Still Three Nil Down

Joining the general level of excitement that we have arrived at a lower level of economic growth than on the day of the last General Election, the former Conservative frontbencher Robert Skidelsky writes:

The Chancellor has been celebrating the recent estimates showing that the economy has grown by 0.8 per cent in the third quarter of this year. However, these forecasts do not tell us anything about what is most important: well-being. National well-being is the only object of economic growth, but GDP data says nothing about it.

Well-being depends on a range of factors, including amount of leisure time, good health, security of income, sense of community, a clean environment, harmony with nature, respect for personality, and so on. It also includes sustainability of the ecological basis of human life. Either these things do not show up in GDP at all, or turn up as subtractions from GDP growth. For example, the more medicines people consume, the more hours they work, and the more polluted the atmosphere – the higher the GDP!

The latest estimates do not settle the debate of how the economy might have fared under an alternative strategy either. Critics of Osborne’s policies never claimed that the economy would not recover from the collapse of 2008-2009. Economies always recover from their low points, whatever the policies pursued, sooner or later. The real question is whether the recovery was delayed by austerity and whether it could have been stronger without austerity.

So first, what do the latest results by the ONS say? In summary, the economy has grown by 0.8 per cent in the third quarter of this year, up from 0.7 in the last quarter and up by 1.5 per cent compared to Q3 2012. This is the fastest growth in three years. It is somewhat more broadly-based than last quarter’s. But the economy is still 2.5 per cent below its peak in 2008. Most of the growth has been in the housing sector, with construction boosted by the Government’s “Help to Buy” scheme. Production output is still 12.5 per cent down.

Osborne tweeted “Britain’s hard work is paying off”, but has the hard slog really been worth it? Not necessarily. Most economists agree that the Chancellor’s austerity policy has inflicted significant damage on the economy, quite apart from the damage caused by the recession itself.

Economists Alan Taylor and Òscar Jordà even estimated that each year of Osborne knocked 1 per cent off growth, meaning that UK GDP would be 3 per cent higher today without austerity. This corresponds to £92bn all told, enough to restore Labour’s school-building plans and still have enough change to plug the funding gap in the NHS. For the average household, this amounts to a loss of £3,500 over three years – and, as Taylor and Jordà point out, this is a conservative estimate.

In other words, we might have had the recovery sooner, without having had to pay the cost of three years of output foregone. And the growth potential of the economy might well have been greater had the unemployed been absorbed into production sooner, instead of their skills being allowed to rust away.

In particular, the UK could have secured itself a brighter recovery by investing extensively in infrastructure, without having to add a single penny to the deficit. Economic analysis suggests that every £1 spent in construction returns £2.84 to the economy. Through this multiplier effect, construction could have offered a route out of recession.

The economy has turned a corner, and this is to be welcomed. But we should not imagine the game is won. Osborne’s satisfaction is like that of a football team which scores its first goal, forgetting it is 3 nil down.

The question, of course, is whether the recovery, in the jargon, is “sustainable”, or whether it will peter out before full health is restored. This depends partly on the level of aggregate demand, or spending, both in the UK and abroad. From the findings of Taylor and Jordà, households have £3,500 less to spend than in 2008. The recovery will have to do a lot of hard lifting to raise the total level of spending to what it was before. A housing-cum-construction boom on its own will not be enough.

The depreciation of the pound has helped our exports, but the eurozone remains flat, and the IMF has recently reduced its 2014 growth estimates for the big emerging economies like China, India, and Brazil, to whom the eurosceptics say we should direct our exports.

However, sustainability also depends on the long-term balance of the economy: not just how much is produced, but what is produced, and to whom it goes. The pre-recession economy relied disproportionately on the growth of the financial sector; and that meant that rewards to financial activities – from the activity of buying and selling existing assets  – grew much faster than rewards to producers of actual goods and services. This has become scandalous. The UK mean income in 2011 was £27,000, but the median income was £21,500. That means that 50 percent of people earned less than 27,000; and 12 million people were officially “in poverty”  – defined as having less than half of the median income. One cannot say whether the welfare of a country’s citizens is going up or down without knowing what has happened to income distribution.

The recovery so far promises to perpetuate this imbalance. Specifically, the extension of “Help to Buy” to existing houses will boost house prices with minimal encouragement for the construction of new houses. And quantitative easing  – the only stimulus policy the Government finds acceptable  – tends in the same direction by increasing the wealth of those who have assets to trade. In other words, the current pattern of recovery does nothing to counter the growth of income inequality, which was, arguably, the main cause of the crash of 2008, and actually makes it worse. “To those who own, it shall be given.”

Hindering the emergence of a broader conception of sustainability is our continual obsession with GDP growth. Gross Domestic Product is undeniably an important indicator of a country’s economic health. It is the most important economic statistic in the short term. However, because it only measures that portion of domestic production traded in markets, it fails to capture the growth of well-being, the only rational reason for economic growth.

The argument for a wider measure than GDP is strengthened by empirical evidence of the lack of a close fit between GDP growth and subjective wellbeing. A recent ONS report shows that, although London is the fastest growing region of the UK, it has the lowest average rating for life satisfaction and the highest average rating for anxiety in the UK. To the extent that GDP is therefore not synonymous with welfare, policy for sustainability should concentrate on the growth of the requirements for well-being rather than on the growth of GDP. Economic growth would have to be viewed as a residual rather than something that policy must be aimed at. David Cameron perhaps had something of this in mind in his initial talk of the “big society”. It is time to revive the language, and match it by deeds.