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Last month, the White House Council of Economic Advisers released a note comparing inflation rates among the Group of 7 — the major advanced economies. This is trickier than it might seem, because different countries measure consumer prices in different ways. In particular, the U.S. Consumer Price Index treats housing differently from the corresponding official measures of European nations, in ways that have caused U.S. inflation to seem more persistent than in some sense it really is. When the C.E.A. produced comparable numbers, they looked like this:
America is now a clear outlier, with inflation falling well below rates in other major economies. And this chart doesn’t include the most recent consumer price report, which showed a further decline in inflation and has probably widened the gap.
But while the United States has emerged as an inflation outlier in a good way, Britain has emerged as an outlier in a bad way. British inflation is still running hot, with few clear signs of progress. And Britain has also had a notably weak recovery from the pandemic recession. Here’s a chart from Simon Wren-Lewis:
So what’s the matter with Britain?
Warning: I’m going to be more diffident than usual in today’s newsletter, to some extent raising questions rather than giving definitive answers. There are two reasons for my diffidence. One is that I don’t know my way around British data and institutions as well as I do those of the United States. The other is that Britain’s recent poor economic record is in some ways genuinely baffling. British economists whose judgment I generally trust, like Wren-Lewis, also seem somewhat bemused by how badly things are going. Recent reports from the International Monetary Fund, which normally projects an air of certainty, use words like “puzzling” to describe British developments.
In particular, monocausal explanations such as “It’s all about Brexit” or “It’s all about right-wing ideology,” much as I might want to accept them, seem to fall short.
So what can we say about Britain? Broadly, the policy response to Covid and the initial effects of that response were similar across the advanced world. The pandemic temporarily disrupted economies: Lockdowns and general fear of infection kept many people from working, a shift in demand away from in-person services to goods (for example, buying exercise equipment instead of going to the gym) overstressed supply chains, and so on. Russia’s invasion of Ukraine, which drove up food and energy prices worldwide, also made economies temporarily poorer.
Governments, however, intervened to limit the economic hardship with aid to the unemployed, subsidies to firms to maintain their payrolls, and so on. What this meant was that purchasing power was sustained even as economies’ abilities to supply goods and services temporarily fell. A burst of inflation was the natural consequence, and arguably a good thing, considering the alternatives.
But at this point the initial shock of the pandemic has largely faded — and economic outcomes have started to diverge. To the eyes of an American economist who has been following the data since Covid struck, British developments postpandemic look strikingly like what we feared would happen here but hasn’t. We worried that the Great Resignation would persist, reducing long-term labor supply; America has instead exceeded prepandemic projections for employment, but Britain has indeed experienced what looks like a permanent reduction in labor force participation. We worried about a wage-price spiral, which hasn’t happened here but may be happening over there. We worried about “scarring” that would leave the economy on a permanently lower growth path, which, again, hasn’t happened here but may be happening there.
Why this divergence? Was it Brexit? Most economists, myself included, expected Britain’s exit from the European Union to impose efficiency losses amounting to a few percent of gross domestic product. Although Britain has fallen about 5 percent behind comparable countries since Brexit, some of that probably reflects other factors (see below), so those early estimates still look defensible. And this hit to efficiency is surely part of Britain’s problem.
That said, one widely predicted result of Brexit — a reduction in British labor supply as a result of reduced immigration — hasn’t happened, or at least hasn’t happened in the way many predicted. The latest I.M.F. country report on Britain, released just last week, contains a remarkable chart on foreign-born workers in the labor force:
Britain is getting fewer European workers but seems to have more than made up the difference by letting in more workers from other parts of the world. Now, these workers may not have the same set of skills, and shortages of certain kinds of immigrant labor may be a factor in inflation. For example, Britain’s Office of National Statistics suggests that one reason food prices have risen so much is labor shortages, “which left some crops unharvested.”
Still, while Brexit has probably been a factor in British inflation, it clearly isn’t the whole story. Nor is it even the most distinctive aspect of the British divergence. That honor goes to a sharp drop in the percentage of working-age Britons participating in the labor force, which the normally circumspect I.M.F. calls a “spike” in inactivity. Here’s what the numbers look like for Britain:
There was a large rise in the percentage of British adults neither working nor seeking work, especially, although not only, among those over 50. Here, by contrast, are comparable numbers for the United States:
There was only a small rise in inactivity among adults ages 25 to 49 and none at all for other groups, and thanks to lower unemployment, the percentage of older Americans actually working hasn’t declined at all.
One caveat: These charts show changes, not levels. Even now, adults in Britain are more likely to be in the labor force than their U.S. counterparts:
The truth is that America has big, long-term problems in providing jobs, especially in lagging regions. But these problems haven’t gotten worse since the pandemic, while Britain’s problems have. Why? According to surveys, Britain, unique among major advanced countries, has seen a surge in older adults leaving the labor force because of long-term sickness — again, something we feared would happen here but didn’t.
Which brings me to the crisis in Britain’s National Health Service, a national icon that appears to be suffering from both inadequate funding and bad management. Why have things gone so wrong for the N.H.S.?
Well, that’s a large subject in itself — and one on which I feel I need to do a lot more research before weighing in.
So let me return to that issue another day, and end this newsletter with a sort of meta lesson from Britain’s problems: Managing an economy in the face of severe shocks is hard. Britain appears to have done this job badly; America, whatever critics of the current administration may say, seems to have handled Covid and its aftermath relatively well.
Why is France doing so well?
Spain, Europe’s inflation champion.
Even though I’m planning to see “Oppenheimer.”
Posted on 18 Jul 2023 22:36 link