he Bank of England forecasts a fall in GDP of 30% due to the pandemic, and says it is the worst recession in 300 years (Business live, 7 May). We need to get this into perspective. There have been at least two other episodes in recent history when there was a massive supply shock of comparable severity: the two world wars necessitated structural changes that dwarf what the Bank is forecasting.
The cost of the war effort – men, uniform plus weapons production – was counted as part of GDP although it contributed nothing directly to living standards. This highlights a limitation of GDP: it only measures output, not welfare. Today’s equivalent of fighting the enemy is the lockdown to stop the virus spreading, but this is not counted as production so represents a direct loss from GDP. A meaningful comparison means adjusting wartime output.
During the second world war, war effort accounted for over 50% of net national expenditure and a quarter of the labour force was in the armed forces. This situation – where the government employed almost half the workforce – was sustained over more than five years. Despite US help via the lend lease policy, the UK had the highest public debt/GDP ratio in its history. But that did not lead to recession and unemployment, thanks to the postwar Labour government rejecting policies fixating on debt in favour of Keynesian full employment targeting. The result was growth instead of recession and unemployment.
We can see therefore that calls to “restart the economy” after only a couple of months are inappropriate. They are also dangerous because they are based on the same kind of neoliberal thinking that we have lived through in the past 10 years of austerity. We cannot afford to repeat the mistakes of the past.
Emeritus professor of economics, University of Warwick