It is beyond dispute
that the UK economy is suffering from a second lost decade, by which
I mean a sustained period of poor or non-existent growth far below
comparable countries. When something has been going on for so long,
it is tempting for many to write as if it has
been happening forever, or at least for our collective
living memory. That in turn allows people to write their own accounts
of the reasons for this decline, and if you wanted to be cynical you
could say they choose reasons for this decline to fit their own
political prejudices. Was it the advent of Thatcherism, or more
generally neoliberalism, that started the rot? Was it and is it the
outsize influence of the City and finance?
The problem that I
have with a lot of this writing is in the empirical evidence it tends
to use. So this post is mainly about establishing the stylised facts
that any account of what has gone wrong needs to explain. In my view
there are two key points that need to be made here, and two more
minor but still important issues that if ignored could mislead..
First, looking at UK
growth rates alone is a mistake. The UK economy operates in a global
environment, where technical innovation tends to be dispersed
wherever it originates from. So, for example, the UK economy
undoubtedly benefited from widespread improvements in computing power
and information availability that began in the 1990s, and it would be
foolish to try and explain that in terms of some peculiar UK
development.
Equally, in the
decades after WWII the global economy grew rapidly in part because of
economic reconstruction (in Germany, Japan and elsewhere) and that
benefited all economies, including the UK. That rapid growth was
unlikely to continue in subsequent decades. Therefore to compare GDP
growth rates before and after the 1980s and blame neoliberalism for
the drop off in growth rates is almost certainly wrong, but it is
frequently done.
It is far better to
assess UK economic performance by comparing the UK to other
countries, and in particular the US, France and Germany. When you do
this you get the following stylised facts. In the 1950s and 1960s the
UK economy grew less rapidly than elsewhere. How much of that was due
to post-war reconstruction is uncertain. But in the 1980s, 1990s and
early 2000s the UK economy grew at similar rates to the US, Germany
and France. During those two and a half decades there was no UK
decline.
The following chart,
plotting productivity in terms of output per hour, is one
illustration of this. (It ends in 2019 to avoid the disruption caused
by the pandemic.)
I have normalised
these index numbers so all countries are at 100 in 2007. Before that,
we can see that US productivity grows most rapidly, followed by the
UK, and then the remaining countries except Italy, which had a
disastrous two decades. After 2007 productivity growth is still
lowest in Italy, but the UK is now second slowest rather than second
fastest.
Fans of a more
continuous UK decline might object that relatively favourable UK
growth in the 1980s and 1990s was itself rather special. The most
obvious candidate here is North Sea Oil. It is certainly the case
that revenues from North Sea Oil allowed the Thatcher government in
particular to do various things that it would not otherwise have been
able to do. However in a purely mechanical sense oil output is not
enough to explain how UK productivity grew at similar rates to
productivity in the US, Germany or France over this period. In
addition, the discovery of North Sea Oil in the late 70s and early
80s helped lead to an appreciation in Sterling that had devastating
consequences for UK manufacturing.
A more plausible
explanation for strong UK growth during these two decades and a half
is EU membership. But perhaps that is better seen as a reason for
relatively poor UK performance before we entered the EU, when the
benefits of lower trade barriers helped growth in Germany and France
but not the UK. It is of course an important reason for slow growth
after we left the EU more recently.
The first stylised
fact that therefore needs explaining is why UK economic decline
relative to other major economies has not been a post-war constant.
Indeed it is possible that all that needs explaining, in terms of
relative UK macroeconomic performance, is the last fifteen to twenty
years. However we need to add our second stylised fact that needs to
be part of any account of the UK’s poor relative performance. Here
is a chart I first showed in
a post last August from a study
by
Chadha and Samir
Investment is
crucial for growth not just because it helps workers produce more,
but also because it
often embodies new technology that adds to productivity growth
and therefore living standards. Investment has nearly always been
higher in Germany, France and the US than in t…
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