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.)
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 casse 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.
