The news that the British economy is growing again did not please everyone. Left-leaning economic commentators tried, but failed, to conceal their disappointment – desperately insisting that what’s happening is the wrong kind of growth.
At so early a stage in the recovery it is surely too soon to come to any conclusion, positive or negative. Instead, we’d do better to look back at the last few years – and try to provide some context for current developments.
In a guest piece for the Economist, John Van Reenen of the London School of Economics presents an overview of the the British economy since the crisis of 2008. The first thing he emphasises is the sheer depth of the recession we’re only just shaking off:
- “The ONS recently revised their figures of national output since the recession. It made grim reading. Popular attention focused on the economically irrelevant statistical revision that abolished the ‘double dip recession’. The brute fact is that UK GDP is estimated to be 3.9% below where it was pre-crisis in 2008 rather than 2.6% as previously thought. We are as a national economically around 14% smaller than we should be based on past trends. ”
Van Reenen describes the period since the recession as the “worst recovery for 100 years”, but notes the disconnect between GDP and employment trends:
- “…unemployment remains at 7.8% whereas we would have expected double digit joblessness given how sluggish growth has been.”
- “Real wages have fallen by about 9% since 2008 due to three decades of reform that have simultaneously kept the pressure up on benefit claimants and weakened the ability of trade unions to maintain real wages even during recessions, as happened in the past. But although some job is better than no job, miserable wages are not the path to long-run economic health.”
A less miserable way of looking at the situation is to recognise that British workers have done their bit for the recovery. Unfortunately the same cannot be said for the owners of capital:
- “Business Investment is now 30% lower than what it was in 2007. This capital shallowing is reflected in the productivity puzzle: UK GDP per hour has not recovered as it did in previous recessions. A big part of this is because low capital per worker means low output per worker.”
A 30% drop is a truly staggering figure. Van Reenen blames it on dislocations within the banking system and cuts to public infrastructure investment. These have certainly played their part, but there must be more to it than that.
Extreme pay restraint on the part of the workforce, plus a big fall in the trade weighted value of Sterling amounts to a double boost of internal and external devaluation. Yet despite this shot in the arm, investment and exports have remained anaemic.
The bog-standard leftwing response is to call for more stimulus, for instance, through a cut in VAT as advocated by the Shadow Chancellor. Rather embarrassingly for Mr Balls, consumption seems to have recovered without the help of his debt-funded temporary tax cut. In any case, it’s investment and exports, not consumption, that is the challenge here.
The bog-standard rightwing response is to call for supply-side reforms. In particular, it is argued in some quarters that employment rights should be weakened or ‘voluntarily’ surrendered in return for company shares. Whatever the merits of some of these proposals, the overall emphasis is economically and politically misjudged. British workers are the heroes of the recovery not the villains – and should be recognised as such.
The real reason why investment has been so weak since the recovery is that it was weak before the recovery. For a while this was disguised by the availability of cheap credit and the abundance of get-rich-quick schemes to pump it into, but when the flow of credit was turned-off the bubbles deflated. By privileging speculation over genuine investment, Gordon Brown’s boom-and-bust policies did lasting damage to the culture of enterprise in this country.
We all know that easy money makes for bad government, but, in much the same way, it makes for bad business too.