Simon Wren-Lewis wonders why the government has been so silent about stagnating productivity. I suspect there's a simple reason for this: you don't look a gift horse in the mouth. The drop in productivity growth has saved Osborne a massive embarrassment.
To see this, consider a counterfactual. Imagine that productivity (defined as GDP divided by total employment) since the general election had grown by 2.3% per year - its average from 1977 to 2007 - and that output had followed the course it actually has*. If this had happened, employment would now be 2.48 million lower. If half of this number were counted as officially unemployed, there'd be over 3.4 million registered as unemployed. And unemployment would have topped 3.5 million last year. That would be a post-war record.
Now, this would not mean that the Tories would have admitted that austerity had been a horrible error. I suspect that, in this scenario we'd be hearing a lot more about the damage done to the UK from the euro area's weakness. And Tory lackeys would be claiming there had been an outbreak of mass laziness; as we're seeing in other contexts, some people will defend any atrocity if it is committed by their own side. Even so, though, the productivity stagnation means that Osborne has dodged a bullet. It's been a massive stroke of luck for him.
Or has it? One could argue that austerity has contributed to the productivity slowdown in at least four ways:
- A tougher benefit regime has forced the unemployed to look for work, thus bidding down wages.
- Cuts in public sector jobs have reduced real wages and so encouraged some firms to substitute labour for capital.
- Low interest rates have allowed inefficient "zombie companies" to stay in business. This has depressed productivity in the same way that keeping injured soldiers alive reduces the average health of an army.
- Standard multiplier-accelerator effects mean that austerity depressed private sector capital formation, and the subsequent lower capital-labour ratio has reduced productivity.
And, in truth, I suspect the Tories agree. Back in 2010 none of them said "Sure, austerity will depress output growth, but it will also depress productivity and so reduce unemployment." And even now none of them are claiming credit for the productivity slowdown.
But unless they do make these claims, they cannot - by the same reasoning - take credit for falling unemployment. This is because unemployment is lowish (on the official measure) and falling solely because of the productivity slowdown, and not because of strong output.
In this sense, the Tories' silence about productivity is because they are doing what decent people do - they are keeping quiet about some extraordinary good fortune.
* Is this scenario plausible? You could argue that it's not, because higher unemployment would have depressed consumer spending - though this only strengthens my point that the productivity slowdown has been a gift to the Tories. Alternatively, you might argue that productivty has been weak because output has been weak. However, the fact that productivity hasn't risen even as output has recovered renders this claim less plausible than it was a year ago.