Regardless of the power cuts, stagflation, the IMF loan, the sick man of Europe, the question, Do you want to go back to ’70s? is as ridiculous now, as asking someone in the ’70s if they want to go back to the ’30s. Even if we wanted to, we cannot turn back time – ignoring all the medical and scientific advances that have improved our lives since. The consistent story of economic history is that thanks to advances in knowledge, we have been getting gradually richer and richer as the graph below shows.
Plotted in the top graph is the average UK weekly income since 1765 adjusted for inflation based on data from the Bank of England.* The dark shaded areas indicate the World Wars, the light shaded regions financial crises. Unsurprisingly, the graph shows that – despite a few bumps along the way – we are richer now than in the ’70s, just like we were richer in the ’70s than we were in the ’30s or the 1870s! More importantly, and what matters in terms of policy, is the rate at which we get richer, i.e., where is the steepest part of the graph?
To find out, below the main graph I have plotted the slope or rate of wages growth per year (grey dots). This fluctuates wildly from year to year so I have added a decadal average (large black squares with a vertical bar to represent the scale of the fluctuations). Each of the black squares is centred on the turn of decade from 1770 to 2010. Some things of note are that in terms of income growth:
1. The best decade was 1965-75.
2. The worst decade was 1785-95. **
3. The second worst was 2005-15.
In terms of recent history, the interesting question is why was 1965-75 so good and 2005-15 so bad? Let’s consider 1965-75 first. Was it just that we were paying ourselves too much. No! This would show up as a hangover, and 1975-85 was pretty good too. The reason that income growth was so high around 1970 is because this era coincided with peak productivity growth and as any economist will tell you:
prosperity = productivity
The economist Paul Krugman – winner of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 2008 – put it like this in 1994:
Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.
The Bank of England data set also includes productivity so below I plot income growth (top graph) together with productivity growth (bottom graph).
The wage growth plot is the same as before but for productivity growth (which is very volatile) I have used a moving average. Roughly the ups and downs in the income growth and productivity growth match just as Krugman said they should. In particular, it is clear that peak income growth around 1970 correlates with peak productivity growth also in 1970.
A puzzle is why productivity growth started to decline after 1980, dropped off a cliff in 2008, and has not recovered since causing the stagnation in wages that we see now.*** One argument is that all the easy gains had been made, another is that financialisation has crowded out real production as I discussed previously.
Yes we are richer now, but if we want to get back to the productivity gains of the past we should look at what worked well in the ’70s – e.g. the higher income share of labour (see Chart 15 in this speech by the Chief Economist of the Bank of England) – and what is not working now – e.g. lack of investment.
And while we are on the subject of the best of times, have a listen to this!
* For those that care about such things I have used a logarithmic scale on the vertical axis such that each factor of ten takes up the same amount of space. If I use a linear scale, the graph hovers around bottom until 1950 and then shoots up.
*** The situation in the US since 1970 is even worse because average growth has not kept pace with productivity growth.