Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 27 February 2015


William Keegan, while discussing my NIER article on the UK government’s macro record, writes:

After the collapse of output of some 6-7% engendered by the financial crisis, output per capita grew by “just under 2%” from 2010 to 2013, whereas in 1981-84 and 1992-95 growth was over 8%. Wren-Lewis comments: “In short, the performance of the coalition government has been a disaster.” “Disaster” is a strong word from such a rigorous academic as Wren-Lewis, but I fully agree with him.

I like the idea - which is probably true - that rigorous academics generally refrain from calling things a disaster in print. Does that mean I’m not as rigorous as Keegan believes? I thought I’d try and justify my departure from this norm with some more data. It comes from a newly released dataset put together by the Bank of England. I’ve used it to calculate GDP per head over a much longer time horizon than I’ve shown before. Here it is.

It is a story of two trends: one from 1820 to WWI, and another from the end of WWII until the financial crisis. Now whether this really is a good way to describe how the economy evolved over the last two centuries I will leave to others, but it is remarkable how well this simple idea of deviations around a constant trend seems to work for the UK economy. To see this more clearly, here is 1820 to 1913 with the trend drawn in.

 The trend growth rate is just under 0.9% per annum. Here is the equivalent graph since 1950.

The trend growth rate, estimated from 1950 to 2010, is more than double that of the 1800s, at about 2.25%. Quite when and why the growth rate increased so much between the two world wars is a huge question, but my concern here is with deviations from these trends. Apart perhaps from two booms - the 1870s and the 1970s - large deviations from trend are short lived, with correction back towards the trend occurring pretty quickly.

The big exception, of course, is what has happened since the Great Recession. The deviation from trend just kept on getting bigger, and even with a fairly generous estimate for 2014 the best that can be said is that we might have started growing at trend again, so the gap has stopped getting any bigger. Even after the slump of 1919-21, GDP growth for the next four years was well above trend. What has happened since the financial crisis is unprecedented. This below average growth in GDP per head is one reason why real wages have been falling steadily over this period, which is also unprecedented.

It could of course be that what we are seeing is part of an adjustment to a new lower trend growth rate that was going on behind the scenes before 2010. That is what the methods used by the OECD and IMF (but not the OBR) assume. However they imply that 2007 was a huge boom in the UK, whereas all the other evidence says any boom was decidedly modest. It could be that these trends can suddenly shift after traumatic events. What is abundantly clear is that the last few years are no success story, and the constant drum beat in macromedia that the economy is doing well is completely inappropriate. A much better way of describing the last four years is to say it has been a disaster.


  1. It is argued that the "voice of the system" is heard when concepts behind Statistical Process Control demonstrate real deviation from underlying trends. SPC proponents and - of course leading stock market analysts - often use 2 moving averages of different durations to demonstrate this. I think your time series illustrate such step wise change. The question is are we returning to the pre 1950 trend or a new one altogether.? Which will prove to be the real anomaly?

  2. if the historical trend growth rate is 2.25% and comparable with contemporary quoted year on year growth statistics 2%, then why isn't the slope of the graph exponential

    1. I assume the Y-axis is logarithmic but we could do with a label!

    2. The clue is in those big bold letters above the chart!

    3. It doesn't look logarithmic it looks like £5000 per equal spaced division.

    4. The change in the trend rate is no big mystery. The two trend rates as plotted, intersect in 1932. Older members of mainly macro's "Pseuds Corner", will be aware that this was the time of the partial abandonment of the Gold Standard and the start of a move to using FIAT currency as sovereign nations "unit of account".

      PS. A "Unit of Account" IS NOT the same as "money" as generally understood by the proletariat. (Acorn).

    5. Those graphs are a mess , you need to redraw the Y axis with logarithmic divisions and re - label in the logarithmic form

    6. The biggest laugh a proper Mathematician gets is when he sees an Economist, trying to use Mathematics in his models. .

      Anyway, it looks like log to the base "n", that is "e" (2.718) to the power of x. So for the x axis max' above that would be e^3.25 = 25.79 assumed to represent £25,790, which is pretty close to the actuality.

    7. I do not need to redraw anything. The variable is what it says it is in the heading on the chart (and yes, it is the natural log).

    8. SWL there is the "ultimate question" that nobody is asking. Macro-media has no idea what the correct answer is, because it wouldn't understand the question in the first instance. The standard of economics journalism in the UK is pathetic. They all are welded to the neo-liberal myth, that a sovereign fiat currency nation has to "borrow" money from the "markets"; and, that the government can't spend money until it gets some money by taxing the non-government sector. All our political parties are welded to this myth.

      An economist from a premier league University, should ask the question of our politicians, in the "macro-media":-

      What exactly will happen if we do not reduce the deficit?


    9. > Anonymous 8.04


      > Mainly Macro

      Oh I see , and thats why there are no units , ta !

    10. Anonymous@27thFeb09:03, you ask, "What exactly will happen if we do not reduce the deficit?"

      I guess the stock answer is that we get devaluation relative to other currencies but if all countries are doing it then it gets even more murky. I think the key danger is that you empower a constituency holding those financial assets (bonds or deposits or cash) who campaign to uphold the value of those assets even at the expense of having a successful economy. Basically you get a campaign for secular stagnation. I had a go posting about it:

  3. Is it possible that the 1981-84 and 1992-95 recessions were a totally different type of economic condition than the 2008 event? Perhaps the 1981-84 and 1992-95 recessions were "tight-money-recessions" induced by the central bank deciding to hike interest rates to put a brake on inflation. As such, they could easily be cured by monetary policy with the central bank simply releasing that brake by lowering interst rates once inflation was quashed.
    By contrast the 2008 event was more like the 1930s depression in the USA. That was only cured after WWII and its aftermath induced full employment and flattened the wealth distribution.

  4. Could it not be argued that, in the last 35 years, there has been huge change in the structure of the economy. In the years of supply side economics, the depressing effect on the economy of rising inequality (and thus higher savings) has been counteracted by the increasing private, corporate and financial debt. The economic stimulus of increasing debt can not go on forever.

    I would argue that the last 35 years of growth has not been of the quality of previous growth due to reliance on debt.

    I agree with you about the austerity. I just also think that there is a large debt overhang here which provides a drag on the economy which was not necessarily there in previous recessions.

  5. This comment has been removed by the author.

  6. "The big exception, of course, is what has happened since the Great Recession. The deviation from trend just kept on getting bigger,"

    The answer is that we have returned to the pre WWI trend of slow growth. The answer why could be found by answering this question: "Quite when and why the growth rate increased so much between the two world wars is a huge question" but as you said "but my concern here is with deviations from these trends" so let's not look for hard answers, let's only wonder about that "new" age we come into.

    As Piketty is pointing out that inequality was reduced between WWs by destruction of "capital" (mostly money/power of oligarchs) and new distribution patterns that was producing agregat demand creating that fast growth trend. Simple, just look at new trend on distribution of money and you will find answers to that 'huge question'.
    Strong regulation of banking was ensuring that new distribution of money was constant in sustaining agregate demand and also huge federal spending on R&D. Strong dirigist governments were creating infrastructures that could allow for easy acces and implementation of new ideas and technologies from R&D developed mostly at universities.

    Since even before Reagan that changed, after Goldwater, TPTB made a plan on how to reverse all that was achieved under FDR which influenced Europe too. To reverse all that which brought new speedy trend growth. ALEC plan.

    The process was succesfull and wages stoped following productivity growth and banks were deregulated (enforecement was lacking as the first step) which allowed for debt to replace wages as source of Agregate Demand. State is distanced from R&D and put into private hands but with state finacing. Infrastructure for countrywide acces to new inovations is put back into corporate hands, so only specific corporations can benefit from it. Even building physical infrastructure is going back into private control (IT infrastructure) trough privatisation.

    And post WWII distribution pattern has stoped by banking crisis since new debt can not replace stagnating wages as the source of AD anymore. In simple wording; AD bubble burst and we have returned to pre WWI trend growth.

    Even the term "Secular Stagnation" which is pointing to this new growth trend is a way to discourage anyone to look at how this period of good growth was achieved and just to relax and take this "new" condition of slow growth.

  7. "It could of course be that what we are seeing is part of an adjustment to a new lower trend growth rate that was going on behind the scenes before 2010. That is what the methods used by the OECD and IMF (but not the OBR) assume."

    I am quite sympathetic to that idea. I think this is something we'll be seeing in the next 20 years (after those 20 years revolutionary new technologies and smaller PPP/capita differences between countries will allow for fast growth again in what are today's developed countries) across the developed countries, with the exception of the US (though they too will not achieve stellar growth). The UK has a huge financial sector, it will fundamentally grow slow, like the rest of the developed countries but at times it can experience strong booms and busts because of that huge financial sector.

    In my opinion British governments should adjust their fiscal policy to be robust against large fluctuations in the financial sector.

  8. This is one I baked earlier (Acorn).

    In the interest of an unbiased debate, you should visit
    Pick from Countries, the US; UK and Euro Area. Pick from the right side menu for each country basic GDP; and Money M1. You will get a graph of each element. Change the origin of the X axis to the earliest year available; so you can see the long term trend.
    See how the US GDP is nearly back on its trend line, now notice the rate of “anti-austerity” fiscal injection that starts on the Money M1 graph at 2008. Compare that to the UK M1 plot where you will see “austerity” kick-in in 2010 and only start to lift off again in 2013. At which point, the UK is quite a way off its long-term trend line.
    Compare both to the Eurozone, where M1 appears to have not responded much to the 2008 crash. Hence no fiscal injections to boost demand, just wall to wall “austerity”. The Eurozone is bigger now with nineteen countries.
    The UK economy is lifting off three years late because of “austerity”. It is only lifting off recently because of the governments budget “deficit”; which is currently about £75 billion bigger than it was planned to be.
    The US was quicker into budget stimulus than the UK and it kept in on longer. The UK cut back to fast; the evidence is in the numbers. The US since 2013, is now cutting back to fast; the US economy will slow down this year. See:-

  9. I wonder whether what was needed in 2008 was to have let vast swathes of the financial system go bust and shut up shop with the employees changing career. The payment system could have been kept going as a nationalized utility until basic low cost private sector alternatives got going. We then wouldn't be carrying the administrative burden of our vast financial apperatus. With all those highly educated talented people doing something other than concocting toxic debt, we might now be thriving.

  10. Dumb off-topic question: what caused that big long boom in the 1870's?

    1. Read David Edgerton,

      "Science, Technology and the British Industrial ‘Decline’ 1870-1970"
      (Cambridge University Press, 1996).

      I would also thoroughly recommend any of his seminars or lectures - I saw one in Japan, brilliant.

      Questions relating to the fundamental causes of rise and (absolute, not only relative) decline of Great Britain are very important which all economists and historians should know something about. It is a bit like a Classicist understanding the causes of Athenian democratisation and the decline of Rome.

  11. Perhaps that 1950-2008 period was the playing out of an unsustainable process. It entailed allowing debt and wealth inequality to let rip and at the same time required both debt and wealth inequality to not be too great. Increasing debt and increasing wealth inequality can boost inward capital flows and growth even though increased debt and increased wealth inequality smoother it. The low level of household debt and relatively flat wealth distribution in 1950 set things up for the transition to our present state. Perhaps it is a big mistake to pretend that we can keep doing what we were doing and get the results we were getting?

  12. The IMF WEO data for the last 10 years, comparing US, UK, Euroarea, Germany, Japan

    1. I used similar numbers in my NIER article. Notice that the low UK trend here is due only to the post recession numbers.

    2. since your NIER article, or versions of it, doesn't seem to be available, would you like to post your international comparison plot here as well?

    3. If Deutsche Bank goes belly up and Germany chooses to save it in the way that the UK government burdened us with saving RBS, then Germany might also come to suffer such a period of economic floundering - I hope Germany has more sense. The "Greek bailout" makes me fear that they (like the UK) will be suckers since the Greek bail out was really just a bail out of the creditor Banks -perhaps a portent of more to come.

  13. The financial community exploited modern information and telecommunications (ITC) and realized in the late 1990s that it could in fact make its fees/gains/profits by fueling huge marketplaces where financial-assets are being traded - so they moved away from their historic role as an endogenous lender for real-economy purposes. Especially outside the US, the basics of the demographics also told them to look elsewhere for their gains.

    The financial crisis caught them up (I just can't stop thinking about how Ponzi, Madoff, needed speed of turnover and exuberance to mask what was going on to almost everyone).

    Now the financial community, not only has forgotten how to lend traditionally but find themselves in legal/financial positions and huge interconnected marketplaces where their hands are tied, and they are scared that this may all fall apart.

    The public needs to re-define the financial community - help the sectors within the financial community find what their purpose are now. I'd use the stable models of before as comparative models (Bagehot may return!).

    The current situation is clearly not working for the bulk of society.


  14. The anomaly in the UK is that if the output gap is as large as this analysis suggests, why is the unemployment rate not higher?

    1. The IMF 2014 WEO shows an output gap of just 1% for the UK.

      Together with a current account deficit of 4%, and government deficit of 4% (each of GDP) there will be substantially blood letting to do after the May 2015 elections.

      Given those deficit numbers, the massive increase of government debt from 47 to 91% during the crisis, people from the continent wouldnt call this "austerity"

    2. The output gap is big with unemployment low because capital is being substituted for with low wage, low grade human labour. It even extends beyond what the unemployment figures imply because people are now retiring later. We go from having high tech machines doing the work to having to do it by hand. The high paid jobs inventing and making the machines get replaced by a larger number of crap jobs. It ruins the economy because future profits come from reinvested current profits. Now there is no investment because cheap labour can substitute for machines so instead profits go to share buybacks and future profits have to come from government deficits and debt expansion.

    3. would you mind to provide any evidence for your numerous claims?
      The OECD number for UK output gap is 1.2% in 2015 (Annex Table 10)

      There are no hidden reserves to be lifted to account for the huge current account and government deficits

      Taxes can not be really raised, so cutting expenses it will be


      taking on ever more debt and inflating it away, the time honored strategy of the UK, after 1920, just that there is now the Euro as an alternative : - )

  15. From a historical point of view you were correct to avoid the period 1914-1950, these were periods of exceptional tumult that will distort any long term trend. As Piketty, Maddison and others have pointed out these left long legacies into the post-WWII period and if included give misleading views about the dynamics of capitalism. Many would also argue that the period 1950-1970 (the so-called "Golden Age") was also exceptional in its 'benigness' as it set off by one off technological innovation from military related one off extraordinary technological innovation and recovery from destruction. But we do not want a war to deal with 'secular stagnation'! Have you read Schumpeter and his theories about 'creative destruction'?

  16. Recently I did a long term analysis of the macro economic performance (population, GDP per capita, deflator) of the whole US history (page 8), with explicit modelling,

    and did (start) now the the same for the UK (page 9)

    For both the transistion to the higher growth regime (2%) from the prior less than 1% was triggered by a war demanding massive resources (civil war for the US, WWI for the UK)

    Both started systematic inflation after 1900 US 2%, 1915 UK 5%

    Please also note the marked changes in population growth in the UK around 1800 and 1920, genauer

  17. I come from a US perspective. We had a lot of painful deleveraging that gutted demand, increasing an output gap. Mild fiscal stmilus at the federal lvl but hard austerity at state and local lvl. I think the near death of unions sparked inequality and the growth of the financial sector are troubling signs. Income inequality in a democracy where corporations are legally persons creates a power feedback loop, where the wealthy buy more power to secure more money for heirs. This money rots trusts and you get secular stagnation.

    Welcome to the machine.

    1. all that is probabl true, but it doesn't explain why growth started to fall back in 2007. The tendencies you describe have been going on over a longer period and the results should thus manifest themselves over a similar period.


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