expense of the young.

Conclusion

The UK economy is in a mess and things are set to get even worse. It’s a particularly bad situation for young people who have already experienced one lost decade and look set to endure another. It doesn’t have to be this way. Introducing many of the policies in this post will boost productivity, increase economic growth, and improve living standards for all people, especially the young.