So what is going to happen to growth?
It is a question that of course is very much at the front of the British news and political agenda this week, with the next GDP numbers out on Thursday. But like so many deceptively simple questions in economics, it is hard to give a satisfactory answer. Part of the reason why is that it is two questions wrapped in one.
The first concerns how we dig ourselves out of recession more swiftly and effectively, and that dominates most of the present debate. The second is the longer-term one, which is whether the UK and other developed nations, quite aside from the blow from this downturn, are suffering from a structural decline in our growth potential. The two issues are linked, in that the recession may have damaged the longer-term outlook, if only because of the debt burden of coping with the former. But eventually we will be back past our previous peak in output, as we are already in employment, and what happens then? Ultimately, the structural issue must matter more than the cyclical one.
There are, as so often, two views. The first, which was at least until recently the mainstream one, is that there is no necessary reason why growth in the future should be lower than growth in the past.
The underlying thought behind this is that human ingenuity will go on delivering increased productivity, as it has for the past 200 years. The drivers behind these increases will change. For example, in a predominantly manufacturing economy it was developments such as Henry Ford’s moving production line, whereas in our predominantly service economy it will be greater application of the new communications technologies. It is true that as we live longer, we will have to put more resources into healthcare as well as retiring later, but that should not affect growth in GDP per head; it is just a different sort of growth.
There has been a lot of work on this, for example by the OECD, and it is supported by the common-sense argument that if a trend of rising productivity has been established for more than two centuries, you have to be pretty glum to believe it has changed now.
The counter-argument is that a combination of factors will reduce growth. These include environmental pressures, the ageing population (you cannot reasonably increase retirement ages in proportion to increased longevity), the practical difficulties of increasing productivity in some services (for example, a primary school), and the possibility that many people in the West don’t actually want economic growth.
This last point – that the West has lost its mojo – was mooted by Lord Heseltine a few weeks ago, and it was explored last year in the book How Much is Enough? written by Keynes’ biographer Lord Skidelsky with his son Edward. He argued that “capitalist civilisation has unleashed greed from its traditional moral constraint” and that we should now focus less on growth and more on “the good life”.
It is a powerful argument that will resonate with a lot of people, though it does rather raise the retort that it is fine if you are a famous and well-off member of the House of Lords, but not so fine if you are struggling to bring up a family in modern Britain. I think, too, that one must factor in the pressure that lack of growth is beginning to put on funding for public services. But it is undeniable that if people in Britain and Europe make some sort of collective decision that they don’t want economic growth, then they won’t get it. It is certainly a fascinating question and one that needs to be asked.
An academic spat
Call it an academic spat, but it has been one with massive political ramifications. In 2010 two well-known US economists, Carmen Reinhart and Kenneth Rogoff, published This Time is Different – Eight Centuries of Financial Folly. It shot to the top of bestseller lists, astoundingly so given it was essentially an academic, statistical study of public finances. The big message, derived from a mass of work, was that if a government increased the national debt to more than 90 per cent of GDP, it inhibited economic growth.
This has now been challenged by three economists at the University of Massachusetts (Thomas Herndon, Michael Ash, and Robert Pollin), who went back over the data and discovered a coding error. If you correct for that, they argued, the performance for the 90 per cent plus club was not so different as countries with lower debt. As a result the case for economic austerity was undermined.
What should the rest of us think? Well, there was indeed a coding error, as Reinhart and Rogoff acknowledge. That precise 90 per cent figure always felt a bit stark. But while the broad relationship between excessive borrowing and poor performance probably does still stand, the question is rather which way round the relationship works. Are high debts the cause of slow growth or the result of it – or a bit of both? Or are both simply the outcome of poor economic management, of which the book chronicles a fine collection?