From the TUC

The UK’s Economic Car Crash: An Extended Analogy

19 Aug 2013, by Guest in Economics

One of the Government’s key economic messages ahead of the next election looks set to be that ‘voters shouldn’t hand back the keys to the people who crashed the car’.

The logic behind this is quite straight forward – there was an economic crisis under the last government and the present lot are simply trying to clean up their mess.

Perhaps unwisely though, I’ve been thinking about this simple analogy rather too much in recent days and I think, as justification for current government economic policy, it falls quite short.

No one can deny that the economy experienced a crisis in 2008/09. The car certainly crashed. But to get policy right and avoid another accident, we need to first understand why the crash happened in the first place.

The Government’s argument is again straight forward, the reason for the economic disaster was reckless driving – the previous government simply spend too much in the good times.

But this argument does not explain what happened to other major economies – how could apparently excessive government spending in the UK have caused a recession in the US, or Germany or Japan?

Almost every advanced economy in the world experienced a recession in 2008 and 2009. This was a multi-car pileup not an isolated accident.

That said, the UK’s recession was worse than most with GDP falling by 7.5% and the recovery from that recession has been slower. Our own GDP remains well below pre-crisis where as other countries are now above their 2008 peaks.

To stick with the motoring analogy, the problem was not so much with the drivers as with the car itself.

The UK’s economic model, the essential characteristics of which emerged in the 1980s or in some cases even before, has inherent flaws – firms are too short-termist, investment is too low, growth is characterised by boom and bust cycles often linked to the property market, the rewards from that growth are too easily captured by those at the top and economic activity is too concerned in too small a geography and too few sectors.  

For much of the 1950s, 1960s and 1970s British politicians looked enviously at foreign models and cursed the problems with their car.

In the 1980s though we discovered that by replacing petrol with rocket fuel in the form of deregulation and a super-sized financial sector we could attain a great speed.

The problem was that the fundamental flaws remained.

In 2008, we crashed not because of government policy failures but because the nature of our growth model left us vulnerable.

We were caught up in a huge global crash that we were more vulnerable to than most and afterwards, as other cars started to move off back down the road we initially found that the engine wouldn’t start again.

The new government initially seemed (at least at times) to recognise part of the problem. There was much talk of ‘new economic model’ based on rising business investment and net trade rather than consumption and consumer debt.

However the government was not prepared to spend the cash necessary to make these changes.  A new growth engine doesn’t come cheap after all and despite record low interest rates the Government refused to borrow.

We spent the best part of two years stuck on the hard shoulder with a stagnant economy.

In the past year the government have got the car moving again but without fundamental reforms to our national business model.  

The ‘new economic model’ – and the wider attempt at rebalancing – has been put on hiatus. Instead we get Help-to-Buy and attempt to re-inflate the housing market. A recovery marked by the familiar characteristics of a falling household savings ratio, a pick up in the property market and consumer spending. Business investment continues to lag.

The government appear so concerned with catching up in the ‘global race’ that we are back on the rocket fuel.

This will not end well.

We don’t just need more careful drivers, we need a new car. Or at the very least to make big changes to the one we have.

If we want a balanced, sustainable recovery then we need to do more than simply boost demand, instead we need to reform our national business model.

4 Responses to The UK’s Economic Car Crash: An Extended Analogy

  1. Dave Holden
    Aug 19th 2013, 4:48 pm

    There was a bubble in unproductive private credit creation, ZIRP/QE helped with it’s serviceability but lead to stagflation relative to wages. Now the policy is to stoke back up the same bubble in time for the next election. If I though they had a clue I’d say it was highly cynical but I’m not sure I do.

    As an aside I’m not sure of the dynamics of house price inflation and popularity, is the feel good of home owners better than the feel bad of those not on the merry go round..

  2. John
    Aug 20th 2013, 1:28 am

    As an economics layperson, I very much appreciated the car transport analogy used in this article. Thanks.

  3. BrianSJ
    Aug 20th 2013, 10:17 am

    I regret to inform you that traditional economics had quite a hand in getting us into the mess, and being surprised when it happened. It is completely irrelevant to what happens next. Politics, technology, race, energy and religion all come ahead in the queue.

    A 1970’s union call for higher wages is not part of the solution either.

  4. Syzygy
    Aug 20th 2013, 2:58 pm

    How to resist posting a link to the car crash analogy in ‘MMT the movie: economics for Dummiez’ ? – I can’t.

    http://www.youtube.com/watch?v=4bXpOUYrr1c