Martin Wolf has become the commentator amongst commentators during this recession. An FT subscription is almost worth it for his column alone. As he says this morning (and I quote very selectively):
In the OBR’s November forecasts it further lowered potential output at the start of 2016 by 3.5 per cent. As a result, my colleague Chris Giles has estimated that the level of potential output forecast for 2017 is 18 per cent below that implied by the 1997-2008 trend. This is a huge fall.
That means we're likely to be more than one pound in six poorer than expected in 2017.
Now, somewhere, deep down, I have a sneaking suspicion I welcome some aspect of that. After all, in the Courageous State I call for finance to be curtailed, and no doubt that would for a period reduce GDP - as it is clear it contributed far too much to our national income in 2008. So, let's not take numbers at face value alone, there's always more to them than that.
And there is, as Wolf notes:
[I]t is unclear what economic forces are causing the reductions in potential output that the OBR and other forecasters believe in. In explaining the collapse, the prime piece of evidence is the declining level of productivity. This is startling: output per hour in the whole economy was 1.7 per cent lower in the second quarter of 2011 than in the fourth quarter of 2007.
Again, this needs interpretation: the reality is that if productivity had been maintained we would now have hundreds of thousands more people unemployed. And you never know, what we may be seeing is a real shift in attitudes that says people are more important than machines. We may also be seeing a shift to services, and Baumol's law virtually guarantees reduced productivity when that happens. So again, this may not all be bad.
But as Wolf also notes:
Yet these persistent losses may not be inevitable, but rather be the fruit of policy choices.
He's right, of course. The fact is that policy is constraining demand, and threatening profit. The almost inveitable consequence is a decline in productivity. And as Wolf puts it:
The priority, then, should be policies that raise investment, in both corporate and public sectors. It remains difficult to understand why the government cannot take advantage of today’s low interest rates to expand investment in income-generating assets. Again tax cuts that would directly add to employment must make sense.
The conclusion I draw is that we do not understand the causes of the UK’s falling productivity and should not assume lost output is permanent. Above all, the aim of policy is to ensure it is not. The country should accept such radically reduced circumstances only if sure they are inescapable. It cannot now be.
I agree. It's perplexing to be in a situation like this, where the glaringly obvious is not being done.
Mind you, I'd add a rider to Wolf: the incidence of the investment - ensuring that the impact is for employment and with greatest rewards to those lower in the income distribution, is vital. And that is possible too.
So why aren't we doing that? Could it be that it's because Cameron is only intent on saving the City?