If we had more confidence in the acceleration of technology, we’d be more optimistic about the economyby Anatole Kaletsky / December 10, 2015 / Leave a comment
Published in January 2016 issue of Prospect Magazine
As George Osborne justifiably boasted in his Autumn Statement, Britain is now growing as rapidly as the United States and faster than any other G7 economy. Job creation is beating all records, with all the employment losses of the 2008-09 “great recession” now fully recovered and a higher percentage of the population employed than ever before. But if the economy is doing so brilliantly, why was the Chancellor again forced to fudge all his fiscal targets and why does the country seem unable to afford the levels of public spending that governments found perfectly possible to finance a decade ago?
These questions point to the central paradox of the economic recovery since 2008. While very strong job creation has apparently refuted the Keynesian prophecies that fiscal austerity and draconian spending cuts would produce mass unemployment, the Keynesian critics have proved nearer the mark on broad economic performance. In terms of overall economic activity, as measured by GDP growth and reflected in public finances, Britain has experienced its weakest expansion on record, with no apparent prospect of improvement in the years ahead.
Another way of looking at this paradox is more revealing. Total employment is now 1.5m above its pre-crisis record. Yet Britain’s GDP per head, the broadest measure of living standards and national economic success, which grew reliably by about 2 per cent every year between the Second World War and the 2008 crisis, is still only 1 per cent above its level of eight years ago. This means that the productivity of British workers, as measured by GDP per employee, is now 16 per cent lower than it would be if the economy returned to its pre-crisis trend—a loss of potential income worth £5,000 annually for every man, woman and child (see chart on p44).
Why has Britain suffered this unprecedented setback in its potential living standards and capacity to support public services? And how could such a collapse of productivity have occurred in this period of spectacular technological progress and business innovation? There are three possible explanations for the employment and productivity conundrum—and they have radically different policy implications.