Comment

By Danny Blanchflower

Over the last dozen years both the British and Scottish economies have been hit by two, once-in-a-lifetime, global shocks – a financial collapse and a Covid pandemic. There are striking similarities to the 1930s where the global influenza pandemic came first in 1918 followed 11 years later by the Great Crash of 1929. The collapse of the UK economy was much deeper and faster in 2020 than it was in 2008 and more comparable to the one eight decades earlier.

The financial crisis in 2008 that triggered the near-collapse of Royal Bank of Scotland and resulted in the world going into the Great Recession followed a housing market crash that started in Florida, just as the Great Crash did in 1929 that resulted in the Great Depression.

Both the 1930s and the 2000s had long periods of slow growth because of the failures of policymakers who in both instances largely missed the crash. But at least this time around we had the lessons of what not to do from 80 years earlier, so central bankers acted but governments got it wrong.

The introduction of austerity, by former chancellor George Osborne in the UK in 2010, which had no basis in economics, was a disastrous failure. Economist John Maynard Keynes had warned in 1931 about what he called “the long dragging conditions of semi-slump” that were to follow the crash, but nobody listened. Depression only ended with increased war spending.

In 2020 the world was hit by Covid, which caused countries to go into lockdown and forced up unemployment and lowered growth. The similarities with the Great Influenza of 1918 are eerily similar. John M. Barry in his 2004 magnum opus The Great Influenza: the Story of the Deadliest Pandemic in History documented that “there was terror afoot in 1918, real terror….as horrific as the disease itself was, public officials and the media helped create the terror – not by exaggerating the disease but by minimizing it”. As Churchill noted “those that fail to learn from history are doomed to repeat it”. We didn’t learn and got another terror.

The big story heading into the May elections is the state of the economy as the UK emerges slowly from lockdown. From March 2020 the global economy collapsed: in the US the unemployment rate jumped from 4% in March to 20% in April once misclassifications are accounted for. The gross domestic product index in the UK was 101.2 in February 2020 (where 2018=100). The index then fell to a low of 76.9 in April 2020. It picked up to 96 in October but has subsequently fallen back with the most recent lockdown to 92.1 in January 2021. In March 2008, the GDP index dropped from 89.5 to 83.4, so a much smaller drop.

In Scotland the unemployment rate rose to a high of 8.7% in October 2011 from 4.2% in April 2008 when the Great Recession started. Today the Scottish unemployment rate is 4.1% – the joint lowest of any nation or region in the UK with East of England – down from 4.5% in April 2020 so all is well? In fact, the number of unemployed in Scotland according to the Office for National Statistics has fallen from 115,000 in March 2020 to 114,000 in the latest count. That makes no sense. If we simply look at the number of people claiming benefits in Scotland, the so-called claimant count, that is up from 110,000 to 213,000. Lies, damn lies and statistics.

There is a big problem working out what is going on in the labour market because so many workers are furloughed and that in itself messes up measurement. The latest estimates are around 4.7 million at the end of February. The problem is what will happen when help for these workers stops as Chancellor Rishi Sunak has signalled he is planning on doing later this year. My guess is around half of the firms that were shuttered will not reopen. The nature of recovery will depend on government support continuing as well as on unpredictable changes in long-run behaviour – will people save more and reduce travelling? What proportion of shuttered pubs and restaurants will reopen? We don’t know. All those who say that swift recovery is coming are simply engaged in wishful thinking just as those are who say they know what would happen to GDP if Scotland voted for independence. The right answer is it depends.

Danny Blanchflower, Bruce V. Rauner ’78 Professor of Economics, Dartmouth College, and University of Glasgow