Friday, March 25, 2022
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The US has had the best vaccine-shaped recovery from the pandemic, despite inflation fears, yet Tory ministers pretend otherwise


 

One of my
(partially) unfulfilled quests is to understand why voters think the
Conservatives are better at running the economy, when the objective
data suggests they are hopeless
at it. A part of the answer is that they use their (greater) airtime
much better than Labour, by repeating a few generally misleading
lines to take over and over again.

All this week the
Prime Minister and ministers have deflected questions about partygate
and instead trotted out the ‘real’ successes that Johnson has
achieved. Often these are straight lies, but at other times they
involve cherry picking statistics. The clearest example of the latter
is that the IMF are forecasting the UK to have the most rapid growth
among the G7 this year. This is sometimes linked to a claim that
Johnson has made the right calls over the pandemic.

Here is the IMF’s
latest projection for growth over the pandemic period, where I have
made 2019=100. May contain rounding errors.

It is true that
forecast UK growth for 2022 is higher than any of the other G7
countries. But as the chart shows, all that indicates is that we had
the biggest recession of all the G7 during the pandemic, and so need
faster growth to catch up with pre-pandemic trends. Claiming that
faster growth as an indication that the UK made the right calls
during the pandemic is clearly ludicrous.

However that is not
the point. The point is that ministers and the Prime Minister get
away with misleading the public, because these bogus or misleading
claims are very rarely picked up in any interview. The technique is
simple: make lots of positive claims in an interview about something
other than what the interviewer wants to talk about and the
interviewer will rarely dispute one, let alone them all. Johnson
explains it here.

I first became aware
of this technique in the early Cameron years. Conservative ministers
when interviewed would always claim that they inherited a deficit at
crisis proportions caused by Labour, and therefore they had no choice
but to embark on austerity. Then Labour chose not to argue otherwise,
and I never saw any interviewer question the claim (which was
nonsense on stilts). Together with the right wing press pushing
similar nonsense, the result was a large proportion of voters blame
Labour for austerity.

Today, Labour
politicians understandably talk about the cost of living crisis, but
perhaps they are missing a trick here. Voters do not need to be told
about the cost of living, but they have much less knowledge about
‘the economy’. They will not bother to check the accuracy of Tory
lines to take, and may even think that because these lines go
unchallenged they must be true. As a result, the Tory lead on the
economy may remain
intact
. Labour needs to follow the example of the
Shadow Chancellor, Rachel Reeves, who in her recent
speech
explicitly focused on how growth had
deteriorated under successive Tory governments since 2010.

Returning to the
Chart above, two points stand out. First, the success story among the
G7 is the US. Only they appear to have got back to something like
where trend growth would be if the pandemic hadn’t happened. The
reason was a large fiscal stimulus, and whether that went too far
I’ll discuss below. Second, everyone has had a (kind of) V shaped
recovery. However with variants appearing just as cases were under
control in many countries, I think the vaccines were crucial in
getting a V shaped recovery.

Without vaccines,
you need regular lockdowns. Even without lockdowns, each new variant
spike will mean many consumers withdraw from social consumption
(travel, recreation, shopping etc). Vaccines gave people the chance
to partially continue social consumption, and largely avoided
lockdowns. It therefore allowed an initial recovery to be sustained.

But is the US really
the success story the chart above suggests, given current 7%
inflation? Did the first Biden stimulus go to far, as some have
suggested? The table below is helpful in this respect.


US Real Personal Consumption Expenditures by Type of Product,
Quantity Indexes (source)

2019Q4

2020Q2

2020Q4

2021Q4

Total

119.929

106.418

117.023

125.303

Goods

131.59

128.261

141.709

151.881

Services

114.795

97.405

106.847

114.392

Note first that the
total hides very different behaviour between consumption of goods and
services. Social consumption is concentrated in services, like travel
and recreation. Both types of consumption fell in the first COVID
wave (2020Q2), but services by much more. From then on, goods
consumption grew quickly, largely immune from the impact of later
waves of the pandemic. (Durable consumption has grown even faster.)
In contrast, service consumption was only just back to pre-pandemic
levels at the end of last year, and it will be interesting to see
what impact Omicron has in 2022.

In our study
of a flu type pandemic ten years before COVID, I assumed exactly this
pattern would emerge. What I didn’t assume, which may also have
happened, is some displacement of social consumption into durables.
As this has been happening worldwide, it is perhaps not surprising
that we might be seeing some inflation in specific goods sectors. One
final assumption I made, which is not unreasonable, is that inflation
would occur just after any pandemic ended as consumers not only
increased social consumption to previous trends, but overshot these
trends initially to partially make up what they had lost.

We don’t know how
much Omicron will suppress social consumption, and whether any new variant waves will be milder or not. At least two scenarios are possible. In
the first, COVID variants become more transmissible but milder (with
the help of vaccines). If this is the case, expect a return to
previous trends in social consumption, with probably a temporary boom
as people try and make good a bit of what they lost. That might add
additional but temporary pressure to inflation. However demand for
goods may plateau or even fall at the same time, relieving some
inflationary pressure from that source. The second scenario is that
new threatening variants continue for a long time, with vaccines
playing catch-up. In that case we may see a medium run shift in the
structure of demand away from social consumption.

Rising world fuel
and food costs have produced inflation in most advanced economies. US
inflation may be the highest because demand there is strongest,
revealing both auto supply problems and reflecting expected house
prices. All of these things are temporary, and price increases over
2021 were unusually
concentrated
in particular areas, which does not
indicate persistent inflation. The paragraph above suggests it is
possible that new sources of inflationary pressure may arise if the
pandemic largely ends, but these again are temporary, although
temporary needn’t mean over in a few months.

Temporary inflation
a bit above UK and European levels is a price well worth paying for
output after the pandemic 4-5% higher than most other G7 countries,
including the UK. The only reason not to try and emulate the US in
enacting a strong fiscal stimulus is if you think temporary inflation
becomes embedded in expectations i.e. real wage [1] increases in
excess of productivity gains.

It would be a
healthy sign if interest rates rise a little because Biden’s (now
much more modest) infrastructure plan will maintain demand after all the
pandemic effects are over (if they are ever over). The big danger for
the Fed is if this doesn’t happen, they still raise rates because
of temporary increases in inflation, and the economy dips in time for
political gains for the (now anti-democratic) Republic party.

Just as current US
inflation is unlikely to negate the achievement of having such a
strong recovery from recession, relatively poor performances in most
other G7 countries (UK included) are shown to be a policy choice, in
most part because deficit concerns ruled out a large fiscal stimulus.
Permanently losing a few percentage points of output to the
pandemic is such a bigger cost than temporary inflation at 5% rather
than 7%.

After 2010 everyone
pivoted to austerity outside China, so it was difficult to find a
country that showed its folly. It is a tribute to Biden and those
around him that at least one country has now understood the folly of
worrying about the government’s deficit in a recession. It is the
example of the US that interviewers should mention the next time
Conservative ministers trot out their line to take on the UK
recovery.

[1] By real wages here I mean deflated
by output prices, not consumer prices.



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