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.

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Brexit will hike energy prices - progressive campaigners should seize the opportunity

Winter is Coming. 

Friday 24th June 2016 was a beautiful day. Blue sky and highs of 22 degrees greeted Londoners as they awoke to the news that Britain had voted to leave the EU.  

Yet the sunny weather was at odds with the mood of the capital, which was largely in favour of Remain. And even more so with the prospect of an expensive, uncertain and potentially dirty energy future. 

For not only are prominent members of the Leave leadership well known climate sceptics - with Boris Johnson playing down human impact upon the weather, Nigel Farage admitting he doesn’t “have a clue” about global warming, and Owen Paterson advocating scrapping the Climate Change Act altogether - but Brexit looks set to harm more than just our plans to reduce emissions.

Far from delivering the Leave campaign’s promise of a cheaper and more secure energy supply, it is likely that the referendum’s outcome will cause bills to rise and investment in new infrastructure to delay -  regardless of whether or not we opt to stay within Europe’s internal energy market.

Here’s why: 

1. Rising cost of imports

With the UK importing around 50% of our gas supply, any fall in the value of sterling are likely to push up the wholesale price of fuel and drive up charges - offsetting Boris Johnson’s promise to remove VAT on energy bills.

2. Less funding for energy development

Pulling out of the EU will also require us to give up valuable funding. According to a Chatham House report, not only was the UK set to receive €1.9bn for climate change adaptation and risk prevention, but €1.6bn had also been earmarked to support the transition to a low carbon economy.

3.  Investment uncertainty & capital flight

EU countries currently account for over half of all foreign direct investment in UK energy infrastructure. And while the chairman of EDF energy, the French state giant that is building the planned nuclear plant at Hinkley Point, has said Brexit would have “no impact” on the project’s future, Angus Brendan MacNeil, chair of the energy and climate select committee, believes last week’s vote undermines all such certainty; “anything could happen”, he says.

4. Compromised security

According to a report by the Institute for European Environmental Policy (the IEEP), an independent UK stands less chance of securing favourable bilateral deals with non-EU countries. A situation that carries particular weight with regard to Russia, from whom the UK receives 16% of its energy imports.

5. A divided energy supply

Brexiteers have argued that leaving the EU will strengthen our indigenous energy sources. And is a belief supported by some industry officials: “leaving the EU could ultimately signal a more prosperous future for the UK North Sea”, said Peter Searle of Airswift, the global energy workforce provider, last Friday.

However, not only is North Sea oil and gas already a mature energy arena, but the renewed prospect of Scottish independence could yet throw the above optimism into free fall, with Scotland expected to secure the lion’s share of UK offshore reserves. On top of this, the prospect for protecting the UK’s nascent renewable industry is also looking rocky. “Dreadful” was the word Natalie Bennett used to describe the Conservative’s current record on green policy, while a special government audit committee agreed that UK environment policy was likely to be better off within the EU than without.

The Brexiteer’s promise to deliver, in Andrea Leadsom’s words, the “freedom to keep bills down”, thus looks likely to inflict financial pain on those least able to pay. And consumers could start to feel the effects by the Autumn, when the cold weather closes in and the Conservatives, perhaps appropriately, plan to begin Brexit negotiations in earnest.

Those pressing for full withdrawal from EU ties and trade, may write off price hikes as short term pain for long term gain. While those wishing to protect our place within EU markets may seize on them, as they did during referendum campaign, as an argument to maintain the status quo. Conservative secretary of state for energy and climate change, Amber Rudd, has already warned that leaving the internal energy market could cause energy costs “to rocket by at least half a billion pounds a year”.

But progressive forces might be able to use arguments on energy to do even more than this - to set out the case for an approach to energy policy in which economics is not automatically set against ideals.

Technological innovation could help. HSBC has predicted that plans for additional interconnectors to the continent and Ireland could lower the wholesale market price for baseload electricity by as much as 7% - a physical example of just how linked our international interests are. 

Closer to home, projects that prioritise reducing emission through tackling energy poverty -  from energy efficiency schemes to campaigns for publicly owned energy companies - may provide a means of helping heal the some of the deeper divides that the referendum campaign has exposed.

If the failure of Remain shows anything, it’s that economic arguments alone will not always win the day and that a sense of justice – or injustice – is still equally powerful. Luckily, if played right, the debate over energy and the environment might yet be able to win on both.

 

India Bourke is the New Statesman's editorial assistant.