Where are public sector cuts really?

An incredibly helpful piece from Jonathan Dupont gives the answer and shows how salience is so key in understanding economic policy: boring things like indexation are just not salient to voters.

1. capping each household’s benefits to average take-home pay will save only £387m a year
2.  By far, the biggest saver for the government has been the early decision to switch the indexing of benefits, tax credits and public sector pensions to CPI. By 2018-19, the OBR estimates that this will save £6.6bn in total a year.

UK relative productivity again

The ONS has helpfully an international productivity comparison page,  here.  
What does it show?

First, teh UK performance in the 2000s was pretty impressive: better than the US.  Italy was very poor.  Second, our performance after the shock was also very poor, note the US in particular.
Third, note that the real puzzle is the post 2011 data.  This is mostly due to the rise in UK hours worked relative to other countries, see below.








I wonder if the hours data might be under revision at some point. 

Returns to medical research

We have just produced a report on the public sector spillovers from science spending and find a 20% rate of return on public sector science spend. 

This medical paper, What’s It Worth report, very widely quoted finds

We estimated that the GDP gains that result from
increased public/charitable medical research deliver
an additional rate of return in the range 20–67% (with a
best estimate of 30%). (Page 7)

How does all this relate?

Page 5 explains this

Economic returns to medical research comprise two,
additive, elements:
• health gains net of the health care costs of delivering
them
• GDP gains, that is to say the UK national income
that results directly and indirectly from the medical
research and the further activity stimulated by it.

How do they get the first? By counting how much life has been extended due to a drug, valuing that life over time and figuring out what the drug cost to develop and whether it was done in the UK or not.

How do they get the second?  P.36 sets out two methods

1 two-stage approach:
a) estimating the private R&D stimulated by public
research
b) estimating the social rate of return to the private
R&D so stimulated
2 one-stage approach: a direct estimate of the social
rate of return generated, by whatever transmission
mechanisms, by public medical research

The one-stage method uses estiamtes of the social rate of return that are derived from agriculture. See their page 36

But because  empirical estimates to enable the one-stage approach
to be taken come only from non-medical sectors (mainly
agriculture), we considered it desirable to provide a
check by undertaking the two-stage estimates as well,
as described in the following paragraphs.

The one-stage method uses data from the US to get 1a above, that is, the crowding in effect of public R&D and then uses an average of the public rates of return of private R&D , see page 38, based mainly on US manufacturing studies. 

. 

Global value chains and why UK exporting has not done better

OECD has worked on global value chains GVCs. here's the idea:


As in this nice example of forward  participation, even though gross exports of A are 100, 110 of that are then re-exported.  And backward participation gives the corresponding import value.

How much are these? Figure 2 gives the answer



The UK figure is that total foreign inputs and domestically produced inputs used in third economies’ exports are 45% of total exports, made up of 20% and 25% backward and forward.  That is, for every £1 of UK exports, 25p is re-exported and 20p is imported.

How does this relate to exchange rates, which fell in the UK in 2008, but were not accompanied by a rise in exports?  I conjecture GVCs  might be part of the reason: for the UK, 20p of our exports are imported, so that as the exchange rate falls that 20p gets more expensive.  And if 25p is then re-exported the exchange rate between the re-exporting trading partners matters too.