> The obsession of Britain’s political class with the US, the product of a shared language and the dominance of American culture, means it tends to look across the Atlantic to see how the UK is performing. At present, the comparison is not a flattering one. US growth has powered ahead during the recovery from the pandemic, on the back of large fiscal stimulus and higher investment. Moreover, that comes after Britain had struggled through a prolonged period of weaker growth in living standards than America since the 2008 financial crisis.
> The new Chancellor, Rachel Reeves, has promised to raise growth, but finds herself in an environment that will make that promise hard to fulfil. Britain’s public debt is high, and interest rates have risen. Labour markets are tight, and sticky inflation suggests there are few scarce resources that she can put to work through fiscal stimulus. Britain has also imposed sizeable trade barriers on itself by leaving the EU, and Keir Starmer has decided not to try to reverse that decision. The security threat from Russia means that defence spending will have to rise, which will require lower government consumption and investment elsewhere. When Donald Trump takes office in January 2025, trade barriers may rise further: he plans to demand better terms of market access for US companies or impose tariffs. A more transactional US will sharpen Britain’s post-Brexit dilemma about whether it should move closer to America, diverging from EU norms and standards in the process, or remain close to the EU, its largest export market.
> This policy brief compares Britain’s recent economic performance to that of France and the US, and suggests that the successes of France in productivity and investment have been underappreciated across the Channel. Despite the apparent similarities between the US and UK economic models, such as smaller states and larger service sectors than continental European economies, France provides more policies for the British government to consider emulating. France has big economic problems too – slow growth, a sizeable budget deficit and a comparatively low employment rate (although the latter has been improving in recent years). But its workers are more productive, it has a more effective state, and it has made fewer economic policy blunders in the last two decades.
> However, what follows is not an argument for Britain to ‘strategically converge’ on the French model. Grands projets are always risky: the last two attempts to reconfigure Britain’s economic and social model have both failed. One of Reeves’s predecessors, George Osborne, sought to reduce the size of the state during a period of weak demand in the 2010s. But he merely weakened growth further and reduced the state’s capacity to deal with shocks like the pandemic. To the extent there was an economic theory behind Brexit – deregulation and free trade agreements with faster growing economies to compensate for higher trade barriers with the EU – it has, predictably, been found wanting, and leaving the EU has imposed huge costs. Instead of radical change, Britain’s aim should be to ‘muddle through’ the economic risks that Trump and Vladimir Putin pose, but in the direction of France.
> Britain is often portrayed as a ‘mid-Atlantic’ economy, with a higher consumption share of GDP and a smaller state than continental European countries. It has a more laissez-faire tradition of policy-making, at least since it adopted a floating currency and joined the EU in the 1970s, and Margaret Thatcher’s reforms of the 1980s. And it has been comparatively open to foreign investment, with overseas investors especially attracted to assets located in the engine of the economy in London and the South-East.
> Some British economic commentators – especially those of a conservative bent – can be contemptuous of France, with its larger state, more regulated labour market, and higher rates of taxation. It has also found it difficult to curb its chronic budget deficit. In upturns, France’s economic growth rate has tended to be slower than the UK’s, at least between 1993 and 2016, but the UK tends to have larger recessions. As a result, the size of the British and French economies has remained similar for many decades. However, Britain has fallen behind France, as well as the US, on a number of metrics.
> “In the long run, productivity is almost everything”, said Paul Krugman – a quote that is almost impossible to exclude from any discussion of the subject. Productivity growth – getting more output from labour and capital, and thereby gaining more resources for the same amount of work – matters because other types of economic growth do not raise living standards sustainably. Adding more immigrant workers to the labour force has a small beneficial effect on existing workers’ incomes, but increases living standards less than overall output, because higher national income is shared between a larger number of workers. Juicing growth with fiscal or monetary expansion helps to stabilise output when demand falters, but will lead to inflation and financial instability if used as a long-run strategy. Throwing ever more capital at an economy by splurging on investment in roads, computing equipment and housing ultimately leads to literal and metaphorical bridges to nowhere.
> It is well known that US productivity growth has been stronger than the UK’s. Britain’s dismal performance since the global financial crisis is the main reason why average wages have barely improved since then. It is less well known that France’s output per hour worked has been growing at a similar rate to that of the US.
> Why, then, is France’s GDP per capita so much smaller than America’s? The answer is that the French choose to bank more of their productivity gains as leisure time than Americans do, with each French worker working about a fifth fewer hours than an American one. Workers in Britain, on the other hand, work more hours than in France but fewer than the US, and are less productive than both.
> The UK’s productivity gap with France remains even if we account for the fact that fewer French people work. Workless people would tend to be in lower productivity jobs if they were in work, so France’s productivity rate might be flattered by the fact that it has lower employment than Britain does. Chart 2 shows what French output per hour would be if it had the UK’s employment rate, and if all the additional workers were as productive as the bottom decile of French people. In this scenario, France would still be 12 per cent more productive than the UK.
1 Comment
> The obsession of Britain’s political class with the US, the product of a shared language and the dominance of American culture, means it tends to look across the Atlantic to see how the UK is performing. At present, the comparison is not a flattering one. US growth has powered ahead during the recovery from the pandemic, on the back of large fiscal stimulus and higher investment. Moreover, that comes after Britain had struggled through a prolonged period of weaker growth in living standards than America since the 2008 financial crisis.
> The new Chancellor, Rachel Reeves, has promised to raise growth, but finds herself in an environment that will make that promise hard to fulfil. Britain’s public debt is high, and interest rates have risen. Labour markets are tight, and sticky inflation suggests there are few scarce resources that she can put to work through fiscal stimulus. Britain has also imposed sizeable trade barriers on itself by leaving the EU, and Keir Starmer has decided not to try to reverse that decision. The security threat from Russia means that defence spending will have to rise, which will require lower government consumption and investment elsewhere. When Donald Trump takes office in January 2025, trade barriers may rise further: he plans to demand better terms of market access for US companies or impose tariffs. A more transactional US will sharpen Britain’s post-Brexit dilemma about whether it should move closer to America, diverging from EU norms and standards in the process, or remain close to the EU, its largest export market.
> This policy brief compares Britain’s recent economic performance to that of France and the US, and suggests that the successes of France in productivity and investment have been underappreciated across the Channel. Despite the apparent similarities between the US and UK economic models, such as smaller states and larger service sectors than continental European economies, France provides more policies for the British government to consider emulating. France has big economic problems too – slow growth, a sizeable budget deficit and a comparatively low employment rate (although the latter has been improving in recent years). But its workers are more productive, it has a more effective state, and it has made fewer economic policy blunders in the last two decades.
> However, what follows is not an argument for Britain to ‘strategically converge’ on the French model. Grands projets are always risky: the last two attempts to reconfigure Britain’s economic and social model have both failed. One of Reeves’s predecessors, George Osborne, sought to reduce the size of the state during a period of weak demand in the 2010s. But he merely weakened growth further and reduced the state’s capacity to deal with shocks like the pandemic. To the extent there was an economic theory behind Brexit – deregulation and free trade agreements with faster growing economies to compensate for higher trade barriers with the EU – it has, predictably, been found wanting, and leaving the EU has imposed huge costs. Instead of radical change, Britain’s aim should be to ‘muddle through’ the economic risks that Trump and Vladimir Putin pose, but in the direction of France.
> Britain is often portrayed as a ‘mid-Atlantic’ economy, with a higher consumption share of GDP and a smaller state than continental European countries. It has a more laissez-faire tradition of policy-making, at least since it adopted a floating currency and joined the EU in the 1970s, and Margaret Thatcher’s reforms of the 1980s. And it has been comparatively open to foreign investment, with overseas investors especially attracted to assets located in the engine of the economy in London and the South-East.
> Some British economic commentators – especially those of a conservative bent – can be contemptuous of France, with its larger state, more regulated labour market, and higher rates of taxation. It has also found it difficult to curb its chronic budget deficit. In upturns, France’s economic growth rate has tended to be slower than the UK’s, at least between 1993 and 2016, but the UK tends to have larger recessions. As a result, the size of the British and French economies has remained similar for many decades. However, Britain has fallen behind France, as well as the US, on a number of metrics.
> “In the long run, productivity is almost everything”, said Paul Krugman – a quote that is almost impossible to exclude from any discussion of the subject. Productivity growth – getting more output from labour and capital, and thereby gaining more resources for the same amount of work – matters because other types of economic growth do not raise living standards sustainably. Adding more immigrant workers to the labour force has a small beneficial effect on existing workers’ incomes, but increases living standards less than overall output, because higher national income is shared between a larger number of workers. Juicing growth with fiscal or monetary expansion helps to stabilise output when demand falters, but will lead to inflation and financial instability if used as a long-run strategy. Throwing ever more capital at an economy by splurging on investment in roads, computing equipment and housing ultimately leads to literal and metaphorical bridges to nowhere.
> It is well known that US productivity growth has been stronger than the UK’s. Britain’s dismal performance since the global financial crisis is the main reason why average wages have barely improved since then. It is less well known that France’s output per hour worked has been growing at a similar rate to that of the US.
> Why, then, is France’s GDP per capita so much smaller than America’s? The answer is that the French choose to bank more of their productivity gains as leisure time than Americans do, with each French worker working about a fifth fewer hours than an American one. Workers in Britain, on the other hand, work more hours than in France but fewer than the US, and are less productive than both.
> The UK’s productivity gap with France remains even if we account for the fact that fewer French people work. Workless people would tend to be in lower productivity jobs if they were in work, so France’s productivity rate might be flattered by the fact that it has lower employment than Britain does. Chart 2 shows what French output per hour would be if it had the UK’s employment rate, and if all the additional workers were as productive as the bottom decile of French people. In this scenario, France would still be 12 per cent more productive than the UK.
!ping UK&FRANCE