No Match Found
Hello and welcome to the latest Economics in Business podcast. We've taken a break over the past few months, given the current circumstances, but we are back with a very special episode to mark the retirement of our chief economist John Hawksworth, who is retiring after 34 years with the firm.
Now because of COVID-19, we are obviously not in the studio today. Instead, we are recording this remotely from our homes. So I'll say that I am virtually joined today by John Hawksworth and Jing Teow, who works closely with John in our UK economics team, and she will be joining me today to help interview John.
We are going to use this opportunity to get John's reflections on the UK economy over the past four decades, the key lessons learned, and his thoughts on the long-term prospects of the UK economy. Of course, we are now also deep in the COVID-19 crisis, and we will also be getting John's views on what this means for the UK and global economy.
But before we do that, let's take a look back first.
John, I understand that you first studied economics at A-Level in 1979. You’ve seen the economy transition through many phases in the past four decades. Can you first start off by reminding us what UK economy looked like back then and the key challenges it has faced since then?
In the 1970s, the government was really trying to grapple with what we called stagflation. We had both very high inflation and rising unemployment, particularly in the middle 70s and also later, towards the end of the 70s and in the early 80s. This was linked on the inflation side to things like the oil price globally going up very fast, as OPEC restricted supply and pushed up prices, as well as things like trade unions seeking to make up for the increased cost of living by pushing up wages, so you've got the wage price spiral. To some extent this also led to people being priced out of jobs and higher unemployment. Generally, the 1970s were very volatile time after the period in the 1950s and 1960s where the economy had been going through a golden age, as people refer to it, a relative stability and relatively rapid growth in the UK and the US, Western Europe, and Japan. The 1970s was a much more difficult time that posed real challenges for policymakers, because the traditional approach when unemployment went up is that the government would cut taxes or increase government spending to try and get people back to work, as they had gone back in the 1930s, great depression, but the problem with that is that when inflation was high that was just further stoking inflationary pressures.
There was a real challenge to conventional economic wisdom, if you like, go back to Keynes in the 1930s, people were trying to find a new solution. That's really what. when I was first studying economics at A level or university in the early 1980s, everyone was grappling with. There were different schools of thought as to how you should approach this. The Keynesian school, which was still looking back to the old methods of boosting the economy through fiscal policy and trying to control inflation, through incomes policy, basically putting a limit on wage rises, and the monetary school which was emerging of the influence of Milton Friedman and some other economists, and which had a big influence on the policies of the Carter government and the Reagan government in the US in the early 1980s.
Those really led to some quite difficult policy debates about how you should go about dealing with these issues. Very much the policy shifted with the government towards trying to emphasise on controlling inflation by being rather tighter on fiscal policy, sometimes by raising interest rates. That did have some benefits in reducing inflation, but it also led to a big rise in unemployment in the 1980s, unemployment went above 3 million in the UK and stayed there right up until 1986. There was a lot of difficult challenges around that time, about how you deal with these twin problems of inflation and unemployment, and not really intended to dominate the debate on the macroeconomic side.
John, do you see any parallels between what's happening in the post 1970s era that follow the Golden Age with today? So the global financial crisis again following the nice period, and we are currently in the period of low productivity recovery as well.
In some ways it is a bit different, because inflation isn't a problem, it was a big problem then and you had these twin problems, inflation and unemployment. Now, I think if you look at the global financial crisis that was more of a demand shock, so it was tending to push inflation down, and unemployment up. It was more straightforward the way to respond to it was to try to have a more relaxed monetary and fiscal policy, at least in the short term, although that then left the big budget deficit to deal with. That was a slightly different environment, because we haven't recently had the problems with inflation that we had back in the 1970s and 1980s, and so the policy response, although there have been challenges, it's been a little bit different.
In those days, it was always trying to balance those two things that was particularly hard. One of the things I would say is that each recession, each crisis has been different. You need to approach them in a way that doesn't just repeat the sort of recipes of the past. There may be some lessons you can learn, but you also need to be very flexible, and that is also very true in the current crisis with COVID. That's a very different type of shock again from anything we've experienced in any of our lifetime. You can't just roll out exactly the same policies, or there may be some similarities, but you always need to be flexible to the specific circumstances that you are facing.
John you have no doubt lived through some major policy shifts as well as major shifts in trends over your long career with us as well. What do you think stands out for you?
In the 1980s, certainly in the UK and also in the US, and some other countries, as well, in the macroeconomic debate there were changes, if you like, in the way the economies were run. There was a move to a more consumer led and more marketised economy, you had privatisation of state enterprises, which were previously in the UK very important part of the economy that has been gradually sold off.
Generally, there was a different approach of allowing the market to operate more to deeply regulate financial services, which made it much easier for people to borrow money, for example, to buy a house that led to a big boom in house prices in the 1980s. There was a big shift and somehow it has led to a more efficient economy, but it also led to a more unequal economy, so there was a huge rise in income inequality in 1980s in the UK and in the US, which has never really been reversed.
In the UK, you could argue that since about 1990, inequality has gone up and down, hasn’t actually shown such a strong trend, but that big shift in the 1980s has never been reversed. Again, there's a trade off between, on the one hand the economic efficiency, but also a sense of social justice or fairness that was one of the other big issues in the 1980s.
If you go forward to the 1990s and beyond, the big shift was really towards globalisation. With the fall of the iron curtain at the end of the 1980s and early 1990s with the collapse of the former Soviet Union, and also with China adopting a much more open economy, open approach towards the world, being much more engaged with the world trade system, and trying to make its economy more market orientated. India also at the same time opening up to the world, perhaps a little behind China but following same course. We have seen that globalisation has really taken hold and that's been associated with the spread of supply chains across the world economy. That has brought quite a lot of benefits, if nothing else, probably a couple of billion people in Asia and some other emerging economies have been pulled out of poverty by that process. It has also meant that there has been a much greater productive capacity in the global economy, places like China and former Soviet Union, which have now integrated into the world economy and therefore increased the labour supply available to make stuff that has tended to make things cheaper, but it has also posed some problems for some workers in advanced economies like the US and Europe, who were facing much greater competition for their jobs in some cases, therefore, facing some dip to their employment or their living standards from that.
There was a balance of positive and negative, overall it was probably a positive, but there were some people, who lost out from it. That really was also associated with lots of globalisation with financialisaton, it was a big expansion of the financial markets that really began in the 1980s with the regulation and continued through the 1990s, and right up to 2007. This basically meant that there was a big expansion of things like tendency to borrow, not just for household, but for companies, and more generally in financial markets.
Again, that tended to be supportive of growth, and made some people very wealthy, but it also turned out suddenly in retrospect to have built up a lot of vulnerabilities in the system with excessive borrowing, and people taking on risk that they didn’t fully understand, few things like credit derivatives. This whole process of globalisation and financialisaton, while it brought many benefits, it did certainly, in retrospect, also bring some problems and those really manifest themselves in probably a spectacular way in 2008 with the global financial crisis, and collapse of some leading banks, and other problems that spread out to the rest of the economy, because with a much weaker banking sector that also led to a much reduced lending, and loss of confidence across the economy as a whole, and therefore quite a deep recession in most of the major economies.
There has been a process, as always with economies of cycles, you got these developments, which are initially quite positive, they did seem very good, but very often they do also bring vulnerabilities and then sooner or later there is a reckoning a new crisis or recession, and then things have to reset themselves again.
Given the scarring that so many countries experience after the financial crisis, we’ve got increasing trade protectionism and Brexit, low trust in institutions and governments, what do you think the future holds for globalisation, will we retreat to more regionalisation and does COVID accelerate that?
Well, certainly since the financial crisis, previously we had seen global trade and global investment flows grow much faster than global GDP, as the world economy became more open. Since the financial crisis, those really haven't so much fallen, but they have been fairly stuck at several levels. We haven't seen that further rising globalisation, it has been very difficult to do any kind of global trade deal, approved with WTO. There have been some regional deals within Asia or in some other parts of the world, but it has been very difficult to get big deals between the US and Europe, or the US and Asia over the line politically. Certainly, there has been a turn over the last few years, the US towards more protectionist, America first approach, which is a bit reminiscent of what happened after the Great Depression in the 1930s, where there was a rise of protectionism and that wasn't good for economic growth. It was only really after the Second World War that you’ve moved back towards a free trading system that actually was more positive for growth.
Eventually, I do think the benefits of globalisation will resurface, and there will be some move back in that direction, but it could be a long process, and obviously the COVID crisis, thereby closing borders, perhaps getting people to think in a rather nationalistic way, in some cases, won’t be too helpful for that over the next few years. But the lesson really over the last 500 years is that even with development over that period has been very much driven by trade, investment, ideas, and technologies flying across borders, in the long run that tends to raise the living standards for almost everyone, but in the short term, there are winners and losers, and some of those losers can have quite a lot of political influence and that can slow things down, and we’ve seen that recently in some countries. There has been a bit of backlash against globalisation, perhaps understandably so. There is going to be a tricky period over the next 5 to 10 years, but I am hopeful that in the longer term, benefits of globalisation will mean that people will turn back in that direction, but it won't be a quick or easy process.
Today, we are obviously speaking under quite unusual circumstance with the outbreak of COVID-19 and the current lockdown situation, the world economy is facing unprecedented challenges. This is obviously an entirely unique economic crisis, but are there any lessons that we can learn from past economic challenges to help us navigate this one do you think?
There's an opportunity to learn from global financial crisis. One thing that worked there is when governments and central bank really said they will do whatever is necessary to stabilise the economy and financial markets. For example, Mario Draghi, the President of the European Central Bank really made a very firm statement on that that helped to end the eurozone crisis. Governments have learned from that and central banks that they do need to make big interventions, fiscal policy, and monetary policy through things like asset purchases to really get the message across through to the economy into financial markets that they are serious about supporting the economy.
They have actually done a pretty good job so far doing that, but at the same time when it comes to the detail of what they have to do, they can't just take a recipe off the shelf, because this is a very unique crisis as you say. We have never been in a situation where governments have had to shut down whole sways of the economy before, but certainly not in modern times. You also need to come up with innovative ideas like furloughing scheme for staff and that haven’t been tried before. It's a mixture of some messages from the past, but also being adaptable, and coming up with innovative new solutions, both from the governments and same would apply for businesses.
Do you think this will open up a new debate about the role of fiscal policy? Clearly with governments throwing the kitchen sink and more at the crisis to support the economy, the fiscal rule has fallen by the wayside, plus we may be nearing the limits for monetary policy, do you think there will be a bigger role for fiscal policy in the future?
To some extent, obviously government budget deficits will be extremely high this year, probably more than 10% of GDP, but I think, as the crisis passes and recovers, and the emergency measures come to an end, then deficit will fall. In the meantime, the Bank of England buying up government bonds can avoid the big rise in interest rates on government. In the short term, the situation is sustainable, in the longer term, though, looking 2 or 3 years ahead when the economy has made a full recovery, then I think you probably might need to consider some measures to address the fiscal deficit. I don’t think there is much appetite for more austerity on spending now, I thought it could be opposite, people wanting to spend more in areas like health and social care, and boost the wages of key workers who has really shown their value in the crisis. At some point you might need to consider options of higher taxes to reduce the deficit, but again definitely not yet, definitely not two to three years or more in the future once the economy is fully recovered.
What this crisis has shown as well is that different regions have been affected differently by COVID-19 and when you add in the impacts of Brexit and the existing North-South divide. These trends might have exacerbated regional inequalities, what's the best mechanism for rebalancing growth in the UK?
It is certainly possible, North-South divide is a very longstanding thing, dates back at least to 1980s when the financial deregulation boosted the role of London as a global financial centre, while the early 1980s recession really hit the industrial areas in the north very hard. I was living in Bradford at that time, like many off the University that came to London, so there is that factor.
It isn't going to be easy to address these racial inequalities, but I think it is important to try to do so through investment in transport infrastructure and other infrastructure, trying to build out local research hubs, where universities and businesses could work together on promising new technologies and boosting skill levels in the regions. We have to be realistic and say that that's a long-term program and probably take many decades to bring benefits just as it took many decades for the current North South divide to open up, but hopefully once the current crisis has passed, the government can get back to that levelling up agenda, which had set out before the crisis started.
Now let’s end by looking into to the future and putting COVID-19 aside. What are some of the key opportunities for the UK in the global economy do you think?
Well I think one key opportunity is really around technology and technology has been what's driven the rise in global living standards since the industrial revolution 250 years ago by boosting productivity and also wages. We've seen a lot of very interesting developments in technology around smartphones, AI, nanotechnology, biotechnology over the last 10 years or more, but it hasn't really translated into higher productivity growth, which is a bit of a puzzle. Maybe businesses have preferred not to take the risk with those investments, but hopefully, this crisis could actually be stimulus to businesses looking at the opportunities for investing in these technologies.
Some sectors might become more automated with reduced employment, and that will potentially allow people to move into other sectors that still require the human touch like health, social care, and other areas, and particularly wages can rise in those sectors. Technology has got the potential to boost growth in the UK also globally in emerging economies in Asia, and longer-term Africa, particularly if you can return to an environment where there is more open global trade investment. This won't happen overnight, but again as a long-term prospect, looking into future decades you might still be cautiously optimistic that we can get back on track once this crisis has passed.
Well, many thanks John, this has been such an interesting discussion, and really great to be able to look back on the UK’s economic history as well as to the future, and we wish you all the best for your retirement.
Thank you for listening, I hope everyone is keeping safe and well. Please do subscribe to our economics and business podcast channel and for more information on the potential economic and business implications of COVID-19, please head to pwc.co.uk/covid-19 for more information.
UK Chief Economist, PwC United Kingdom
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