Economics and productivity

On the train home now. On the way out there were speed restrictions in force because of the heat (sniggers throughout the compartment at that); we’re now back to 8 degrees.

I’ve just read an article by Duncan Weldon about UK productivity and demographic problems. None of it was new to me, but he expressed it well. He hooked me in the first paragraph when he ascribed UK low growth estimates less to an external “economic crash” than to “engine trouble”.

We were used to a productivity rate of 2.2% for several years, but since the recession it has been more like 0.5%. (The idea of a steady state economy seems to be pie in the sky under the present system: I recall reading somewhere that we needed 2% annual growth just to maintain our current standard of living and cover population growth.) No one can say for sure why productivity has been dropping globally (although not as much as the UK, where it is spread across many sectors). Measurement may have something (but by no means everything) to do with it: online productivity is less straightforward to quantify than industrial output. Theories embrace historical lack of investment, weaker labour bargaining strength, and the concomitant expansion of a low-skill, low-wage economy. Lower productivity means more infighting over the division of lower returns: shareholders vs. workers.

Demographics are also a headache: we now have fewer workers for each pensioner. This can be addressed either by raising the retirement age or by importing more workers through immigration, but it would be politically difficult to do either on the economically necessary scale.

The combination of the two problems is a worry and there aren’t many palatable solutions in sight. Redistribution of wealth is more usually attempted at times of higher productivity. An increase in public spending might help*, but when it comes to corporate investment the government has few levers to pull. The recent increase in the minimum wage may spur businesses to improve productivity as their cost base rises  – but Weldon doesn’t mention that the current experience is that companies that pay those kinds of wages seem to be making savings by squeezing their workforces. Does that count as a productivity rise?

So – unless you can believe six impossible things before breakfast – if things don’t improve we’ll have to choose between a smaller state or higher taxes. Easy to say, but the real-world implications are more problematic.

I’m glad when I find a knowledgeable commentator who does the heavy lifting for me! It’s a little like the scene in A Serious Man when the failing student explains to the physics professor that he understands the Schrödinger’s Cat story perfectly well, and the physics professor tells him that it’s not the story he needs to know but the maths behind it. Well, I operate solely at the superficial cat story level.

It’s also interesting to think about this after spending a few days in Paris with a score of prosperous middle-class older people who seemed to take their comfortable lives for granted. In some cases – gross generalisation alert – their sense of entitlement to a very comfortable life was perhaps quite as great as that of the Daily Mail hate-figure of the skiving scrounger. I’m sure some of them had worked very hard for their prosperity, but I would also guess that some of them started their lives from a high rung on the ladder. The reminders of the various French upheavals over the years and the ostentatious display of wealth (step forward, Opéra Garnier) set up some interesting parallels. On the final night our taxi from the Train Bleu took us past the place de la République and the Nuit Debout protesters. Nobody threw a bomb into our carriage . . . but I can see why politically engaged young people might also be politically enraged.

* I’m writing this on a train delayed by no power to signals at Crewe and a broken-down engineering train on the tracks near Oxenholme.

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