It's Worse than we Thought

Yet Britain has the freedom to change its high-migration consensus

Towering columns

In The Telegraph, Miriam Cates says the prevailing orthodoxy on the benefits of mass migration treats Britain like “a spreadsheet”.

The economic arguments against mass immigration are compelling. Increasing the number of people in the labour market has boosted overall GDP, but it has failed to increase GDP per capita, a good proxy for the standard of living. Allowing employers to recruit low-paid staff from abroad disincentivises investment in capital and skills and stifles productivity. Efforts to solve the housing crisis or reduce NHS waiting times are futile against a backdrop of yearly population growth of over half a million.

Cultural arguments against high levels of immigration are harder to make but equally legitimate. If we have learned anything from recent political turmoil in Western democracies it is that national identity matters. While the vast majority of Britons have respect for other cultures and agree that many immigrants contribute enormously to this country, it is also true that immigration on such a large scale challenges social cohesion. Over the last few weeks we have witnessed the results of a clash of cultures on the streets of London, and few would claim our nation is more secure as a result.

But the strongest argument against almost unlimited immigration is a democratic one. At every election since 1992, the Conservative Party has promised to reduce migration. Brexit and the 2019 election confirmed this popular mandate and polling consistently shows the majority of Britons think migration is too high. Ignoring the voice of the people for more than 30 years puts a strain on our democracy. Failing to deliver on this issue is more serious than failing to cut taxes or taking too long to build hospitals - mass migration is changing the nature of Britain forever.

On his Substack, Neil O’Brien shows the economic impact of migration to be less certain and more complex than is often assumed.

So every 1% increase in the population needs to be offset with a 1% increase in the housing stock (pretty intuitive). But affordability will still deteriorate if you just build enough for the new arrivals, not least because incomes are going up, pushing up prices. From June 2012 to June 2023 net migration added 3.3 million to the population of England and Wales, roughly a 6% increase, therefore adding 12% to house prices on CLG’s ready reckoner.

In England and Wales from 2012 to 2022 (sorry no figs for ‘23 yet) the housing stock grew eight and a bit percent (pushing prices down 17%). So net migration is eating up most of the benefits of supply - and that’s before we even get to the upward pressure on prices from domestic population growth or rising incomes or more fancy factors that DCLG’s model doesn’t capture, like growing desire for space, shrinking unit sizes etc.. Net migration obviously isn’t the only factor, but if we are to improve affordability then having high net migration effectively means you have to run a marathon to even get to the starting line of the race.

As I have written about before, we obviously need to take other actions: increase supply, use tax to cut demand, incentivise investment demand to flow to more productive uses, reset housing inflation expectations etc. But people who say '“yeah but build more houses and problem go away” don’t have a sense of how hard the housing problem is to fix. It’s like a guy with pipe cleaner arms turning up at the gym for the first time ever and announcing they can lift a tonne weight no problem. It’s magical thinking. Nor is it just those who want to rent or buy privately that are affected. People are surprised to lean that 48% of households in social housing in London are headed by someone not born in the UK. Many of these people have subsequently got naturalisation, but that is little consolation to someone else who now can’t have that home.

Also in The Telegraph, Nick Timothy cautions against the politics of envy but says we need a much better deal for millennials.

[I]t is undeniable that there is an unfairness in the opportunities and responsibilities shared by the different generations. For people my age, there was a lack of alternatives to university when we turned 18, and the country was already over-reliant on London and the south-east for growth and tax revenues. But for those of us who did go to university, tuition fees – just introduced – were only £1,000 per year. We were still only part way through the great shift in manufacturing jobs from West to East. And while it was painfully expensive to get onto the property ladder, it was still ultimately possible.

…The dream that was within reach for us is increasingly out of reach for [younger people]. Research by the Resolution Foundation shows that those born in the late 1980s earned on average 8 per cent less by the age of 30 than those born 10 years earlier. Pay for graduates in their early 30s fell by 16 per cent between 2007 and 2023. In the past quarter of a century, home ownership rates among those in their early 30s have fallen by more than 20 percentage points. And with these and other difficulties, such as the sheer cost of raising a family, the birth rate is falling fast. Research commissioned by Miriam Cates, a Tory MP, recently showed that 92 per cent of young women want to become mothers and have, on average, 2.4 children. Our birth rate fell to a low of 1.56 per woman. 

Demographic change, then, is a symptom of our troubles, but it is also a cause. As their name suggests, baby boomers are a large cohort. The old-age dependency ratio has grown as the generation has aged and life expectancy increased. This has obvious effects, such as the rising cost of health and social care and pensions payments, the relative reduction in the number of workers compared with pensioners, and the longer occupancy of family-sized homes. Other problems are at play too. The millennial experience in the labour market has more or less coincided with Britain’s poor post-financial crash economic performance. Since that time, 16 years ago, productivity is only 1.7 per cent higher. Economic growth, once we account for population growth caused by record immigration, has been negligible. So it is no surprise that overall pay, on average, has not grown at all. 

In ConservativeHome, James Johnson says the booming of the American South can be explained in part by its pro-growth mindset.

Why is the American economy so much more durable, and so much more productive, than the UK’s? Labour differences, population size, raw materials – I’m sure all of those things play a role; I’m no economist and am not going to attempt to answer that question.

But there is one stark difference I have observed in my public opinion work: there is in the States a natural pro-growth mindset that you simply do not see amongst the average British adult. I was recently in a small Arizona town, population 50,000, asking residents about their area. Most were, on paper when I recruited the focus group, opposed to development. They said at the start of the discussion too that the place was growing too fast.

But then it became clear why they were really opposed to development. They did not mind seeing new homes go up in principle, but felt there was not enough infrastructure to handle it. They wanted to see bigger roads, more shops, a new hospital. The reason they opposed development was because they wanted more development. Compare this to the UK, where people are against the idea of more homes because they are against the idea of more homes. They do not want the fuss, they do not want their street or town getting more busy, they do not want their view to be changed.

At Project Syndicate, Laura Tyson and John Zysman make a defence of the new industrial policy.

Far from harming markets, industrial policy can expand them, while also promoting trade and resilient, secure, and sustainable supplies. It does so by fostering competition, research, and innovation in targeted sectors where progress otherwise would be delayed or lacking altogether. For example, it was EU industrial policy that drove the development of Airbus, spurring competition and innovation in a global civilian aircraft market that had long been dominated by a single US supplier (Boeing), itself the beneficiary of significant industrial-policy support. Likewise, many examples of a market-expanding and market-creating industrial policy can be found in the biotech industry, which has received generous support in the US, both from significant public funding for research and development and from an absence of drug-price regulation. This policy mix has created a high-profitability market for biotech products and made the US the center of medical and pharmaceutical innovation globally.

…The new US industrial policy also illustrates how international collaboration on the development of next-generation technologies can dampen fears that such strategies are inherently protectionist. For example, CHIPS provides the funding for the recently announced Microelectronics Commons, a network of innovation hubs that brings together researchers from academia, government labs, and business to advance microelectronics discovery, innovation, prototyping, and eventual commercialization. Crucially, any foreign company not on the “concern” list can participate.

Moreover, the drafters of CHIPS recognized that achieving competitive, resilient, secure, and sustainable supplies requires investment not just in physical and knowledge capital but also in people. If industrial policy is to play its proper role – expanding market competition and innovation – it must provide for workforce development. TSMC (Taiwan Semiconductor Manufacturing Company), the leading global producer of advanced semiconductor chips, recently warned that a shortage of qualified talent is delaying the opening of its new fabrication facility (“fab”) in Arizona, as well as adding substantially to its costs. The Semiconductor Industry Association predicts that, over the next decade, nearly half of the positions for technicians, computer scientists, and engineers risk going unfilled, owing to a lack of qualified workers.

…As matters stand, market forces and private decisions have left the US economy dangerously dependent on advanced semiconductors produced by a single company (TSMC) in a single location (Taiwan) that is fraught with geopolitical risk. Moreover, the US and its European allies are no less dependent on China for batteries, as well as for the key minerals and rare earth elements used in wind turbines, solar panels, electric-vehicle batteries, and much else. Chinese market power in these sectors poses a significant threat to the resilience and security of supply chains, as well as to US and European national and economic security. In early July, China’s Ministry of Commerce announced new restrictions on exports of germanium and gallium – minerals used in semiconductors and EV batteries – in the name of protecting its own “national security and interests.” A leading global producer of both metals (including 94% of the world’s gallium), China has now demonstrated its ability to disrupt critical supplies to the US and Europe.

On his blog, Iain Mansfield lionises the education reforms overseen by former Schools Minister Nick Gibb.

And school by school, and silently, the revolution has gained ground, with more and more schools adopting the successful recipe of a knowledge-rich curriculum, firm and consistent behaviour policies, with high expectations for all. What is more, the network of those who believe in the reforms have increased, including classroom teachers, school leaders and others involved in education, whether in the Department for Education, Ofsted, the Education Endowment Foundation or elsewhere.

By and large these people are not conservatives – indeed, some of them may be actively opposed to the Conservative Party – but they believe in knowledge-rich education. And they believe in it because it works. Even Bridget Philipson, Labour’s Shadow Education Secretary, has said that Labour has no plans to scrap phonics, saying that, “We will be led by the evidence on this. I want better outcomes for our children.”

For the truth is it has worked. Our schools are better than ever – with children from all social backgrounds and ethnicities doing better than they were 13 years ago. An international ranking of schools system, PIRRLS, found that England was now the ‘best in the West’ for reading, fourth in the world and outperformimg the rest of Europe and the US. Increasing numbers of state schools now regularly outperform private schools, whether you are looking at measures such as children getting into Oxbridge, or the performance of those with Free School Meals getting five good GCSEs. It works.

Wonky thinking

Zachary Spiro and Allan Nixon published a new report for Onward, “Pension Power: Unlocking the UK’s pensions for science and tech growth”, which offers practical proposals for unlocking Britain’s vast, unproductively invested capital stock currently held by pension funds.

If the UK wants to maintain its position as a global tech leader, it must resolve the pensions investment problem. The Government has shown appreciation of the challenge, announcing the “Mansion House Reforms” earlier this year to encourage more investment by pension funds into assets such as venture capital. This included initiatives like targets for the largest funds to invest minimum amounts into these assets. Although a good first step, the 5% target is still well below the largest US or Canadian pension funds that invest 13% and 21% of their assets in this investment category respectively.

The UK must go further. A strategy for tackling the root causes of the failure to invest is needed: a fragmented market, outdated industry attitudes, and an overdrawn preoccupation on keeping down costs at the expense of returns. To achieve this, it should concentrate on three areas. Unlocking these investments will require the Government to impose new regulatory requirements on pension firms — creating new investment structures and, in some cases, taking away some functions altogether.

First, Ministers must take steps to consolidate the defined contribution pension market. The Government should create the “Science Superpower Fund” - an investment vehicle housed in the British Business Bank composed of cash from smaller pension funds, local government pensions, and private savers looking to invest in promising UK companies. New time-limited tax credits for smaller pension funds would encourage them to wind up.

Second, ministers must change the culture around pensions and investment. To boost transparency, all major UK pension funds should be required to benchmark themselves against higher-performing international competitors, not the historically under-performing UK market. This benchmarking should be extended to the allocation of assets, not just overall performance net of fees, and any underperformance should be disclosed directly to savers in language they will understand. The Mansion House Compact’s ambition of 5% investment in private equity should also be doubled. To tackle funds’ preoccupation with keeping down costs, the regulatory duties placed on pension trustees should change to ensure that costs are considered as part of overall investment growth, not in isolation. Funds should be required by regulators to change how they draft their annual reports and regulator-required disclosures to include a statement on how they approach costs. Funds should also be required to consider whether their policies on liquidity are impacting their ability to invest in venture capital. Venture capital (VC) firms accepting public sector funding should be subject to a new “Science and Security Mandate” – a regime requiring VCs to disclose their approach to technology in unfriendly countries.

Third, ministers must facilitate an increase in the investment capacity of the UK venture capital sector. To boost market confidence in a long-term shift in the UK’s venture capital climate, public sector pension schemes should be funded like their US and Canadian equivalents with £3 billion per year, pumping tens of billions into growing UK firms over time. Together, these proposals could close the UK’s scientific funding gap by unlocking £20 billion of investment every year.

These reforms could help remove the single largest barrier to the UK achieving its ambition of becoming a scientific superpower. Generations of British savers would reap the rewards of successful UK companies, boosting their pension savings and supporting more comfortable retirements. If UK pension returns were as high as their US, Canadian or Australian equivalents, a typical saver with annual contributions of £1,600 per year over 35 years would have an additional £97,900 when they retired.

Book of the week

We recommend The Once and Future Worker by Oren Cass. He argues that the decades-long stagnation in living standards for working-class Americans is the product of a policy consensus prioritising consumption over the needs of families, communities and the nation.

The economists, policy makers, and commentators who led and cheered America into the wilderness are understandably reluctant to accept responsibility. They often prefer to blame phenomena like “automation” for our troubles. But that is no explanation. Technological innovation and automation have always been integral to our economic progress, and in a well-functioning labor market, they should produce gains for all types of workers. The economic data these days all point to declining productivity growth, suggesting that progress is “destroying jobs” more slowly than ever. Others continue to insist either that their policies would have worked but for the confounding influence of the other side - if only government had been smaller, with lower taxes and spending, less regulation, and thus more room for economic dynamism - or else if only government had been bigger, with more infrastructure investment, more checks on the market, a more generous safety net, and thus a prosperity more widely shared. Regardless, the prevailing consensus holds that ever more growth paired with ever more redistribution (along with, of course, the ubiquitous boosting of “skills”) must be the right solution, indeed the only solution. Not so.

The alternative is to make trade-offs that instead place the renewal of work and family, sustained by a healthy labor market, at the center of public policy. Rather than taxing low-wage work to to cut other tax rates and expand entitlements, we can do the reverse: we can provide a subsidy for low-wage work, funded with higher tax rates and reduced transfer payments. Instead of organized labor piling burdens on atop the ones that federal regulators already place on employment relationships, we can repurpose unions to help workers and employers optimize workplace conditions. We can expand the demand for more of the work that more Americans can actually do if we place the concerns of the industrial economy on an equal footing with those of, say, environmentalists. We can prepare Americans to work more productively if we shift some attention and resources into from the college track to the other tracks down which most people actually travel. And if we acknowledge that while the influx of foreign persons and products can greatly benefit consumers, it can also harm workers, we can even rethink our embrace of effectively open borders. If we give workers standing, if we make their productive employment an economic imperative instead of an inconvenience, the labor market can reach a healthy equilibrium.

Quick links

Net migration figures for 2022 were revised upwards to 745,000.

Net migration accounts for 84% of projected population growth.

The Chancellor cut 2p from employees’ National Insurance Contributions, funded by real-terms tax rises elsewhere.

The overall tax burden is set to reach a post-war high of 37.7% in 2028-9.

The Government is set to be the first to preside over a fall in real living standards during the course of a Parliament.

“Full expensing” was made permanent, giving larger companies a significant tax incentive for investment.

Those earning £50,000 per year may face a marginal tax rate of 68%.

7 in 10 voters support toughening the welfare system for those claiming long-term sickness benefits.

Rishi Sunak is the second most unpopular member of the Cabinet with voters.

£45 billion of funding was announced for green manufacturing.

An illicit Chinese-owned lab engaged in biological research was found in California.

A 48-hour ceasefire in Gaza started today in response to the release of Hamas-held hostages.

A student wrote anonymously for the Guardian highlighting the growth of anti-Semitism in UK universities.

A draft report is expected to criticise Transport for London for overestimating the effectiveness of ULEZ.