New ideas from Labour on economic policy

 

It may be a coincidence, but the possibility of fresh leadership seems to have inspired a couple of papers published by Labour groups on how to reform the UK economy. In reality their appearance is probably more a testament to at least the perception of the lack of major reform coming from the current Labour government. Ben Zaranko has already discussed both in the Observer, but I think what I write here is complementary. (Unlike Ben I won’t be discussing ‘Manchesterism’ for reasons well set out by Joshi Herrmann here.)

The paper from the “Labour Growth Group” is written by Mark McVitie with Chris Curtis MP. Its overall theme can be summed up by the following quotation:

“Britain has become an economy where position too often pays better than action and contribution. We call this the extraction economy: a settlement in which holding scarce assets, protected licences, legal leverage, regulatory position or the power to shape and navigate broken systems can pay better than working, building, investing, caring, competing or taking productive risk.”

This is a call to prioritise socially productive activity over rent seeking that will be familiar to many, including economists. The paper argues that to achieve this requires a shift “from a distributive state to a capable one: the democratic choices of the people delivered by a state that can choose, build, enforce, reshape markets.” The paper argues that the UK state contains the power to act capably, and implies that the reasons it doesn’t lie in political attitudes.

The paper does have two important, although familiar, suggestions as to how to get the state to be more capable and less managerial. The first is to give the Prime Minister more resources, by building a Department for the Prime Minister. The second is to devolve power regionally, and in particular financial power, which this government has begun to do. (If Manchesterism is anything it is this.) While I strongly agree with the second proposal, I was not convinced either would in themselves necessarily achieve a more capable state. The paper says that centralisation means that “organised interests need capture fewer decision points”, but equally organised interests may find it easier to dominate local and less powerful politicians, or even play one region off against another. That criticism does not imply that financial devolution is wrong, but that it is right for different reasons.

More generally, if I ask myself why this Labour government has been such a disappointment over the last two years, I’m not sure I would answer that at an institutional rather than personal level. Its major mistake, it seems to me, has been a wish not to upset most social and political groups, leading to an inability to make key reforms. This helps produce an excessive deference to the status quo. It is the mindset of an opposition facing an unpopular government, not a government determined to pursue its own vision. (Ironically one group the government has felt free to offend have been its core supporters, which has led to its current downfall.) To quote from the paper: “The British state increasingly … treats conflict between objectives as an administrative problem to be managed, rather than a political choice to be made. The consequence is paralysis, not balance.” This seems like a criticism of political leadership rather than institutional structure.

Of course there are limits on what it is possible for Labour insiders to say publicly in this respect. However on one important point in the paper I clearly disagree. To quote: “The tax burden as a whole is unsustainably high, in time the economic benefit of this programme should provide scope to reduce it, but for the time being we believe the burden must first shift from the payslip.”

The overall tax burden is historically high, but this is true in most countries and the main reason for it is the same: a growing demand from an ageing and wealthier population for health services. That cannot be wished away. What is not historically high and what is certainly not unsustainably high, is taxes coming from the payslip. As the IFS shows, UK tax revenue is lower than in most Western European countries, and in particular the UK raises far less from employees' social security contributions than other countries. While the overall tax burden has been increasing, since the early 1980s taxes in median earnings have been falling almost steadily (see this post and the chart from the Resolution Foundation reproduced there).

The second paper is by Louise Haigh. There are clear commonalities with the Growth Group paper. For example “we must look to reduce regulatory barriers, especially those that are holding back new and innovative businesses wishing to scale up.” Labour’s reforms of the planning system are praised by both papers, and as Ben Zaranko points out this parallels US arguments around “abundance”.

While the Growth Group paper sees the central problem as vested interests around rent seeking holding back growth, Haigh focuses on short-termism.

“A central weakness in the UK’s economic model is the systematic undervaluation of what might be termed “preventative” investment – spending that reduces future fiscal pressures while raising long-term growth. Our institutions, appraisal frameworks, and political incentives are poorly configured to recognise these benefits, tending instead to favour interventions with immediate, easily measurable returns.”

But isn’t it the high cost of borrowing that is currently holding back investment?

“It is therefore possible for two things to be true at once: that the current institutional framework is ill-suited to supporting long-term growth, and that the immediate constraint on government action is the cost of borrowing in financial markets. A credible reform agenda must address both – improving the framework over time while demonstrating, in the near term, that public investment will strengthen, rather than weaken, fiscal sustainability.”

I agree with Haigh about the importance of public investment. Public investment is often complimentary to private investment, so increasing the former should help raise the latter. 

Where I would have a different view is on the details of how you achieve that. The key fiscal rule, the golden rule, already excludes public investment, and I have written chapter and verse on why it is essential that it should. The other fiscal rule (falling debt to GDP) doesn’t, but I have also long argued that this second fiscal rule is not fit for purpose and should be simply abolished. Once this is done, public investment decisions would be unconstrained by fiscal rules, which is a much more straightforward way of achieving the goal that Haigh wants. Typically when she became Chancellor Reeves tinkered with the fiscal rules in a way that wasn’t very controversial, rather than making more radical but logical changes.

In contrast, the paper’s suggestion of extending the time horizon of these rules from five to ten years, while allowing more of the benefits of public investment to become apparent, makes targets too easy to game by governments, leading to the rules losing credibility. Five years is about right, because in OBR forecasts the economy pretty well always returns to trend within five years, yet it is also sufficiently close that it is hard to game (unless you don't believe you will win an upcoming election!). I also don’t think taking away responsibility for growth from the Treasury works, as I discussed in the context of the Kerslake review here. It is perfectly possible for a Chancellor to override traditional Treasury concerns, as Gordon Brown showed.

What I think it is also important to acknowledge, and which too many within Labour including these authors avoid acknowledging, is that the main reason our public services are weaker than in other Western European countries is not because of our fiscal rules or Treasury attitudes or vested interests but simply because we put less resources into them by paying less tax. Take the health service for example. The only hope we have of stemming the growing demand for health services is to focus more on prevention, which however it is classified is a form of investment. This is an age old message pushed by expert after expert. But it doesn't happen at scale, and will not happen, as long as the resources going into NHS front line services are tightly squeezed.  

Where I do agree with Haigh is that decisions about selling the Bank of England’s large quantity of public debt (the result of earlier Quantitative Easing) should not be in the hands of the Bank. When short term interest rates are free to move, the Bank’s debt sales have fiscal consequences rather than implications for inflation and therefore should be a Treasury concern. Making it so would not compromise central bank independence in any meaningful way.

Given that the Bank is not only making government borrowing more expensive by selling its debt now, but also by selling the debt when it’s relatively cheap making a capital loss, unlike other central banks, it is surprising that the Chancellor has not done anything about this. It emphasises the point I made earlier that the government is unduly cautious about doing anything that might upset the status quo. When so many voters feel that nothing works in the UK, what you don’t need is a government that only offers small change.

Why Labour's current disarray is ultimately the consequence of Osborne’s austerity

 

I want to expand on a footnote to last week’s post. As I said there, we now have clear evidence that austerity from 2010 onwards helped fuel right wing populism, Brexit and Farage. However, that post argued that right wing populism would have emerged anyway, because its fundamental cause was a trend towards ending elite taboos on the right against appealing to xenophobic and racist voters which we see across the world. So austerity just helped populism arrive more quickly and, with Brexit, more dramatically.

In contrast I do think a lot of the problems we see in the UK Labour party today stem from Osborne's successful devastation of public services, and it is less clear they would have happened anyway. A Conservative cutting public services to numbers way below what the public were comfortable with should have been a gift to Labour of course. So I think the story of how it turned out otherwise is worth spelling out.

It is easy to forget how almost universal the belief was in the UK media during the austerity years that reducing the budget deficit had to be the major macroeconomic priority. Basic macroeconomics, understood since Keynes, said that when interest rates were stuck at their lower bound cutting the deficit would damage a recovery. This was ignored, despite it being in the worst recession since WWII. We now know, from empirical work at the IMF, that trying to cut the deficit in this situation not only prolonged the recession but in all likelihood made the public finances worse in the medium term as well!     

As few now defend Osborne’s policy today, it is easy to forget how much it seemed to be common sense to the media and large parts of the electorate at the time. I invented the term ‘mediamacro’ to describe this. In contrast a majority of academic economists opposed austerity as it began, unsurprisingly given it violated what we all taught, and this majority grew steadily over the next few years as the damage became clear and the intellectual arguments for austerity collapsed, but none of that made much impression on the media.

The result was that Labour in opposition found their arguments against Osborne’s policy were getting nowhere, and so they were gradually discarded. [1] Despite UK workers facing a cost of living crisis at least as bad if not worse than over the last few years, the Conservatives won the 2015 election, and the media’s promotion of austerity played a key part in that. The reaction to this among many prominent Labour figures was to almost completely accept the case for Osborne’s austerity. Ironically, just when public opinion was finally beginning to turn against what Osborne had been doing, it looked as if Labour’s senior politicians were heading in the wrong direction.

I thought at the time and still think this is the essential background to understanding the election of Jeremy Corbyn as leader in 2015. A majority of Labour members hated austerity for good reason, and were dismayed at seeing their party leaders be equivocal at best. Corbyn was the only one of the four candidates who clearly opposed austerity, and as a result he won overwhelmingly. It is silly to blame this result on ‘entryism’, although that is less true of his re-election in 2016.

So I think it is fair to say that it was austerity, and the failure of Labour to dent the media consensus that austerity was necessary, that led to the four years in which the left led the Labour party. Of course that doesn’t excuse the Labour leadership that came before him for their appeasement of austerity, but I hope it makes it a little more understandable. Equally it is unconvincing to suggest that most of this pre-Corbyn leadership actually wanted a smaller state, after they spent years in government doing the opposite.

In opposition Labour under Corbyn and Shadow Chancellor John McDonnell did make good on the promise of ruling out a repeat of 2010 austerity. Although McDonnell accepted (rightly in my view) the need for a fiscal rule, these would not apply when interest rates were stuck at their lower bound, which they had been since 2009. The media at the time called this a ‘loophole', of course, but something like it is now standard in most UK fiscal rules adopted in recent years. In the recession that came with the pandemic Sunak made no attempt to pretend that the budget deficit was the priority, and instead enacted a (probably overgenerous) fiscal stimulus package, which was the opposite of the policy advocated by Osborne in 2009.

It also became clear, pretty quickly after Corbyn’s election, that there were those on the right of the Labour party that would never accept a party led from the left, and who were prepared to see a Conservative government as a price worth paying for taking control of the Labour party away from the left. They had expected this to happen in 2017, and were rather shocked when it didn’t, but they organised with the help of the media to ensure it happened in 2019.

That is not to suggest that this right wing faction was responsible for Corbyn’s 2019 defeat. Actual and potential Labour voters were overwhelmingly against Brexit, and as it became clear from 2016 to 2019 what Brexit under the Conservatives would entail, this opposition grew more impassioned. Corbyn was slow to respond to this, which neither pleased Remainers or (when he finally did) Leavers. But the reality probably was that there was very little Corbyn could have done that would have prevented Johnson winning in 2019.

Defeat, together with the anti-Brexit views of most Labour party members, meant that the left were unlikely to win the contest for his successor in 2020. Morgan McSweeney from Labour’s right found their ideal candidate in Keir Starmer. He was a relatively new MP without a public record of clear policy positions, and he promised to unify the party with a platform that was pretty left wing.

Whether Starmer always intended to renege on this platform, or whether it was McSweeney’s influence that persuaded him to do so, we will probably never know, although plenty of people will tell you they do. In an important sense it doesn’t matter. Either Starmer was always part of the right wing faction that intended to bring Corbyn down, or he was politically naive and therefore easily persuaded by the man who got him elected to allow a purge of the left [2] once he had won, but the result was the same. Neither alternative reflects well on Starmer.

Purging the left didn’t have an immediate electoral cost while the Conservatives were in power, as it was the Conservatives who badly lost the election in 2024 rather than Labour winning a great victory. Labour won with just 34% of the vote, having been over 40% in the polls a month before. However, once in government the influence of McSweeney, and the political weakness of Starmer, began to have serious costs. Just as the far right faction had had contempt for the left during the Corbyn years, when in power they seemed to have a similar indifference to voters with socially liberal views. In McSweeney’s case this reflected a Blue Labour ideology, which combined modestly left wing economic policies with pretty socially conservative policies on asylum and immigration.

This position was the worst of all worlds for the Labour government to take. Copying Reform on immigration and asylum just legitimised and reinforced Reform’s appeal, while at the same time alienating much of Labour’s core vote. Labour in government has lost voters on both sides, although more to the left than the right. Disastrous Council election results inevitably followed, as many of us said they would. (I initially made this point a year ago.) It is true that Starmer has made plenty of other mistakes, but it is far from clear that these mistakes are similar in magnitude to those made by Johnson and Truss. It is best to ignore the preoccupations of the media here. What gives the media licence to pretend otherwise is Labour’s terrible poll position, which reflects losing votes to their left as well as to the right.

In this respect Labour and Starmer’s current precarious position is a direct result of being led by the right wing faction that wanted Corbyn out at all costs, a faction that gained control because of Corbyn’s victory in 2015, a victory which in turn owed a great deal to Osborne’s austerity policy and the Labour leadership’s powerlessness to strongly oppose it. What we are seeing today, therefore, is a direct consequence of that austerity policy and the support it received in the media. Furthermore, it is not obvious how all this would have happened without Osborne’s austerity and the media’s promotion of it.

Of course setting this out does not imply that any of it was unavoidable. Labour could have fought austerity in a more knowledgeable way (see footnote 1.) The media should have been more interested in what academics said and paid less attention to central bankers who had axes to grind and market analysts who had a vested interest in austerity [3]. Lexit was always a dumb idea. Those on Labour’s right who wanted Johnson rather than Corbyn in 2019 gave us a version of Brexit that has produced the economic stagnation that limits what Starmer can do today. While some Labour voters are socially conservative, it was always obvious the majority are not and would not remain passive as Labour trotted out Reform cliches and lies. Yet historical analysis involves recognising actors as they are rather than how you would like them to be. In this respect it is ironic that Osborne’s austerity not only screwed up the economy and public services until this day, but it has also inflicted severe political damage on the Labour party.

[1] If I wanted to be critical, I would say that the weakness of Labour opposition to austerity owes something to a mistake made in government, by a new Chancellor preoccupied by rescuing the banks and strongly influenced by the Treasury’s fear of rising budget deficits. The policy message then should have involved clear priorities: first deal with getting the economy completely out of the deepest recession since WWII, and only once the recovery was almost complete and interest rates were rising to start dealing with whatever excessive budget deficit remained.

But Labour’s plans to reduce the deficit when in government meant its message in opposition, faced with a Conservative government determined to cut spending even when the economic recovery never came, was weak. As growth stagnated from 2010 to 2012, instead of saying this was because the government was focused on the wrong problem they instead just said it was going too fast. Instead of confronting with basic Keynesian economic a media convinced that deficit reduction was necessary, Labour’s message seemed tame and failed to convince many.

However, so total was the media’s conviction that Osborne was right that I doubt that even this superior messaging in government and then opposition would have made that much of a difference to Labour’s fortunes at the time.

[2] Of course there have always been battles between left and right within Labour. However figures like Corbyn were tolerated by Blair, but not by Starmer. In reality there is a significant proportion of voters who are socially liberal and economically left wing, and if they don’t feel represented by the Labour party then they are easily lost to a dynamic party that does embody their views.

[3] Austerity killed the recovery meaning that short term interest rates would be stuck at their lower bound for a long time, meaning longer term interest rates fell and bond prises rose. As Toby Nangle points out the bond markets cheered, because rising gilt prices produce good returns. Taking macroeconomic advice from bond market traders is like taking advice on how to deal with pandemics from undertakers.

Why has Westminster politics become so dumb?

 

Recently Chris Dillow wrote about how stupid Westminster politics (which is most of UK politics) has become. I’m always wary when oldies like Chris and myself say things are much worse than they used to be, but he is hardly alone in making this complaint. I have read many people bemoaning the fact that politicians seem unable nowadays to present bad news to voters (e.g. Trump’s Iran war will make us worse off whatever the government does) or to discuss policy trade-offs (e.g. cutting immigration will require higher taxes). Discussion of policy has been replaced by a seemingly endless game of musical chairs in and around Downing Street. 

However what really convinced me he was right was that he referenced a paper I wrote some time ago. It was about what I call the knowledge transmission mechanism between academics and policymakers, and how it had failed when the world outside China turned to fiscal austerity in 2010. It convinced me because I would never write that kind of paper today. The idea that we should presume politicians might be interested in, or still less follow, an academic consensus seems very old fashioned and rather naive today.

Perhaps we were spoiled by the Brown era (I think it was mainly Brown, not Blair). I note in my paper that my own example of the knowledge transition mechanism working really well was the Treasury analysis behind the five tests for deciding on whether the UK should adopt the Euro in 2003, for which David Ramsden should take a lot of the credit. After these years when evidence-based policy making was the ideal, it was a genuine puzzle as to why the Western world had collectively decided to ignore basic macroeconomics and cut government spending in the middle of the worst recession since WWII when interest rates were stuck at their lower bound. Yet from today’s perspective, where everything from harvesting policy-based evidence to simple lying is so endemic, it all seems much less of a puzzle.

The Brexit referendum was decisive in this respect. The winning side didn’t talk about a trade-off between sovereignty and the economy, but instead argued that Brexit would have overall economic benefits. Around 2010 there had been some serious and high profile economists arguing for quick deficit reduction, although still a minority that became pretty small in size as time went on. In contrast in 2016 there was as much a consensus among economists as you will ever get that Brexit would significantly harm the economy. Yet the Leave side got away with Project Fear because the media let them.

The press was overwhelmingly pro-Brexit, and being the propaganda outlets they are, the truth didn’t bother them. The broadcast media, led by the BBC, decided that ‘balance’ was more important than the truth, and didn’t even attempt to explain why Brexit would be bad for UK growth. Now that these negative economic effects are plain for pretty well everyone to see, including most voters, those who should be hanging their heads in shame alongside the Brexiters are those in the broadcast media who failed to fulfil their mandate of informing viewers. But they are not, of course, because things have only become worse since 2016.

Brexit marked the first triumph of populism in the UK. It was immediately after Brexit that we had newspaper headlines condemning judges upholding the very reasonable law that the executive couldn’t just close down parliament when convenient. The judges were going against the ‘will of the people’ the papers claimed in typical populist fashion. This makes it obvious, to me at least, that one reason, perhaps the reason, that politics in the UK and elsewhere has become significantly more dumb is the ascendancy of right wing populism.

One of the features of the austerity period was the absence of balance in political reporting. The broadcast media quickly decided that the rising budget deficit was the major economic problem, and it was really quite hard for opposing voices to get a look in. The media made it hard for opposition Labour voices to argue that the government was going too fast, too hard on cuts, so Labour eventually gave up. In part my paper was an attempt to explain why most journalists in the broadcast media thought it was so obvious that austerity was necessary.

Politics in the broadcast media is dominated by political journalists, and they should be seen as part rather than being apart from the political club made up of the executive, MPs and those who work for them. Balance for the broadcast media invariably means reflecting the balance among Westminster politicians, with outsiders treated badly. [1] The main exception to this rule is the influence of the right wing press (particularly if those running the BBC have been appointed by the populist right, as is the case today), and I argue in my paper a more minor exception are institutions like central banks. What doesn’t count nearly so much for the media, beyond any direct influence on politicians, is expertise in academia and elsewhere. Hence the media consensus that austerity was necessary, and ignoring the reality that Brexit was bound to hit the UK economy.

So one possible contributor to the state of UK politics today apart from politicians themselves is the right wing media, and therefore its owners. The right wing media is hardly a source of informed and balanced commentary. To some extent that has always been true, but it does seem to have got worse over the last few decades: just look at the Daily Telegraph, or GB news. The transformation of social media, to the extent that it influences political debate and discourse, has been more dramatic, and is now clearly a source of simplistic views that tend to match those of its owners.

However I’m not sure these developments in the media should be seen as independent of the rise in right wing populism. According to the thesis I outlined here, there has always been a significant source of voters who would be attracted by right wing populist rhetoric. However after the defeat of fascism in WWII there was a social taboo among the mainstream political elite, including to some extent newspaper owners, against appealing to voters in this way. Fascism, after all, is just a more extreme version of right wing populism, and they both share a focus on blaming social and economic problems on racial or religious minorities. The reaction of Prime Minister Heath to Enoch Powell’s speech was a polar example of this taboo in action. The thesis is that what has changed over the last few decades, and led to rise in right wing populism in national politics, is the weakening of this elite taboo, allowing key mainstream parties or politicians to appeal to xenophobic and racist views and not be ostracised by other politicians or the media.

What caused this taboo to break down is open to debate. It could simply be the passage of time, with memories of 1930s fascism fading away. In the case of the UK it could involve a view among those wanting to further neoliberal policies that the EU stood in their way. It could be a realisation among proponents of neoliberalism (both politicians and media barons) that their ideas could no longer win elections, and that therefore neoliberal parties needed to switch to fighting culture wars. It was the Conservative party that pivoted to focusing on immigration under the previous Labour government, and whose leader now openly courts the Islamophobic vote. [2]

Why does the rise in right wing populism lead to a deterioration in the level of political debate, such that it can seem dumb or stupid, and certainly dishonest? We have clear evidence that right wing populists lie all the time, and far more than mainstream politicians. Their appeal lies not in their honesty, but their connection to xenophobia, racism and just fear of the new among some voters. But their policies to pander to this social conservatism have real economic costs, and they prefer to lie about these because it makes their emotional appeal more comfortable (and even authentic) to those it is designed for.

More generally, right wing populists don’t want power to make their section of the electorate (‘the people’) better off. Instead, they sell an emotional connection so they can gain power for its own sake, and/or to enact the policies that benefit themselves and those who fund them. Among the voters they want to attract, lying ‘for the cause’ can be seen as a virtue rather than a problem.

When right wing populists become significant political players, that can (and in the UK does) intimidate all other political actors. When Reform and the Tories argue that problems accessing public services is down to high levels of immigration, Labour feel compelled to do the same. (That is not to justify them doing so, of course. See footnote 2.) When key political actors are constantly lying and getting away with it, it becomes harder for the rest to tell difficult truths, or indeed to hold any kind of serious political conversation. When one side is telling voters they can always eat cake, it becomes hard to say that cake is off the menu.

[1] This is not to say that the broadcast media fails to hold individual politicians to account. It clearly does, and without it Boris Johnson might still be Prime Minister. What the broadcast media in the UK is unlikely to do is challenge the political consensus among most MPs, or between major parties.

[2] Austerity didn’t help, for two reasons. First, there is growing evidence that austerity makes many voters more receptive to right wing populist messages. For that reason holding the Brexit referendum at the end of a long period of austerity was playing into the hands of the Brexiters. Second and more specifically, the Labour party’s gradual acceptance of austerity from 2010 onwards, and particularly after losing the 2015 election, led to a rebellion among party members and the election of Corbyn. When Corbyn was defeated in 2019 the Labour right, strongly influenced by Blue Labour, took over. This then produced in 2024 a government that repeated right wing populist lies on immigration and asylum.

UK decline and stylised empirical facts

 

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 the UK, but part of that may reflect the composition of UK output. What is noticeable in this chart is that investment since the mid-1990s has been way below these other countries. So the stylised fact in this case is similar to the previous one, but with slightly different timing. UK investment was comparable with that in the US, Germany and France in the 1970s and 1980s, but significantly below it both before and afterwards.

Two more minor points relate to measurement and timing. In my view the best measures to use in looking at comparative UK performance is growth in real (constant price in own currency) GDP per head or some measure of productivity. Real GDP growth is OK and is easy, but it can be distorted by waves of immigration. Measures of real wages as a way of doing international comparisons of overall economic performance suffer from distortions caused by sudden movements in exchange rates or more trend-like movements in the distribution of income, affecting the US in particular. (The relationship between productivity growth and real wages is very different in the US and the UK.)

A second point about timing is particularly important if the focus is on the last two lost decades. As the first productivity chart illustrates, it is tempting to start the period of poor UK growth around 2007, and therefore to relate this to the Global Financial Crisis (GFC). I have read many times about how the UK’s productivity (and therefore growth) problem started during the GFC. As I argued here, there are two problems with this. First, we see a slowdown in productivity growth in other countries before 2007, perhaps as a result of the beneficial effects of the 1990s IT revolution beginning to die away. The reason that doesn’t show up in the UK data is because of rapid growth in productivity in the UK financial sector.

That growth spurt in finance was reversed after the GFC, and we now know it was a spurious result of excess leverage. If we abstract from that sector, then UK productivity doesn’t clearly begin to diverge from other major countries until the early 2010s. (Just as finance boosted productivity growth before 2007, its reversal after 2007 brought aggregate UK productivity down at the end of this decade.) Second, US productivity appeared to be largely unaffected by the GFC.

To summarise, any account of UK economic decline has to explain two important stylised facts: why growth was relatively strong in the 1980s, 90s and perhaps 2000s, and why investment has been so low since the mid 1990s. Also beware any accounts that avoid looking at international comparisons of productivity growth or growth in GDP per head, and also accounts that assume decline started with the GFC.

Andy Burnham is said to have talked about the four horsemen of UK decline: deindustrialisation, privatisation, austerity and Brexit. As I have suggested above (see also here) there is strong evidence to support the last, and this is consistent with our stylised facts. The case is less strong for the other three. UK deindustrialisation in the 1980s was certainly much more rapid than it needed to be, but the problem there is that this was also the start of the period of relatively strong UK growth. [1] How privatisation in the 1980s could have led to a relative decline in the 2010s is not obvious, but it could help account for some of the collapse in UK investment in the 1990s. I personally would be very happy to put the blame on austerity from 2010 onwards, but the empirical problem there is that all the major economies except China were hit by their governments cutting spending during a recession [2]. So while I cannot yet give a comprehensive account of UK economic decline, isolating the key stylised facts does help eliminate or illuminate various possibilities.

[1] Rapid deindustrialisation and (Hesiltine apart) the Thatcher’s government’s disinterest in doing anything about it could be an important factor behind the UK’s unusually high level of regional inequality, and that may in turn have had a longer term impact on aggregate economic growth.

[2] As I note here, 2010 also represented a sea-change in how the UK government viewed comparative growth. Before they were obsessed by it, and the UK’s relative productivity performance in particular. From 2010 that concern was no longer a priority, replaced by the deficit and later sovereignty.