Month: June 2022

Fully Grown: why economic growth has slowed down

This book was one of The Economist‘s books of the year in 2020 – and I bought in time for Christmas. It has taken me until now to read it. It tackles the question of why economic growth in the US, along with the rest of the developed world, slowed in the 21st century compared to the last half of the 20th. It is a topic that has troubled many, but the usual response is to attribute it to whatever the commentator’s pet theory happens to be, throwing in a few pieces of circumstantial evidence in support. I am as guilty of this as anybody: using my theory that it is mainly the Baumol effect – a switch in the economy from manufacturing to services. The virtue of Dietrich Vollrath’s book is that he is led by the evidence – though restricted to the United States. He concludes that, mostly, the slowdown arises from the problems of success, rather than being any failure of economic management.

Interestingly, Professor Vollrath admits to starting his search with his own pet theory: that the slowdown resulted from the growing concentration of big business, their consequent market power, and the resultant higher profit margins. That is doubtless why he devotes three whole chapters to it compared to one on Baumol – but his conclusion is that it did not have a major impact on growth – and its effect is even ambiguous. His overall conclusion is that the growth rate (in GDP per capita) slowed by 1.25% per annum, from 2.25% to 1.00% on average, and that 0.8% of this is due to demographics (i.e., a smaller proportion of people working), 0.2% is due to the Baumol effect, 0.15% due to a slower turnover of staff and firms, and 0.1% is due to a decline in geographic mobility. Changes to tax and regulation, rising inequality and trade with China were all examined but had an overall effect of nil. Both the demographic effects (smaller families, retirement, etc.) and the Baumol effect arise from choices to be expected as societies grow more prosperous – so he calls these the results of success. This, of course, fits in with what I have been saying for some time – though in my commentary the Baumol effect figured larger than demographics. Professor Vollmer finds this effect to be real but slow-acting, and dwarfed by the effect of demographic changes.

How much does this apply to Britain? According to some statistics I have found on an internet search, the growth of GDP per head in the UK was 2.4% per annum from 1950 to 2000, and 1.1% from 2000 to 2016 (actually a bit more than the US – but this may an issue with the statistical series) – a very similar level of decline. I don’t have comparable figures on demographics, but the same sort of thing was going on in the UK, with a clear baby boom in the 1940s and 1950s, followed by shrinking family sizes. If anything family sizes were shrinking further – and we had a lower rate of immigration. This week The Economist has started a series on Britain’s productivity problem – but it is hard to tie in their data with this book. It is looking at a shorter time period, and comparing output per hour worked with other countries. And Britain does seem to be less productive than many other countries – and productivity has fallen since the great financial crisis in 2007-09, though it is not so different from other countries in that (it has a similar decline to the US). But productivity figures are notoriously difficult to calculate, and they are not necessarily fully comparable from country to country, even in the same OECD data set. The most important conclusion arising from Professor Vollmer’s calculations is that, so far as the overall economy is concerned, productivity is liable to be trumped by demographics. And here the position in Britain post covid is grim. A lot of people have dropped out of the work force, though it is unclear why (early retirement looks the most likely). Immigration remains high, but with extra bureaucratic hurdles since Brexit, imported workers aren’t necessarily going to the places of highest stress.

One conclusion of this book is that it is hard to detect any growth effects from deregulation or tax changes – so it is hard to see that the government’s hopes for increased productivity will have much effect. The partial exception, according to Prof. Vollmer, is changes that allow greater housing mobility. Allowing more homes to be built in areas of high productivity is the leading aspect of this, and the government shows no sign of wanting to deal with this. One policy not talked of in the book is the idea of “levelling up” – of improving the productivity of lagging regions to be closer to that o the leading ones. According to The Economist Britain has a particularly big regional gap – so there is the possibility of growth through catch up. This probably entails substantial devolution of tax-raising and spending powers, which Westminster is fond of talking of, but never actually does much about. So the outlook for GDP growth in the UK looks weak – even if, as the book suggests, a lot of this is actually a problem of success.

This book does have a couple of major defects, which arise from the way the problem has been framed. The first is that there is no investigation of the impact of status goods (or services). These are significant because their economic characteristics differ from normal goods – the point of them is that they are expensive and so not generally accessible. Low productivity is often a feature, not a problem. It is to be expected that as an economy becomes more successful, the demand for status goods rises. This would have a very similar effect to the one Baumol identified (and, indeed it doubtless contributes to the Baumol effect, as a lot of services are status symbols). But I have seen no attempt to prove this statistically – and Prof. Vollmer does not even mention it. It may also be a factor in the rise of market power he discusses. Apple’s high margins, for example, arise in part from the fact that their products have become status symbols. Modelling the effects of status goods on the economy at large is complex, however – and it is not well supported by established statistical categories. So it is not surprising that the book ignores them. But a reduction in economic growth as a result of a move to status goods would support its “problems of success” thesis.

The second disappointment is the narrow way it deals with the effects of globalisation. It solely looks at the effect of workers displaced by the move of production in America abroad, and in particular to China. It finds a mild negative effect on productivity. Prof.Vollmer keeps any benefit of lower prices to American consumers from increased trade out of the scope of his analysis. This is disappointing, because I believe that it could be significant. I’m sure it was in the UK, whose economy is more exposed to world trade, as price reductions on imported manufacturing goods had a significant impact on overall prices in the first part of the 21st century. I’m not sure how this would work through into the statistics though (the D in GDP stands for “domestic” after all). This should manifest as a positive effect on growth in the late 1990s and early 2000s, going into reverse afterwards. But it would make the story significantly less tidy, so it is easy to see why Prof. Vollmer left it out.

This remains an important book, however. Economic growth attracts an awful lot of commentary from economists and politicians. Given that, it is surprising how weakly understood the phenomenon is, even amongst people who should know better. Alas that includes the writers at The Economist, whose article on Britain’s economic growth only mentions the effect of demographics in passing, and superficially at that. And that from a journal that made the book recommended reading. This is yet another sign of just how stilted most public discussion of economics remains.

Can the monarchy cope with modern politics?

Bonfire consumes Isfield’s Jubilee beacon, 2 June 2022

The Queen’s Platinum Jubilee has been a happy event in our East Sussex village. On Thursday evening we lit a beacon, and then, this being East Sussex, we burnt it in a bonfire. On Friday afternoon we had a lovely street party. Today it was the village fete, where I won a bottle of whisky in the raffle. There is also a treasure hunt and a scarecrow competition.Everybody was in the mood for a celebration.

But what are we celebrating? Nominally it is Queen Elizabeth II’s remarkable achievement of reigning as monarch for 70 years. And she certainly commands a lot of respect and affection among the villagers here. Most of the bunting features patriotic union jacks. But for many it more of a question of “any excuse for a party”, especially after two years when local events and activities have been badly disrupted. In the grim days of 2020 (when we moved into the village), it was a common sentiment that we should have a big party when it was all over. It isn’t really all over, but for many this is the party. The theme of a number of the scarecrows (which are meant to reflect aspects of the Queen’s reign) were the heroes of the pandemic. Other than that it is mainly pop stars; the Yellow Submarine won.

We haven’t been watching the national events on television, beyond summaries on the news. But that, and the BBC radio coverage, was bad enough. The thing I most hate about monarchy is the obsequiousness that surrounds it. And the BBC, along with many others, is laying it on by the shovel load. This is an ancient tradition, though. The obsequiousness doubtless goes back to our Anglo-Saxon kings of the Dark Ages, and perhaps the Celtic chieftains that preceded them, and it unites them with Persian and Chinese Emperors, Russian Tsars and Thai kings. The strange thing about our monarchy is that the tradition of obsequiousness has outlasted the political power that the institution wields. It makes me yearn for a republic – though that does not always solve that particular problem.

It is a moment to reflect on the institution. The British seem to be quite pragmatic about it. The reason usually offered in the monarchy’s defence, given that few accept that it is divine will, is that it works. Britain has a long-standing and functioning democracy. The monarchy has been part of the web of institutions that has upheld it. It is not obvious to most that republics manage these things any better; the country’s one attempt at being a republic in the 17th century is usually regarded as a failure. Meanwhile all the pomp adds a certain dignity to proceedings. It is surprising how often people justify it on the basis that it is a tourist attraction.

But does it work really? The overwhelming impression of the institution’s standing is one of political weakness. Its actions are dictated by a series of written and unwritten conventions which are designed to keep the institution away from any kind of political controversy. According to Netflix’s highly engaging drama The Crown, the institution has an enduring horror of Edward VIII, the uncrowned monarch of 1936, and Elizabeth’s uncle, who nearly destroyed it. Edward saw a more dynamic leadership role for the monarchy, which included a distinct sympathy for fascism. This drama does suggest that the Queen was a bulwark against any kind of undemocratic coup, even if led by aristocracy and institutionally embedded types. Just how close the country has ever been to such a coup I don’t know, though.

There is something to be said for a weak titular head of any institution. The French and American model of combining the role with that of chief executive is not obviously better, as the role becomes too strong, reminding us of what we dislike about the old political monarchies. Then the obsequiousness was driven by real fear, along with ambition. But if the titular head becomes too weak, there is too little check on the chief executive role – which politically in Britain is that of the prime minister.

This matters more than it might in Britain because the other checks on the prime minister are so weak. Nominally he or she is the creature of a democratically elected parliament. And this is true up to a point. Right now our prime minster is running scared of his Conservative Party backbenchers, who may even be able to oust him from power. But this drama reveals something rather worrying. Constitutional checks on the executive can depend on the internal rules of political parties – which lack proper democratic validation. And there are times when the prime minister has complete mastery over their party. And then there are very few other checks on their power at all.

We had a rather scary reminder about this in the period from 2017 to 2019 when the Conservatives did not have a parliamentary majority. At first Theresa May cobbled together an agreement with the Democratic Unionist Party of Northern Ireland (the DUP), and secured a parliamentary majority – the country’s principal means of democratic validation. But, as relations with the DUP proved rocky, and rebellious factions emerged within the Conservatives, Mrs May’s government relied less and less on parliamentary validation. The parliamentary session was prolonged so as to avoid the necessity of a Queen’s Speech, and endorsement of the premiership. The government relied increasingly on executive powers without consulting parliament. Finally Mrs May’s position became untenable and she resigned as Conservative leader. She continued to be prime minister while the party chose a new leader, and then resigned from that office once Boris Johnson was chosen as her successor. She then advised the Queen to appoint Mr Johnson as prime minister, and the Queen complied. What is so wrong with that? Mr Johnson did not command a parliamentary majority, and he had only be chosen on the basis of his party’s internal leadership election process. Mr Johnson then assumed all the massive executive powers of the British state without ever asking parliament to validate his authority. In fact he went to extremes in order to avoid such a validation. In the end he asked for parliament to be suspended so that he could govern without democratic interference, based on the thinnest veneer of a pretext. It was not the Queen that stopped him. It was the Supreme Court. The Court has since been attacked for standing in the way of the will of the people – when its actions were actually based on the opposite notion – that of forcing the government to be accountable. And yet I have heard few people try to defend the Court. Mr Johnson’s version of history risks being accepted by default.

And then there is the elephant in the room. Parliament’s claim to represent the will of the people is a weak one. The electoral system means that governments are usually elected based on a minority of votes. Well perhaps what counts is whether the system used has broad popular consent, and people abide by the results. That is mostly true, with the important exception of Scotland. But how long will this continue? What puts the system at risk is political polarisation. Then parties want to win elections by any means necessary, and then use that power to implement an ideological programme – ignoring the idea of broad political consent, upon which a system such as Britain’s depends for democratic legitimacy. Once that happens there are few institutional checks on the executive – and certainly not the monarchy. And it does not even need a majority of voters to achieve such a result.

That is certainly true of the Conservatives under Mr Johnson. The party’s leaders actively seek “wedge issues” to divide the country and motivate its supporters. It was true of Labour too under the leadership of Jeremy Corbyn. Its new leader, Sir Keir Starmer, is taking it in the opposite direction, of being an un-ideological party of broad consent. The party that he leads is less sure that this is the right course, having 9in their eyes) come so close to success under Mr Corbyn. Polarisation has already deeply infected the politics of America. France seems dangerously close to it too. An elected head of state, separate from the executive, might act as a check on an overly divisive executive. In 2019 tan elected president might have been able to insist that the prime minister secure a parliamentary mandate or see if somebody else could, and failing that, call an election. That would have been the democratically proper way to proceed.

But then a small voice suggests something else to me. Perhaps the monarchy is helping the country avoid polarisation. The Jubilee celebrations are striking for for the way they are bringing Britons together. Diversity is celebrated. Perhaps the country is stepping back from polarisation after the nightmare of the Brexit years. The Labour Party has become more popular with the country at large after Sir Keir’s change of direction, even if few have enthusiasm for it. Mr Johnson’s wedge issues are failing to get traction. If the monarchy has a single message, it is that we should all get along together as a country (and also to get on better with other countries too).

In that perhaps the institution is a beacon of hope. Let us hope it is not consumed by the bonfire of party politics.