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Has rapid economic growth in the world's high-income countries come to an end? If so, was the bursting of the economic bubble in 2007 the turning point? Alternatively, are we at the beginning of a new era of rapid growth fueled by artificial intelligence? The answers to these questions are likely to go a long way in shaping the future of our societies, because stagnant economies partly explain our bitter politics.
So what does the record look like and to what extent was it based on one-off opportunities? I will focus here on the United Kingdom, as one of a number of countries struggling to regain its dynamism. In fact, the United Kingdom has been relatively undynamic since World War II. However, according to the Conference Board, the UK's real GDP per capita rose by 277 per cent between 1950 and 2023. During the same period, real GDP rose in the United States by 299 percent, in France by 375 percent, in Germany by 501 percent, and in Japan by 1,220 percent. cent. Cumulatively, living standards have changed.
Yet many people feel miserable. Part of the explanation for this is that growth rates have been declining. The fastest pace was between 1950 and 1973, the post-war recovery era, and was lower between 1973 and 2007, and lower between 2007 and 2023. Remarkably, this recent period was the first in which US growth in both GDP per capita and output per hour was higher than in France, Germany, Japan, and the United Kingdom. However, the level of growth of hourly output in the United States was lower than in previous periods.
The post-1945 growth “miracle”, especially in continental Europe and Japan, was a one-time miracle. This was driven by the opportunities offered by post-war reconstruction, the mass consumption economy that the United States had created in the previous half-century, renewed economic integration, and above all trade liberalization, a high-employment and high-investment economy, supported by better conditions. Macroeconomic policies and enhancing business confidence. Also important was the Cold War, which brought the United States into the world permanently, in contrast to its disastrous withdrawal from a still-torn Europe in the 1920s.
For many of today's high-income economies, the post-war boom has been an unprecedented success. This was also true for the United Kingdom, although its economy grew much slower than that of its European neighbours. Growth rates have generally slowed since the early 1970s, but at least in the United States and the United Kingdom. The reasonable explanation is that great opportunities were exploited at that time. Since the 1980s, this phenomenon has been found instead in emerging Asia, whose economies have been feeding off the growth opportunities previously enjoyed by Japan and South Korea. China was the prominent example of this success.
New technologies have also continued to be invented, especially those related to the digital revolution. But Robert Gordon's argument, in his masterpiece The rise and fall of American growthThe existence of a marked decline in the overall rate of technological progress compared to its scope and scale before World War II is compelling. Another reason for the slowdown in overall productivity growth is the increasing role played by labor-intensive services, where productivity is difficult to increase.
There have also been inevitable temporary increases in growth in the twentieth and early twenty-first centuries. One of these challenges was the high participation of females in the labor force. Another reason was the global move towards longer years of education, including higher education in particular. Another reason was the decline in overall dependency ratios, as the “baby boom generation” entered the labor force. The UK itself also benefited from EU membership, which it then blithely ignored.
Another temporary boost, especially to UK public finances, came from inflation, which helped eliminate the public debt burden that had built up during the war. The UK public sector also enjoyed a windfall from North Sea oil revenues and privatization proceeds, both of which were consumed. Unfortunately, the impact of the financial crisis and pandemic has led to public debt rising again, although nowhere near its peak levels in 1945.
A final, one-off boost from the massive growth of the financial sector in which the UK has played more than a full role. As I argued November 5The financial bubble “not only exaggerated the sustainable size of the financial sector, but also exaggerated the sustainable size of a whole range of additional activities.” This again is unrepeatable, or so at least one should hope.
So what awaits us now? Has post-2007 stagnation become the norm in older high-income economies, with the possible exception of the United States? Fortunately, there are some new opportunities. The first is to catch up with the United States, as happened in the 1950s and 1960s. For the UK, another opportunity is to raise arrears in 'left behind' areas. Another possibility is a return to the EU customs union and single market. But the UK may instead seek to be Donald Trump's favorite country. For the European Union, the opportunity is thereo Fully implement Draghi report.
However, what lies ahead for most of these economies, certainly including the UK, is to manage the burden of high public spending, especially on defense and the elderly. Policymakers will also need to undertake economic reforms aimed at encouraging competition, innovation and investment. In the UK, they should promote Much higher savings. The policy should also aim to encourage immigration by skilled people.
We should at least hope that AI will increase productivity without destroying the information ecosystems we depend on. Growth must be environmentally and politically sustainable.
Slowing growth is a major feature of our times. It should be the focus of policy.
