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The British Economy

By Dr John Sydenham  23/8/2022

Amol Rajan has been hosting a round table discussion on the British economy for the past few days.  Guests are popular economics pundits such as Minton-Beddoes, Vince Cable, Luke Johnson, Jim O'Neill, Miatta Fahnbulleh and Paul Drechsler.  The Programme is asking why the UK economy has failed to grow as fast as its G7 competitors.  The contributors exposed the real problem.

The panel were all clear that the economy was not growing but failed to define what is meant by growth.  Most people would agree that growth is growth in real wages.  The starting point for any discussion on UK growth is the data that shows that real median household income was stalled between 2004 and 2013:

Mean household incomes rose between 2004 and the financial crisis in 2007-8 as inequality increased but median household incomes, the household incomes of ordinary workers, were static.

When the real growth of personal wages (not household incomes) is examined the problem of lower growth goes back to the early 1990s, the major precipitating factor being the free movement of labour after Maastricht which limited worker's bargaining power:

An Examination of Falling Real Wages

Those who deny that wages respond to supply and demand of workers are unaware of the data which show a clear link between wages and worker supply:

Bank of England. Supply and the Labour Market

Between 2004 and 2008 the increase in output per worker was being used to increase the wages of the wealthier sector of society.  Productivity rose until 2008:

But the rise in productivity happened without a corresponding rise in median incomes in the period 2004-8.

After the financial crisis the output per worker (productivity) ceased growing.  The growth in productivity increased slightly after the EU Referendum:

It is clear that real wage growth in the UK economy has two problems, the first is a failure to translate productivity rises into real wage growth for ordinary people and the second is a lack of investment since the financial crisis.  There is no objective evidence that Brexit is a problem for productivity or growth, look at the data.

Failing to provide economic growth for workers is considered by many to be a major failure of government.  Historically UK governments have used a steady increase in the numbers of the workforce to cover up their economic failure.  This is one of the reasons for high migration rates (UK population growth is due to migration).  Notice how the apparently strong GDP growth in 2014 was due to workforce growth, not productivity growth:

Foreign workers are largely imported through the universities (students and staff) and the NHS.  As an example, there were almost 190,000 foreign workers in the NHS in 2021 which, with family members etc, is nearly 1 million people who were imported to cover up for the poor NHS management that results in rapid staff loss.  Migration to the UK was fairly steady at 500-600,000 per year between 2000 and 2020 so "importing foreign labour to cure labour shortages" is the background to our current economic woes, not the cure.  Migrant cleaners, auxillaries etc. in the NHS soon learn that they have a better life working elsewhere in the economy.

After 20 years governments should have learnt that importing foreign labour is not the answer to the problems of the UK economy.

Foreign labour is not the cure but it is part of the problem.  Governments are addicted to foreign labour for two reasons.  The first is that by increasing the working population they can boast of rising GDP even though real gdp per head is not rising.  The second is that it allows the country to pay for the Current Account Deficit.  The Current Account is a measure of most overseas transactions except investment.  It includes trade, interest payments, dividends, rents etc.  A country that runs a large Current Account Deficit has a problem maintaining real wage growth because the currency is always at risk of devaluation so that real purchasing power declines.

Paying for the Current Account Deficit is a major problem for the Treasury.  The Deficit has been huge for two decades.

Balance of Payments Current Account (ONS)

Most of this deficit was with the EU:

Current Account Balance with EU (ONS)

The scale of the deficit is mind boggling.  It would rapidly lead to a collapse of the pound without the sale of assets to foreigners.  This is the preferred solution of the Treasury which has removed controls on the foreign ownership of British property and industry and boasts of "openness" to encourage overseas investment (See ONS FDI figures).  Low wages encourage foreign investment but another, essential component of ensuring high returns for foreign investors is to rapidly increase the UK population so that demand for rentals is very high:

Most countries have significant barriers to foreign property ownership and hidden barriers to the acquisition of domestic industry but the UK has deliberately removed these.  (The UK actually has laws to prevent foreign takeovers but they are not used).

Since the EU Referendum the Current Account Deficit has been reduced but it is still far too high and UK property is still highly attractive to overseas investors.  The Treasury seems to have no sympathy at all with UK citizens who must pay inflated rentals and property prices to prop up their mismanagement. (See FT article)  Should the markets become worried about the perpetual Current Account Deficit the run on the pound and the resulting interest rate rises will cause terrible problems for all of us.

After years of mismanagement the UK now has a continual haemorrhage of profits and rentals to foreign investors which makes it difficult to balance the books even were we to have, say, a trade surplus.  This can be seen from the UK Primary Income figures which show a large deficit in the flow of profits, rents, dividends etc:

This is the background to the economic woes of the UK.  What is the cure? 

The problems are: migrant labour creates a low pay economy where workers have reduced bargaining power, after the banking crisis there was a lack of investment in increasing productivity and there is a huge Current Account Deficit.  To some degree the large inflow of migrant labour will discourage investment in productivity so the two factors are related.  However, this is not the whole answer, the increase in property prices has diverted capital to the property market from industry:

In recent years this has been corrected to some degree after years of ever decreasing investment by banks in industry.  The attractiveness of  the property market for banks was due to the demand due to the perpetual population growth due to migration. (See Population Growth)

The measures that any government can take to improve the real pay of UK workers are to greatly reduce migration and to reinstate controls on foreign ownership of UK assets whilst ensuring that conditions of trade with the EU continue to be as onerous as possible.  This sounds "protectionist" but the UK economy and population really needs protection from the consequences of the disastrous imbalance in UK-EU finances, especially trade.

The data tells us the nature of the problem and hence what must be done to cure it.    Why, when the causes are obvious are the cures avoided?  The BBC Today programme supplied the answer.

What did the contributors say? 

Luke Johnson: "we need a more entrepreneurial approach to how wealth is created".  Is this true? The British are entrepreneurial but they sell off their industry to foreigners as fast as it is created. The majority of large businesses in the UK are foreign owned.  Profits are exported and foreign owned UK companies reduced to warehousing operations.

Minton-Beddoes: economic growth comes from productivity rises.  This is true but capital is diverted to property in the UK and low cost labour has been a staple input.

Minton-Beddoes: "all the uncertainty around Brexit crimped investment".  This is not supported by the data.  Output per worker hour has actually increased since Brexit.

Vince Cable: growth was the result of "the politics of Margaret Thatcher and more competition or the politics of Gordon Brown and financial stability"...  Here is a reminder of what actually happened to growth:

: Gordon Brown presided over ever decreasing growth and Margaret Thatcher actually made little difference to real wage growth. Her real achievement was wage stability.

Vince Cable: "We volunteered for Brexit with cost to the economy".  There is no evidence of this in the data and the problem of low real wage growth dates back to 2004.

Luke Johnson:  "Take the regulation around house building and planning in this country, which is one of the things I would free up if I were in charge".  This shows an intention to grow the population.  This is not a sensible policy on a small island:

(See Population Growth) It also continues the population growth policy favoured by the Treasury as discussed above.

Miatta Fahnbulleh: there is a growing consensus that lack of demand in the economy is responsible for poor productivity.  This takes no account of the fact that without a productivity increase or a rise in workforce numbers the rise in demand will cause inflation.  In other words the ability to increase productivity must be present for demand to increase productivity.  In the UK increased demand has, over the past decade, increased the size of the workforce not productivity.

Paul Drechsler: Education, investment in R&D, investing in skills and development of people and positive motivation will increase productivity.  These things are necessary in any developed economy but Drechsler has failed to spot that they do not achieve the desired effect in the UK:

This is because it has been easy to import foreign workers so that low wages can trump productivity.  Stop the continual undermining of British workers and the educational investment should indeed give us the wages of a Swiss worker.

Jim O'Neill: Increasing demand will cause inflation without a productivity increase, productivity is due to supply side issues, SE productivity is better than that in rest of country.  Showing that he understands regional differences but he should have pointed out that it is these same forces that have caused the Current Account Deficit with the EU with the effects discussed above:

Wealth gravitates towards the places that already have the highest purchase power densities.  This is because these places have spending power.  They are the buoyant market.

Amol Rajan: should we increase the population?  Rajan is showing the almost fanatical BBC pro-population growth bias.

Miatta Fahnbulleh: we should increase the productivity of SMEs through pay, motivation and training.  Good thoughts but this has been said for decades.  SMEs hire cheap foreign workers if they are available - this provides profits and lessens staff bargaining power for wages.

The Today programme was helpful by showing that the real problem for the UK is that people are avoiding the data for political reasons.  The data is crystal clear that foreign workers are part of the problem, that investment has been diverted into property by Treasury policy and that the UK-EU Current Account Deficit would sink the pound without the sale of assets.  If we want real growth in wages we need to reduce the import of labour, prevent the sale of assets abroad and hinder UK-EU trade.

Most of all we need economics pundits such as those on the Today Programme to pay attention to the data rather than their political prejudices.  It is these pro-population growth and pro-EU prejudices that have created the current problems.  These prejudices are rife throughout the Corporate Elite in the UK and are the source of UK's malaise.

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