On the U.K.’s Dearth of AS
I have been working on this post for a few days and don’t really know what I am trying to say. Still, now that Sumner has beaten me to the punch, I’ll post so that people can see recent movements in British NGDP, at least as of the third quarter.
So Britain is slipping again. The sometimes tribally partisan Menzie Chin:
The UK Office of National Statistics has just released preliminary estimates for real GDP growth in 2011Q4. The 0.8% contraction (q/q SAAR) was large than consensus , and in fact larger than the 0.6% decline forecasted by Deutsche Bank on 1/18. Figure 1 illustrates the fact that a year and a half after the election of a coalition government bent on a path of austerity, the UK economy is likely to be entering a new recession (not that growth was so great even before the dip).
U.K. NGDP has been weak for a while now, and sterling fairly resilient in 2011. My interpretation is predictable. The BOE hasn’t done enough. If they would debase the currency down to 1.30 or 1.20 v.s. USD and get AD back on track then we could have a debate about the wisdom of austerity. Until then the blame goes to BOE for not spiking the punch enough. Remember, monetary policy is not about setting interest rates. Monetary policy is about manipulating the aggregate behavior of the public by using the central bank’s monopoly on money base money creation. The BOE should manipulate the public into spending more, now.
Here is a plot:
I kind of like this measure of NGDP stability. The change in NGDP from three years ago. The much bigger U.K. economy had pretty stable growth over three year spans compared with tiny Sweden (presumably harder for the Riksbank to steer nominal growth quarter-to-quarter). Even if you were a member of that small minority of Britons who actually work in the nonfinancial private sector (stealing TVs in riots and breeding legions
of dullards on Her Majesty’s largess don’t pass muster) you could be pretty confident that your average self would see about 16% nominal income growth every three years. So…1.16^(1/3) -1… that’s 5%!
NGDP in Britain is too weak, but probably not so weak as to explain more than just slow growth if the potential growth rate of the economy were not compromised. My story is that out-migration of the upper middle class is dragging on AS while the economy transitions from finance to other services. I read the the Daily Mail daily and it seems to me that England in particular is becoming a crass, uncouth land. I probably wouldn’t live anywhere in Britain but for maybe Scotland, unless it was temporary or I were being well paid or were house sitting for the Queen. This may be the real reason why Britons capable of producing AS gains are flocking to American and Canada. I’ll work on finding some evidence, there was an article in The Economist on this about two years ago, but I can’t find it now.
Until I get some real numbers, think of this anecdote: While visiting a friend in Malmö this summer I went bar hopping with the inevitable chain of expat acquaintance. In the group was an English theoretical chemistry PhD student. He wasn’t too keen on Sweden, but as university funding had dried up in the U.K. he was forced to study in Malmö (this would have been my second choice after Copenhagen and Uppsala but then I am from Vermont). I asked him if he had been in England for the riots and he proudly proclaimed that the garish sweatshirt which he wore had been looted by him personally. Wow. In England theoretical chemistry PhD students loot sweatshirts. Wow. It is almost a shame that members of the Second Word War generation are alive to see the monstrosity that their formerly great country has become.
Sometimes youtube clips are better than words: