Missing the damn point

But not only did we in Whitehall fail to see the crisis coming, we failed in anticipating its long-term impact. We expected unemployment, repossessions and business insolvencies to surge, just as we had seen in the recessions of the 1980s and 90s. But none of these reached anywhere near the levels seen in the past. Repossessions peaked at a lower level than in 1991; the annual rate of business liquidations remained well below those seen in the 1990s; and unemployment fell just half as far as it had in the 1980s. Some groups, including black men and the young, paid a heavy price, but the infamous 3 million unemployment figure that scarred Britain in a previous recession was never breached.

In contrast, not a single Whitehall meeting I recall remotely anticipated the colossal pay squeeze that would see real earnings fall by over 10%. We should have spotted earlier the changed dynamic of a flexible labour market, very low interest rates and a big depreciation of the exchange rate, which fed quickly through into the higher inflation and lower living standards still evident today. Had we done so, we might have recognised earlier that employment levels were understating the economic damage being done and, for example, pushed harder against opposition to more radical action from Mervyn King, then governor of the Bank of England.

The first is because of the second you idiot.

Recession = GDP falling. GDP = all incomes. Recession = someones’ incomes, somewhere, falling.

Either 10% of everyone lose all their income through unemployment or everyone loses 10% of their income through falling real wages.

The performance of real wages and unemployment in this recent recession is a fucking success. Fool.

There are indeed some puzzles we lack definitive answers to, such as why our productivity levels are flatlining.

Sigh. We know this very well. Output’s not much higher than it used to be, about the same number of people are in employment. Given that productivity is output divided by hours in how could this be any different? Again, this is a fucking success. Fool. Instead of unemployment soaring productivity fell.

26 thoughts on “Missing the damn point”

  1. Roger Bootle had a good piece in the Tel on Monday explaining that the Treasury gets all important things wrong.

  2. “After the second world war the Attlee government didn’t simply try to undo the damage of the war. From the NHS to our national parks, it used the energy from that cataclysm to build a better Britain.”

    The Attlee government spent money on its social justice agenda – including a socialist NHS – rather than on infrastructure, reconstruction and re-training. As Corelli Barnett argued in ‘The Audit of War’, the economic consequences of the Attlee government’s spending priorities are still with us.

  3. I do wonder if our attempt to spread the pain of the recession through pay cuts for many rather than redundancies for a few has made for a worse experience overall.

    That said it was the general opinion of the time this was the right way. Many forms gave their staff the option of 10% pay cut or 10% redundancies and the staff choose payouts. We aren’t selfish enough bastards anymore.

  4. Fairer to say that West Germany used the energy from that cataclysm to build a better West Germany.

    Britain, by contrast, went down a dead-end to ruin until Thatcher grabbed the wheel just in time.

  5. “I do wonder if our attempt to spread the pain of the recession through pay cuts for many rather than redundancies for a few has made for a worse experience overall.”

    I won’t claim to be anything more than an armchair observer, but I think the economic literature strongly supports the idea that income flexibility is generally more desirable than mass unemployment.

    There are a whole host of problems that come along with unemployment – a fiscal drag from the welfare that need to be paid, a proportion of people who end up disengaging from the workforce permanently, increased health and family breakdown costs etc.

    Of course one should never be dogmatic over redundancies vs. pay cuts in any individual situation, but on a national scale.

    The 1991 recession was about a 4pc increase in unemployment and it felt awful. We’ve just had a 9% cut in real incomes (according to the piece above anyway) and it’s feels… tolerable.

  6. From the end of the article: “The financial crisis highlighted the big challenge of our time: to ensure the economy delivers for working people. ”

    Which you will never do by throwing in work benefits at people, trapping them in taxation with fiscal drag and opening the doors to cheaper foreign labour. Which were all Labour’s policies under Blair & Brown.

    The article reads like the Treasury was all geared up to fight the last recession again rather than look at what was actually happening in the economy. If that’s the case why should anyone take any notice of what Torsten Bell is saying now? He’s just wanting to fight the financial crisis again.

  7. So what does one take away from this?
    Economic ignoramus was employed in a senior position at the Treasury at the time of the Crash.
    Quelle surprise
    Business as usual.

  8. Oblong. I know that the textbook answer is that wage flexibility is better than unemployment and it is more equitable to spread the pain. But I’m wondering if we are conducting an empirical experiment that will prove the textbooks wrong.

    While the pain of the 1990s recession was acute it didn’t last too long , while our current chronic condition is eroding faith in the market economy. We might end up saving the bathwater but throwing out the baby.

  9. Devonchap, useful clarification of what you meant.

    I still happen to think that the answer is no, just as an opinion, but I can see why you pose the question.

  10. Err,

    “Output’s not much higher than it used to be, about the same number of people are in employment.”

    Is that quite right? (Growth in) Output is pretty static, as is the employment rate, but the number employed is higher. We’re consuming more resources to achieve the same result.

  11. But not only did we in Whitehall fail to see the crisis coming, we failed in anticipating its long-term impact.

    Arguments against Socialism, vol. 94.

  12. DevonChap said: “While the pain of the 1990s recession was acute it didn’t last too long , while our current chronic condition is eroding faith in the market economy. We might end up saving the bathwater but throwing out the baby.”

    It’s not our condition eroding faith in the market economy but our representatives eroding that faith. They just can’t help themselves reaching for our money to spend it on the things they want and trying to pick winners.

  13. “While the pain of the 1990s recession was acute it didn’t last too long , while our current chronic condition is eroding faith in the market economy.”

    You could have a point. The human condition is such that it forgets pretty quickly, if it didn’t it wouldn’t ever recover from terrible events. So a short sharp nasty experience will soon pass through the national consciousness, if things improve measurably soon after, while a long and (seemingly) never ending period of stagnation will affect people’s thought processes far deeper, by mere fact of going on for longer, even though it is not as bad for any given person.

  14. “We’re consuming more resources to achieve the same result.”

    Aaand, that’s not quite right either. Pennants hoisted etc, etc.

    AIUI, one of the oddities about the GFC and the apparent recovery is that previous recessions had displayed different behaviour in the recovery phase; that is, GDP growth during the recovery had been at a higher rate than the pre-recession trend, but had reverted back to that average rate once the recovery had completed. So, the GDP growth series would run something like;

    +2%, +2%, -4%, +3%, +3%, +2%. …

    What we actually got this time around was something like;

    +2%, +2%, -4%, +1%, +1%, +2%. …

    So GDP ten years later remains somewhat below that which would have been expected. So we’ve actually been consuming more resources to achieve a worse result.

    Either way, it’s all terribly Soviet, or we’ve way too many shoes and should shortly be back in the trees.

    Or am I talking bollocks?

  15. I thought productivity had gone up a lot in the last 10 years. We’re just measuring it wrong. The man who was drying fruit by the Kabul river is now working 24 hours in a Newham take-away. The woman who was earning 400 euros a month in Poland is now earning 4 times that making cake in Patisserie Valerie.
    At the same time thousands of Brits have left the UK to take up more productive jobs in Qatar, USA etc.
    And I can get a working answer to almost any question in the universe for a few minutes on wikipedia.

  16. Tim Congdon has an interesting piece in this morning’s Tel, blaming the scale of the Great Recession on the Bank of England, and specifically Merv. They ignored Bagehot, the buffoons.

  17. jgh on a tablet on a bus

    I think one of the things is we’ve gone from employing ten fulltimets to twenty part-timers, so input remains the same but employment has doubled, woo hoo.

  18. “Fairer to say that West Germany used the energy from that cataclysm to build a better West Germany”

    Until Germany decided to suicide itself. And we are not far behind.

  19. @ Ducky McDuckface
    Your argument *would* be sound *but* it is based on false numbers. Alastair Campdell was a genius. GDP growth under New Labour was overstated for *three* reasons that I know of (and maybe some more that haven’t yet been exposed).
    (i) Every public sector pay rise counts as a rise in GDP since public services are valued at cost not value of output so New Labour’s increase in public sector pay rates relative to private sector rates appears to boost “real GDP” when it adds *nothing* to output.
    (ii) Brown ordered the banks to mis-state their profits by ignoring expected but not yet identified losses on their loan books so as to increase current year tax receipts and reduce his reported deficit. (Did you notice all the £billions of losses reported by the banks in the years after he ceased to be Chancellor as the hidden losses showed up?)
    (iii) The “real GDP” growth is calculated by a Heath Robinson method – instead of counting how much more is produced the ONS takes the nominal GDP and adjustsb it for inflation BUT RPI inflation was understated by up to 1% pa from 1997 to 2010 due to an error introduced into the calculation in Autumn 1997 and corrected in Autumn 2010 – ask the Royal Statistical Society if you don’t believe me, at which I shall not take offence because it seems so incredible.
    The apparent fall in average GDP growth since 2010 is unreal – the actual decline took place from 1998-9 (perhaps because the National Minimum Wage threw lots of people permanently out of work, perhaps because so much time was taken up with handling red tape and bureaucracy the workers had less time to produce stuff).

  20. John77

    That’s fascinating.

    Do you know if anyone has made any proper attempt to come up with any sort of correcting adjustments – that might show what the real numbers realistically might be if such gerrymandering were removed (or normalised)? I accept it’s not simple for things such as public sector pay rises, due to the fact that the increases then interact subsequently with the private sector. Or at least a very approximate big picture estimate of the annual effects from 1998 to current?

    And why isn’t this more mainstream? Blair and Brown still get far too easy a ride for their tenure.

    btw, genius isn’t a word I could ever use (even “loaded”)! Low life crooks, every single one of them.

  21. @PF
    AFAIK, no. ONS apparently concluded that they couldn’t discover the correct data a dozen years later so left the incorrect historic numbers unchanged (or they may have been told by HM Treasury that the cost of recalculating ten million state pensions that were wrong by various amounts, some of which were less than £1 a week, was horrendous and any benefit was not worth the cost).

    Why isn’t it more mainstream? A majority of journalists self-categorise as “left of centre”, based on *their* concept of “centre”, which may be left of Blair. They do *not* want people pointing out Labour’s failures and that the poor got richer faster under Thatcher than under any Labour government in history (or that the poor got poorer while the rich got richer under Blair/Brown). Journalists are vastly overpaid while pretending to speak for the poor.

    “Genius” can have “evil” in front of it as well as “tame” or “mathematical”. [The definition varies – my father described a work colleague as “one of three mathematical geniuses in England” (the lads used, two or three times a week, to see if he could solve a problem faster than the computer: he usually won; computers have improved since then, but …) – whereas I, the family dunce, have once or twice been called a “tame genius”.]

  22. John

    I understand. It’s interesting, I’ll try and find / read some more on it later.

    Evil – yes sure. Even with the appropriate adjective, it just seems (to me) flattering when I consider that mob..:)

  23. John,

    Thanks, I was more interested in the soundness rather than the actual numbers, since these days, my opinion is that even if you were to ignore actual outright manipulation, a large chunk of the statistics are somewhere between “no longer much use” and “arse gravy of the highest water”.

    (i) Don’t get me started on the public sector wage bill. Probably sounds a bit odd given the above, but the effect on GDP is probably the least of my irritations.
    (ii) Is this the change from UK GAAP to IAS mark to market? If so, I was more focused on private equity firms than the banks at the time, but it was pretty obvious there was going to be trouble. I’d be tempted to give Brown something like a pass on that (apart from the general principle that he’s a twat).
    (iii) I’d forgotten about that. Now you mention it I remember my gast being well and truly flabbered when the RSS got involved, *and the government continued to argue*. On the other hand, I thought it was fairly obvious that the inflation numbers were going to be the first against the wall, given the way the BoE independence issue panned out, following the ERM adventure.

  24. @ DuckyMcDuckface
    (i) Agreed – I tried and failed to avoid it
    (ii) No, differents and earlier. Basically eliminating general loss provisions – any provision for future losses that would crystallise more than 12 months later were not tax-deductible. So Bank A prices its loans based on the assumption on 0.5% losses (1% go bad and 50% of money irrecoverable) in one year, 1% in each of years 2 and 3 and another 2% later and 0.5% profit. At the end of year 1 it has to pay tax on 3.5% which, at Brown’s 30% Corporation Tax rate, is 1.05% or more than twice actual profits. The massive profits reported in the lead-up to 2008 were, mostly, phoney.

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