Those sixties weren't so great

Bank of England Governor Carney delivered an interesting speech this week (here) in which he took a closer look at the reasons behind the rise in populist responses to our current economic ills. None of it was particularly new, but it was illuminating for the fact that a heavyweight economic policymaker addressed the issues in a more rational fashion than I have yet heard from most politicians.

Most of the newspaper headlines focused on his one killer statistic that in the UK we are currently experiencing “the first lost decade since the 1860s.” (Clearly those sixties were not all about flower power). Carney used the excellent BoE database (here) to show that real wages over the last ten years have grown at their slowest rate since the mid-nineteenth century. And as I have long argued, although productivity performance has been lousy it has at least outstripped real wage growth, which suggests that workers have not been compensated for their efforts. Indeed, the share of wage and salary income in UK GDP (technically, gross valued added at factor cost, but let’s not overcomplicate things) has fallen from around 58% in 2011 to 56.5% in 2015.

Carney makes the valid point that although economists are unshakeable in their belief that society benefits from free trade, not everybody benefits equally. As he put it, “the benefits from trade are unequally spread across individuals and time.” So far as I am concerned, he is preaching to the converted: Those of us who recall the wholesale destruction of large parts of the UK manufacturing base in the 1980s need no reminding that there were significant adjustment costs as those losing their jobs had nowhere else to turn. Some people were eventually forced to relocate to find work; others had to wait for new local opportunities to arise. Viewed from 30 years on, many of the economic scars have healed as the UK macroeconomic data show that real incomes per head are almost double the levels of the early-1980s. But at the time the local dislocation was huge, and today it is not just the UK which is facing these problems: It is an issue across the whole of (what is still euphemistically called) the industrialised world.

Those who argue that markets will always adjust often overlook the fact that the longer-term gains are smaller than they appear when offset against the short-term costs. The pace of technological change magnifies these impacts. If people are concerned that their jobs can be replaced by machines, they are bound to become fearful and resentful. This is, of course, not new as the Luddite movement of the early 19^th century demonstrates (here for a quick overview). We should also take encouragement from the fact that societies have usually managed to accommodate technological advances relatively easily. But this will not happen if we continue to plod down the same unimaginative policy path that we have been following in recent decades.

Before turning to what needs to be done, Carney defended the role of monetary policy by arguing that it “has offset all of the headwinds to growth arising from private deleveraging, fiscal consolidation and subdued world growth.  People haven’t been made poorer.” But he noted that they feel worse off because productivity growth remains subdued. Recall Paul Krugman’s line that “productivity isn’t everything, but in the long run it is almost everything.  A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” (Actually that is true only if workers are compensated for their productivity performance which, at least in the UK, has not been true in recent years).

Carney thus believes that efforts to boost productivity are an important element in generating an economic turnaround. Quite how we achieve this is not so easy to identify and we will revisit it another time. However, his conclusion was a sharp retort to the recent criticisms which have been put his way by politicians: “To address the deeper causes of weak growth, higher inequality and rising insecurity requires a globalisation that works for all. For the societies of free-trading, networked countries to prosper, they must first re-distribute some of the gains from trade and technology, and then re-skill and reconnect all of their citizens. By doing so, they can put individuals back in control.” This is an interesting twist on the take-back-control of the Brexiteers, and I have to say I agree with the Governor on this one.

It is just a pity that such a cogent analysis of the UK’s ills was left until almost six months after the referendum. But when it takes the Governor of the Bank of England to point out that “we must grow our economy by rebalancing the mix of monetary policy, fiscal policy and structural reform,” this strikes me as a sad indictment of a political class which continues to deflect the blame for years of policy neglect onto the EU.