Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday, 6 March 2017

Why it’s your bloody GDP, not ours

Why does the recovery mediamacro constantly talk about seem not to apply to most people? Aditya Chakrabortty tells the story behind my title better than I did here, and picks up the important regional angle. But there is more to it than that.

First, there is the abuse of language I talked about here. I make a strong case that recovery should only be used when GDP is catching up with a past trend. Instead mediamacro use it for any non-negligible increase in GDP. They are egged on, of course, by the politicians who are partly responsible for our failure to actually recover from the Great Recession.

Second is an old favourite. Mediamacro constantly uses GDP rather than GDP per capita. This makes a big difference when an economy experiences a large increase in immigration. This chart from an article in the FT recently attracted attention, showing that the UK was the only major economy over the period 2007 to 2015 to combine growth in GDP with a fall in real wages. (I assume below the chart means growth between 2007 and 2015, rather than between 2006 and 2015.)


If we use the latest ONS data, UK GDP did indeed grow by 7% between those years (0.85% average annual growth), but GDP per head increased by only 0.8% (0.1% annual growth). It is one of the great ironies of this period, and a largely untold mediamacro secret (because mediamacro hardly ever connects dots), that the government has relied on claims about GDP growth that were in large part a consequence of the immigration which they were at the same time complaining about.

GDP per capita is of course the relevant comparison for real wages. But the claim in the FT article remains true: the UK does combine growth in GDP/capita (albeit small) with falls in real wages. The chart below uses ONS data on average earnings deflated by the consumer expenditure deflator. [1] That is the relevant deflator to use, if you want to look at the purchasing power of wages. However if instead you use as a deflator the price of GDP as a whole, the GDP deflator, then you get a very different story. As the chart below shows, that measure of real wages has increased by a similar amount to GDP per capita between 2007 and 2015.


So what has caused the price of consumer goods to increase more rapidly than the price of total output? There are a number of factors, but I emphasised two in a similar analysis I did two years ago: the depreciation in sterling in 2008, and the increase in VAT in 2011. The impact of the later is clearly evident in the chart, but so is the depreciation if you recall that there was a temporary cut in VAT in 2010, which led to a short term fall in consumer prices. The depreciation raises after a lag the price of imported goods and therefore consumer prices, relative to the price of domestic output. [2]

The disparity between GDP growth and real wages is therefore due to a combination of three factors: immigration, which boosted GDP, a rise in indirect taxes and a depreciation which both raised consumer prices. If we focus on GDP per head, as we should, then very weak GDP growth caused by the global financial crisis and austerity was translated into negative real wage growth, because of the global financial crisis (the depreciation) and austerity (the rise in indirect taxes). We are not seeing a shift from wages to profits. [3]

If there is one overall message here, it is that since the global financial crisis overall GDP growth in the UK has been terrible, and austerity plus an exchange rate depreciation has made it even worse for real earnings. That the media have not presented it that way is an important reason why it seems like your GDP, not ours. 

This disconnect in mediamacro between GDP and real wages has been very evident more recently as well. On the one hand Brexiteers have made great play about the fact that GDP in 2016 has been much stronger than some had expected. The media has also noted how inflation is increasing, and earnings growth is flat, implying a squeeze on real wages. Yet the two facts are hardly ever brought together. If they were, they might note that the 1.8% growth that the Brexiteers are so proud of in 2016 falls to 1.1% if you take out population growth (immigration). And they might also note that any growth in GDP in 2017 is likely to seem like ‘your bloody GDP’ if real earnings fall because of the Brexit depreciation. (No wonder they are in such a hurry to start negotiations.) Another message of this discussion is that the media could try a little harder to relate GDP growth to average earnings, rather than treat them as disconnected events just because the statistics are published on different dates.

[1] The fall in real wages shown in this chart is a lot less than in the FT chart, but without knowing their exact source it is difficult to know why.

[2] If you are wondering how real wages managed to ride out the recession, there are two main factors involved. The recession reduced the share of profits in national income (as recessions generally do), and in addition there was a large increase in unemployment.

[3] The labour share (of GDP at market prices) did fall by over 1% over this period, but the profit share also fell. The share that increased was taxes, reflecting the VAT increase already noted.  

8 comments:

  1. How can someone assigned to economic repporting miss that easy, simple picture? Those people have college degrees and often find information about very shady ties that people try hard to burry... At some point you got to wonder if it's plain idiocy or if they do it on purpose.

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  2. In explaining the fact that many [most?] people do not feel better-off despite GDP growth, it would be interesting to compare GDP with median real earnings rather than average real earnings. I assume that "average" in the ONS figures used here refers, as usual, to mean rather than median.

    In the US there has been discussion about how far the growth in income has been confined primarily to the top 1%. It would be relevant to see if this also applies to the UK. Using median rather than mean earnings would more appropraite in this case. (I haven't done this for myself, as now that I am retired I no longer have full versions of Excel and find it more difficult to download ONS data, calculate and graph it.)

    Almar

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  3. If you want disconnect of reported GDP just remember the Irish GDP last year of 26%. Just how does the calulation of GDP havs any relevence to the real world

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  4. You confuse me, shouldn't the depreciation in sterling, which leads to higher reported earnings in exporting companies, have a dissimilar effect to the depreciation and vat cuts between 2008 and 2011. Are you saying that we have not yet recovered from the 2008 crash? That would make sense to me because it would appear that you are being consistent rather than intentionally beating a party-political message

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  5. Wow that wages diagram really tells a story. A very big terms of trade effect (too often ignored).

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  6. So the UK's GDP is increasing but wages are decreasing. Not only is inequality is increasing, the UK is now unique in the developed world in that it is fast-tracking it. Isn't this the path to feudalism? There must come a time, if this trend continues, when all the wealth is owned by the top 1% and the serfs have next to nothing.
    Obviously the only way to stop this happening is decrease inequality. But what force, if any, prevents inequality increasing?
    Soldiers seem to come back from wars determined to decrease inequality--"a country fit for heroes" after the First World War; the Labour landslide after the Second World War---and yet inequality quickly re-established itself.
    Labour stuttered into power in the early 1920's but were quickly removed after the infamous "Zinoviev letter" general election. After the Second World War Labour were removed after six years in power. In the 19th century, did the soldiers returning to Britain from the Crimean War or the Napoleonic Wars also want more equality, only to have it taken away once the dust of war had settled ?
    Is there any way in which inequality can be reduced without having a war?

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  7. If you do the figures with net national disposable income median per capita, rather than GDP per capita, it's simply terrifying

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  8. You equate GDP with “wages,” which I don't understand: income distribution is no less important a part of this story, and much of the growth in personal income has been from investments that are generally not part of the story for either immigrants or the bottom 3/4 of the income distribution. NOT wages.

    Sure, there are problems with median household income, too. But they probably highlight the UK's shocking situation more dramatically, and change the tenor of the debate to how the country has structured its economy so that only* the very wealthiest have particularly benefitted over the past couple of decades.

    * (This is pretty much the US story…I'd be happy to see UK-specific stats.)

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