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The view from outside the bubble

If there is one thing economic journalists love it is a “mystery.”  A popular favourite in recent years has been the famous “productivity mystery” in which, despite full employment, both output and wages have remained depressed.  This month saw another – somewhat similar – conundrum; the “energy-GDP mystery.”  A peculiarly British phenomenon (for now) in which a country’s energy consumption falls even though its GDP is rising.  As Camila Domonoske at National Public Radio reports:

“For well over a decade, the country’s total energy consumption has dropped steadily. All told, there’s been a 10 percent decline since 2002, after accounting for temperature variation.

“The trend is widespread, documented in the residential, commercial and industrial sectors (though not, notably, in transportation). It’s not tied to economic decline or supply shortages.

“It’s also significant: The reduction in electricity use over the last decade is equivalent to shutting down the country’s largest coal- and biomass-burning power plant twice over, according to the climate policy think tank Sandbag.”

True to form for economic reporters whose editors insist that they maintain a positive gloss on their stories, Domonoske reports the mismatch between energy and GDP as an environmental triumph related to such things as LED lightbulbs and tighter gas boiler regulations:

“Hypothetically, the U.K. could provide a model for other countries hoping to reduce their energy use — cutting greenhouse gas emissions — while maintaining economic growth.”

To understand what is actually going on here we need to take a step back.  When economists talk about “a mystery,” what they mean is that the real world is no longer conforming to the models in their textbooks.  When this sort of thing happens to scientists, they update their models to account for the new data – sometimes even ditching the model entirely.  When the same thing happens in economics, however, economists keep the model and then try to shoehorn the real world to make it fit.

Britain is not conforming to the standard economic models in two key (although economists don’t realise this) related areas – energy use and productivity.  To be clear; energy and productivity are intimately linked: productivity is the application of technology and/or technique in order to optimise the useful work provided by energy.  This is true in all circumstances, whether it be a member of a hunter-gatherer tribe utilising a piece of flint to cut wood or a multinational corporation using electricity-powered robots to assemble cars.

If, then, we find that a country has experienced both a drop in its energy use and a decline in its productivity, the obvious conclusion to draw is that a combination of market forces and government policies have resulted in a less efficient use of the energy available to it.  Is there evidence to support this hypothesis?  Well yes, and lots of it.

Even prior to the 2008 crash, the UK economy was becoming dangerously unbalanced; with far too few energy-intensive high-skilled/high-paid jobs being created.  In the wake of the crash, and particularly following the ideological austerity programme of David Cameron and George Osborne, this shift in the balance of employment continued; with big upturns in the numbers employed in low-energy low-paid part-time, zero hours and self-employed roles.  While something close to full-employment has been maintained, the growth sectors are primarily the three that continue to depend upon (extremely low-energy) labour-intensive work.  As I reported back in June:

“According to the UK Office for National Statistics, just 7.5 percent (59,000) of vacancies are in manufacturing.  The remainder (727,000) are in services:  A breakdown of the services sector shows that the vacancy rate in that sector is driven by four sub-sectors. The four sub-sectors of the services sector with the largest number of vacancies are Wholesale and retail trade sub-sector (133,000), the Human health and social work sub-sector (130,000), the Accommodation and food service sub-sector (90,000)…”

These are areas where there is little value to be made from investing in automation – the technology is far too expensive compared to the likely returns.  And so beyond merging companies and cutting workers’ pay and conditions, there are very few productivity gains to be made.  For example, the BBC recently covered a report into the UK’s shrinking pub business:

“Pubs are employing more people than 10 years ago, despite almost a quarter of them having closed over the same period, official figures show.

“According to research by the Office for National Statistics (ONS) this could be because an increasing number now serve food, which is more labour intensive.  More than 11,000 pubs have closed, leaving around 39,000 across the UK, the ONS said.”

Crucially:

“The rise in employment has been more pronounced in rural pubs, where in 2018 total employment in England and Wales is 17% higher compared with 2008. In contrast, employment in urban pubs rose by only 4% over the same period.

“But most jobs in the sector are low paid with around 70% of workers in pubs and bars being paid less than the Living Wage Foundation’s recommended Living Wage.”

Similar pay and conditions can be found in each of the growth areas of the UK labour market, as businesses desperately try to stay afloat by holding down the wages and conditions of their workers.  And since most of the unfilled vacancies in the UK labour market are in similar roles, there is little incentive for these workers to seek alternative employment.  Nor, following changes to social security and tuition fees is there much incentive to temporarily leave the workforce in order to retrain.

The social costs of this economic situation – and the government policies that underpin it – are obvious enough.  Where work used to be the route out of poverty, in-work poverty has risen to become the primary social problem in the UK.  One in 200 citizens is now homeless; more than half a million children now depend on meals from foodbanks; and the United Nations has been moved to report that:

“It thus seems patently unjust and contrary to British values that so many people are living in poverty. This is obvious to anyone who opens their eyes to see the immense growth in foodbanks and the queues waiting outside them, the people sleeping rough in the streets, the growth of homelessness, the sense of deep despair that leads even the Government to appoint a Minister for suicide prevention and civil society to report in depth on unheard of levels of loneliness and isolation.  And local authorities, especially in England, which perform vital roles in providing a real social safety net have been gutted by a series of government policies.  Libraries have closed in record numbers, community and youth centers have been shrunk and underfunded, public spaces and buildings including parks and recreation centers have been sold off…

“The results? 14 million people, a fifth of the population, live in poverty. Four million of these are more than 50% below the poverty line, and 1.5 million are destitute, unable to afford basic essentials. The widely respected Institute for Fiscal Studies predicts a 7% rise in child poverty between 2015 and 2022, and various sources predict child poverty rates of as high as 40%.  For almost one in every two children to be poor in twenty-first century Britain is not just a disgrace, but a social calamity and an economic disaster, all rolled into one.”

The falling productivity/energy use side of the so-called “mystery,” then, is simply enough to understand – the economy is less productive because it is reverting to low-productivity employment.  And as the number of high-energy/high-productivity jobs shrink, so energy use shrinks with it… aided, of course, by the massive inflation in energy prices seen in the last decade.

The only thing that makes this situation mysterious is that UK GDP continues to increase.  In part, this is due to the fallacy of measuring Gross National Product in a globalised economy.  In my book The Consciousness of Sheep I used the (now somewhat dated) example of an Apple i-phone to show one of the ways in which GDP data serves to mystify rather than clarify:

“If you have an Apple i-phone, it will have been manufactured by Foxconn in one of its 13 Chinese factories where as many as 450,000 people are employed, and where perhaps three times as many people operate as casual and subcontract labour.  The raw materials required to create the phone include gold shipped from the USA, tantalum from Australia, platinum from South Africa, tin and zinc from Peru, copper from Chile, nickel and palladium from Russia, bromine from Israel and, of course, crude oil from Saudi Arabia.  The whole process involves highly fragile, just-in-time production and distribution networks that ensure that all of these materials arrive in the right quantities at the right time to allow those 13 factories to operate at a coherent optimal rate.  All of this economic activity has to have occurred before a single i-phone can be shipped.

“In the USA in 2006, a 30Gb Apple i-phone cost $299 to buy, but all of the economic activity that went into producing resources, generating energy, transporting components, financing capital and feeding, clothing and housing labour cost just $144.40.“

In order to avoid double counting, GDP data records only the value of the end sale.  So in this case the sale of a single i-phone is counted as an additional $299 to the GDP of the USA rather than as £154.6 to the USA and $144.40 divided between all of the offshored people who actually made the phone.

A large part of Britain’s skewed GDP – and a large part of its energy consumption (and its greenhouse gas emissions) – can be explained by this process of offshoring into the global economy; with the UK claiming the GDP without accounting for the manufacturing process.  However, an even bigger part is played by the “services” provided by the City of London.  Here is where we find the “Bubble Britain” within the Cambridge-London-Oxford triangle.

The 20 percent or so of the UK population that works for corporations based in this region in three key sectors – banking and finance, tech (including pharmaceuticals) and government – account for almost all of the UK wage growth since 2010.  Their impact can be seen all too clearly in recent Eurostat data:

EU rich v poor

The London region has emerged as the richest place in northern Europe.  At the same time, nine of the ten poorest regions have emerged in the UK.  The two are not unconnected.  Contemporary Britain is an extremely divided society in which four-fifths of the population have seen their living standards fall even as a small affluent class (and especially a handful of individuals at the very top) has enjoyed considerable prosperity.  This is the class that looked on gobsmacked when a mass of traditional working class areas voted to leave the European Union.  It is a class where most economists (at least the ones the mainstream media takes seriously) can be found.  It is a class that continues to delude itself that the unprecedented oil-based economic boom between 1953 and 1973 was the “normal” upon which the economic models are built.

The mystery here is not that the real economy is doing anything wrong.  It, in fact, is doing precisely what we would expect it to in the face of rising energy and resource costs (not to be mistaken with fluctuating prices).  The real mystery is that we continue to give credence to an unscientific cabal whose models, predictions and prescriptions are no better – and often a lot more dangerous – than those of astrologers and homeopaths.

As you made it to the end…

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