Are we catching the US disease?

The average American household has failed to benefit from the recent era of economic growth and risi

In the 1970s, the policy and political elite obsessed about the 'British disease' -- the failure of our system of industrial relations, and its impact on UK prosperity relative to our competitors, above all the US. Forty years on, their concern should be whether we have caught the 'US disease': the failure of the broad mass of US households on low to middle incomes, the middle-class in American parlance, to benefit from the recent era of economic growth and rising productivity. Typical US family incomes today are at the same level as they were in the late 1980s, and median wages have flat-lined for an even longer period.

As the chart shows, the US has long had a problem with sharing -- that is, sharing out the proceeds of growth.

Source: Machin, Centre for Economic Performance

The question is: are we catching their bug? Over the last decade the UK (as well as other countries like Germany) has started to show more US-like tendencies, as the relationship between economic growth and the pay rises going to the ordinary worker has weakened.


Source: Resolution Foundation

There's no consensus as to what explains this great American stagnation. The easy bit is to point the finger at US policy mistakes that have certainly made matters much worse. Regressive tax policy, motivated by trickle-down theories; together with weak regulation motivated by a belief in the infallibility of markets, undermined their fiscal position, fuelled inequality and magnified economic instability. And the nature of the US political system itself poses a barrier to economic progress, with the efforts of President Obama -- like those of other Presidents -- being thwarted by deep and intractable political gridlock.

But to appreciate the deeper causes of the problem, we also need to consider the longer term hollowing out of the US jobs market. Leading US economist Jared Bernstein, who is in the UK this week to speak to a major conference on how the UK can avoid the US fate, puts it this way:

The developments that have hurt the US middle class -- and they are related -- are high levels of inequality and weak employment growth. Together, they have created a wedge between growth and broadly shared prosperity. UK policy makers take note: pushback on these forces or be prepared for a prolonged middle income squeeze.

The chart below demonstrates Bernstein's point. Each decade since World War II has seen fast employment growth (usually consisting of a dip during a downturn followed by strong growth as the economic cycle picks up). But prior to the recent recession, there was almost no employment growth: the jobs market was already flat-lining before it went into freefall.

graph 3

There are plenty of potential reasons for this decline -- the rise of an ever sharper focus on shareholder value, and more intense competition from China and India are both regularly blamed.

But the most likely villain is the changing relationship between technology and the jobs market. A leading view is that the rate of technological change has slowed down since the 1970s, and the new innovations which have occurred, particularly in ICT, are far less job-rich than was the case in previous waves of technological change (an argument advocated by US economist Tyler Cowen in his Great Stagnation). Another argument, set out in the latest zeitgeist e-book from the US, Race Against the Machine by Erik Brynjolfsson and Andrew McAfees, is that digital technology is changing faster than many workers can keep up with, rapidly encroaching into new sectors of the economy, leaving many workers economically displaced and disadvantaged (read this to see where these two perspectives converge and diverge).

If either of these are an accurate diagnosis, it's more than a bit worrying for the UK. We are of course exposed to precisely the same technological trends as the US; and prior to the recession we were already exhibiting many of the symptoms of a polarising labour market. Worse still, these long-term and underlying challenges are being made worse by short-term policy mistakes.

For now, our focus is rightly on injecting life into an economy with chronically weak domestic demand, whose main export market is in crisis. Beyond this, we need to contemplate how to avoid the US disease which, if caught, could mean that living standards for much of the country could be divorced from any future growth for a generation to come.


Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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Why relations between Theresa May and Philip Hammond became tense so quickly

The political imperative of controlling immigration is clashing with the economic imperative of maintaining growth. 

There is no relationship in government more important than that between the prime minister and the chancellor. When Theresa May entered No.10, she chose Philip Hammond, a dependable technocrat and long-standing ally who she had known since Oxford University. 

But relations between the pair have proved far tenser than anticipated. On Wednesday, Hammond suggested that students could be excluded from the net migration target. "We are having conversations within government about the most appropriate way to record and address net migration," he told the Treasury select committee. The Chancellor, in common with many others, has long regarded the inclusion of students as an obstacle to growth. 

The following day Hammond was publicly rebuked by No.10. "Our position on who is included in the figures has not changed, and we are categorically not reviewing whether or not students are included," a spokesman said (as I reported in advance, May believes that the public would see this move as "a fix"). 

This is not the only clash in May's first 100 days. Hammond was aggrieved by the Prime Minister's criticisms of loose monetary policy (which forced No.10 to state that it "respects the independence of the Bank of England") and is resisting tougher controls on foreign takeovers. The Chancellor has also struck a more sceptical tone on the UK's economic prospects. "It is clear to me that the British people did not vote on June 23 to become poorer," he declared in his conference speech, a signal that national prosperity must come before control of immigration. 

May and Hammond's relationship was never going to match the remarkable bond between David Cameron and George Osborne. But should relations worsen it risks becoming closer to that beween Gordon Brown and Alistair Darling. Like Hammond, Darling entered the Treasury as a calm technocrat and an ally of the PM. But the extraordinary circumstances of the financial crisis transformed him into a far more assertive figure.

In times of turmoil, there is an inevitable clash between political and economic priorities. As prime minister, Brown resisted talk of cuts for fear of the electoral consequences. But as chancellor, Darling was more concerned with the bottom line (backing a rise in VAT). By analogy, May is focused on the political imperative of controlling immigration, while Hammond is focused on the economic imperative of maintaining growth. If their relationship is to endure far tougher times they will soon need to find a middle way. 

George Eaton is political editor of the New Statesman.