I think so, but I’d like to be fair to the other side of the debate. Commenter Sean recently pointed me toward this interesting article:
It addressed the question of why, while the budget deficit in the coalition’s first two years came down in line with its June 2010 forecast, growth has fallen well short. Compared with a prediction that GDP would rise by 5.7% between mid-2010 and mid-2012, it only increased by 0.9%.
Where did the growth go? The biggest reason identified by the OBR is one frequently noted here. High inflation has eaten into real, or inflation-adjusted, consumer spending. Interestingly, consumers have been spending; the OBR’s forecast of a cash spending rise of 9.3% over two years was spot on. But it was eaten up by higher prices, leaving no room for “real” growth.
The other weak components of GDP were business investment, which the OBR attributes mainly to eurozone uncertainty and lack of credit, and exports, or net trade, similarly affected by eurozone woes.
Did it not allow enough for the impact of the fiscal tightening? Possibly, though any such effect is balanced by the fact that government spending so far has been significantly stronger than it expected.
The other useful report was from the ONS. To coincide with a seminar it held in Westminster on the great productivity conundrum – why has employment been so strong when GDP has been so weak? – it published a paper by Peter Patterson, its deputy chief economist.
Productivity is not the same as growth, though it is a key driver of it. It measures output per worker or output per hour. According to the latter, productivity was growing 2.4% a year in the decade or so before the crisis but has barely grown – a mere 0.2% a year – since mid-2009. An economy that does not generate productivity growth is in trouble.
Though most sectors of the economy are suffering from weaker productivity growth, two stand out. One is North Sea oil and gas, where output per hour has dropped more than 40% in five years.
The other is financial services, where productivity was growing by more than 4% a year, but in the past three years has been falling nearly 3% annually, as its output has plunged. Just these two sectors provide much of the explanation for the very weak productivity numbers.
If oil and finance explain “much” of the productivity shortfall, then ipso facto they explain “much” of the RGDP shortfall. And RGDP is the statistic that Keynesians point to in order to show that expansionary austerity has failed in Britain. In the US they like to point to the employment to population ratio, but that variable is doing very well in Britain, especially compared to the US.
Where am I in this debate? Somewhere in the middle:
1. Expansionary austerity would have worked if the BOE had kept NGDP growing at a brisk rate. I blame the BOE for the slow recovery, and I blame Cameron and Osborne for not asking the BOE to adopt a more robust NGDP target, as their Business Minister Vince Cable recommended (partly due to the influence of us market monetarists.)
2. However I don’t think expansionary austerity failed anywhere near as badly as the Keynesians assume. Keynesian stimulus is aimed at fixing output shortfalls caused by mass (involuntary) unemployment, not those caused by declining oil and gas output in the North Sea, or declining (measured) real output generated by a handful of financiers dressed in Savile Row suits. (Whether this measured “output” was real is an interesting question, but has no bearing on this post. It was measured.)
3. I believe Britain’s labor market is doing better than the RGDP numbers show, and worse than the employment to population numbers show. I think the unemployment rate gets it about right. Up from 5.5% at the peak of the boom, to the high sevens today. That’s actually not as big an increase as in the US, but it still suggests there’s some slack, and that stronger NGDP growth would have been helpful.
4. Due to the huge increase in the UK government sector during the first 10 years of this millennium, it’s possible the natural rate of unemployment in Britain has risen. I still think they have slack, but I have less confidence in my views on Britain than the US. I’d recommend that people look at Britmouse’s excellent blog; he recently did a wonderful post using Maradona as a metaphor for what Nick Rowe calls the Chuck Norris effect.
Update: That Maradona metaphor was actually from Mervyn King.
PS. One can regard both North Sea oil and super high incomes in the City as a sort of manna from heaven. I sucks when the manna stops falling.