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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"We repealed, then forgot": the long shadow of Section 28 homophobia

Why are deeply conservative views about the "promotion" of homosexuality still being reiterated to Scottish school pupils? 

Grim stories of LGBTI children being bullied in school are all too common. But one which emerged over the weekend garnered particular attention - because of the echoes of the infamous Section 28, nearly two decades after it was scrapped.

A 16-year-old pupil of a West Lothian school, who does not wish to be named, told Pink News that staff asked him to remove his small rainbow pride badge because, though they had "no problem" with his sexuality, it was not appropriate to "promote it" in school. It's a blast from the past - the rules against "promoting" homosexuality were repealed in 2000 in Scotland, but the long legacy of Section 28 seems hard to shake off. 

The local authority responsible said in a statement that non-school related badges are not permitted on uniforms, and says it is "committed to equal rights for LGBT people". 

The small badge depicted a rainbow-striped heart, which the pupil said he had brought back from the Edinburgh Pride march the previous weekend. He reportedly "no longer feels comfortable going to school", and said homophobia from staff members felt "much more scar[y] than when I encountered the same from other pupils". 

At a time when four Scottish party leaders are gay, and the new Westminster parliament included a record number of LGBTQ MPs, the political world is making progress in promoting equality. But education, it seems, has not kept up. According to research from LGBT rights campaigners Stonewall, 40 per cent of LGBT pupils across the UK reported being taught nothing about LGBT issues at school. Among trans students, 44 per cent said school staff didn’t know what "trans" even means.

The need for teacher training and curriculum reform is at the top of campaigners' agendas. "We're disappointed but not surprised by this example," says Jordan Daly, the co-founder of Time for Inclusive Education [TIE]. His grassroots campaign focuses on making politicians and wider society aware of the reality LGBTI school students in Scotland face. "We're in schools on a monthly basis, so we know this is by no means an isolated incident." 

Studies have repeatedly shown a startling level of self-harm and mental illness reported by LGBTI school students. Trans students are particularly at risk. In 2015, Daly and colleagues began a tour of schools. Shocking stories included one in which a teacher singled out a trans pupils for ridicule in front of the class. More commonly, though, staff told them the same story: we just don't know what we're allowed to say about gay relationships. 

This is the point, according to Daly - retraining, or rather the lack of it. For some of those teachers trained during the 1980s and 1990s, when Section 28 prevented local authorities from "promoting homosexuality", confusion still reigns about what they can and cannot teach - or even mention in front of their pupils. 

The infamous clause was specific in its homophobia: the "acceptability of homosexuality as a pretended family relationship" could not be mentioned in schools. But it's been 17 years since the clause was repealed in Scotland - indeed, it was one of the very first acts of the new Scottish Parliament (the rest of the UK followed suit three years later). Why are we still hearing this archaic language? 

"We repealed, we clapped and cheered, and then we just forgot," Daly says. After the bitter campaign in Scotland, in which an alliance of churches led by millionaire businessman Brian Souter poured money into "Keeping the Clause", the government was pleased with its victory, which seemed to establish Holyrood as a progressive political space early on in the life of the parliament. But without updating the curriculum or retraining teaching staff, Daly argues, it left a "massive vacuum" of uncertainty. 

The Stonewall research suggests a similar confusion is likely across the UK. Daly doesn't believe the situation in Scotland is notably worse than in England, and disputes the oft-cited allegation that the issue is somehow worse in Scotland's denominational schools. Homophobia may be "wrapped up in the language of religious belief" in certain schools, he says, but it's "just as much of a problem elsewhere. The TIE campaign doesn't have different strategies for different schools." 

After initial disappointments - their thousands-strong petition to change the curriculum was thrown out by parliament in 2016 - the campaign has won the support of leaders such as Nicola Sturgeon and Kezia Dugdale, and recently, the backing of a majority of MSPs. The Scottish government has set up a working group, and promised a national strategy. 

But for Daly, who himself struggled at a young age with his sexuality and society's failure to accept it, the matter remains an urgent one.  At just 21, he can reel off countless painful stories of young LGBTI students - some of which end in tragedy. One of the saddest elements of the story from St Kentigern's is that the pupil claimed his school was the safest place he had to express his identity, because he was not out at home. Perhaps for a gay pupil in ten years time, that will be a guarantee. 

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