The different way in which the Uk and USA have reacted to fairly similar NGDP pathways has occasioned some useful but high level blog commentary. The basic conclusion is that the UK suffered a supply shock as well as a demand shock; see Historinhas on the not so much Siamese twins qualities here, and Professor Sumner, who says we combine fantastic labour market flexibility with lousy labour productivity.

I am not so sure. Labour productivity shocks don’t just hit an economy like a sudden storm. I can list some sharp supply side hits – to oil, financial sector activities, and the withdrawal of credit does damage capacity and can do so sharply. But the way the shock had coincided with the massive aggregate demand hit has always made me look there, first. Ockham’s law. The US economy reacted to weak demand by shedding labour. The UK by lowering it’s price. But we’re both Anglo Saxon economies trading internationally, with many of the same products, multinationals, and markets.

But when Marcus says the UK needs structural reform I take it seriously. So- what reforms do we need? Not the labour market. Bank credit, sure. But for me, the biggie is the one you can see from space. Land.

Any others?

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3 thoughts on “What ARE the big UK supply side issues?

  1. Land reform comes up against the same problem, why did it become so terribly bad in 2008/9?

    Plus the land problem is a south east problem. The property market in Wales and the North isn’t inflated.

    Okay, so here’s maybe a consistent story. The financial industry screwed up and is shedding staff and so the UK economy needed a sectoral shift, we’d be a bit poorer but basically okay.

    We don’t have export industries that are easy to ramp up so the natural sectoral shift in the SE would be into real estate investment. Because this is massively restrained it shows up as soaring prices and a slow acceleration of construction. This isn’t enough to absorb the shift in resources so it shows up in higher nominal prices and lower economic activity.

    People don’t want to leave London to do property development because it’s still a global hub and the theatres are still there.

    How’s that sound?

  2. @LA – I’m not 100% sure the land problem can really be considered exclusively a South East problem, granted the problem is far worse in London and the South East but if you look at, say the nice bits of Liverpool or Manchester property prices are still pretty steep relative to wages.

    @Giles – I’m really not convinced that current low productivity indicates a need for structural reform. Like you I can’t really pin down where the actual reform is needed, the labour market looks just fine at the moment and if there are major skills shortages it’s hard to make out anything specific.

    I think it’s hard to unpick whether the current productivity problems are down to something structural or whether they’re a side effect of low aggregate demand. Land reform and bank reform both sound like good ideas but I can’t help thinking that either our current problems are due to low AD or we might have to live with low productivity as the new normal.

  3. Maybe the UK story just comes down to high quality immigration from Europe? Significantly flatter labour cost structure means that the marginal cost of labour is low. This doesn’t happen very often, normally immigration is tightly controlled, but the UK is effectively now tapped into an enormous labour supply. Its more of a factor for the UK because everyone’s second language is English. The US doesn’t have this as their immigrants are low quality and smaller as a fraction of the labour supply. So in the US increased nominal demand is met with investment in productivity enhancing mechanisms, in the UK by increasing the workforce. Its not clear what structural reforms, other than replacing immigration controls, could actually change this picture. Its simply businesses choosing the most economical way of expanding capacity.

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