Why is the UK economy failing?

by on March 25, 2012 at 3:22 am in Current Affairs, Economics | Permalink

Do not heed those who paint with a limited palette and speak only of fiscal austerity.  Via Scott Sumner, Britmouse has one report:

The Office for National Statistics’ current data on quarterly UK nominal GDP growth in 2008 is as follows, at Seasonally Adjusted Annual Rates:

  • Quarter 1: 4.3%
  • Quarter 2: -1.7%
  • Quarter 3: -5.2%
  • Quarter 4: -3.4%

That collapse in nominal spending has no precedent in the data, and is certainly worse than anything since the 1930s. . . .

There was by the way no liquidity trap, as rates were often at five percent and in general not close to zero.  Britmouse now has his (her?  its?) own blog.

Going back in time a bit further:

The stark generational rift emerging in Britain is highlighted by a Financial Times analysis showing that the real disposable household incomes of people in their 20s have stagnated over the past 10 years just as older households are capturing a much greater share of the nation’s income and wealth.

…The FT analysis of 50 years of official data also shows that the living standards of Britons in their 20s have been overtaken by those of their 60-something grandparents for the first time, with the household incomes of pensioners in their 70s and even 80s also catching up rapidly.

The data, which underpins government publications on living standards, takes no account of housing costs or wealth. Had it done so the results would have been even more dramatic, showing median living standards of people in their 20s have now slipped below those of people in their 70s and 80s.

The problems over there are deeply rooted.

Nonetheless, via David Harbottle, we learn that during the Olympics there is a home in London for rent for about $412,646 per month.  So far there appear to be no takers.  The price is listed as negotiable.

NAME REDACTED March 25, 2012 at 4:29 am

Sigh, when will people learn that fiscal and monetary policy are completely and utterly ineffective. Its not like this hasn’t been done before.

sc March 25, 2012 at 4:53 am

“There was by the way no liquidity trap, as rates were often at five percent and in general not close to zero.” To someone with very little knowledge of the UK’s economy I’d have to ask why on earth the rates were 5%, BoE’s incompetence?

NAME REDACTED March 25, 2012 at 5:11 am

The BoE was dumping crap-tons into the economy, but the UK is a small open economy, so GBP value just went down.

Millian March 25, 2012 at 2:03 pm

The UK has the sixth highest nominal GDP in the world – what exactly counts as a “large” economy, if we’re using words this loosely?

NAME REDACTED March 26, 2012 at 2:34 am

the UK is fairly large in GDP terms, but thats not what determines small or large for the mundel-flemming model.

dbeach March 25, 2012 at 10:21 pm

Aside from redacted’s point about calling the UK “small,” the GBP has scarcely depreciated at all. It’s dropped by maybe 3% (1.63 or so to 1.58) or so since the austerity programme began. It’s clear that the BoE had considerably more latitude to ease than what they have done. They just needed to tolerate a brief period of inflation north of 5%, which they weren’t willing to do. Presumably they believed that such a policy would weaken their already undercapitalised banks.

But certainly, contra Tyler, it did not have to be this way. The BoE could have mitigated the damage from the austerity programme by engaging in further easing.

NAME REDACTED March 26, 2012 at 2:48 am

Its fallen vs what?
Since the crisis began, in 2008, its fallen versus AUD (a country that avoided the crisis) from ~2 to about ~1.5.
It has faired almost identically against the CAD (another country that avoided the crisis.)
And it also fell almost the same against the Swiss Franc.

In Chinese Yuan, its fallen from about 13.5 to about 10.

In Kuwaiti Dinars its fallen from ~.525 to ~.425.

In Japanese yen it fell from about 200 to about 120.

It fell in many currencies massively, but it didn’t fall in rupees (highly inflationary). And it didn’t fall in the currency of countries that didn’t avoid the collapse, Euros, dollars, or Argentenian pesos. This suggests to me that what we see is massive-scale monetary expansion on part of the GBP, USD, and EUD.

In gold its fallen about 50% In silver its fallen by about 60%.

Loren F. File March 25, 2012 at 7:26 am

“I believe that “liquidity-trap Keynesianism” is one of the major causes of the Great Recession—it contributed greatly to the monetary policy passivity.”

I must be missing something here which is hardly unusual, but liquidity-trap Keynesians have been pretty well ignored in policy making circles. And does the kind of “quantitative easing” the Fed has been doing really qualify as “monetary policy passivity?”

lff

NAME REDACTED March 25, 2012 at 7:42 am

Doubling AMB is passivity now, heh? This is what happens when people have their priors squashed.

NAME REDACTED March 25, 2012 at 7:48 am

“That’s to say, in 2002, one greenback bought you a buck-ninety Down Under; now it buys you 95 cents.”

DOOM.

sc March 25, 2012 at 10:48 am

That might be a bit of a cherry picked data point, you’ve picked a resource rich nation with non terrible governance so its currency would have strengthened regardless of the Fed’s activity. The drop in the USD TWI is not nearly so dire, in fact if I’m not mistaken the USD’s actually strengthened since the beginning of 2008 by that metric.

NAME REDACTED March 26, 2012 at 2:56 am

“The drop in the USD TWI is not nearly so dire, in fact if I’m not mistaken the USD’s actually strengthened since the beginning of 2008 by that metric.”

Correct. As many currencies try to peg to the USD, (and wages are sticky) the Fed’s attempts at money printing haven’t changed wage prices, just resource prices, which have skyrocketed despite being in a global recession.

dearieme March 25, 2012 at 8:39 am

“The problems over there are deeply rooted.” To a good approximation, the root is called Tony Blair.

brian March 25, 2012 at 2:52 pm

You’ll have to write more than a six-word approximation to convince anyone of this.

Ted Craig March 25, 2012 at 9:07 am

From the NYT:
” Barclays said Friday that it would cap cash bonuses for its investment bankers after a drop in the unit’s revenue last year dragged the British bank’s earnings lower.”

Since the ’80s, the U.K. economy has become more and more tied to the fate of London and London’s fate has been tied to the finance sector.

Ali Choudhury March 25, 2012 at 9:25 am

We have a crippled banking sector that isn’t lending money to productive enterprises.

sc March 25, 2012 at 10:50 am

Or even lending for less productive endeavours like refinancing a rental property, good luck doing that over there.

a March 25, 2012 at 12:49 pm

In 2009-10 in the UK median income after tax for 25-29 year olds was £16,490, for 30-34 year olds it was £19,370. Those figures are down 0.314% and up 4.4% respectively, in real terms since 2004. In the same period those aged 65-69 have seen their income rise 16.3% in real terms, and aged over 75 have seen their incomes rise 11.8% in real terms.

In 2011 Q4 the average first time buyer house paid £139,472 for a home, down 20% in real terms from a peak of £156,892 in 2007 Q4.

The recent student fees reforms have increased the interest for next years student loans, whilst studying or earning above £41,000 to Retail Price Index +3%. Currently this would be 6.7%. The UK government funds these loans by issuing gilts, which currently have negative real interest rates for maturities up to 18 years.

Martin Weale of the MPC has recently hypothesized that the current weakness of private consumption in the UK, may be particularly affected by the stagnant wages and high levels of unemployment among the young.

In April the UK basic state pension will be increased by at 5.2%, because it is indexed to inflation. Earnings rose by 1.4% year on year in February.

Pensioners do not pay national insurance contributions, which are levied at 12% and 13.8% on employees and employers wages respectively, which is in addition to the basic (income above £9k) and higher (income above £43k) rates of income tax of 20% and 40% respectively.

I wonder whether the dead weight losses associated with these transfers from young to old are causing unemployment to remain so high (currently 8.3%).

But I’m told “talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children.”

See:
Martin Weale on consumption:
http://www.bankofengland.co.uk/publications/Pages/news/2012/021.aspx

UK house prices:
http://www.nationwide.co.uk/hpi/historical.htm
ONS figures on consumer prices and earnings:
http://www.ons.gov.uk/ons/dcp171778_257901.pdf
http://www.ons.gov.uk/ons/dcp171778_259092.pdf
Debt management office for yields:
http://www.dmo.gov.uk/
Her Majesty’s Revenue and customs for income by age:
http://www.hmrc.gov.uk/stats/income_distribution/menu-by-year.htm

NAME REDACTED March 26, 2012 at 2:58 am

‘But I am told “talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children”‘

Yah I agree, thats so much baloney. Government in the west has turned into an extractive institution to favor the old.

Peter March 25, 2012 at 1:08 pm

Britain’s younger age cohort includes a large number of Pakistani immigrants, almost all of whom are in abject poverty.

maguro March 25, 2012 at 2:41 pm

That’s sure to end well.

Ali Choudhury March 26, 2012 at 5:13 pm

There’s a lot of young British Pakistanis with mediocre prospects, especially if they’re living in the various decaying towns of the North and West Midlands. I don’t think they’re as generally in a bad as state as Afro-Caribbeans in say, East and South London as they usually have the option to work for crap wages in a small family business if nothing else. The Pakistani middle class is also a lot bigger.

Even then minorities in the UK, are just that, minorities. What’s more significant for the UK is how sections of the white working class are drifting into the underclass at a faster rate than the US equivalent, something that Steve Sailer has commented on from time to time.

Ed March 25, 2012 at 1:42 pm

The UK is pretty much a more extreme version of what is going on elsewhere.

With the emerging generational gap, I’m starting to wonder what happens when the generation now in their 60s die. Do the later generations inherit the money the older generation is, apologize for not being able to come up with a more neutral term, hoarding? Or is it going to disappear into the healthcare system? Or is this wealth mostly paper wealth tied up in bubbly assets like housing, and therefore will also vanish?

This could be a self-correcting problem, the baby boom generation takes more than their share of the national wealth, because of this economies stagnate as they leave their working years but eventually they die and the wealth disperses back into the productive economy. Alternately, we could be in the case where people in developed economies are generally becoming poorer, but for various reasons the people who have lived most their lives in wealthier times are fenced off from this. Everyone else will stay poorer once they leave, but the statistics will start showing the real situation more.

Millian March 25, 2012 at 2:05 pm

The UK went longer construction and financial services than other countries. They suffered more in the post-2007 period than other countries. Their problems aren’t all that deeply rooted; they simply specialise in sectors which fell further and are growing slower. Consider the UK a larger Ireland, but with longer-term debt.

ricardo March 25, 2012 at 8:03 pm

Good comment, to which I’d add “… and its own monetary policy.”

Anthony March 25, 2012 at 3:22 pm

No wonder it hasn’t rented – a 60-something probably won’t appreciate all the stair-climbing the 4 separate floors would require.

UnlearningEcon March 25, 2012 at 4:06 pm

Maybe finance affects the real economy, and monetary policy has limited control?

Just a thought.

Peter Linley March 26, 2012 at 8:01 am

Just an independent thought, you mean.

How could you?

Greg Marquez March 26, 2012 at 12:48 pm

Am I the only one who sees an inherent contradiction between:
“Do not heed those who paint with a limited palette and speak only of fiscal austerity…”
and
” That collapse in nominal spending has no precedent in the data, and is certainly worse than anything since the 1930s…”

You do realize that when the government fires a teacher/social worker/healthcare worker, etc., that teacher’s nominal spending also collapses, and so on and so on.

Look, here’s the thing, monetary policy wont work by moving electrons from one sector of the Federal Reserve’s (or BOE) hard drive to another. If you want to expand the money supply you actually have to move the money beyond the bounds of the Federal Reserve Building, the only way to do that is for the government to actually spend the increase into the economy. By cutting spending the English government has decreased the money supply in spite of all the electron movement taking place in the BOE’s computers.

The MMT guys predicted exactly what’s happening in England. What did you guys predict would happen?

Lord March 26, 2012 at 2:38 pm

Rates were at 5% but inflation was also, still they could have done more.

Olympic hosts always think they will get rich only to find they are the ones that have to buy the tickets.

sa March 27, 2012 at 5:32 am

How about a Total Debt to GDP ratio of 466%, second only to Japan. Add to that a country whose only reliable export is great music and shady finance.

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