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The persistent myth about the financial crisis and living standards

Received wisdom says household income has stagnated since 2008. Actually the problem goes further back

by Jonathan Cribb / August 9, 2018 / Leave a comment
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It has become commonplace to describe the period since the Great Recession with lots of dramatic words—not only referring to the financial crisis itself, but how the economy and household living standards have stagnated. Growth in average living standards has been described as “terrible” or “disastrous,” while there has been much talk of a “cost of living crisis” and a “squeezed middle.”

There are good reasons to think that household income growth has been very poor since the crisis. Between 2007-08 and 2011-12, real average household income (measured after taxes have been paid and benefits received) in the UK fell by 2.3 per cent, or by £600 per year. Then, as the recovery started, growth was weak at first but then strengthened. Household income rose by 8 per cent in the five years between 2011-12 and 2016-17—in other words it grew at 1.6 per cent per year.

Growth in average living standards of 1.6 per cent per year (remember, this is after accounting for inflation). Is that good or not? It really depends what you compare it to. In the 40 years before the financial crisis, average household income grew by 2 per cent a year. So, comparing to that, growth doesn’t look great. On the other hand, if you compare it to the five years before the recession, when growth averaged only 1.1 per cent per year, the recent trends look a lot better.

And for those of you who think that these don’t sound like big differences—they aren’t in the short term. But in the long run even small differences in growth can cause really big differences in living standards. If average income grows at only 1.1 per cent per year, it will take 63 years for incomes to double. But if growth is 1.6 per cent it only takes 44 years for incomes to double, and at 2 per cent it…

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Comments

  1. SEan McHugh
    August 16, 2018 at 22:19
    @Jonathan Cribb “The persistent myth about the financial crisis and living standards” You remark in passing that “economists do have a good understanding of things that are important.” I suggest that you are deceiving yourself if you believe this. The credibility of economics is in a death spiral.

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Jonathan Cribb
Jonathan Cribb is a Senior Research Economist at the Institute for Fiscal Studies
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