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It never rains, but it pours. This is how UK economic policymakers must feel right now. The economy performed terribly after the financial crisis of 2007-09, then performed even worse after the pandemic and is now in the midst of an economic storm created by an American president who is not just protectionist, but madly unpredictable. For a trade-dependent economy, this is a horrifyingly uncomfortable position to be in.
The most important reality about the UK’s economics and politics is the collapse in productivity growth. According to “Yanked away”, a paper by Simon Pittaway for the Resolution Foundation, labour productivity rose by a miserable 5.9 per cent between the first quarters of 2007 and 2024. Real wages rose by an even more miserable 2.2 per cent over this period. To put this in (utterly depressing) context, in the previous 17 years, from 1990 to 2007, UK productivity rose 38 per cent, while real wages rose 42 per cent. In essence, the UK economy has gone ex-growth. A comparable period of stagnation seems not to have happened since the 18th century.
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With one exception, the rest of the G7 has also fared miserably since the financial crisis and again since the pandemic. Thus, according to Resolution, US GDP per hour worked rose by 9.1 per cent from the fourth quarter of 2019 to the fourth quarter of 2024, against 3.4 per cent in Japan, 0.4 per cent in Germany, minus 0.5 per cent in Canada, minus 0.8 per cent in the UK, minus 0.9 per cent in Italy and minus 1.2 per cent in France. The UK then is at least not alone.
The US is in one league; the rest of the G7 in another. Why? This question is addressed by Pittaway, and in “What should the UK learn from ‘Bidenomics’?”, published by the Mossavar-Rahmani Center of Harvard Kennedy School (and co-authored by Ed Balls).
Pittaway’s main conclusion is that recent US outperformance in productivity growth vis-à-vis the UK is not narrowly based in the technology sector, but far bigger. He does note that “the UK’s healthcare sector has been a major drag on productivity”. But the problems go far beyond this: thus, since 2019, productivity has actually fallen in sectors that account for almost two-thirds of UK output. He adds that, while US tech companies are world-beating, the use of technology in the rest of the US economy has done even more to drive productivity upwards. A part of the explanation is that US business has raised investment in research and development, software, and information and communications technology far faster than the UK’s.
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The UK then has suffered from a lack of business dynamism. How far can policies affect this? This is a focus of the Kennedy School study of Bidenomics.
It concludes that the scale of the US fiscal response to the Covid-19 pandemic was unprecedented. Thus, the stimulus totalled roughly 25 per cent of GDP ($5.2tn), which far exceeded that in any other major economy. Moreover, policymakers allowed rapid churn in the labour market. In the context of strong demand, this pulled workers into better jobs with higher real wages. Furthermore, Bidenomics, while interventionist, was rather carefully so. Instead of the erratic protectionist broadsides of Donald Trump, Bidenomics was carefully designed by sector and by instrument. Thus, reliance on tax credits was seen as leaving the onus of innovation upon businesses and so avoiding picking winners among them.
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Needless to say, the scale of the US economy, its creditworthiness and its dominant technology sector make any such interventionism, including the fiscal spending, far easier to do than in the UK. The latter has more limited resources and creditworthiness and a far weaker basis for new activities.
It is also evident that Bidenomics ended badly, at least politically. This is in large part due to the upsurge in inflation. How far it was responsible for the latter remains contested. The fact that it is now replaced by Trumponomics, which is spectacularly incompetent by any standard, is likely to make Bidenomics look better in retrospect. But it also means that the economic and political environment for UK policymakers is now even more adverse.
Yet the underlying reality remains that continued stagnation is enormously dangerous for the political and social stability of the country. There is, moreover, no good reason to suppose it will end on its own. In this dire domestic and external predicament, the country has to take the risk of active policy. One aspect of this, in my view, must be to create stronger bonds with our European neighbours. Another is to pursue intelligently interventionist industrial policies. I plan to analyse possibilities for such policies in future columns.
martin.wolf@ft.com
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