It was the best of recessions, it was the worst of recessions
“It was the best of times, it was the worst of times”.
Dickens’ famous summary of the period in the run up to the French Revolution could apply to the recession we just came through. Depending on how you look at it, it was either the worst recession Britain has had since the war, or a surprisingly mild one really.
How so? It depends whether you look at what happened to output or to the labour market.
The two charts below (from the low pay commission) give you both sides of the story.
Look at output, and the recent recession was a monster: the biggest since the second world war and worse than the thirties. In fact it was, in a sense, as big as the previous two recessions put together. In the early 80s recession output fell 4-5pc, and in the early 90s recession by about 2pc. But our recent recession saw output fall about 7pc from its peak. After such a long period of expansion, it was like a rollover jackpot recession.
And yet, despite this, the labour market doesn’t look so bad. In the pit of the 80s recession the number of hours worked was down 10pc, and it was pretty much the same – down 9pc – in the 90s. But this time round the fall was way less – about 4pc. A similar story applies to the fall in the number of people employed.
This puzzle – a terrible recession combined with surprising labour market resilience – has been the subject of lots of economic research.
But I think it has also had some important political consequences too.
The 1980s recession was far more visible, and it was more obvious to everyone that the country was in a terrible state. Britain’s culture is still incredibly shaped by the events of those years. From Auf Wiedersehen Pet to the Brixton riots, and from Tony Harrison’s “V” to Faith in the City, there were constant reminders about how bad things were.
The recent recession has hardly been invisible: shut shops are highly a visible sign across the country, and the millions of people who are unemployed are all too aware of it.
But the true scale of the disaster is a little less obvious this time, because of the performance of the labour market.
And that in turn means that some of its effects are less obvious. In particular, relatively few people understand just how bad a state the public finances are in. But last year (2011/12) the government had to borrow £127 billion to cover the gap between its spending and the taxes it raised. We are borrowing more, relative to our income, that at any time since the second world war (see below), and the national debt will double as a share of our income. People complain about “government waste”, but soon a tenth of all your taxes will be going to pay interest on our debts.
Yet lobby groups, some politicians and the media all still spend lots of time thinking about ways they government could spend more money. The surprising resilience of the labour market might explain why: it means we haven’t noticed how much poorer we are going to be. The bottom chart shows how our economy will end up a tenth smaller than we might have expected without the recession. Our expectations from government have continued to follow the dotted line upwards, as if nothing had happened. But politicians and the media owe it to us to be honest about the state that we’re really in.