And have we reached the end of the road for stimulus policies?...
SO HOW has Britain's economy fared over the Queen's 60-year reign? asks former Bank of England Monetary Policy Committee member Andrew Sentance in his Hawk Talks blog.
The last few years have been dominated by the global financial crisis, coupled with worries about slow recovery and the impact of more austere spending and tax policies.
Despite all this doom and gloom, however, the nation has enjoyed unprecedented prosperity during the reign of Queen Elizabeth II. Living standards have increased – reaching an all-time high before the recession. And in her 60 years on the throne, the Queen has presided over a much stronger growing economy than any of her predecessors. GDP growth in her reign (1952-2012) has averaged 2.4% per annum. This is the strongest economic growth rate seen in the reign of any monarch since the start of the Industrial Revolution in the mid-18th Century.
William IV's short reign from 1830 to 1837 is the second best for growth, at 2.2%. And Queen Victoria only managed 2% per annum in her long reign. From the start of the Industrial Revolution, the UK economy grew on average by around 1.6% per annum prior to Queen Elizabeth's accession to the throne in 1952. Before that, it is most unlikely that any monarch presided over such a strongly expanding economy – economic historians estimate that the rate of growth in the pre-industrial UK economy averaged around 0.5%*, about a fifth of the growth rate we have experienced since 1952.
But while the growth record has been good for the Queen, the record on inflation is less encouraging. The average inflation rate since 1952 (using the Retail Prices Index) has been 5.5% per annum. Even if we take out the period 1972-82, when UK inflation averaged nearly 15%, inflation still averaged nearly 4% for the rest of the Queen's reign.
Such a long and prolonged period of inflation has a major impact on our perception of money values. Back in 1952, you could send a letter for 2.5 old pence (just over 1p) – whereas this now costs 50-60p. A loaf of bread or a pint of milk cost 6d (2.5p). Now they cost 20-40 times as much. A gallon of petrol in 1952 cost 4 shillings and 3 pence – just over 20p in decimal coinage. Now a gallon of petrol costs £6 or more – around 30 times as much. The TV (and radio) licence in 1952 cost £2. Now a colour TV licence costs £145.50 – a 70-fold increase. Taking all the goods and services in our consumer basket together. they cost in money terms nearly 25 times as much as when the Queen came to the throne in 1952.
This drift into a world of higher inflation did not start with Queen Elizabeth II in the early 1950s. Inflation averaged 5.8% in the reign of her father, King George VI, from 1936 to 1952. The war was a major factor pushing up prices in his reign, and prices had also risen sharply in the Napoleonic wars and the First World War. But there was a downwards correction in prices after 1815 and 1914 which restored the perception of price stability. That did not happen after 1945, and inflation burst out again in the late 1960s and 1970s and continued into the 1980s. It was not until the 1990s – after three major recessions, that a version of price stability was re-established.
Once again, we seem to be living in a world where inflation is tolerated as the price for economic growth. That underpins the economic policy consensus of today – and hence the willingness of the Bank of England to continue to inject stimulus into the UK economy when inflation is significantly above their official target.
But classical economics teaches that economic growth cannot be supported in this way indefinitely. Longer term economic progress depends on supply-side fundamentals, which western policy-makers are currently neglecting. Over the longer term, inflation – particularly unanticipated inflation such as we have seen recently – is bad for economic growth.
I suspect that the disappointing growth we are now experiencing in the UK and other western economies is an indication we have reached the end of the road for these inflationary policies – just as we did in the 1970s. The "New Normal" is likely to see the UK economy growing on average by around 1.5% per annum, or maybe even lower. Unfortunately, it seems most unlikely we will quickly return to the trend rate of nearly 2.5% GDP growth we have enjoyed during the 60 years of the Queen's reign so far.
* See Stephen Broadberry's paper on very long run economic growth.
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