Economics, politics and the reality of the 'squeezed middle'

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It's too early to be pessimistic about boosting living standards

Despite the recent upturn, the still severely weakened state of our economy means we can't judge what is possible yet.

Commuters walk across London Bridge in the City of London on January 25, 2013. Photograph: Getty Images.

Things are likely to stop getting worse sometime soon, progress will then be painfully slow, and it’s going to be an awful long time before they get back to where they were before the crash. 

That’s the gist of a major new report on living standards by the Resolution Foundation, which will show that typical household incomes are set to start growing in 2015 and then creep upwards thereafter. But by 2018 they are still likely to be 3.5 per cent below their pre-crisis peak (5 per cent below if we exclude pensioners households).

Whether this outlook provides grounds for a modest sense of cheer or a further round of gloom is a moot point. Given the six years of falling incomes the public will have endured, it is hard to gauge exactly where expectations are now set in terms of what a period of rising GDP might actually mean for families. New polling out today suggests that the public are broadly split between those who take the view that a "recovery" in their living standards merely means any improvement at all, and those who think it requires making up all the ground that has been lost since 2008.

This apparent lowering of expectations about what a period of recovery may yield is certainly in tune with the wider intellectual zeitgeist. Whether it’s the rise of the robots, accelerating globalisation, the spectre of permanent austerity, crushing levels of household debt or the demands of an ageing society – there are plenty of arguments being offered that suggest that, even with growth, it’s going to be harder to grind out significant gains in prosperity for most working people than it used to be. 

We will, so the argument goes, just have to learn to settle for less. Not, in all likelihood, less in absolute terms; but in the sense that we are not going to get better off at the same rate as we used to in the past, certainly in the latter half of the 20th century. Those days are gone. Time for stoical adjustment.

Only a fool would totally dismiss this. There are some signs of a secular decline in the rate of UK wage growth over recent decades. Some jobs have been automated and won’t be coming back. Even before the crisis there was evidence from both the UK and elsewhere that mature economies can grow for periods without significantly improving the prospects of many, or even most, of the people in them.

Yet it would be equally foolish to swallow too neatly these voguish and gloomy arguments. Despite the recent upturn, the still severely weakened state of our economy means it’s way too soon to judge what is possible. How could we possibly determine whether over the longer term significant rises in living standards are going to be much harder to realise when so many of the essential conditions for progress are still absent?

Slack in the economy is always the great enemy of widely shared growth and, if last week’s Green Budget by the IFS is right, there is still a massive amount of it around. It suggests there is so much spare capacity that growth should be able to accelerate without causing inflation and, in doing so, eat away the entire underlying deficit by 2015 without the need for further austerity thereafter.

Unemployment, though greatly outperforming expectations, is still high at above 7 per cent and underemployment is widespread. Both will continue to exert a powerful chilling effect on wages until they fall far lower. The minimum wage – a crucial underpinning to our jobs market - has been falling in real terms for five years and needs to be restored to help spark wages at the bottom end. Net public investment has plummeted by around 40 per cent since 2010 and business investment is on the floor. Both impede the rises in productivity that will be the ultimate determinant of living standards.  

With none of these elements in place, though all in principle achievable, the case for longer-term pessimism is highly premature. Let’s not get too spooked, too soon. Rather than winding down our expectations about what is possible, we should be rebuilding the conditions that at least give us a fighting chance of steadily rising living standards for the majority. We might even be pleasantly surprised.

Gavin Kelly is chief executive of the Resolution Foundation