Smithers stops us from feeling so smug

Anthony Hilton
The London Evening Standard, 25th November 2014

Economist don't agree on much but if there is one thing which unites them, it is the fact that Japan has been a basket case for the past 20 years. Growth has been so low as to be almost invisible and government efforts to stimulate the economy have served mainly to cause a quite staggering build-up of public sector debt. But what if this judgement is wrong? What if we are looking at the wrong figures?

True that is not what it looks like at first glance. The latest government effort - the three arrows strategy of monetary and fiscal stimulus plus structural reform - pursued by Japan's Prime Minister Shinzo Abe is only the latest effort to have delivered rather less than was promised. The disappointment has prompted him to call a snap election to see if the country still backs him.

But the problem with economics is that nothing can be proved; or rather almost anything can be proved if you select the right measuring rods. So it is that Andrew Smithers, one of the leading experts on Japan's economy, produced a paper this week which showed that, according to the measures he's used, it has performed as well as Germany and the US and a whole lot better than we have.

This is probably not a message George Osborne wants to hear the week before his Autumn Statement, nor indeed one that David Cameron will welcome as he proposes to go to the country next May boasting about the Tory-led Government's successful economic strategy. But it is one the voters should be aware of before they give him full marks for economic competence.

The point Smithers makes is simple enough. Politicians boast about the rate of growth in the economy and use that as the yardstick for the success or failure of their policies. But the growth rate is simply a measure of economic size, it tells you nothing about whether everyone in the country is better off, or whether the economy is operating efficiently.

Focusing only on the growth rate ignores the fact that if the population is growing faster than the cake, people have less, not more, to eat.

If, for example, 100,000 more people are working this year than last, the economy will be bigger and this will show in the growth rate. Now, if those new workers are more productive than all the other millions of existing employees, then everyone will be better off on average. But if they are less productive, everyone will be worse off. In the case of the UK as we shall see shortly - this is exactly the problem.

There are two figures which tell you much more about what is really happening in a way that affects ordinary people. One is the output per head, and the other is the output per person of working age.

Smithers has done the sums for both and they make our economic performance look depressingly poor. For GDP per head, the UK is bottom of the table of the five leading developed nations because output per head has in fact shrunk not grown. For the past 5 years we have become poorer at the rate of 0. 75% a year. Even the French - whom our politicians love to mock - have done better than that. They have grown poorer too but at half the rate, around 0.3% a year.

The US shows a small positive over the same time period of plus - 0.25% per year whereas the Japanese - and this is the telling figure - have done twice as well as the Americans with a growth rate of 0.5%. This figure is beaten only by the Germans with 0.75%. So, much as our press and politicians like to be smug about the problems in the Eurozone and how clever we are not to be part of it, the Germans at its heart have grown richer than us at the rate of l.5% a year for the past 5 years. Nor is this just a problem caused by the 2008 financial crash. You can go back 9 years and we still do worse than everyone else - though at least the figure is positive.

Smithers' second key measure is output per person of working age the thesis being that Japan is ageing and the workforce is shrinking fast as increasing numbers of workers retire, So, even if overall output is flat it is being produced by fewer and fewer working people.

And that is what the graphs show. By this measure in the past 5 years, Japan is the most efficient of the five nations, better even than the United States, with a growth rate per working age person in excess of l%. The US grew at around 0.8% - and the UK was bottom, even trailing behind France, with minus 0.5%.

This matters because it flies in the face of popular conceptions. Most people think that the United States has been the most successful developed economy in recent years, and that the UK has done better than Europe.

But if allowance is made for the changes in the number of people of working age, the US has been far less successful than either Japan or Germany over the past 5 years and, although the UK may still have bragging rights over Greece, it has a lot to learn from the northern Europeans.

The other interesting thing is that, measured over the past 15 rather than 5 years, the UK occupies the number three slot rather than being bottom. But that is what you would expect because over that period, UK corporate investment has declined and flexible employment measures have progressively squeezed the labour force.

Workers have come to lack modern equipment and have little encouragement to develop skills and loyalty so they produce less.

Compared with what our neighbours have achieved, government policy over the past 15 years - and particularly over the past 5 - has made the average British worker relatively worse off.