Wednesday, May 13, 2015

How Should We Understand The Slow Recovery From Recession In The UK Economy?

The Conservative Party was successful in convincing the electorate that fiscal austerity has been good for the economy.  Many economists have argued that fiscal stimulus would have been better for the economy.  Noah Smith looks at some of the data and he concludes that neither fiscal austerity or a Keynesian stimulus are the appropriate responses to slow economic growth in the UK.  He points his finger at the low level of productivity which is holding back economic growth in the UK.  A larger share of the workforce is employed but the level of output has not grown in proportion to the rise in employment.  In other words, potential GDP is lower than it was prior to the financial crisis.  He suggests that the financial sector in the UK may have grown rapidly without benefiting other sectors in the economy. 

Brad DeLong, who generally agrees with Noah Smith, looks at the data and scratches his head.  He finds no reason to argue that a shortfall in aggregate demand is not responsible for the slow recovery from recession in the UK.  He does not offer an explanation for the low level of productivity in the UK but we do know it is much easier to increase productivity in the manufacturing sector than it is in the services sector.  As services replace manufacturing as a source of employment in advanced economies it may be more difficult to stimulate economic growth through increased productivity.

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