CHARTS: Digging deeper into the US and UK GDP comparison

A variation of this graph has been making its way around the internet over the past two days (see here for instance). It compares the levels of real US and UK GDP since the beginning of 2006, and shows that while the US economy has returned to its pre-recession peak, the UK economy is still about 4%  lower.

The US of course passed large fiscal stimulus measures in 2008, 2009, and to a lesser extent 2010. By contrast, the UK has for the most part avoided such massive policies, and in fact more recently under the Cameron government has enacted austerity measures.

Some have therefore held up this graph as evidence of the efficacy of US fiscal policy during and after the Great Recession, treating the paths of our two countries as a sort of “natural experiment.”

I think it’s true, given the economic evidence on the size of fiscal multipliers in a recession, that the US’s fiscal policies explain at least some of the growth in our real GDP over the past three years. However, a simple graph almost certainly doesn’t prove this, because there are too many other factors aggregated into the data. I don’t know enough about the recent UK experience to comment on how comparable the two countries are, but my knee-jerk reaction is to be skeptical. We’re talking about two different currencies, two different central banks… hell, two different continents here. All of these factors and more explain economic growth. It’s simply not true that fiscal policy is the sole difference between the US and the UK since 2006.

Still, given all the different components of GDP (and given that I wanted a good excuse to use FRED for the first time), I thought it might be helpful to breakdown the US/UK comparison further. It would at least provide an impetus for commentary from people smarter than me!

The first chart shows real government consumption, which includes government spending at the national, regional (state), and local levels.

Note that (under US definitions, at least) government consumption is essentially just the salaries and benefits of government workers. It doesn’t include social benefits like Social Security/pensions (these are “transfers”). Nor would it show tax cuts such as the 2008 stimulus or the Making Work Pay tax credit,  which would instead manifest themselves as lower revenues or as spikes in disposable personal income.

Next comes real personal consumption expenditures.

PCE is where our two countries have truly parted ways since the Great Recession. Bear in mind that even though this is called “private” consumption, we would expect most demand-side fiscal policies (tax rebates, Cash-for-Clunkers, etc.) to show up on this side of the GDP ledger, because PCE shows how much people are actually consuming, a stat which policy makers hope goes up when the government gives them more money.

Capital formation essentially shows both private and government investment. Interestingly, the UK peaked later than the US did.

Finally, here’s net exports (exports minus imports). Both the UK and the US are currently running trade deficits. Notice the sharp uptick in UK net exports in the latest quarter, essentially bringing it back to the 2009 peak. The US meanwhile is well below peak.

The quick conclusion here is that the differences in US and UK GDP have been mainly driven by a divergence in the path of real personal consumption. Fiscal policy may explain part of this difference, but there are other plausible candidates as well (such as, for example, the housing markets). I’d love it if someone pointed me to more detailed UK data that’s apples-to-apples with the US NIPAs.