Are we coming to an end of economic growth?

12:15 pm - June 21st 2010

by Chris Dillow    

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Further to an earlier post on my blog, is there another similarity between now and the 1970s – that the causes of rapid economic growth in previous years are fading away?

I mean, one reason why growth slowed in the 1970s was that a couple of the impetuses behind fast non-inflationary growth in the 50s and 60s – post-war rebuilding and the spread of some big technical advances – became weaker.

Similarly, four possible forces behind economic growth since the mid-80s might also now be fading:

1. Credit liberalization in the 80s  led to a rise in the ratio of consumer debt to incomes. You can think of this as a long one-off adjustment, which is now most over.

2. In the 90s and early 00s, the risk premia on real capital assets declined, thanks to lower inflation, the absence of worker militancy and macroeconomic stability. This caused a rise in capitalists’ confidence and in capital spending, which was partly one-off. With the re-emergence of economic volatility, this process has stopped.

3. In the 90s and early 00s, technical change in IT and telephony created investment opportunities that have now been mostly exploited.

4. We’ve seen the best of the positive supply shock resulting from the supply of cheap goods from the far east. Even before the crisis began, the inflation rate for non-energy industrial goods was turning less negative; it was minus 0.8% in the 12 months to December 2007, against more than minus 2% for 1999-2005.

These weakening forces are consistent with one overlooked aspect of the OBR's recent forecasts – that it reduced the estimate of trend GDP growth from the 2.75% which the last government believed, though it seems to blame this upon the credit crunch rather than upon pre-existing trends. They also gel well with two broad facts.

First, the trade-off between unemployment and inflation (in the US) and between unemployment and the trade gap (in the UK) has worsened.

This is consistent with a deterioration in the ability of economies to deliver non-inflationary growth.
Secondly, even before the crisis, consumer spending was falling relative to wealth, and capital spending was low relative to profits. Both are consistent with forward-looking agents taking a dim view of future growth prospects. Maybe they were right.

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About the author
Chris Dillow is a regular contributor and former City economist, now an economics writer. He is also the author of The End of Politics: New Labour and the Folly of Managerialism. Also at: Stumbling and Mumbling
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Reader comments

1. Flowerpower

why growth slowed in the 1970s was that a couple of the impetuses behind fast non-inflationary growth in the 50s and 60s – post-war rebuilding and the spread of some big technical advances – became weaker.

So, nothing to do with overmanning, Old Spanish practices, overweening union bosses, Trotskyites stirring every industrial dispute, ham-fisted attempts to direct investment by government, rigid exchange controls or rampant inflation then?

The reason the Left never seems to learn from history is that it always tries to rewrite it.

In the diagnostics of low growth in the 1970s, I’m amazed to see no mention of the impact of the oil price hikes in 1973/4 and in 1979:

According to various commentary, in several then important sectors of the economy – motor, coal, steel – productivity declined on trend through the 1970s.

Jim Callaghan as Labour PM famously concluded that Keynesian remedies for unemployment didn’t work:

“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”

Bob – Callaghan was also famously uncomfortable with that quote at the time and was mainly trying to appease the Americans.

4. Luis Enrique

So, are these arguments strong enough for the current government to have to revise down its expectations for future growth? Should we be asking not what the deficit is expected to look like if we grow 2.5% on average over the next few years, but 1%?

For the sake of argument, let’s say the answers to those questions are yes, and we have learnt today from reading this post that we need to revise our expectations downwards, and plan on being able to afford less than we thought, tomorrow. Is there any prospect of anybody changing their positions on anything at all, in light of this new information? Is that something the left-wing (or anybody) could do?

Moreover, let’s say the present government does whatever it’s going to do, with respects to cuts and taxes, over the next 5 years, and because of the reasons Chris outlines here, economic growth is low, tax revenues are lower than forecast etc. Is anybody going to be capable of saying “it’s not the government’s fault” or are we all going to blame it on the fiscal contraction?

“Bob – Callaghan was also famously uncomfortable with that quote at the time and was mainly trying to appease the Americans.”

Dig a little and you’ll find that the quoted passage was written by Peter Jay, who had worked as an economist in HM Treasury and went on to become the BBC’s economics editor.

Keynesian measures to boost demand are appropriate – other things equal – when there’s a deficiency in total demand (as in the 1930s) but the oil price hike was a supply-side shock.

If monetary demand is simply boosted to accommodate the upward pressure on costs from the higher prices for imported oil – and, at the time, higher world commodity prices as well – the result is not only to embed higher prices but also to generate expectations that prices will continue to rise. The downstream result is – and was at the time – an inflationary spiral which can only be halted by fiscal and monetary policies to curb total monetary demand – supported, if it works, by some sort of incomes policy to arrest rises in costs and dampen inflationary expectations.

West European countries which were less accommodating towards the hikes in oil and commodity prices than Britain had lower rates of inflation. There’s no escaping the unpleasant implications of higher prices for imported oil and commodities – somehow or other, average living standards have to fall to adjust unless export prices also increase to compensate.

Btw I think there are still plenty of underlying growth opportunities ahead from computer and communications technologies and also from innovations in pharmaceuticals and medical treatments. The implications of the discoveries in genetics and cellular biology are only just starting to become apparent. Also, what of pressures for a lower carbon economy arising from climate change?

The worry ahead is that that the numbers of unskilled jobs will continue to decline.

6. Just Visiting


> The worry ahead is that that the numbers of unskilled jobs will continue to decline.

Hasn’t that already happened?

And what is also happening now in my sector of IT – is that many many jobs are going off-shore.

In fact, many knowledge-industry jobs are leaving the west: going to India/ China where they churn out zillions of IT graduates.

@6: “Hasn’t that already happened?”

Sure, but that trend will continue – and only half 16 year-olds in Britain attain 5 GCSE subjects A*-C grades, including maths and English.

The concerns are not just about outsourcing work to countires like India which are producing thousands of tech graduates a year. The fact is that productivity in Britain doesn’t compare favourably with other major west European economies:

The government has relied on buoyant tax revenues generated by the financial services industry until the crisis broke.

BAE Systems, which is focused on producing armaments, vehicles and equipment for military use, is Britain’s largest manufacturing company. It would be bad news for Britain if the world became a more peaceful place with fewer armed conflicts.

Too much of the public discussion about economics policy is focused on the (admittedly important) deficit issue and not nearly enough attention is paid to the other fundamentals contributing to economic prosperity IMO.

8. David Vinter

Given the inevitable long run limit on many of the world’s commodities, coupled with the population increase of over one and a half million humans every week, then growth must inevitably be curtailed, either physically or through inflation. Already over a billion humans go hungry to bed every night, we in the richer world have no right to overconsume.
As to Keynsian use of an increased money supply to ‘buy’ employment, it demands a very well skilled population, and a very fluid population, ready to move around the country at short notice. However as the population slowly build up their individual capital, they become more reluctant to move—houses, schools, etc.
Maybe we need another visit of –‘The Black Death’!

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