I know my place

The UK is, in historical terms, growing at a 'Ronnie Corbett' rather than a 'John Cleese' rate. But its headroom to sustain some drivers of this growth is limited.

I know my place” was the title of a famous sketch on English class sensibilities from the 1960s, starring the very tall (Upper Class) John Cleese, the average height (Middle Class) Ronnie Barker, and the very short (Lower Class) Ronnie Corbett.

The Upper Class Cleese generally looked down on both Middle Class Barker and Lower Class Corbett; Barker looked up to Cleese and down on Corbett; and Corbett “knew his place”. That was at the bottom of the English class system pecking order, and surviving his place meant living life with lowered expectations.

This skit - and Corbett’s perennial state of acquiescence - came to mind as I read UK media reports heralding the news that, according to the The Office of Mind Your Own Business (well, it’s formal name is the Office for National Statistics, but you try finding any data there!), the UK economy grew by 1.9 per cent in 2013.

On historical trends, this was a 'Ronnie Corbett' rather than John Cleese rate of growth (see Figure 1). But such was the level of despondency over the UK’s performance since the global financial crisis began that it has received a John Cleese response from the UK public. The Opposition Labour Party’s once substantial lead over the ruling Conservatives has evaporated, and the Conservatives are now running just one point below the Labour Party in opinion polls.

Figure 1: Nominal and real UK GDP growth rates since 1988

Graph for I know my place

Such a low rate of growth has been received so well because the public’s expectations have been lowered to Ronnie Corbett levels by the sustained slump. Though unemployment didn’t reach the peak it hit in the early 1990s - nor rise as high as in the US - England appeared becalmed as the US progressively though slowly reduced its unemployment rate (see Figure 2). So the apparent sign of progress is being greeted like a breeze on the Sargasso Sea, rather than criticised as a still modest  rate of growth after so many years of contraction.

Figure 2: UK & US Unemployment since the 1980s

Graph for I know my place

Predictably, both the UK government and elements of the tabloid press are also proclaiming that the return to growth vindicates the austerity policies of the Conservatives. Journalist Quentin Letts gave a typical shove here, proclaiming that:

“George Osborne seems to have been proven right about deficit reduction… For three years the Tories have had to put up with the maniac Balls [Labour’s Shadow Chancellor] insisting that more public spending was needed. Now at last the Siege of Gibraltar is over…” (“Poor Ballsy... what a nightmare for the shouty old brute!”)

I’m glad at least to see the “seems” in that first sentence, because as Figure 2 emphasises, the US has had a better recovery from this crisis than the UK, even though its plunge was deeper. And if you had to identify a policy difference between these two countries, it would be that the UK successfully imposed austerity from 2010 on, while the US failed to do so - and thereby ran a stimulatory program by default. As Paul Krugman keeps emphasising, given the relative performance of austerity-driven governments like the UK versus deficit spenders like the US, the evidence is firmly on the side of the deficit spenders and against the austerians (but hey, let’s not let empirical evidence get in the way of a good argument).

So the commencement of growth doesn’t prove that austerity was the right policy; it may instead indicate that other factors have chipped in to allow growth to occur. And one of the likely candidates was identified by the BBC’s Robert Peston, who, after joining the Hooray chorus, noted that “It is a recovery … driven by household consumption and activity related to the revival in the housing market” (“The UK's traditional recovery”).

So the government policy that has caused the turnaround was not fiscal conservatism, but it may have been that old favourite of starting a housing bubble via a government handout to first home buyers - the “Help to Buy” program that I think is better described as Help to Sell.

Figure 3: House prices rising once more in the UK

Graph for I know my place

Though this proves once again that governments know how to start asset bubbles, it doesn’t prove that they can maintain them - let alone turn this into the basis for a truly sustainable recovery. On that point, Peston noted three headwinds: low business investment, a rising trade deficit, and “fat chance of reducing the massive burden of debt bearing down on the UK economy - 500ish per cent of national income and rising.”

The debt data from the Office of Mind Your Own Business are out of date - the best they can supply is to September of last year (see Figure 4) but they indicate the scale of Peston’s final headwind. The UK levered up more than the US during the bubble economy - let’s be realistic, that’s what the Western economy has been since 1987 - delevered less smoothly and less substantially than the US, and may now be levering back up again.

Figure 4: UK debt levels

Graph for I know my place

But its headroom to keep doing this is limited. I stress that the UK data I’m using is at least four months out of date, but the UK credit accelerator - my key measure of how much debt is driving economic growth - is trending down (see Figure 5). Cameron’s austerity spring may be shortlived - though perhaps enough to get him re-elected in May 2015. If so, he can consider himself very lucky.

Figure 5: Private debt acceleration and change in unemployment in the UK

Graph for I know my place

Then again, there are some elections one might, on reflection, prefer to lose. Lowered expectations are not always a bad thing.

Steve Keen is author of Debunking Economics and the blog Debtwatch and developer of the Minsky software program.

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