Predictions of economic disaster are always with us

Britain was meant to have sunk by now – and the developed world along with it. But the good thing about the future is you don’t know what it will bring

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The headline “Goodbye Great Britain” ran above an editorial in The Wall Street Journal on 29 April 1975, which concluded that the high taxation, high spending policies of the then chancellor Denis Healey would result in “still slower economic growth and still lower living standards for all the British, rich and poor.”

This was, at the time, received wisdom. The WSJ article followed a cover story in The Economist headed “Steady as She Sinks” and I recall an editorial meeting at The Guardian, where I worked at the time, when one of our top columnists argued that Britain faced not just relative decline but absolute decline. 

The reason to bring this up now is not to point out that received wisdom is often wrong but to set in context current defeatism about not just the British economy but about that of the developed world as a whole. Here are some current headlines: “Harsh truths about the decline of Britain”, “Meet the new Japan – it’s called Europe”, “Canada’s younger generation facing deep declines in its standard of living”, “The Inevitable Decline of the American Economy” – and so on.

There is a lot of it about, so much that it needs to be taken seriously. There are several strands. One is to focus on demography: that ageing populations will have a smaller workforce caring for (or paying for the care of) a larger number of retirees.

That will tend to reduce the living standards of all, but particularly the young. Another is to note that productivity growth is slowing and has been for about 20 years, with the result that the still-rising living standards of the period to 2007 were financed by excessive borrowing by both individuals and government – borrowing that has now to be paid back. Still another is to focus on the impact of economic change on different income groups, and to note the median incomes in the United States have not risen in real terms for a generation. And finally there are environmental concerns, at their simplest that rising living standards have only been possible because we have been using up the planet’s natural resources at an unsustainable rate.

The difficulty for anyone trying to stand against this tidal wave of gloom is that there is some merit in all these arguments. The case for optimism is that this stuff overemphasises the negative and underestimates our ability to adapt.

Take demography. Actually as far as the UK is concerned this is not really a problem. Our population is expected to rise through to 2050 and is currently rising at 400,000 a year. Our fertility rate, unlike that of most of Europe or Japan, is at or close to replacement rate of an average of 2.1 babies per mother. As for the growing numbers of retirees, the fact that people beyond normal retirement age are staying in some form of work is a major reason for the increasing size of our workforce.

While the young will have to some extent to pay higher contributions to finance pensions, the burden can be cut by quite a small increase in the retirement age. Demography is a problem for much of Europe, for many countries face shrinking populations. It is less so for the UK and US.

Falling productivity is a real concern. There are two issues. One is the cyclical decline in productivity that seems to have happened as a result of recession. If most of the recent fall is indeed cyclical then that should not be a worry because it should be reversed as the cycle reverts. If on the other hand there is a structural decline, then it will be very hard to increase living standards.

There is some evidence that there has been a structural decline in the rate of productivity growth since the 1990s in the developed world. Part of the problem is that it has proved harder to increase productivity in service industries than in manufacturing, and as the former grows in relation to the latter total productivity is likely to lag. It is obviously tougher to increase productivity in a university or a hospital than in a car plant.

There is no easy answer to this. Some activities, such as looking after older people, will always need human beings – and caring and trained ones. What we don’t know is whether better application of the new technologies could boost productivity in ways that are hard to envisage until they happen. Think of Moocs – massive open online courses – which may be creating a revolution in education. Or think of the ways in which public services could be simplified to improve efficiency: a much simpler tax system for example. Should the legal system be simplified to cut costs? To what extent do compliance costs reduce efficiency? Intuitively there must be huge potential gains to be made but how we structure society to deliver these is harder to see.

Of the rest, well, debts have to be repaid in some way or other and that will be a drag on living standards here and elsewhere. But another three or four years should see debts in the UK and US at an acceptable level. There are no easy answers to issues of inequality and the environment – subjects for a much longer column than this. But the big point surely is that if we are thoughtful, numerate and intelligent there is no reason why we should be unable to apply our ingenuity to improve living standards for all. We have always managed to do so in the past. Why not now?

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