We have 'recovered' apparently, so why does it still hurt?

Growth is not strong enough to make up the ground lost on living standards, or to pay down debt

Share

The economy is back to its pre-crisis level and about time too, you may say. But living standards are not, in the sense that GDP per head is still something like 4 per cent below the peak. We are growing fast, at more than 3 per cent a year, but we need to, and not only to rebuild living standards. The government deficit seems to have stopped falling, personal debt remains high, so we need growth to help pay off debt.

True, the growth figures will almost certainly be revised up, and there will be technical changes to the series in the autumn that will make GDP appear higher – by, among other things, counting services such as drug-dealing and prostitution in national output. True too, part of the reason for the underperformance has been falling North Sea output: the on-shore economy passed its previous peak last year. But whatever qualifications you make, the recovery has been a disappointing one. In previous cycles, ground lost in recession is made up reasonably swiftly and the economy gets back to trend (long-term average) growth. It does not look as though this will happen this cycle, or at least not for a very long time.

This is not just a British phenomenon. The United States is below trend, Europe is way below trend, in Japan there seems to be no connection between the boom years to 1990 and what has happened since. So it has been a pig of a cycle for just about the entire developed world.

It is important, though, to separate the cyclical from the structural. Now that the West is on the way to fixing the problems associated with the financial crisis and is learning to live with the consequences of it, we need to think about the structural problems that the crisis highlighted.

Of those problems, the one that matters most, is the slow growth of productivity. Many economists are worrying about this. For example Larry Summers, Harvard economics professor and former Treasury Secretary for President Clinton, has written and spoken about "secular stagnation", the old idea that growth drivers such as expanding populations and new technologies are played out. Even before the financial crisis, the US was only managing to maintain a reasonable growth rate by having, as he put it in an interview in the New Republic last week, "the mother of all financial bubbles with vast erosion of credit standards and extraordinary run up in artificial wealth creation in houses and what have subsequently been criticised as overly easy monetary and fiscal policies". Ouch.

There is certainly evidence that there has been slow-down in growth in the US, going as far back as the 1980s. What happens in the US is hugely important because it is at the frontier of technology. It is relatively easy for other countries to catch up by applying best global practice: Japan in the 1950s, 1960s and 1970s, China and increasingly India at the moment. The UK did reasonably well in productivity growth between 1980 and 2007, but a lot of that was catch-up. Since 2007 we have done particularly badly, the flip-side of our rapid growth in employment.

For the US, from the 1950s to the 1970s, labour productivity rose by around 2.5 per cent a year. Then it fell to around 1.5 per cent until the 2000s, when it seems to have picked up to more than 2 per cent, or at least it did until the crash. Of course it may be that the 2000s recovery was a bit of a mirage associated with the boom – financial services have very high productivity even if what they are doing turns out to be destructive. Since 2011, US productivity growth has been only 1.1 per cent a year.

So the figures, as so often in economics, are mushy. The perception in the US is that productivity growth is disappointing, and various reasons have been trotted out to explain it. The political right argues that it is the result of poor incentives for entrepreneurs, weak schools, excessive regulation and so on. The left believes it is a lack of government spending, particularly on infrastructure, inadequate government support for scientific research and exports, etc.

There is a further and more general reason for concern. It has long proved much easier to increase productivity in manufacturing than in services, so as the former has shrunk relative to the latter you would expect overall gains to be harder to come by. The huge task is to work out how to increase productivity in the service industries – a huge task for the UK too. Can the new technologies help?

Maybe something is happening not yet caught in the data. The expression secular stagnation was coined by Harvard economist Alvin Hansen in the 1930s. But we now know that the 1930s were a time of great innovation, laying the foundations for post-war growth. Fingers crossed something similar is happening again right now.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
iJobs Job Widget
iJobs General

Recruitment Genius: Buyer / Planner

£20000 - £23000 per annum: Recruitment Genius: An excellent opportunity has ar...

Recruitment Genius: Marketing Manager

£40000 per annum: Recruitment Genius: This is a fantastic opportunity working ...

Recruitment Genius: Assistant Journals Manager

£33000 per annum: Recruitment Genius: The prime focus of the role is to assist...

SThree: Trainee Recruitment Consultant - Bristol

£18000 - £23000 per annum + Uncapped OTE: SThree: SThree Trainee Recruitment C...

Day In a Page

Read Next
 

The era of graduates from the university conveyor belt is over

Hamish McRae
The UCAS clearing house call centre in Cheltenham, England  

Ucas should share its data on students from poor backgrounds so we can get a clearer picture of social mobility

Conor Ryan
Giants Club: After wholesale butchery of Idi Amin's regime, Uganda’s giants flourish once again

Uganda's giants are flourishing once again

After the wholesale butchery of Idi Amin's regime, elephant populations are finally recovering
The London: After 350 years, the riddle of Britain's exploding fleet is finally solved

After 350 years, the riddle of Britain's exploding fleet is finally solved

Archaeologists will recover a crucial item from the wreck of the London which could help shed more light on what happened in the vessel's final seconds
Airbus has patented a jet that could fly from London to New York in one hour

Airbus has patented a jet that could fly from London to New York in one hour

The invention involves turbojets and ramjets - a type of jet engine - and a rocket motor
10 best sun creams for kids

10 best sun creams for kids

Protect delicate and sensitive skin with products specially formulated for little ones
Tate Sensorium: New exhibition at Tate Britain invites art lovers to taste, smell and hear art

Tate Sensorium

New exhibition at Tate Britain invites art lovers to taste, smell and hear art
Ashes 2015: Nice guy Steven Finn is making up for lost time – and quickly

Nice guy Finn is making up for lost time – and quickly

He was man-of-the-match in the third Test following his recall to the England side
Ashes 2015: Remember Ashton Agar? The No 11 that nearly toppled England

Remember Ashton Agar?

The No 11 that nearly toppled England
Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks