Productivity growth is the only thing that matters for the economy. All of the current sound and fury in the stock market, arguments over the size and deployment of the fiscal space and whether or not capitalism has much of a future are secondary to productivity. All of these things, in the end, are determined by productivity growth.
It’s an arcane and difficult topic. “Output per worker disappoints” is, in the US and UK at least, a common headline that usually attracts little attention and, in any event, rarely makes the front page. Until recently anyway.
In Britain the independent Office for Budget Responsibility has again reduced its estimates for UK productivity growth. It’s a game it has had to play pretty much consistently since the great financial crisis, which means its been constantly revising down its estimates of trend economic growth. Less growth means less tax revenues.
This matters in a myriad of ways. In particular, it means that the UK chancellor will have much less room for manoeuvre to allocate cash for housing in particular and, more generally, to end the austerity that the British public detests.
The UK government’s attempts to outflank Jeremy Corbyn’s promises to renationalise key industries, abolish student fees and to end the housing crisis will founder for lack of money. Corbyn, it seems, will finance these commitments via extra borrowing and the printing press (“people’s QE”).
Generational divide
For all sorts of strange reasons, not least the ongoing disintegration of the Conservative Party, Corbyn’s retro-socialism is attracting students, anyone affected by high housing costs and those suffering a decade-long flatlining (or even decline) of real incomes. That’s pretty much everyone under 50: a generational divide in the UK that is becoming starker by the day.
Restoring or boosting productivity growth should be the UK government’s priority. Right now, probably the only priority.
It used to be, implicitly at least, in the DNA of Conservatives. They used to understand that the way to keep businesses happy and middle class aspirations alive is to boost the economy.
Theresa May speaks (sort of) about the restoring the "British dream", the one about children being better off than their parents. This can only be achieved via productivity growth. Without such growth there is stagnation and no dream. It really is as simple as that.
The key problem for the Conservatives is that their DNA has become corrupted. They used to be able to claim (with partial justification) that they represented an ideology-free, safe pair of hands. "Trust us with the economy and your ambition" summarises many a previous Tory manifesto. Today the party is in the grip of zealots and is driven by a single issue an ideology: Brexit.
The end of one or two previous Tory governments often came because they became gripped by a single idea. Margaret Thatcher and the poll tax comes to mind: an issue that led to her demise but one that is wholly trivial compared to the ideological madness of Brexit.
Living standards
What’s Brexit got to do with disappointing productivity growth?
We know that many economies suffered recession-induced low productivity in the wake of the financial crisis. Recessions always do that. Economic slumps are calamitous for living standards in both obvious and subtle ways. Historically, economies have nearly always bounced back, driven by recovering productivity growth.
If the UK economy had, since the crisis, performed roughly as it has done in the past it should now be perhaps 10 per cent to 15 per cent bigger than we currently observe. That’s a massive gap: an awful lot of cash gone missing.
That kind of economic growth would have transformed the public finances and the Conservative Party's fortunes. Arguably, David Cameron would not have lost the Brexit referendum: there would have been far fewer disgruntled British voters. Productivity growth really is everything.
What has gone wrong?
Simon Wren-Lewis, a leading Oxford professor, convincingly argues that it is entirely a self-inflicted wound. After the financial crisis came totally unnecessary fiscal austerity: that depressed everything, including the electorate and productivity growth.
But the effects of the crisis have long since faded, and George Osborne, austerity's original author, has similarly departed the scene. His ideological mistake was, of course, his determination to shrink the size of the state, to cut government spending in the teeth of a severe recession. That he quietly abandoned austerity long before he was sacked is now largely forgotten.
Fiscal cutbacks
So, if the effects of the crisis and Osborne fiscal cutbacks are now firmly in the past, why is disappointing productivity growth still with us? There is a new suspect: Brexit.
The sheer incompetence of the current UK government has merely added to massive uncertainties of what a post-Brexit future looks like. Productivity-enhancing investments in R&D, capital equipment, buildings and software are all taking second place to decisions over whether or not to move activities overseas.
The Conservatives know they have to boost living standards if they are to stand any chance of survival. So they have to remove the single biggest barrier to productivity growth. That would be Brexit.
Scylla and Charybdis, rock and a hard place: pick your metaphor. It’s going to get even uglier.
