No growth, but the LSE is looking for it
‘Official data showed the UK economy contracted slightly in the last quarter of 2011’
– Financial Times, January 25
Is that a surprise?
Not particularly. The economy was expected to shrink and the provisional data show that it shrank a tiny bit more than expected.
Does that mean we are officially back in recession?
There is no official definition of a recession and, in any case, who cares? Whether the economy is shrinking slowly or growing slowly is neither here nor there – given that technology is developing and the British population is growing, “positive growth” is both an arbitrary hurdle and a low one.
So growth doesn’t matter?
Of course growth matters. Unemployment is at its highest level since the mid-1990s. Government debt is growing very fast. A nice surge in economic growth would go a long way towards solving the country’s problems right now. Apart from the direct reduction in human misery that more jobs would bring, growth would also reduce the deficit.
Any sign of that surge?
No. You can get a good sense of how serious the situation is by comparing today’s slump with the slumps of yesteryear – the National Institute of Economic and Social Research has a handy graph. Measured from the peak of gross domestic product, the recessions of the early 1990s and early 1970s reduced output by no more than 4 per cent and the economy recovered to the pre-crisis peak in about three years. Even the recession of the early 1980s troughed at 6 per cent below the peak, and output took four years to recover. The current recession troughed at 7 per cent and four years on, output is 4 per cent below the peak and going nowhere. Today’s crisis is arguably graver than the situation in the 1930s. Given another year of this kind of growth it will be inarguably worse.
So what is to be done?
Good question. The London School of Economics has just launched a “Growth Commission” to look into how to boost the economy. The first two guest speakers were academic economists with a heavyweight record in policymaking: Larry Summers, former US Treasury secretary, and Steve Nickell, a member of the UK’s Office for Budget Responsibility.
What did they say?
Mr Nickell pointed out that many such growth reports have been written in recent years and the commissioners might care to read them in the hope of picking up some useful ideas.
But is long-term growth relevant? In the long run we’ll all be dead.
Mr Summers argued that the longer and deeper the recession, the more damage will be done to long-term growth prospects. Workers will become disheartened and rusty, buildings and machines will fall into disrepair and, in general, opportunities to sow the seeds of future growth will be missed. He argued for measures to boost aggregate demand, which presumably means printing more money, lowering taxes, raising state spending, or perhaps all three. Mr Nickell did not comment, except to point out that this is ground well trodden elsewhere.
That’s true enough. So what about the long term – is it time to boost manufacturing?
High-tech manufacturing is fashionable, but it is unlikely to drive much economic growth because the sector is too small. Nor is it a source of jobs: as Mr Summers pointed out, even China seems to have been shedding manufacturing jobs over the last couple of decades. Perhaps the data deceive here, but the Chinese manufacturing boom seems to be more about increasing output per worker than employing more workers. If the Chinese can’t generate jobs through manufacturing I am not sure we should be expecting too much from that strategy.
Any good news to report?
I think so. Mr Nickell pointed out that the quality of UK management is demonstrably poor. David Brent is alive and well, and managing offices all over the country.
Why is that good news?
Because it is probably easier to fix than our Victorian infrastructure or the fact that half the workforce is under-skilled compared with our European neighbours. In any case, it feels reassuring to blame our troubles on bumbling bosses rather than on more intractable causes. It’s always satisfying to blame the management – and even more so when blame is justified.
Also published at ft.com.