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.

graph
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.

graph

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.

Getty
Show Hide image

The 4 questions to ask any politician waffling on about immigration

Like - if you're really worried about overcrowding, why don't you ban Brits from moving to London? 

As the general election campaigns kick off, Theresa May signalled that she intends to recommit herself to the Conservatives’ target to reduce net migration to the “tens of thousands.” It is a target that many – including some of her own colleagues - view as unattainable, undesirable or both. It is no substitute for a policy. And, in contrast to previous elections, where politicians made sweeping pledges, but in practice implemented fairly modest changes to the existing system, Brexit means that radical reform of the UK immigration system is not just possible but inevitable.

The government has refused to say more than it is “looking at a range of options”. Meanwhile, the Labour Party appears hopelessly divided. So here are four key questions for all the parties:

1. What's the point of a migration target?

Essentially scribbled on the back of an envelope, with no serious analysis of either its feasibility or desirability, this target has distorted UK immigration policy since 2010. From either an economic or social point of view, it is almost impossible to justify. If the concern is overall population levels or pressure on public services, then why not target population growth, including births and deaths? (after all, it is children and old people who account for most spending on public services and benefits, not migrant workers). In any case, given the positive fiscal impact of migration, these pressures are mostly a local phenomenon – Scotland is not overcrowded and there is no shortage of school places in Durham. Banning people from moving to London would be much better targeted.

And if the concern is social or cultural – the pace of change – it is bizarre to look at net migration, to include British citizens in the target, and indeed to choose a measure that makes it more attractive to substitute short-term, transient and temporary migrants for permanent ones who are more likely to settle and integrate. Beyond this, there are the practical issues, like the inclusion of students, and the difficulty of managing a target where many of the drivers are not directly under government control. Perhaps most importantly, actually hitting the target would have a substantial economic cost. The Office for Budget Responsibility’s estimates imply that hitting the target by 2021 – towards the end of the next Parliament – would cost about £6bn a year, compared to its current forecasts.

So the first question is, whether the target stays? If so, what are the specific policy measures that will ensure that, in contrast to the past, it is met? And what taxes will be increased, or what public services cut to fill the fiscal gap?

2. How and when will you end free movement? 

The government has made clear that Brexit means an end to free movement. Its white paper states:

“We will design our immigration system to ensure that we are able to control the numbers of people who come here from the EU. In future, therefore, the Free Movement Directive will no longer apply and the migration of EU nationals will be subject to UK law.”

But it hasn’t said when this will happen – and it has also stated there is likely to be an “implementation period” for the UK’s future economic and trading relationship with the remaining EU. The EU’s position on this is not hard to guess – if we want to avoid a damaging “cliff edge Brexit”, the easiest and simplest option would be for the UK to adopt, de facto or de jure, some version of the “Norway model”, or membership of the European Economic Area. But that would involve keeping free movement more or less as now (including, for example, the payment of in-work benefits to EU citizens here, since of course David Cameron’s renegotiation is now irrelevant).

So the second question is this – are you committed to ending free movement immediately after Brexit? Or do you accept that it might well be in the UK’s economic interest for it to continue for much or all of the next Parliament?

3. Will we still have a system that gives priority to other Europeans?

During the referendum campaign, Vote Leave argued for a “non-discriminatory” system, under which non-UK nationals seeking to migrate to the UK would be treated the same, regardless of their country of origin (with a few relatively minor exceptions, non-EEA/Swiss nationals all currently face the same rules). And if we are indeed going to leave the single market, the broader economic and political rationale for very different immigration arrangements for EU and non-EU migrants to the UK (and UK migrants to the rest of the EU) will in part disappear. But the Immigration Minister recently said “I hope that the negotiations will result in a bespoke system between ourselves and the European Union.”

So the third question is whether, post-Brexit, our immigration system could and should give preferential access to EU citizens? If so, why?

4. What do you actually mean by reducing "low-skilled" migration? 

One issue on which the polling evidence appears clear is that the British public approves of skilled migration – indeed, wants more of it- but not of migration for unskilled jobs. However, as I point out here, most migrants – like most Brits – are neither in high or low skilled jobs. So politicians should not be allowed to get away with saying that they want to reduce low-skilled migration while still attracting the “best and the brightest”.

Do we still want nurses? Teachers? Care workers? Butchers? Plumbers and skilled construction workers? Technicians? If so, do you accept that this means continuing high levels of economic migration? If not, do you accept the negative consequences for business and public services? 

Politicians and commentators have been saying for years "you can't talk about immigration" and "we need an honest debate." Now is the time for all the parties to stop waffling and give us some straight answers; and for the public to actually have a choice over what sort of immigration policy – and by implication, what sort of economy and society – we really want.

 

 

Jonathan Portes is director of the National Institute of Economic and Social Research and former chief economist at the Cabinet Office.

0800 7318496