A passer-by sees a man looking under a lamppost and asks what he is trying to find. “My keys,” he replies. They look for a while but find nothing. The passer-by asks whether the first man is sure he lost his keys here. “Oh, no,” replies the man. “But this is where the light falls.”
This is the economic debate in the UK. Everybody could see the glare of the fiscal deficits left by the crisis. It was easy to agree that this was where the government needed to look for its priorities. It was also easy to agree that those deficits were the result of fiscal irresponsibility. But the real story is of the impact of the financial crisis on output and productivity. The correct focus is on how to recover the lost output and productivity. Fiscal irresponsibility was not the cause of these disasters; eliminating it cannot be the cure.
UK output per head and labour productivity are vastly below long-term trends. In 2012, for example, gross domestic product was 12 per cent below the 1950-2007 trend. This is the result of a deep recession followed by the weakest recovery on record. The one ameliorating factor, low joblessness, is a mirror image of the productivity collapse. This is a policy failure, as Simon Wren-Lewis, the Oxford academic, has argued.