The Barber Boom was more like a Barber Spike (aka “BS”)

In the comment thread of Britmouse´s excellent post, James in London and W Peden have an exchange in which I´m mentioned. W Peden´s comment is very long so I just reproduce a few paragraphs.

(James in London): Looking forward to a revisionist critique by a Market Monetarist of the “Barber Boom”. Was it so bad? Are you listening Marcus?

(W Peden): James in London,

Interesting question. I’m sure Marcus Nunes could do a better job, but a few revisionary observations-

Now for NGDP. To set the scene for the Barber Boom: the quarterly data I have (from the “Money Creation in a Modern Economy”) suggest that UK economic policy was very good from Q2 1965 to Q4 1967, when there was a halving of NGDP growth from over 10% to about 5%. NGDP growth then picked up following devaluation, and by the end of the (perhaps overrated) Roy Jenkins chancellorship was running at about 10% again.

Looking at NGDP, the “recession” during the early stages of the Heath government was clearly a supply shock. NGDP growth was above trend and stable from Q3 1970 to Q1 1972, but during this period unemployment rose dramatically and RGDP slowed right down (and IIRC fell in some quarters) presumably due to the collapse of incomes policies and the reversion of unemployment to its underlying natural rate, which had risen as a result of the major expansion of the welfare state during the Wilson government.

In terms of NGDP, the Barber Boom was very short. From Q2 1972 to Q1 1973, NGDP growth accelerated drastically from about 11% to over 20% as the government desperately tried to get unemployment down and RGDP growth up to 5%. Looking at the quarterly RGDP data from Trading Economics, NON-ANNUALIZED RGDP growth reached 5.3% in Q1 1973. In other words, even by the standards of their own incorrect estimates of the output gap, the UK macroeconomic authorities expanded RGDP by more than their ANNUAL target in a single quarter.

Probably the main revisionist note I shall sound is this: by the end of Anthony Barber’s chancellorship in March 1973, there was absolutely no reason why the UK needed to have >20% inflation. The monetary overhang could have been handled by a good market monetarist chancellor. Even taking Q1 1974 as a bit of an outlier, NGDP growth was coming back under control (relatively speaking) by the end of 1973, nearing 10%. Even with very pessimistic estimates of potential output in 1974-1975, inflation need not have risen very far beyond 10% in that period. And this means that the REAL inflationary boom was under Denis Healey from Q2 1974 to Q4 1975, during which NGDP and inflation accelerated far above 20%.

However, the boom was ended. NGDP growth was brought down even more rapidly than it was raised, falling to under 5% by Q1 1974. I have mixed feelings about this disinflation. On the one hand, a mid-term government practicing a statutory incomes policy probably has the best excuse and tools for a “shock therapy” approach, and unemployment continued to fall, presumably due to a temporary shift in the natural rate of unemployment resulting from the incomes policy. Nevertheless, a recession began in Q1 1974, partly supply-driven (the oil crisis and the miners’ strike) and partly driven by the sharp fall in NGDP growth.

It´s not a question of “doing a better job”, but of illustrating the period. I´m a firm believer in the “power of images” and that´s what I do below.

Barber Boom_1

 

Barber Boom_2

Barber Boom_3

My takeaways:  The so called Barber Boom was “BS”. NGDP growth had been stable as was RGDP growth, while inflation was trending down. What appears to have happened in 1972-73 was a politically-driven and desperate move with eyes on a possible election in 1974-75. According to “Backbencher”: In 1972, with an election looming, Heath U-turned in a spectacular turn of events that became known as the ‘Barber Boom’.

The oil shock (which erupted on October 1973) just made a bad situation worse. By constraining AD, the fall in real output was worse than otherwise (much like the Fed and the BoE, plus the ECB and others did in 2008).

The next charts indicate that if in the US the 1970s were known as the “Great Inflation”, in the UK the period should be called one of “Mammoth Inflation”. And the link of inflation with the behavior of NGDP couldn´t be more evident.

Barber Boom_4

Update: In the comments James wrote:

Very clear. Very spiky times, but growth bulldozed on, almost regardless. Some sharp periods, but sharp recoveries. At least “stop-go” had plenty of go, and not just stagnation like today.

James, not quite. Today is a different world altogether, reflecting “peoples wish” for living a Great Stagnation (see next post).

In the 70s it was “spiky times” but growth (at least in the UK) did not “bulldozed on”. The charts below illustrate. In the 70s UK average gowth was 2.6 and pretty spiky, with standard deviation also of 2.6. In the US average growth was 3.2, and just as spiky (SD also 2.6).

During the GM, average real growth in the US continued at 3.3. but “spikiness” fell by more than 50% (SD 1.2). Average UK growth was the same (3.3%) and SD 1.1.

Certainly life was more pleasant in 1992-07!

Barber Boom_5

7 thoughts on “The Barber Boom was more like a Barber Spike (aka “BS”)

  1. Yes, the central banks of the 1970s were “too easy.”

    But I will say this: those 1970s central banks proved that modern economies could grow, even at 10 percent annual rates. Nobody was boo-hoo-ing about structural impediments and stagnation.

    The US economy grew, in real terms, by 20 percent from 1976 to 1979.

    Indeed, I suspect that “structural impediments” were worse in that day of higher tax rates, labor unions, big steel, big autos, big retailers, heavily regulated finance, telecommunications and transportation industries, and much less foreign competition.

    Yes, over many years, a demographic change might start crimping growth. But now there is excess labor everywhere.

    • Yes the economy is surely more flexible than in the 1970’s and, sorry to keep banging on about this, the reserve army of labour in Europe that now has free access to the UK would surely keep a lid on wage rises. Just think what a quarter or two of 10% YoY growth would do for the countries finances.

  2. Very clear. Very spiky times, but growth bulldozed on, almost regardless. Some sharp periods, but sharp recoveries. At least “stop-go” had plenty of go, and not just stagnation like today.

    Maybe people are happier with the certainty of low growth versus the uncertainty of spiky growth, but I don’t think so. Inflation can help work around structural impediments in a way that doesn’t seem to work today.

    Or is Brazil today a counter-example? Or is it indexation too widespread? Or the structural impediments too great?

  3. Great post Marcus.

    I agree on 1992-2007 being more pleasant (can you imagine the height of my standards of what constitutes “good times”, given that this was the period in which I spent almost all of my early life?) for the UK. Our performance in that period looks even better when compared with other countries, including those that were once the objects of great envy by UK policymakers e.g. France and Germany. Nor were there very long lags between Thatcher’s reforms and the good times: most of her really important reforms came in her second and third terms (1983-1990) and many of them, like olive trees, would be expected to only slowly bear fruit e.g. trade union reform, better training to help the unemployed back into work, and reforming education.

  4. Also, I love the term “Barber Spike”!

    The UK lost its last major constraint on inflation in June 1972, when we left the European “Currency Snake”. Almost exactly three years of Keynesian and corporatist policies that were supposed to control unemployment and inflation respectively, we had record post-war unemployment and inflation had reached about 27%. If there was a Keynesian/cost-push experiment, this was it.

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