Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 29 January 2015

To all UK journalists

who plan to talk about the economy over the next 100 days. Here is a very simple fact. [3] GDP per head (a much better guide to average prosperity than GDP itself) grew at an average rate of less than 1% in the four years from 2010 to 2014. [1] In the previous 13 years (1997 to 2010), growth averaged over 1.5%. So growth in GDP per head was more than 50% higher under Labour than under the Conservatives, even though the biggest recession since the 1930s is included in the Labour period!

You have all read, and perhaps written, that the Conservatives will focus on the economy, because they think that is their strong point. Compared to their performance on other issues, maybe it is their strong point. But relative to the previous administration, this simple fact suggests otherwise.

George Osborne says: “Britain has had the fastest growing major economy in the world in 2014.” However GDP per head in the UK in 2014 remains below 2007 levels, but it had exceeded those levels in the US and Japan by 2013. The UK is not bottom of the league in these terms only because the Eurozone’s performance has been so poor. That GDP per head growth under 1.9% in 2014 can be trumpeted as a great success when it is no more than average growth between 1971 and 2010, and when we should be recovering from a huge recession, and when there are signs that this growth may not be sustainable, shows how diminished our expectations have become.  

In terms of a historical comparison between the record of this government and the previous administration Labour has no case to answer, because its performance is miles better. I am sure a supporter of the current government would say at this point that they had to clear up the mess that Labour created. But just think what such an excuse implies:

(1)  The Great Recession was in 2009, so it is included in the Labour government’s growth average, not that of the current government. You can see the impact of the recession on the average (the red line) in the chart below. [2] Are they really saying that the mess Labour left was worse than the impact of the global financial crisis!?

(2)  This excuse implies that bringing the government deficit down rapidly (austerity) meant that GDP growth is bound to be lower. This is something that the government’s critics have long argued, and which the OBR agrees with [4], but the government has always denied. Are they now admitting that austerity was (really) bad for growth?

(3)  If a government was elected just after a major recession, you would normally expect the exact opposite from these figures to be true. The new government would benefit from the recovery from the recession, while their predecessors average would be weighed down by the recession itself. So in any normal world, you would expect GDP per head to have grown much more rapidly over the last four years than any long run average. The fact that it has grown by considerably less means that the government should have a lot of explaining to do.

Growth under Labour, including the Great Recession, was 50% better than under the Coalition. So please, if you want to make your reporting on the economy over the next 100 days objective, use this fact. If the Conservatives win this election because enough people believe that they are more competent than the previous government at handling the economy, it will be a devastating verdict - on the UK media and its journalists.  

Quarter on previous year's quarter growth in UK GDP per head, 1997Q2 to 2014Q3

[1] The ONS data can easily be found here. The fourth quarter data is not out yet, so I have taken the ONS data updated on 21st January, and assumed growth of 0.5% in the final quarter, which is the first estimate of GDP growth in that quarter. That is obviously an overestimate, as it assumes no population growth in that quarter.

[2] The chart uses quarter on previous year’s quarter growth rates for the actual data (no estimates), and the average shown there is simply the average of these growth rates.

[3] A tweet from Ann Pettifor inspired this post, but of course responsibility for it is entirely mine.

[4] The OBR estimate, somewhat conservatively, that austerity reduced GDP growth by 1% in both FY 2010-11 and 2011-12. That alone would raise the average growth in GDP per head over the four years from 0.9% to 1.4%. Research by Jorda and Taylor suggests austerity had larger and more prolonged effects. 

26 comments:

  1. Discussion of GDP per capital is something a lot of people have wanted for some time. This is helpful. Also helpful would be more discussion in the media and among high profile economists close to the policy making establishment about how any growth (relatively high vv Labour or not) is distributed and what is going on in the denominator, as well as the numerator.

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  2. Excellent, straight forward and clear. So who in the mainstream broadcast media will pick up on these points? Surely it is pretty straightforward, or is it assumed by BBC, ITV, SKY, Channel 4 that these facts are already widely known and understood. C'mon journos, you can all do better.

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  3. It would be useful if when saying the economy was the Conservatives strong point they started the sentence "According to polling..."

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  4. And you didn't even mention any of Osborne's outright lies and deliberately misleading rhetoric; or the 'official' verdict on the UKs performance and policy choice of austerity as described by the OBR themselves, who estimated that austerity alone had needlessly cost the UK economy over £100bn in lost output; or the mistaken cuts to investment spending, or the weight of the cuts falling disproportionately on the lower income decile groups, or the failure to get anywhere near to their own deficit reduction targets....

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    1. I am consistently amazed by the feats of statistical acrobatics performed by Conservative press officers..the way they've managed to keep "Fastest growing economy.." claim in the air through cunning selective sampling is astounding.

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    2. For a real eye-opener, you want to scrutinize the ways/methods in which the employment and unemplolyment figures have been 'managed' in the last few years...

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  5. Good article - with the possible exception of the observation that the UK post 2010 would be at the bottom of the GDP per head league if it wasn't for the fact that others have done worse.

    The footnote says this article was prompted by an Ann Pettifor tweet, assuming that you do requests I would really like to hear your views on the prospects for UK productivity (or GDP per head - am not an economist but believe the two are closely linked) given what we know of the manifestos (or stated intentions) of Labour, Lib Dems and Conservatives.


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    1. Have a look at http://www.ons.gov.uk/ons/dcp171766_358832.pdf for ONS new indicators. Also the "Growth Dashboard" at https://www.gov.uk/government/publications/growth-dashboard ; particularly the four spreadsheets on that page.

      Nice one SWL. All the best Acorn.

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  6. if you want journalists to understand your point and repeat it to the average audience you need to give your chart a more informative legend - the red line is the average of what exactly? Yes, I know you said, "the Labour Government's growth average" - but growth in what? If you leave it up to a journalist to guess what you mean they will assume GDP growth, compare with their figures and assume the whole article is incorrect; or opponents will seize on the lack of clarity and use it to misrepresent you.

    I'm not having a go at you, but you do this a lot when it comes to charts and legends. Leave no possibility for misunderstanding by journalists and non-economists. They have to explain stuff to people who failed GCSE maths...

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  7. To do an all things the same by per head rather than nationally you would need to use demographics. It may still give the same result as you suggest. But without doing the demographics the post becomes easily picked on by any competent journalist, as you might find in their responses to the post, if they take notice of it. After all per capita can simply increase by a declining population without any increase in GDP. To compare that time to another would be inaccurate without the demographic input. http://en.wikipedia.org/wiki/Demography_of_the_United_Kingdom

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    1. what is this demographics you speak whereof?

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  8. Am.

    If our GDP remains constant but our population decreases, those of us who are left would be richer. Result: happiness.

    If our GDP remained constant but everyone in the country left bar me, I'd be chuffed to bits. But then I'm a misanthrope.

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  9. SWL concentrates on an abstract number, but ignores the fact that employment growth in the UK since 2010 has benefited roughly a million and a half people. In other words, at the cost of lower wage growth, the UK has avoided the social crisis that now looks to be starting to tear the euro area apart. I'm not sure I see that as a terrible problem, and I'm also not sure that voters will, either.

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    1. I think his point is that we could have had less unemployment and higher wages if the tories weren't such dicks

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    2. John Livesey,
      I am not sure that the UK's disturbing productivity decline is something the Tories want to be taking credit for. It's also something S W-L has previously discussed at length. Do keep up.

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  10. Has any country in the developed world had better per-capita GDP growth in the years since 2010, compared to the period 1997-2010?

    If, as I would suspect, the answer is no, isn't this comparison a bit misleading?

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  11. Is that graph real GDP per head? If so, what is the base year?

    Would this be important if you are going to make an historical comparison of such a time length?

    In Japan if you take into account falling prices (and falling population), it has actually been doing reasonably well.

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    1. Excellent point. Have made it here before. But all was silence. Japan has a good record on GDP per capita in the last 10 years, equal to the US, yet mainstream macro continually harps on about their failure. Which is it, a success or a failure?

      But the UK has had a far better record than both in the denominator as others have said, and in total numbers employed of course. We should celebrate the greater total utility in the UK. Well done the Tories, utilitarians par excellence.

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  12. Good questions for the Tories. And now some for Labour:

    (1) You say you created two million new jobs during your tenure in power. Did that go to long term unemployed local workers?
    (2) Once you stimulate the economy, and you get employment growth, what are you going to do ensure this goes to local people (especially the children of) that have been forced out of London into Essex into Kent because they cannot secure council housing or afford rent in London, and assuming they do get work, get something that can be called a sustainable income?

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  13. And if I remember a previous post right, the reason GDP is higher in the UK than GDP per capita since 2010 has been due to the rise in immigration.

    Journalists: that's immigration, immigration. You talk about both; why not put them together rather than indulging in the old switcheroo.

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  14. By focusing on GDP per capita, the argument essentially boils down to the fact that UK productivity growth enjoyed a boom in the late 1990s and early 2000s. Unless you're claiming that Tony Blair invented the internet (rather than Al Gore) then I don't see how you can give the labour government credit for that. The US economy enjoyed a similar productivity boom in the second half of the 1990s that faded after 2004. In both countries the productivity boom and the associated surge in GDP per capita was driven by technological change not government policy.

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    1. To claim one government is better than another is potentially very difficult, because as you point out lots of things happen which are beyond the government's control. However the current government is making such a claim, and so my main point is that the raw figures hardly back that up. In addition, we do know that this government lost at least 5% of GDP as a result of fiscal austerity in 2010 and 2011.

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    2. I think a lot of people believe that Labour squandered the opportunities of that productivity boom. They allowed a massive party to happen with financial deregulation, housing booms. They did not do a lot for the long term unemployed and let inequality grow. In response to warnings about the free inward flow of labour there was also a lot of talk from people who can only think in terms of neo-classical theory about how large inward flows of labour would not hurt low skilled workers but lead to fantastical win win outcomes for all.

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  15. Given that present Govt policy is not working would Labour party's idea of continuing cuts if in power not end up cancelling out their other policies?

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  16. Simon,

    As I commented on your blog 'Debt restructuring: a proposed principle' I think it is important to consider whether your objective for the Keynesianism that you propose is a labour market objective or one which relates to GDP.

    In terms of labour market objectives in general both the recession and the recovery has been 'job rich' and 'productivity poor' not just in the UK but - with few exceptions - across the developed world.

    In terms of labour market objectives it is arguable that the approach in the UK could be described as 'supply side Keynesianism'. With its focus on the labour market and maintaining the automatic stabilisers not only associated with paying benefits but also maintaining the activation/conditionality regime for all those on JSA throughout the duration of their claim. This boost to public spending - through improving/maintaining the social infrastructure - (although it does not cost that much) seems to have been more effective in contributing to delivering outcomes though investing in the social infrastructure than, for example, investing in capital investment (at least if your objective is more towards the labour market than towards GDP).

    In addition, activation/welfare to work was applied to other parts of the benefits and pensions system - the equalisation of the state pension age, lone parents and people on incapacity benefits. This combined with enormous income tax cuts since 2007 - which were also supply side friendly as they were focused on the low paid - could be seen in old-fashioned Keynesian terms as a balanced budget mutiplier with public spending cut elsewhere but active labour market policies both maintained and increased and big tax cuts. But because the focus was on the bottom end of the labour market (and 'activation' does not cost much as it is about getting the workless to do all of the (job-seeking) work) this has shown up more in terms of labour market outcomes - with the people that started off in the worst position generally having seen the biggest improvements - and less so in terms of growth.

    There is, of course, a debate to be had about whether it is the supply side improvements or the Keynesianism that is more important in the supply side Keynesianism we have seen. I would suggest that it is the supply side improvements whereas I think that you would say that it was the Keynesianism.

    Bill Wells

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