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 decline of the north's sporting powerhouse

Yorkshire historically acted as a counterweight to the dominance of southern elites, in sport as in politics and culture. Now, things are different.

On a drive between Sheffield and Barnsley, I spotted a striking painting of the Kes poster. Billy Casper’s two-fingered salute covered the wall of a once-popular pub that is now boarded up.

It is almost 50 years since the late Barry Hines wrote A Kestrel for a Knave, the novel that inspired Ken Loach’s 1969 film, and it seems that the defiant, us-against-the-world, stick-it-to-the-man Yorkshireness he commemorated still resonates here. Almost two-thirds of the people of south Yorkshire voted to leave the EU, flicking two fingers up at what they saw as a London-based establishment, detached from life beyond the capital.

But whatever happened to Billy the unlikely lad, and the myriad other northern characters who were once the stars of stage and screen? Like the pitheads that dominated Casper’s tightly knit neighbourhood, they have disappeared from the landscape. The rot set in during the 1980s, when industries were destroyed and communities collapsed, a point eloquently made in Melvyn Bragg’s excellent radio series The Matter of the North.

Yorkshire historically acted as a counterweight to the dominance of southern elites, in sport as in politics and culture. Yet today, we rarely get to hear the voices of Barnsley, Sheffield, Doncaster and Rotherham. And the Yorkshire sporting powerhouse is no more – at least, not as we once knew it.

This should be a matter of national concern. The White Rose county is, after all, the home of the world’s oldest registered football club – Sheffield FC, formed in 1857 – and the first English team to win three successive League titles, Huddersfield Town, in the mid-1920s. Hull City are now Yorkshire’s lone representative in the Premier League.

Howard Wilkinson, the manager of Leeds United when they were crowned champions in 1992, the season before the Premier League was founded, lamented the passing of a less money-obsessed era. “My dad worked at Orgreave,” he said, “the scene of Mrs Thatcher’s greatest hour, bless her. You paid for putting an axe through what is a very strong culture of community and joint responsibility.”

The best-known scene in Loach’s film shows a football match in which Mr Sugden, the PE teacher, played by Brian Glover, comically assumes the role of Bobby Charlton. It was played out on the muddy school fields of Barnsley’s run-down Athersley estate. On a visit to his alma mater a few years ago, David Bradley, who played the scrawny 15-year-old Billy, showed me the goalposts that he had swung from as a reluctant goalkeeper. “You can still see the dint in the crossbar,” he said. When I spoke to him recently, Bradley enthused about his lifelong support for Barnsley FC. “But I’ve not been to the ground over the last season and a half,” he said. “I can’t afford it.”

Bradley is not alone. Many long-standing fans have been priced out. Barnsley is only a Championship side, but for their home encounter with Newcastle last October, their fans had to pay £30 for a ticket.

The English game is rooted in the northern, working-class communities that have borne the brunt of austerity over the past six years. The top leagues – like the EU – are perceived to be out of touch and skewed in favour of the moneyed elites.

Bradley, an ardent Remainer, despaired after the Brexit vote. “They did not know what they were doing. But I can understand why. There’s still a lot of neglect, a lot of deprivation in parts of Barnsley. They feel left behind because they have been left behind.”

It is true that there has been a feel-good factor in Yorkshire following the Rio Olympics; if the county were a country, it would have finished 17th in the international medals table. Yet while millions have been invested in “podium-level athletes”, in the team games that are most relevant to the lives of most Yorkshire folk – football, cricket and rugby league – there is a clear division between sport’s elites and its grass roots. While lucrative TV deals have enriched ruling bodies and top clubs, there has been a large decrease in the number of adults playing any sport in the four years since London staged the Games.

According to figures from Sport England, there are now 67,000 fewer people in Yorkshire involved in sport than there were in 2012. In Doncaster, to take a typical post-industrial White Rose town, there has been a 13 per cent drop in participation – compared with a 0.4 per cent decline nationally.

Attendances at rugby league, the region’s “national sport”, are falling. But cricket, in theory, is thriving, with Yorkshire winning the County Championship in 2014 and 2015. Yet Joe Root, the batsman and poster boy for this renaissance, plays far more games for his country than for his county and was rested from Yorkshire’s 2016 title decider against Middlesex.

“Root’s almost not a Yorkshire player nowadays,” said Stuart Rayner, whose book The War of the White Roses chronicles the club’s fortunes between 1968 and 1986. As a fan back then, I frequently watched Geoffrey Boycott and other local stars at Headingley. My favourite was the England bowler Chris Old, a gritty, defiant, unsung anti-hero in the Billy Casper mould.

When Old made his debut, 13 of the 17-strong Yorkshire squad were registered as working-class professionals. Half a century later, three of the five Yorkshiremen selec­ted for the last Ashes series – Root, Jonny Bairstow and Gary Ballance – were privately educated. “The game of cricket now is played in public schools,” Old told me. “Top players are getting huge amounts of money, but the grass-roots game doesn’t seem to have benefited in any way.”

“In ten years’ time you won’t get a Joe Root,” Rayner said. “If you haven’t seen these top Yorkshire cricketers playing in your backyard and you haven’t got Sky, it will be difficult to get the whole cricket bug. So where is the next generation of Roots going to come from?” Or the next generation of Jessica Ennis-Hills? Three years ago, the Sheffield stadium where she trained and first discovered athletics was closed after cuts to local services.

This article first appeared in the 19 January 2017 issue of the New Statesman, The Trump era