Stock markets in freefall? Bank of England standing pat on interest rates? Factory output collapsing by the largest amount since Jim Callaghan was a resident of Downing Street?
Never mind all that. The most significant economic news in the past week is the honorary knighthood awarded by the Queen to Alan Greenspan, medicine man of the US economy.
As chairman of the US Federal Reserve, Greenspan was honoured for his “outstanding contribution to global economic stability”. The last time Greenspan won a high-profile award, its sponsor, Enron, was bankrupt within a week. This award represents a much broader sweep of new Labour’s economic policy.
When Labour arrived in power in 1997, the US economy was midway through a dizzying period of economic growth. The anchor for this economic exuberance was an impressive upturn in the growth of productivity. For the first time, hard data supported what many cheerleading Wall Street analysts had claimed for years. All-pervasive communications technology, when combined with a super-flexible labour market, were churning out far greater output from the American workforce. This was the foundation stone for creating wealth and raising living standards. Productivity growth meant that it was possible to back business and redistribution, high profits meant high corporation tax and more funds to pay for public services.
And so productivity growth became the Holy Grail of British economic policy. Senior Treasury officials talk of new Labour’s exact mapping of the experience of Bill Clinton’s two terms in office. The first term was for tough decisions, slashing the ballooning deficits, coaxing central bankers to lower interest rates, as tax and spending decisions hurt the average citizen. Cutting back on the national debt “crowded in” private-sector investment. The fact that the US government was borrowing so little, even paying off the national debt, meant that returns on the staple investment of government bonds were very low. So pension funds and insurance companies piled into the US stock market to make money and remain solvent.
In the US, the first term created the conditions for the second-term spurt in productivity growth. This came, accompanied by a stock market boom – essentially a massive bet that these gains would be sustained, accelerated and passed on to companies in the form of extra corporate profits.
But the second-term productivity miracle has failed to materialise in the UK. Indeed, on some measures, it has fallen back. As Mervyn King, deputy governor of the Bank of England, and probably Britain’s brightest policy economist, said this week: “We’d be delighted to have seen the new economy raising productivity growth over the past five years, but you can’t see it in the UK.”
The abysmal figures on industrial production and business investment have dashed the government’s hopes of raising the trend rate of productivity. Despite creating an independent competition commission, financial regulator, investing in research and development and liberalising the immigration regime for high-skilled workers, the US blueprint is simply not working here. At least so far.
A plausible explanation is that new Labour did not go far enough in aping the US system. Increasing the minimum wage, strengthening trade union rights and increasing payroll taxes on business go against the grain of the US-style flexibility that lets business extract the most out of new technologies.
Maybe improvement in productivity will take longer in the UK, especially given the short-term turbulence in global stock markets. Britain has a very open economy, highly susceptible to the ups and downs in the US and Europe.
Or maybe the entire focus on productivity is completely misguided. The growth of our output is at best, an imperfect and intermediate proxy for creating wealth. What proved successful for the US economy might not suit the UK. Britain is centralised around the south-east, which is in turn dependent upon the City.
The US is 35 times bigger, with five times the population and greater scope for diversification and regional specialisation. One by-product of Labour’s obsession with a US-style productivity performance has been the neglect of manufacturing industry at the expense of “sexy” dotcoms. This month’s woeful factory output figures are the fruits of this fascination.
Nor are these freak figures (despite the rumoured jubilee and World Cup effect). Manufacturing output and jobs have been falling sharply for the past four years, mainly down to the strength of the pound.
In the US, the domestic market is large enough for manufacturers to weather the effects of the strong dollar. Not so in Britain. But British policy-makers misjudge the US if they assume that it would allow manufacturing to wither away.
Last May, the UK’s GDP reached £1trn for the first time. But the added value is tremendously unbalanced. Unleashing the productive potential of our regions would probably better serve the aim of balanced growth. In seeking the Holy Grail of productivity, the aims of economic policy may have been lost.
Faisal Islam is the Observer‘s economics correspondent
Content from our partners
Related
