Imagine we were to suffer an economic catastrophe in which our real incomes fall by 30%, which would be by far the greatest recession in modern times. The response, one might imagine, would be equally dramatic; there’d be a backlash against the government - very likely causing serious political unrest - and our politics would be dominated by the question of what caused the slump and what to do about it.
In fact, we don’t have to imagine such a disaster. It has actually happened. In the last 20 years real GDP per person has grown by just 0.6% a year compared to 2.3% per year in the previous 50 years. This means that our real incomes are indeed 30% lower than they would be if that trend had continued.
What we do have to imagine, however, is the reaction. This disaster does not dominate politics and the political class devotes remarkably little serious thought about what to do about it.
In fact, in some ways they actually seem to want us to be even poorer. The Home Office itself recently estimated (pdf) that the government’s proposals to restrict immigration flows “will have a downward impact on GDP”. Equally, there’s little interest in rejoining the single market despite an estimate (pdf) from Nick Bloom and colleagues that Brexit “reduced UK GDP by 6% to 8%”*.
To someone of my age, this is puzzling. In our formative years, the main political issue was economic growth and how to improve it, and ideas that were considered “bad for the economy” were usually rejected, often with derision. Today, by contrast, voters and their representatives seem to actually want a weaker economy.
Our political feedback mechanisms are broken. In principle, bad events should trigger a reaction which corrects or at least ameliorates the damage. So, for example, the slump of the 1930s lead to the election in 1945 of a government devoted to maintaining full employment; the breakdown of the social democratic system in the 70s led to Thatcherism; the decay of public services in the 90s led to Labour’s election in 1997. Etc.
But there seems little such feedback now. Instead, the political class is content to wallow in our economic dysfunction.
Why?
Partly, it’s because we are like the (apocryphal) frog in a pan of water: we don’t notice gradual changes until it’s too late. This is exacerbated by a media bias: it reports upon salient events more than slow-moving processes so a gradual loss of prosperity is ignored in a way that a sudden one isn’t. And it’s also because we don’t have a Jim Bowen showing us what we could have won; we just can’t see the counterfactual world in which we are 40% better off.
But there’s more to it than this, factors that explain why politicans are not trying to make us richer.
One lies in that notorious shout at Anand Menon during the Brexit referendum campaign: “That’s your bloody GDP. Not ours.” People don’t see a link between aggregate economic growth and their own personal fortunes. And in a sense, they are right. Our personal income depends more upon idiosyncratic events than the state of the national economy: will you keep your job? Will you get a better one? Will you stay healthy? Good or bad GDP numbers tweak the odds of these only slightly: you can lose your job in a boom and get a good one in a recession.
And in fact there is a downside to economic growth. It is a process of creative destruction. And destruction means there’s a chance you’ll lose your job or that the longstanding local company that for years was a familiar landmark will disappear. Even if you will get a better job, this is disconcerting and unsettling. Stagnation is more comfortable.
What we have here is something common in social science - a form of the fallacy of composition: what’s true of any individual is not true for society as a whole. And so things that would help society as a whole are under-appreciated.
This is true for another reason, pointed out by Mancur Olson. The winners from better economic growth are the dispersed millions who might on average become 5-10% better off than they would otherwise be over ten or 20 years. No individual has much incentive to go to the cost and trouble of forming a lobby group to press for such a small and far-off gain. Losers from such policies, however, do have such incentive as their losses are concentrated among fewer people - and the fewer people there are, the easier they are to organize. So utilties can successfully press for high prices; incumbent companies can oppose stronger competition policy; land-owners can resist demands for higher taxes on land; lawyers and accountants can oppose tax simplification; and financiers generally don’t want anything that would increase real interest rates and so depress asset prices.
What’s more, serious efforts to raise growth would ask questions of management: why is it so bad, and how might we change it? Again, this would upset powerful people.
And so we have strong client groups that support the status quo of economic stagnation but few that can successfully press for pro-growth policies. One virtue of relaxing planning restrictions is that it is one of the few things that might improve growth whilst also pleasing a special interest group.
Promoting economic growth doesn’t just mean alienating powerful interests, though. A drawback to growth has always been that it makes other people richer, income being a positional good. This is especially difficult now because growth requires the government to help people the political class dislikes. The UK’s comparative advantage lies in part in higher education and the creative arts - industries staffed by liberal metropolitans rather than the older less educated people who still read newspapers and so constitute what politicians regard as target voters.
Worse still, a serious assault upon stagnation might require governments to reduce inequalities of wealth and power. Gabriel Zucman and colleagues have shown (pdf) that there is, in the long-run, “a strong positive association between equality and productivity.” This doesn’t mean that governments can raise productivity merely by taxing the rich more. It means instead having the sort of institutions that increase both equality and productivity such as education and training for all rather than just a few; good infrastructure and public services; stronger worker rights and unions so firms have to invest in raising productivity rather than simple sweat labour harder; and a democratic ethos (at least) in workplaces.
All this means that the political class has little incentive to think seriously about economic growth. Indeed, it has little incentive to think at all. The malefaction that is current affairs broadcasting has far more hours to fill than there are experts. The upshot is that the airwaves are occupied by know-nothings. And this further helps to skew the agenda away from economics: whereas it requires knowledge to talk about economics (or the welfare system or NHS etc) any fool can spout off about culture wars, and often does**. And so immigration and trans people dominate the agenda to the detriment of economics.
Which suits more people than merely dumbed-down TV and radio producers. Much of the political class would rather not ask questions about capitalism or challenge vested interests and would rather focus on immigrants instead. And stagnation helps them do this. It breeds reactionary politics partly because it fosters status anxiety, and people who look down want to punch down. Also, it creates a yearning for those better days in the past*** before immigrants arrived. And thirdly because stagnation closes pubs and shops and so reduces the sense of community and turns people towards the internet with its cranky right-wingers. In these ways better economic growth would threaten to put an end to the grift that is culture war politics. Why rock the boat?
And so we have a bad equilibrium. Instead of stagnation causing a desire for and interest in pro-growth policies, it actually strengthens the pressures on politicians to wallow in that stagnation.
The question is not therefore merely how to raise economic growth: any economist could give you half a dozen ideas. It’s: how can we create a public sphere in which politicians are incentivized to raise growth when this requires them to confront vested interests and the media?
But, but, but. To paraphrase Trotsky’s cliche, you might not be interested in economic growth, but economic growth is interested in you.
For one thing, a stagnant economy makes politics a zero-sum game. Without growth, better public services require less private consumption (unless you believe in the magic beans of higher public sector productivity). That comes with huge risks - not least of which being that shop and pub closures might further strengthen the far right.
And for another, economic growth has historically been a means of legitimating capitalist liberal democracies. For decades such polities have literally delivered the goods and the promise of doing so in the future. In a stagnant economy, this source of legitimation disappears.
There are therefore good reasons why sensible politicians for decades wanted to raise growth - because doing so avoids that most awkward question for them: socialism or barbarism?
* I’m sceptical about that estimate. A world in which capital spending was rising strongly after 2016 would probably be one in which interest rates were higher, thereby choking off some growth. And the idea that planning for Brexit distracted managers from raising productivity takes too rosy a view of their inclinations and abilities. Nevetheless, there can be no serious dispute that rejoining the single market would make us better off.
** Perhaps the rot began (or began to be evident) 30 years ago when Gordon Brown used the phrase “post-neoclassical endogenous growth theory” and the response was mockery rather than curiosity.
*** A recent Ipsos poll found that 63% of people say Britain was a happier place in 1975, perhaps forgetting the high inflation, strikes and pub bombings.
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