Not much has really changed in Capitalism despite massive changes in technology, market reach, etc. The underlying behaviour is stable – chicanery, bleeding the state for all the advantages that capital can gain while berating workers (unions) and welfare recipients, rigging financial, share and product markets, lying about state finances to gain more access to public handouts, lobbying government to socialise risk and privatise profit, paying off politicians to engage in corrupt behaviour where conflicts of interest dominate, and more. I was reading about the famous – South Sea Company – today, which was a public-private partnership that began life in 1711. It was a total scam and had all of the elements noted above. Its collapse in 1720 on the back of corrupt and incompetent behaviour (GFC anyone?) caused one hell of a recession in the UK. The only thing it managed to do in any significant volume with its trade monopoly between the UK and South America was to buy and sell slaves and, even then, it messed that up financially – quite aside from the repugnance of the venture itself. Interestingly, its collapse led to the rise of the, then private Bank of England, becoming the Government’s banker, and ultimately, its dominant role as the central bank. What is the contemporary relevance of the South Sea Bubble and its collapse? There are many angles that resonate in the current debate, but the point today is that the current recovery in the UK is the slowest in 300 years – that is since the glacial recovery following the collapse of the South Sea Company. And George Osborne thinks he is a champion.
The other point that should be made in relation to the self-proclaimed champion status of the British Chancellor is that a major reason that the British economy is showing any growth at all is because Osborne was unable to inflict as much policy austerity as he claimed he would have liked.
The on-going and rising deficits have supported spending in the UK and given it some life. Please read my blog – Who are the British that are living within their means? – for more discussion on this point.
But back to the South Sea Bubble. David Blanchflower’s Op Ed in the Independent (August 3, 2014) – Britain has taken longer to recover from recession than at any time since the South Sea Bubble – provides the analysis for the claim made in the introduction.
I have to admit I was wrong in claiming that the recovery that has occurred under the Coalition is the slowest and worst in one hundred years. I should have said worst in 314 years. I severely understated how bad things have actually been.
This paper from the Bank of England (it appeared in the Quarterly Bulletin, Fourth Quarter 2010) – The UK recession in context — what do three centuries of data tell us? – by the authors Sally Hills and Ryland Thomas examines the data since 1970 in some detail and is worth a read if you are historically motivated.
The database they rely on was produced by academics Stephen Broadberry, Bruce Campbell, Alexander Klein, Mark Overton and Bas van Leeuwen. It supported a 2011 paper – British Economic Growth, 1270-1870: An Output -based Approach. You can download the final data – HERE.
You can read the paper yourselves if you are interested in their methodology.
I augmented their dataset with another available from the Bank of England – Three Centuries of Data – which took me to 1947.
At each splice point, you just create and equivalence (set the values equal) and then convert the following data according to the ratio required to create that equivalence. It is easy to just convert everything into index number form, which is what I did.
So the UK economy – measured in real GDP terms – is now 441 times larger than it was in 1270.
For interest, the following graph depicts the complete real GDP series from 1700 to 2014 (with the index = 100 at 1700). The take-off after the Industrial Revolution is quite remarkable as are the major recessions (that you see) after that period.
The graph back to 1270 is dead flat (relative) and not unlike the period 1700 to 1770 (or thereabouts).
The most recent recession was clearly fairly sizeable.
The next graph shows the annual real GDP growth for the UK from 1700 to 2014 (blue line) with the major war periods displayed in grey bars. Clearly war-time periods are associated with significant real GDP growth volatility.
David Blanchflower commented in the Op Ed cited above on a similar graph (I have updated his graph):
It shows that the UK economy has, almost always, bounced back rapidly from peacetime recessions, without a two-year flatlining period. Wars are different. Ryland Thomas from the Bank of England has kindly pointed out to me that over the last three hundred years you can find one peacetime episode where it does take output over seven years (on an annual basis) to recover to its pre-crisis peak. This is following the South Sea Bubble in 1720. Then the next one of comparable duration is Mr Osborne’s three hundred years later.
So that is the basis of the claim that the current recovery is the worst (peace-time) recovery in 300 years and the South Sea Bubble was a very large crash indeed.
After the collapse in 1720 (peak = 100), the British economy took until 1736 to catch up to the previous peak. As an aside, it plunged immediately back into recession again in 1737, which set it back for a futher 5 years.
We can look a little more closely at the quarterly data which is available from 1924 (so we leave out the 1920-24 recession).
The following graph plots the percentage deviation from the peak in the quarters following the respective peaks before the major recessions in the C20th and C21st.
The 1930 Great Depression involved a larger negative deviation from the peak in the March-quarter 1930 (maximum deviation was -7.6 per cent recorded in the September-quarter 1932 before recovery slowly began).
But the recovery path in the current recession is clearly much slower than the four other major recessions. The maximum deviation in the current episode was 6 per cent (receorded in both the June- and September-quarters 2009).
You can also see that in the previous four episodes, the quarterly real GDP losses relative to the peak quarter ended well before the current episode. In the 1930 and 1979 recessions it took 16 quarters to stop the losses, in the 1973 recession it took 17 quarters, and in the 1990 recesssion it took just 10 quarters.
In the current recession it took 22 quarters and the rebound has been much more subdued.
Current UK growth performance
Stepping into the current period, Eurostat published the latest – National Accounts estimates – for the December-quarter 2014 last week (as noted in my discussion of Greece yesterday).
How did the UK fare relative to the rest of Europe?
The following graph shows the real GDP growth in the December-quarter 2014 as published by Eurostat. The estimates for Luxembourg, Malta and Iceland are the third-quarter 2014 because no data was published for them for the December-quarter.
Grand old Britain is ranked in the middle of the field with Portugal, the Netherlands, Romania, Iceland, and the USA.
It cannot claim that it has to obey fiscal rules imposed by the European Commission because it has its own currency.
It cannot claim that the Eurozone is holding it back – the usual denial – because meany Eurozone nations are performing better than it.
That excuse came up again yesterday in the Guardian article (March 9, 2015) – UK uncertainties are real, but nothing saps confidence like the eurozone.
It wasn’t the Government saying that this time but a British business executive.
Greece should be worried about the Eurozone and its ridiculous constraints but the British economy is able to chart its own course.
It can stimulate domestic demand to the limit of available real resources should its export markets falter (which they have despite the substantial depreciation in the pound since the recession).
So the lacklustre performance is all down to the failure of the British conservative government to manage the economy properly.
It talked it into submission early in its tenure with all the rubbish about public deficits and debt explosions and cannot find its way to increase the discretionary deficit such that growth accelerates and becomes less reliant on further private debt accumulation, which was the problem in the first place.
We will give the last word to David Blanchflower from his Independent Op Ed:
No other Chancellor since records were kept has been so incompetent in extending a recession for so long. It isn’t that the depth of the shock was unprecedented. So the triumphalism over restoring output to its starting level is totally misplaced, especially given that the economy was growing along the typical growth path of 20th-century recoveries when the Coalition inherited it in 2010. I do recall saying in June 2010 “this Budget will kill the recovery stone dead”. And it did. Not since the South Sea Bubble in 1720 has Britain seen such a prolonged recovery.
But the other important point that Blanchflower doesn’t acknowledge (and implicitly denies) is that the only reason there has been any recovery at all is because the British government has not been able to implement the fiscal austerity that it preached in June 2010 just after it was elected.
Had their initial plans been realised, then the fiscal position would have killed the recovery stone dead.
The recovery has been, in fact, a weak Keynesian-style one. It would have been much better if they hadn’t tried to cut the fiscal deficit at all. Then the UK would have enjoyed a much more robust return to economic growth.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.