Britain's Strange Recovery . . . Part III: Bricks Without Straw

In parts 1 and 2, I’ve tried to show that various popularly-entertained models of britain’s recovery are inconsistent with the economic facts as I find them. plainly, Britain’s recovery is not credit-fuelled consumer boom; it is not a recovery predicated on a widespread property bubble; it is not London-centric it is not explained by a a Keynesian rebound after a retreat from fiscal austerity; and it is not unbalanced in the sense of bringing with it a renewed imbalance in external balances; and finally, it is happening without significant investment and without a noticeably functioning banking system.

It is also, as we shall see, not a recovery based on either a Hakeyian working-out of malinvestment, or, alternatively a recovery in which a willingness to keep interest rates unusually low via quantitative easing has managed to avoid  and reverse the consequences of malinvestment.   Britain’s recovery is emphatically not investment-led, nor is it certain that it will become so in the short to medium-term.

Rather, Britain’s recovery has arrived despite the lack of resolution of previous bad investments, and despite the continuing dsyfunction of its financial system, signalled in this case by the continued decline in monetary velocity (GDP/M2). In that, it looks like much of the rest of developed world. 

So we are left with a puzzle: what is allowing Britain’s economy to recover a growth trajectory? The clue lies in the way we have looked for, and been unable to find, the source of extra demand.  We are so used to approaching the question from a basically Keynesian demand-led view of the cycle, that it is puzzling to discover that certain recoveries can be supply-led. We are so used to seeing employment as a lagging indicator that it comes as a shock to discover that in Britain’s recovery employment is the leading indicator. In fact, I would go further - the rise in employment is Britain’s recovery.  The chart below shows that employment began to rise, and sharply, in mid-2011, nearly two years before GDP began to show a similarly obvious recovery.

But in fact, there’s nothing logically difficult about employment being a leading, not lagging, indicator of this cycle. The assumption that unemployment must reflect a lack of general demand is difficult to uphold in a globally-open economy (and particularly when the local economy in question has a structural current account deficit).  And even Keynesians will agree that Say’s Law holds most of the time: that, as JS Mill paraphrased it, ‘the production of commodities creates, and is the one and universal cause which creates, a market for the commodities produced.’

Bricks without Straw: Some-employment vs Un-employment At this point, the discussion becomes difficult - distasteful even. For it seems to me that the reason employment began to rise in mid-2011 was that British were positively driven into it - even if that employment is part time, or marginal self-employment, or only marginally-productive employment. The various goads driving coralling the population to seek or invent a job are both deliberate and accidental: 

i)  government restrictions on the welfare state; 

ii) the consequences to household finances of the financial crash and subsequent dysfunction of the financial system; 

iii) the deterioration of the UK’s pension system; 

iv) the longer-term consequences of the mass immigration, particularly from Europe.   

This list is hardly complete, but already contains enough for nearly every politician and politically-involved commentator to loathe. Yet all these phenomena are visible not only to common experience, but also in the economic data.  And all lead to a single message from the economy to the population: get a job!  Some employment is better than unemployment!

And here we finally reach the crux of Britain’s recovery.  For the unexpected reinvigoration of the labour market had at least two immediate impacts. First, such supply-side flexibility (desperation?) has made it easy and cheap for companies first to hoard labour and secondly, to substitute low-risk, low-cost labour for high-risk, high-cost capital in the early stages of recovery.  And, estimating movements in capital stock by my usual method of depreciating nominal gross fixed capital formation over a 10yr period, this is what has happened. 

Second, it has brought forth a new layer of what might be called low-level protean capitalism, as the ranks of the part-time employed and low-level self-employed have risen to 41.7%. Prior to the recession, that proportion was steady at about 38%Self employment contributed 2.2 percentage points to the rise since Jan 2007, and part-timers have contributed 1.3 percentage points.  

What lessons one might draw from this must wait until the next instalment, as must consideration of the London property bubble’s role.  For now, I want to leave with two observations. First, Britain’s recovery is real and likely to be sustained, but it is unedifying, and it leaves crucial strategic questions absolutely unanswered.  Second, unedifying as it is, Britain’s labour-led recovery is genuinely surprising given the difficult other major economies have had, and are having, in finding a exit-route from financial disaster.  'It's a recovery, Jim, but not as we know it.'