Upside down economic thinking

Couldn’t resist commenting on this story in yesterday’s FT.  This behind the paywall, but this summary from City AM is a good start:

Britain’s economy is unlikely to grow as fast as before the financial crisis because its most productive sectors have been hardest hit, jeopardising government plans to cut the deficit. A Financial Times analysis of the sectorial performance of the economy before and after the crash highlights how much banks and insurance companies boosted economic growth between 2000 and 2008.

What it says is that the finance industry contributed a lot to measured GDP up to the crisis, but not to jobs.  In that sense the finance industry is said the be “productive”.  But these industries bore the brunt of the crash. The article also says that this is one of the main reasons why unemployment did not rise as much as the fall in GDP suggested.   Because finance is unlikely to recover fast, since the burden of accumulated (private sector) debt still has to be worked off, then we can’t expect to repeat the pre-crash growth rates.  Bad news.

This is the kind of thinking that takes hold when you accept GDP as the ultimate arbiter of progress.  Let’s look at in another way.  A lot of the growth prior to the crash was down to financial services which created few jobs and which was based on expanding indebtedness, not supplying services that people actually wanted or needed.  It was illusory, in other words.  Highly productive is hardly the right description.

In one sense the article is right.  The finance industry contributed a lot of taxes, whose disappearance is one of the causes of our massive structural deficit.  We can’t hope for illusory growth to rescue our tattered public finances, so it could be a long grind.

This type of upside down thinking is one of the reasons why we need to supplement GDP with other measures that aren’t so affected by such illusory “production”.  Cue the forthcoming Lib Dem policy paper on Quality of Life to be published later this year (which yours truly is helping to write…).

6 thoughts on “Upside down economic thinking”

  1. If the ‘Quality of Life’ policy paper deals with things like this, maybe it is should be called something different. The current name has a touchy-feely sound, as if it’s about things like ‘happiness’. Very important imho, but this article is about straightening up the more tradition subjects of economic health – jobs, wages, taxes, wealth – making sure the numbers represent the underlying realities. Even more important?

  2. It will go to the party conference to be adopted as official Lib Dem policy

  3. Is the aim is for it to be readable by potential voters, or generally understandable by someone without an economics degree? I ask because I’ve found it very difficult but very interesting to write about the technical subjects I understand well when aiming the article at non-technical readers (or people with an unrelated technical background), there’s a process of understanding and explaining within the article some of my assumptions, the kind of assumptions which if aiming for a like-minded audience can go without saying because they will have already understood and accepted them (unless the specific aim is challenging an assumption, that’s especially tricky).

    1. It will be a non-technical document, ranging well beyond narrow economics (e.g. into school curriculums). The working group is not composed of technicians. As such it should be widely accessible. If anything that will be its weakness. The technical implications for economists may not be all that clear.

  4. David, the term ‘understandable to potential voters’ is a bit miserable in the light of the referendum just gone. This has to be a discussion document for government policy makers (not all economists?). The voters will choose depending on how the dogs are barking.

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