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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The dog at the end of the lead may be small, but in fact what I’m walking is a hound of love

There is a new, hairy face in the Hovel.

There is a new, hairy face in the Hovel. I seem to have become a temporary co-owner of an enthusiastic Chorkie. A Chorkie, in case you’re not quite up to speed with your canine crossbreeds, is a mixture of a chihuahua and a Yorkshire Terrier, and while my friend K— busies herself elsewhere I am looking after this hound.

This falls squarely into the category of Things I Never Thought I’d Do. I’m a cat person, taking my cue from their idleness, cruelty and beauty. Dogs, with their loyalty, their enthusiasm and their barking, are all a little too much for me, even after the first drink of the day. But the dog is here, and I am in loco parentis, and it is up to me to make sure that she is looked after and entertained, and that there is no repetition of the unfortunate accident that occurred outside my housemate’s room, and which needed several tissues and a little poo baggie to make good.

As it is, the dog thinks I am the bee’s knees. To give you an idea of how beeskneesian it finds me, it is licking my feet as I write. “All right,” I feel like saying to her, “you don’t have to go that far.”

But it’s quite nice to be worshipped like this, I have decided. She has also fallen in love with the Hovel, and literally writhes with delight at the stinky cushions on the sofa. Named after Trude Fleischmann, the lesbian erotic photographer of the Twenties, Thirties and Forties, she has decided, with admirable open-mindedness, that I am the Leader of the Pack. When I take the lead, K— gets a little vexed.

“She’s walking on a loose lead, with you,” K— says. “She never does that when I’m walking her.” I don’t even know what that means, until I have a think and work it out.

“She’s also walking to heel with you,” K— adds, and once again I have to join a couple of mental dots before the mists part. It would appear that when it comes to dogs, I have a natural competence and authority, qualities I had never, not even in my most deranged flights of self-love, considered myself to possess in any measurable quantity at all.

And golly, does having a dog change the relationship the British urban flâneur has with the rest of society. The British, especially those living south of Watford, and above all those in London, do not recognise other people’s existence unless they want to buy something off them or stop them standing on the left of the sodding escalator, you idiot. This all changes when you have a dog with you. You are now fair game for any dog-fancier to come up to you and ask the most personal questions about the dog’s history and genealogy. They don’t even have to have a dog of their own; but if you do, you are obliged by law to stop and exchange dog facts.

My knowledge of dog facts is scant, extending not much further beyond them having a leg at each corner and chasing squirrels, so I leave the talking to K—, who, being a friendly sort who could probably talk dog all day long if pressed, is quite happy to do that. I look meanwhile in a kind of blank wonder at whichever brand of dog we’ve just encountered, and marvel not only at the incredible diversity of dog that abounds in the world, but at a realisation that had hitherto escaped me: almost half of London seems to have one.

And here’s the really interesting thing. When I have the leash, the city looks at me another way. And, specifically, the young women of the city. Having reached the age when one ceases to be visible to any member of the opposite sex under 30, I find, all of a sudden, that I exist again. Women of improbable beauty look at Trude, who looks far more Yorkie than chihuahua, apart from when she does that thing with the ears, and then look at me, and smile unguardedly and unironically, signalling to me that they have decided I am a Good Thing and would, were their schedules not preventing them, like to chat and get to know me and the dog a bit better.

I wonder at first if I am imagining this. I mention it to K—.

“Oh yes,” she says, “it’s a thing. My friend P-J regularly borrows her when he wants to get laid. He reckons he’s had about 12 shags thanks to her in the last six months. The problems only arise when they come back again and notice the dog isn’t there.”

I do the maths. Twelve in six months! That’s one a fortnight. An idea begins to form in my mind. I suppose you don’t have to be a rocket scientist to work out what it is. But no. I couldn’t. Could I?

Nicholas Lezard is a literary critic for the Guardian and also writes for the Independent. He writes the Down and Out in London column for the New Statesman.

This article first appeared in the 28 April 2016 issue of the New Statesman, The new fascism