Wanted: a new purpose for British capitalism

How can Britain avoid going down the US path where for the last generation the majority of the gains

If this year's question is "When will growth resume?", next year's will surely be "How do we make sure that growth benefits the great majority of working people?".

For much of the 20th century, that second question would not have been necessary. The link between growth and living standards held strong -- it was the golden thread of the social contract, binding together the shared efforts of labour, capital and government in a win-win deal for all sides.

But today, across many advanced economies, that thread is badly frayed, while in others it has already severed. The US has seen a generation of flat or falling real incomes among the bottom half of earners. From 1970 to 2010 the link between economic growth and typical wages ruptured -- the "great decoupling", as Lane Kenworthy has called it. GDP continued to grow but it didn't trickle down.

In the 37 years from 1973 to 2010, the annual incomes of the bottom 90 per cent of US families rose by only 10 per cent in real terms. Median US household income was $64,000 in 2007. Had it kept pace with growth in GDP, it would have grown to $90,000. As the table below shows, the richest 1 per cent of the population has captured a truly staggering proportion of the gains from all income growth – two-thirds of the total gain during the Bush years.

 

The result of these extraordinary growth rates is that the richest 1 per cent of American society now receives over 20 per cent of total income, with the richest 10 per cent getting roughly 50 per cent of all income (see below).

Perhaps we can comfort ourselves with the notion that the US is unique? No. In Canada, median earnings have also flatlined for 30 years. In Germany real monthly incomes fell between 2000 and 2009. And in the five years that preceded the 2008-2009 recession, while UK GDP growth averaged above 2 per cent, median wages were near flat at the same time as they carried on steadily rising at the top (see below; sources: ONS, ASHE, Resolution Foundation).

 

So this can't just be put down to a momentary living standards squeeze arising from the fallout from the recession or the deficit - though that is certainly also taking place. The problem started earlier, will last longer, and runs deeper. It is a mega-trend in some, not all, advanced capitalist economies that towers over other questions of social and economic policy that dominate the daily news.

Marginal interests

In the US, unlike the UK, this issue at least shapes mainstream political debate. It is a theme that Barack Obama took up when confronting the captains of industry last week: "We can't go back to the kind of economy where gains in productivity just didn't translate into rising incomes and opportunity for the middle class." Behind the scenes, Gene Sperling, President Obama's newly appointed director of the US National Economic Council, has invoked the spirit of JFK, calling for a new "rising-tide economics" to underpin a return to an era of shared prosperity.

Fine sentiment. But there are few signs from the US, and even less in the UK of fresh thinking on how to shift the distribution of the gains from growth. The truth is that no one really knows the answer, few politicians are focused on it, and the economics profession has until recently largely ignored it.

Which brings us to the much-talked-of "growth plan" that the coalition is working on for the Budget. What are the prospects of it really tackling the problem of living standards? Bleak – at least if the past is anything to go by. When the call goes out in Whitehall for ideas on growth, the response is typically a half-hearted effort to pull together a package of incremental measures – a tweak in the tax treatment of investment, another review of red tape, a new public investment bank or fund (with few resources), a call for stronger links between universities and regional economies.

All of these are wearily familiar. Some of them may help growth at the margins. None begins to match up to the problem – nor do they directly address the issue of who gains from growth. No one in Whitehall even thinks it's their job to worry about this.

So, in addition to the usual business support measures, what would a "rising tide" economics need to consider if it is to try and ensure that growth feeds through into rising incomes and a more stable recovery?

First, there would need to be a much more ambitious drive on jobs and skills. That means employment creation, including the use of government job guarantees. There is no prospect of steadily rising real wages emerging out of a slack and detoriating jobs market; so, steady progress on the long road back to full employment – which as of today feels like a pipe dream – is a vital precondition.

But, as the pre-recession years vividly demonstrated, high employment on its own won't suffice. We also need a deliberate effort to tilt the balance to help labour secure sustainable wage growth. Once steady employment growth is re-established, this will demand a more aggressive approach to raising the minimum wage more steeply year on year; as well as government action rather than words on expanding the reach of the "living wage". And there has to be a new model of skills policy, jettisoning the old approach of pumping out an ever greater supply of paper qualifications in favour of using sticks and carrots to encourage employers to increase their demand for skilled labour.

How to restart growth

Second, there is a need to be unfashionable. That means focusing on the performance of some of the less eye-catching sectors of the economy – where so many low-to-middle-income earners actually work – rather than just showering attention on fashionable "industries of the future" as politicians of all parties like to term them.

Of course, low-carbon energy, digital and the creative sectors are absolutely vital, and the government should intervene more aggressively to secure their success in the UK. But more important to the immediate lives of much of working Britain are the high-employment, low-productivity, "pedestrian" sectors of our economy which account for roughly 25 per cent of GDP – such as retail, hospitality and personal care – where poverty wages are widespread, opportunities for progression within jobs are limited, and management is often poor.

Third, a "rising-tide" economics would involve stretching the growth agenda beyond the confines of traditional "industrial policy" into future choices on public services. Why so? Because tightly constrained public spending should be prioritised for services such childcare and elderly care that, with proper reform, could play a far greater role supporting more people, especially woman, to enter into and stay in work.

As millions of households have long figured out for themselves, when individual earnings are stagnant then the only way of lifting household living standards (without relying on increasing debt) is through more dual-earner couples, as well as helping people to stay in work for longer as they get older. Indeed, it is an irony that the single most potent pro-growth, pro-living-standards measure that the coalition has introduced to date – the abolition of the default retirement rule, which will enable far more people to continue working as they grow older if they choose to – hasn't been presented in this light.

Finally, there is a pressing need to capitalise on the new, if belated, zeitgeist among the high priests of the global economics profession concerning the toxic consequences of rising inequality. This does not stem from the usual left-leaning economists, but from leading financial gurus – including Raghuram Rajan and Ken Rogoff, both former chief economists of the IMF – who are motivated by the need to secure viable conditions for steady economic growth in a post-crisis world.

Translated into the UK context, this interest in greater economic equality very quickly runs up against the reality of our income-tax system, where the 40p rate already kicks in at a relatively low (and falling) income level and there is no appetite from any quarter for raising the 50p rate on the highest incomes. As a result, all roads point to the need for fresh and fearless thinking on taxing wealth and top-end housing – not least as wealth inequalities far exceed those in income.

As things stand, over the short term, the government will remain on the defensive about the lack of a plausible plan for restarting growth. Eventually – however slowly – growth will bounce back and that hurdle will be cleared. Yet the real economic test – indeed, the wider test for the very legitimacy of the British model of capitalism – is the far higher hurdle that follows. Will the proceeds of growth once again be widely shared, or will we go down the American path to an increasingly divisive future in which the majority of workers receive little or no gain from rising national prosperity?

Gavin Kelly is chief executive of the Resolution Foundation.

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

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Should Jeremy Corbyn go? Two Labour Party members take different views

The Labour leader says he will not betray its members. But what do they think?

The Labour MPs stand on one side. The Momentum activists stand on the other. Both claim to represent the real voice of Labour voters, and therefore the true democratic will. 

 

But Labour voters are divided too. We heard from two Labour Party members with very different views about Corbyn:

 

Stay

Sophie Dodds

On 8 May 2015 I felt pretty wretched. Since 2010 my world had seemed to have become increasingly constricted. Rent had gone up at least 5 per cent every year; wages had not kept pace. East Coast Rail had been handed to a private company which increased ticket prices. For the first time ever, I was being told my diabetes medication would have to be switched to cheaper, less adequate brands, and it was getting harder and harder to get appointments with my nurse. And these were just the ways in which politics had touched me personally.

I went to the anti-austerity march that June and it gave me hope. I didn’t see Jeremy Corbyn speak at that but I was given some leaflets and heard Charlotte Church’s incredible speech, so decided to look into him. I watched a panel debate with all four candidates for the Labour leadership and my mind was settled.

 

Corbyn stood there and calmly and repeatedly stated that the poor should not have to pay for the results of an irresponsible financial sector, and that most economists agree that austerity does not work. He seemed to understand not only how Britain had arrived where it had, but what was going on in the world as a whole, and how we would have to fit into that. He understood that people and politics are complicated and that evangelical solutions will never get us anywhere. He was also the most charismatic of the bunch – not in the traditional, swept-back hair kind of way – but he had a rare air of intelligence, honesty and, to use that hackneyed phrase, integrity.

 

I was clearly not the only person to respond to him in this way. The trade unions got on board and tens of thousands of people paid their £3 and signed up for the right to vote for him. All manner of respected public personalities, from journalists and economists to comedians and musicians, spoke at his rallies. A core of young, digital-savvy and politically disillusioned talent formed and Momentum took shape.

 

There is a fundamental gulf between the Parliamentary Labour Party and the Labour Party membership, and a further gulf between those two groups and the rest of the British electorate. We live in fractured times, in which social media only serves to deepen those fractures. As the first Labour leader to be voted in by his own membership, rather than selected by the PLP, Corbyn was never going to have an easy run of it.

 

As for the EU referendum, not only was I 100 per cent sure of where Corbyn stood on this, but he put forward what I felt was the strongest argument for staying in the EU – the protection its laws offer to workers’ rights. Any reserve he showed in his enthusiasm for the EU was simply a reasonable reaction to its very real flaws. Don’t get me wrong, I would much rather be in the EU than out of it, but let’s not forget what happened to Greece. Let’s not forget TTIP.

The mutiny in the PLP has nothing to do with the EU. It’s been coming since he was first elected leader. The PLP are mainly Blairites. At some point or other this s**t was going to hit that fan. If they oust Corbyn, who do they think is going to lead them?

I suspect that the next time Labour win (if there still is a Labour Party by then) it will be under someone a bit more shiny, a bit more slimy, or possibly some charismatic Sturgeon who maintains her right to slash and burn as necessary.

But Godammit, whilst I still have the power to, I will keep voting for that socks and sandals man. And if they oust him for good? Well, at least I will save £5 a month on my Labour membership.

Go

Simon Foster

You've spent the last five days lamenting the loss of your Interrail pass, predicting a return to wartime rationing and contemplating overturning an incredible democratic mandate. Yet now a new post adorns your timeline. Your Facebook profile picture remains a snap of you “finding yourself” on your gap year in Thailand but it is now joined with a curious red banner proclaiming "I'm With Corbyn". You're with who?

Surely we can't be thinking about the same Corbyn? The Corbyn who remained practically invisible during the referendum campaign, surfacing only to reveal that he was "7 out of 10" in favour of Remain. The same Corbyn who refused to put party politics aside to campaign with Cameron even after private polling indicated this would help the Remain vote. Indeed, the very same Corbyn whose team under Seamus Milne actively worked to sabotage Labour In. Surely you cannot still be defending this champagne socialist?

I admit I am towards the more social democratic wing of the Labour Party - sorry, I mean I am "Blairite vermin" (the term adorned on a t-shirt worn by a delightful Socialist Workers' Party member during a recent pro-Corbyn march). I didn't vote for Jezza's vision of a “kinder politics” last September and have been calling for his ousting pretty much ever since.

I am honestly speechless at the continued unwavering support of my Facebook friends for a man whose utter incompetence has lead to a referendum result which most of them have despaired over.

Let's make no mistake here - the big loser of the referendum was the Labour Party. Much, if not most, of the blame for that rests on the shoulders of Jeremy Corbyn. A Britain Stronger In Europe memo leaked just three weeks before polling day revealed that up to 50 per cent of Labour voters weren't actually sure what the party's position on the EU was. How truly pathetic.

Is it really at all surprising then that come Thursday all the Northern Labour heartlands and 64 per cent of C2DE workers voted Leave? So surely we should all now be in agreement that Labour lost this referendum. Spectacularly. Yet I'm sure the Corbyinstas will blame it all on Tony Blair. Is there anything for which Corbyn is to blame which cannot instead be blamed on a Prime Minister who stepped down almost 10 years ago?

I guess this shouldn't even be a surprise to me. Some of those proclaiming their solidarity with Jeremy now are the same people who previously defended the anti-Semitic actions of Naz Shah and Ken Livingstone by claiming this was the imaginings of the "right-wing media".

As far as I can see it you can either be a Brexiteer, happy that the referendum campaign secured you the working-class votes necessary for your shock victory, or you backed Remain and are furious with Corbyn's lacklustre support. How can you possibly continue to support him when he ensured this defeat was inevitable?