Lies, damned lies and living standards

Money-poundsThere is a disconnect between economic growth and living standards in the UK and ordinary workers are bearing the brunt. While politicians seize on data showing that the economy is growing at a reasonable pace, average real wages have largely stagnated for the past decade.

Simon Wren-Lewis illustrates here the uniqueness of the UK economy among rich countries, in that it experienced positive overall GDP growth and falling real wages between 2007 and 2015. This implies of course that job growth has been strong, and indeed it has, with record numbers in work. Unemployment has fallen, but there has also been significant population growth. So while our political masters crow about record employment levels, they keep fairly quiet about the fact that this has been made possible by the immigration flows that they claim will slow after Brexit.

As Wren-Lewis tellingly comments:

“…the government has relied on claims about GDP growth that were in large part a consequence of the immigration which they were at the same time complaining about.”

The flip-side of strong employment growth and reasonable GDP growth shows up in a measure of living standards that is more relevant: GDP per head. This takes account of population growth and is a better indicator of prosperity than the basic GDP figures:

“If we use the latest ONS data, UK GDP did indeed grow by 7% between those years (0.85% average annual growth), but GDP per head increased by only 0.8% (0.1% annual growth).”

This shows up the poor performance of the UK economy since the start of the Great Recession. According to the Socialist Economic Bulletin here, the driver of productivity growth, investment, has actually fallen slightly in absolute terms since 2007. Including the recessionary period, growth in the last decade has been almost entirely driven by consumption. This is unsustainable. Without stronger growth in public and private sector investment, productivity growth will remain weak. Productivity growth is the key indicator of the potential for incomes from wages and profits, and hence for material prosperity, to rise. Without an improvement, the only way that the economy can grow is through an increase in the size of the working population, which as already noted is a big part of the story of recent years.

SEB claims that the UK is still in crisis, since without rising investment, productivity and wages for the mass of the population cannot rise. This may seem a dramatic choice of words, but there is some truth in it. SEB wants to sees much higher public investment, which may ‘crowd in’ private investment, as an alternative to austerity.

Something has to change for the UK economy, or ordinary households will be condemned to stagnant incomes for the foreseeable future. I would argue that this reckoning has been some time in coming, partly due to the periodic overvaluation of the pound since the 1980s. This has weakened export growth, particularly in manufactures, and encouraged borrowing for consumption on domestically produced goods and services as well as imports. The current weakness of the currency could begin to reverse these trends, but it may also be the case that without an ambitious industrial policy to promote growth in net exports, and the domestic supply chains that serve exporters, a weak pound will fail to turn around the economy.

The government goes on about ‘living within our means’ or the necessity to balance the budget. If the current account deficit does not fall significantly, the only way that the government can do this without continued economic stagnation is for private sector (firms and households) debt to continue to rise faster than incomes. As I have argued before, and drawing on the sectoral financial balances approach pioneered by the late Wynne Godley, this is likely to increase financial fragility and the possibility of another crisis. At the very least, it will prove unsustainable. When the accumulation of private sector debt slows or goes in to reverse, growth will weaken and there may even be a recession.

A revival in living standards for the mass of the population on a sustained basis will require a drastic rebalancing of the economy towards investment and net exports, and away from debt-fueled consumption. A weaker currency is a positive first step, even if it hits household incomes in the short term. A renewed and more sustainable rise in household incomes will require a much higher rate of investment on the part of the public and private sectors. Anything else will not do the trick.


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