Why I am (reasonably) bullish about Britain

What a lot of doom and gloom there is about Britain at the moment! I'm here to cheer you up. 

You've probably recently read something that goes a bit like this: "the UK is a disaster zone, Brexit, nothing works any more, why won't someone put us out of our misery, Brexit, we can't build anything any more, the NHS, did I mention Brexit?, Poland is soon going to be richer than us" For example, "Britain is a developing country", claims Sam Bowman, and I see that the Sunday Times has given him space to make his case there too. The wails of despair have been so loud that they are heard even in California: see Scott Alexander here. 

Next time you read one of these articles, I want you to steel yourself against their depression-inducing effects by bearing in mind the following three questions and answers (all explained in full below the break):

(1) Is the UK falling behind the US? No.

(2) Does this kind of article propose sensible solutions? Probably not.

(3) What are the long-term prospects for the UK? Not too bad, all things considered.

(1) Is the UK falling behind?

The key point made by Sam Bowman is that, "adjusted for purchasing power, the US ... is 39% richer than the UK". (He likes this point so much that he gives it to us in another way, telling us that "Americans could stop working each year on September 22nd and they’d still be richer than Britons working for the whole year".) 

Bowman is right about the gap. Not only that, but he has also chosen the right way to measure it. In my earlier post on Boosters and Doomsters, I explained why I would use purchasing power parity (PPP) to compare the income of different countries; Bowman has done the same.

In my Boosters and Doomsters post, I showed a comparison of the UK with other peer countries over time using a series of graphs. The question for today, however, is how the UK compares with the US in proportional terms - i.e., how that 39% figure has changed over time.

To look at that question, I downloaded the data set from the World Bank's website and created my own graph. The World Bank has GDP per capita (PPP) for countries going back to 1990, so that's when my graph starts. What you see in the graph below is each country's GDP per capita for that year divided by the corresponding figure for the US.

I hope you can see what the graph shows: the orange and grey lines, i.e. the ones for the UK and France, are pretty much flat. It's worth pausing to consider what that means. Over the period 1990 to 2022, as we all know, the USA got a lot richer, but the UK and France have nonetheless kept pace with that growth. 

Another way of looking at the issue of the US-UK gap is this. In any given year, US GDP per capita is X: how long does it take for the UK to reach X? The answer for 1990 happens to be 8 years (you can check the World Bank dataset for yourself): that is to say, people in the UK in 1998 were about as well-off as those in the US were in 1990. The interesting point is that that 8 year lag was maintained: by 2022, people in the UK were about as rich as those in the US were in 2014. 

In other words, the US has powered impressively ahead, pushing the frontiers of mass human prosperity to new and untold heights of opulence; but all the while, the UK has managed to keep pace with that amazing achievement. (And France has done so too.)

You'll notice that Germany has often been richer than the UK/France (although not in the late 1990s and the period leading up to the global financial crisis). If you want to get a feel for what the difference amounts to in real life, let me introduce you to another data set, namely the ONS' table of GDP per capita for the home nations and the various UK regions. If you follow this through and do a bit of currency conversion then you'll see that "South East England" is about as rich as Germany. (NB "South East England" does not include "London"; "London" is about as rich per capita as Singapore - just as one would expect.) The average "South East Englander Who Is Not A Londoner" is about as rich as the average German. 

What of other countries? Poland gets much airtime in these discussions. As you can see, it is indeed catching up. If it extends its green line then it will overtake the UK. But if it extends that line long enough then it will overtake Germany, the US and who knows how rich it might become? Of course, it's great that Poland might become "Big Country Rich" (as I explained in Boosters and Doomsters, Big Country Rich is good, but Small Country Rich is even better), but let's not count our kurczaki until they've hatched.

South Korea also gets a mention from Bowman. It might indeed overtake the UK and France, as he suggests, but to my eyes that looked more plausible about 5 or 6 years ago. Again, one wishes nothing but the best for the people of Korea, but the graph suggests a certain degree of plateauing after impressive catch-up growth - which may be an indication of what the future holds for Poland too. 

The UK is an old country that has been rich for a long time. There are all kinds of young, thrusting, up-and-coming countries that have had the chance to over-take it. But it turns out that, as I explained before, it really is very hard to be a big, rich country: lasting sorpassos are few and far between. It would be a great thing for the world if Poland, Argentina, Malaysia, Turkey and so on could become as rich as France - but it's pretty tricky. (Small countries can become rich easily, but that's another story.)

The sorry story that we see in the graph above is Japan (as I also pointed out in Boosters and Doomsters). To put Japan's performance in context, let me go back to the question of time-lags. As I said above, the UK and France are about 8 years behind the US. Japan was only 5 years behind in 1990 - i.e., it reached US levels of prosperity in 1995, 3 years ahead of the UK. However, by 2022, Japan had fallen to 14 years behind the US. That is what relative decline looks like. 

In other words, the UK has kept pace with the US, but at least one other big developed country has not. I repeat what I said in Boosters and Doomsters: "we're consistently keeping up with the top-performing countries of our size". We are not a developing country. Not in any sense that matters.

I have every sympathy with what I expect Bowman's riposte to be: namely that we could do better, that it would be great to close the gap from 8 years to, say, 5 years or even parity. I turn next to his ideas for how to achieve that.  

(2) Solutions?

You'll read various suggestions for policy solutions for Britain's economic woes (over-egged though those woes may be). House-building normally gets a mention, mostly in the context of expensive big city housing. High-speed rail and nuclear power are pretty common suggestions. Something something 'skills' might get a look-in too. 

Here are two reasons to be sceptical about all of these suggestions. I will call them the "Japan" reason and the "2007 graphs" reason.

First, Japan. If there is any one country in the world that seems to have implemented the solutions that these articles propose then it is surely Japan. Bullet trains? Check. Nuclear power? Check (at least before 2011). Skills? Check: best big country on PISA maths and science scores. Affordable big city living? Check: Japan has crushed the NIMBYs. But if someone is selling you Japan-style policies, why should we believe that they are not also selling you Japan-style outcomes? The US, by contrast, is famed for having few fast trains, indifferent schooling, expensive higher education with opaque and unfair admissions criteria, lots of fossil fuel extraction, expensive big cities - and for being rich. So maybe that's the way to go instead? 

Second, the 2007 graphs. Scott Alexander starts his piece with a classic of the "everything changed in 2007" genre of graph. Here's the one he uses: 

On the Website Formerly Known as Twitter, one can find many such graphs. Here's the "output per hour worked" one, originally from the FT:

And do you want to see "real household income per capita" (source unknown)? Sure you do!

You get the picture. If it weren't for that pesky Global Financial Crisis, the UK would be richer than Germany. (Wouldn't Germany be richer too? Shh. These graphs are like marmalade: only produced for the UK market.)

I have all sorts of question about this kind of graph. But let's just think for a moment what these graphs imply. They are saying that there is only one event of significance in post-war British economic history. That event is not joining the EU or the Winter of Discontent or the Thatcher boom or the Single Market or the 1990s recession or New Labour or any decision made by the various governments of different political hues (or none) who have run the country for the last 70 years; nor is it anything to do with the geopolitical events that fill the history books (decolonisation, collapse of Bretton Woods, fall of the Berlin Wall); nor is it any of the technological advances from the nuclear power station to the internet. No. The only economic event of note was the Global Financial Crisis, which knocked the UK off the rails that it had been inexorably and merrily chugging along for generations. (How did it get on those rails? Don't ask.)

If this is true - and of course it is possible that it's true - then it has a rather sombre implication for all your favourite policy ideas for solving the UK's problems: all those governments' policies did nothing, so why should you imagine that your favourite set of policies can do any better? Some of those governments built more houses, some shut more railways, some improved schooling and some enjoyed the discovery of North Sea Oil. But none of it mattered. 

The one policy idea that the 2007 graphs suggest to me is that we need to get back to the finance-fuelled boom days of the 2000s - we need more bankers, more bonuses and more immigration from Eastern Europe. But it might equally suggest that we need to return to (what now turn out to be) the heady boom days of the late 1970s, which look every bit as good on these graphs. Take your pick.

Again, I offer these thoughts as prophylactics for you to bear in mind the next time you read one of these doom and gloom articles (particularly one that features a "2007 graph". Ask yourself: is there any reason to think that the author's suggested policies will have greater effects than those of all the post-war governments before Gordon Brown? And, if so, is there any reason to think that the effect of these policies won't be to turn the UK into Japan West?

(3) The real prospects for the UK

This final section has three parts. First, I will put a different spin on familiar "declinist" facts. Second, I will look at 4 long-term issues and suggest that the UK is pretty well-placed. Finally, I will give you one more reason for optimism.

First, our familiar "declinist facts" and why they are wrong. 

If you read any of these articles then you will likely come across a narrative section that purports to explain why Britain is such a basket case. Scott Alexander's piece has a great example of the genre from "AH", which hits a good number of the points one sees. I'll give you the flavour of it:

"... long-standing, extractive, rentier economy. Post-WWII industrial decline and the subsequent financialisation of the economy have led to a dearth of technical jobs  ... chronic underinvestment elsewhere.  ... The economy hinges on importing cheap labour to sustain GDP and attract foreign capital, which often funnels into real estate or financial services. ... unsustainable pillars: a housing bubble, foreign labour, and capital inflow, rather than robust domestic investment and innovation. There is a strong argument to be made that this situation is the result of an inevitable downward spiral since ~1900, when first the aristocracy, and then the government post-nationalisation, decided to sit on industries rather than refine, grow, invest. ... the feel on the ground is certainly one of general malaise. Even in London there is a general decline- property used to be expensive, it is now exorbitant, rents were kinda bad, they are now catching up to property prices. The job market is ok, but is entirely focused on professional services, with a small tech sector and a huge swathe of service jobs. Leave London and the feeling is one of awful decline since the mid 2000s boom, with Manchester perhaps an exception. ... the Leeds skyline, now filled with cheap student accommodation, sums up the problems with our current capital allocation- billions spent on building non-permanent, suitable only for 18-21 year olds, modern tenement blocks, with the aim of growing our 'university sector'- dozens of, putting it politely, 'second-rate' institutions, which rely on farming out expensive masters degrees to international students and pile-em-high style courses for British students."

I think you have probably seen this sort of thing before. I just want to give you a different take on the things that AH sees. In particular: is it a problem that the UK is good at services rather than industry? No. Why should it be? What's wrong with "professional services, [a] tech sector and a huge swathe of service jobs"? 

The reason that I have not been updating this blog recently is that I have been busy at work, which is to say that I (and the people I have been working with) have been exporting the equivalent of a fleet of cars. And we have done it without any risk of being hurt by robots, using low capital inputs and producing essentially no pollution. That is fantastic! It's great that the UK is good at making money that way! 

Service industries provide good jobs. There are numerous law firms that offer over £100,000 pa to newly-qualified solicitors (and some over £150,000): that's right, you can be a couple of years out of university and earning 6 figures. Isn't that what a productive economy looks like? 

Meanwhile, here's a glimpse of life at the Bar. You have to pay a fee each year to get your practising certificate and that fee depends on your gross income for the previous year. Here are the income bands for that fee:  

Make of that what you will.

Of course, the law is towards the upper end of the British service industries, but it is surely not unique: investment banking, management consulting, IT, accountancy, actuarial work - these can all provide young people with a comfortable lifestyle and professional fulfilment.

I'm not claiming that the university sector is quite as flush, but it is surely somewhat cheering for the Doomsters that you can be a career academic in the UK and end up making the best part of a million pounds a year? 

AH refers to "farming out expensive masters degrees to international students and pile-em-high style courses for British students". That's a pejorative way of putting it. Surely enriching the lives and minds of the global young is at least as honourable a way to make money as pushing expensive sports cars to international playboys and pile-em-high runabouts to the domestic market? 

Put aside your snobbish objections to earning money by providing services and you'll see that the UK is doing pretty well in some sectors. Those international students could have gone anywhere in the world, but they chose Leeds; they didn't do it for the climate, so we must be doing something right. If the UK does more of the things it is good at (and spends less time worrying about whether aristocrats should have invested more in heavy industry in ~1900), then I'm sure it will be fine.

My second point is a broader one. What are the general, long-term trends that will affect the world over the next generation or so, and where does the UK stand relative to other countries?

It seems to me that there are four "Big Things" to think about: being invaded, AI, climate change and demography. I reckon the UK is well-placed on all four.

Being invaded: hasn't happened to the UK for a long time. Doesn't seem plausible for the next couple of generations. 

AI: it turns out that the UK is not doing too badly here. In money terms, the UK seems to be doing about the same as the EU put together:

Indeed, "The UK is home to 334 startups in the AI space, Earlybird’s research showed. Across the Channel, Germany leads with 167 AI startups followed by France’s 135", apparently.

Meanwhile, in "thinking" terms, "this supplement looked at the number of AI-related articles published in the 82 high-quality natural-science journals tracked by the index, which primarily concern the application of AI to research in the broad fields of chemistry, the physical sciences, life sciences, and Earth and environmental sciences. Between 2015 and 2019, the US was the leader, with the UK, Germany and China in second, third and fourth place, respectively. But China has increased its output in journals tracked by the index. ... The US, UK and Germany slightly more than doubled their output over the same period", says Nature, which adds a graph headed as follows:

The UK is second only to Singapore in the "Government Artificial Intelligence Readiness Index 2019", whatever that might be, and number 4 in this chap's rankings.

You should take all of these surveys and studies with copious pinches of salt. But, even so, there seems to be some reason to believe that the UK is not too far off the pace here. DeepMind, for example, the company that produced the AI that beat the world at our top games (Go, chess and protein folding), was originally British (before Google bought it). 

Climate change: the UK is likely one of the top 5 best-placed countries for dealing with climate change (along with Iceland, Ireland, New Zealand and Australia). The ecoexperts, using data taken from Notre Dame Global Adapation Initiative, agree that the UK is at the top of the tree. According to Greenwatch, the UK has been doing pretty well so far. All of that sounds plausible to me: places that are already dry or marginal are at much more at risk than somewhere like the UK, which is rather wet and a bit too cold (for my liking at least). Going to university in Leeds may well become even more attractive in the future. Certainly, the UK's output of méthode champenoise sparkling wine looks set to increase.

Fourth, demographic collapse. I don't know what the productive industries of the future might be, and neither do you, but I'm fairly confident that they will require people to think them up. Unfortunately, however, the rich world seems to be running out of young people.

The next generation is going to see rich countries with declining working age populations. Japan's case is well known ("The working-age population, or people aged 15 to 64, is estimated at 45.35 million in 2070. That represents a 40% fall from 75.9 million in 2020. Over the next 50 years, Japan is expected to lose about 30 million workers", says Nikkei); China's population decline, which has already started, is the big one; and there will be others too. Will young people want to work in such countries? They will see increased welfare burdens placed on them (paying for pensions etc) while at the same time seeing decreased opportunities for the kind of fun at work and at play that we associate with being young. Surely many - especially the entrepreneurial, the go-getters and those with family abroad - will be tempted to get out before things get worse? In a world of global mobility, a demographic decline could quickly tip into a death spiral. On the other hand, countries that can avoid population decline may find themselves the grateful recipients of the youngest, brightest and best of countries that are in difficulty. 

It seems to me that there is a good chance that the UK will be a recipient country rather than a declining country. The UK has good recent experience of integrating huge numbers of immigrants peacefully and productively: net migration to the UK averaged 250,000 pa for the last two decades; the last census found that about 10 million UK residents were born abroad. Last year, net migration was 606,000, which was swelled by people from Ukraine and Hong Kong - but there will be other adverse geopolitical events to come as "nations, not so blest as thee, // Must, in their turns, to tyrants fall". Those immigrants have come for reasons of their own, and others are likely to have similar reasons. Moreover, the people who have arrived are likely to encourage others: they may have family abroad, or their presence may reassure others that they too would be welcomed (or, at least, will find people who can sell them familiar food and speak to them in their own language). 

That should give us time. I have no immediate answer to the collapse in birthrates. (My proposal would be to give c.£5,000 to each mother who gives birth or adopts and a year off income tax to each family who welcomes a new baby by birth or adoption and see if that makes a difference - surely we expect each child to provide more than £5,000 and a year of their working parent's income tax to the Exchequer in due course? - and surely there are better ideas out there.) But the UK's appeal to immigrants will help us to put off the evil day of collapse; and it will increase the chances of finding the solution before that happens.

My third and final reason for optimism is the fact that we are having this conversation at all. There is something more than a little tedious - indeed, something rather wearing and depressing - about so many people moaning about one of the most successful societies in human history. But there is a positive side to it too: all these people are trying to make things better. Their raging against the dying of the light might yet make a reasonably bright light shine more brightly. And not just people in this country either: is it not striking that Californians should be interested in this question? 

As I have said, I'm unpersuaded that building more houses will have quite the utopian effects that the Bowman-YIMBY-Bright Young Things-axis believes, but I might be wrong and, in any case, I think it's worth giving it a go. And even if that doesn't do the trick, maybe some other idea will. The best way to have good ideas is to have lots of ideas, and so the fact that people are so keen on coming up with ideas to make Britain better is an encouraging one.

I'm afraid this final reason does mean that we will have to endure more "Why is Britain so poor?" thinkpieces, but at least after reading this you will be able to do so without getting depressed.