British Economic Triumphalism in Perspective

Chancellor of the Exchequer Osborne has lauded the recent UK growth numbers as validation for the policy of austerity [1] (recently relaxed, although he doesn’t mention that).

Paul Krugman refers to the the Three Stooges in explaining the deficiencies of this logic. And Richard Portes (head of CEPR) states:

“The current policies have been disastrous…My view is pretty much the view I had a little over three years ago when I said the austerity program would be a disaster. And it has been. It has been responsible for the painfully slow recovery.”

So who is right? Well, I think it useful to compare the US and the UK. The former embarked upon a policy of fiscal stimulus, and then retrenchment, but nothing compared to the retrenchment implemented in the latter. And in the US, per capita GDP growth was much more rapid than in the UK.

ukuspercapgdp.jpg
Figure 1: Log per capita US GDP, in Ch.09$ (blue) and per capita UK GDP, in Ch.2010£ (red), all 2007Q3=0 (short dashed line). Long dashed line at 2010Q2, election of Osborne. UK population is annual midyear data from IMF WEO, interpolated using quadratic match. Source: BEA, ONSIMF WEO database (October), and author’s calculations.

The gap between the US and UK per capita income series is 7.3% as of 2013Q3. So, the current growth in the UK is merely digging that economy out of the big hole dug for itself in the vain search of expansionary fiscal contraction. [2].

For a longer perspective on UK per capita GDP — and how big a break the current trend is — see this Simon Wren-Lewis post (actually, Mainly Macro is the best blog on UK macro, so always good to refer to).

This piece is cross-posted from Econbrowser with permission.