Perspectives on the UK’s productivity problem: the end of the puzzle?

workersThe UK’s productivity problem continues. Output per worker has barely grown since the beginning of the financial crisis in 2008. Why is this a problem? Because if we want rising living standards, we must have rising productivity over time.

In theory, rising productivity in our economy gives us choices between increased income and increased leisure time. We can choose on a spectrum between more income for the same hours worked and the same income for fewer hours worked, in other words, more leisure time. Depending on how we in society value work and leisure, increased productivity should make possible increases in human welfare.

Today, output per hour worked in the US is at a similar level to that in France and Germany. However, total hours worked per head in the US have tended to outstrip those in the latter two countries, meaning that output per head remains higher there.

Americans are on average richer (although greater inequality means that many of them are not), but they achieve these greater riches by working longer, while their French and German counterparts have more leisure time, including a shorter working day and longer holidays. This is down to collective economic and social choices, although these are also necessarily political in nature, and far away from simple choices freely made by individuals, as some might choose to believe. Continue reading

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Sun hats and development

I recently bought a new sun hat (stay with me). A label inside reads ‘made in China’. Replacing my previous hat was well overdue, as it was more than 20 years old. Out of curiosity and before getting rid of it, I checked inside and saw a label, which also read ‘made in China’. I must be something of a geek, as this got me thinking about the manufacture of clothing and development processes.

It is notable that China is manufacturing and exporting clothing such as this, just as it was twenty years ago. The hats are not dissimilar. Of course, the Chinese economy is the largest manufacturing nation in the world and exports a huge amount of goods of all kinds. But according to this experience, companies there are still involved in the manufacture of quite basic clothing. Continue reading

Adam Smith, profits and civilisation – a brief intro

Another brief video from the School of Life Political Theory series, this time on Adam Smith, widely thought of as the founder of modern economics. Smith is included in the school of classical political economy, employing an interdisciplinary analysis, and focusing on class and the role of government among other elements of the emerging industrial economy.

Nowadays he is often co-opted by the right in order to make the case for free markets and individualism as the source of wealth creation.

Interestingly, the video does not mention either. It does focus on another important idea, that of specialisation in production, also known as the increasing division of labour. On the one hand, this is a source of growth in productivity and wealth, but also leads to reduced meaning in the lives of ordinary workers.

Smith’s two most famous works are The Wealth of Nations and The Theory of Moral Sentiments. The latter is often neglected in discussions of Smith, but it made the case for man as a complex social being as much as one interested in personal gain. A clear idea of both sides of humanity are required in considerations of how to achieve the greater good.

The video seems to leave a great deal out, particularly in terms of economics, but also includes political and philosophical ideas that I had not really considered, so it is worth taking a few minutes to watch.

The American School of Political Economy – two bios

I have posted before here and here on the neglected American School of Political Economy, which has been well-documented in the work of Michael Hudson. Below are brief bios of two of its members, taken from Hudson’s highly informative and thoroughly heterodox J is for Junk Economics (p.210 and p.176).

Their policy proposals were designed to encourage a dynamic and sustainable economic development path with benefits accruing to the broad population, and emphasized abundance rather than scarcity. The success of such policies in driving industrial and agricultural expansion in the US does not mean that they are necessarily applicable to today’s advanced economies.

The ASPE illustrated the importance of economic and social context, which would change depending on whether an economy is catching up with or occupying the technological frontier.

To take one example which remains highly relevant: in today’s America, and elsewhere among the richest countries, infrastructure spending has been squeezed thanks to the austerity drive, rather than used as a means to enhance prosperity following the economic crisis. This has surely been a serious mistake. Continue reading

Austerity, household debt and Brexit: the case for a weaker pound

What are we to make of the current performance and future prospects for the British economy and for the JAM (Just About Managing) households which the Conservative government proclaims to be trying to help?

According to recent figures from the Office for National Statistics (ONS), households, on average, became net borrowers in 2017 for the first time since records began in 1987. The savings ratio fell to its lowest annual level since 1963.

Household spending growth also fell to 1.7%, the lowest since 2011.

There was some better news on the current account deficit for 2017, which fell to 4.1% of GDP, also the lowest figure since 2011. And in the fourth quarter of last year, it fell to 3.6%. The improvement is at least partly down to the weakness of the pound and a stronger world economy boosting net exports and net earnings on foreign investments.

But the improvement in the current account is also being flattered by weaker growth in imports due to their higher cost reducing real household income and consumption growth. In an open economy, part of household income is inevitably spent on imported goods and services. A fall in the current account deficit can come from a reduced demand leakage into imports as well as increased growth in exports.

With the weaker pound and higher inflation reducing real household income, and interest rates still at very low levels, households are taking the opportunity to add to their already substantial levels of debt, rather than reduce consumption even further.

With the household sector spending more than its income, it is adding to the growth of aggregate demand, as credit acts as a net injection of purchasing power into the economy.

But with household debt already high, interest rates set to rise gradually, and real wage growth still negative, these trends will prove unsustainable. Although inflation has perhaps peaked, and real wages should start to grow once again, there is some way to go before the JAMs start to see a sustained and substantial rise in living standards. Continue reading

Trump’s tariffs: is there a better way?

Donald Trump has said that “trade wars are good, and easy to win”. I posted on the issue of protectionism in the wake of his election victory here, and on ‘beggar-thy-neighbour’ policies here, and stand by my arguments.

Contrary to the claims of mainstream economics, free trade is not always mutually beneficial for the nations involved. In particular, the historical record suggests that particular ‘infant’ industries in developing countries can benefit from temporary and selective protection, until they are competitive enough to succeed on world markets.

There are plenty of examples of infant industry protection which have failed, so it is by no means a universal panacea. Success requires the management of a particular balance of power in a developing country between particular groups such as the state and social classes, which might include emerging industrial leaders or the middle class. It will also be context-specific: it depends on the historical evolution of the groups and society involved.

Trump’s tariffs on steel and aluminium imports are not an example of protecting an infant industry. They may protect some jobs in those sectors, but most economists argue that by increasing the costs of these products as inputs for other industries, many more jobs will be lost in the latter, so that the net employment impact will be negative. Continue reading