Today, the IPPR Commission on Economic Justice publishes its interim report – Time for Change: A New Vision for the British Economy. The Commission offers a powerful analysis of the way the economy functions today, a fresh vision for the future, and contends that this is the moment for reforms of a magnitude last seen in the 1980s or 1940s. What is striking is not just what is being said, but who is saying it: a broad-based coalition of British business, trade unions, civil society and academia. The members of the Commission range from the Archbishop of Canterbury to local community organisers to leaders in the City of London. It reflects 21st century Britain, with a 50-50 gender balance and a quarter of commissioners from ethnic minorities.
But what is economic justice? And why does it matter? Economic justice is the idea that the economy will be more successful if it is fairer: that prosperity and justice go hand-in-hand rather than in opposition to one another. Here’s why.
First, economic justice about creating a successful economy that achieves sustainable growth. This means improving productivity, the measure of what you get out for what you put in. This is important in generating prosperity; but at the same time, it is also about creating good jobs that make the best of people’s talents. Today, there are some five million people working in jobs that are below their skill level. This means they aren’t able to earn what they could, and the productive potential of the economy is held back. Sustainable growth matters because a declining economy hits the poorest hardest. Moreover, as new research in the Commission’s report shows, GDP growth is no longer translating into rising wages – and we are in the midst of the longest stagnation in wages in 150 years.
Second, economic justice is about making sure that the benefits of that growth go to people rather than profits – as the Archbishop of Canterbury, one of the Commissioners, says we need “an economy in service of human flourishing”. The economy exists to serve society, not the other way round. This means over time, the economy should be increasing the share of national income that goes to wages rather than profits. Indeed, today, workers in Britain are getting the rawest deal since the second world war as the labour share has declined since 1980 and flat-lined since 2010. Not only is that not good for living standards, it also reduces demand in the economy for goods and services and holds back growth. An economy that puts more into wages has the potential to grow faster by creating a virtuous circle.
The third aspect of economic justice is making sure that prosperity is broadly-shared across households, regions and sectors of the economy. Research from the IMF shows that redistributing income from the richest to the poorest in society actually boosts growth because poorer people are more likely to spend in the economy (a higher “marginal propensity to consume”). This flies in the face of the free market ideologues who have long claimed that inequality is the price paid for efficiency: that those at the top need to be disproportionately reward as ‘wealth creators’. Moreover, the UK has the most imbalanced economy in Europe, with both the continent’s richest region in London and other regions that are amongst the poorest. This is a choice that we could reverse by following the example of others, such as Denmark or Germany, that have invested in long-term industrial strategies.
Fourth, economic justice is about fairness across generations – ensuring that the economic promise of rising living standards for successive generations. Even among diehard supporters of the status quo there is a growing recognition that it is hard to convince new generations of the virtues of capitalism if they have no capital. And with home ownership – and indeed car ownership – plummeting among millennials, the problem is on the rise. Not only do millennials expect to be poorer than their parents, on current trend, they will be. An economy which has justice as its organising principle should at the very least offer the same opportunities to present generations that past generations have enjoyed. Indeed, what was so striking about the huge turnout of young people in the general election of 2017 was that their political demands were so limited: the opportunity to have education without being saddled by debt; a decent job with a living wage; and the possibility of owning their own home. Each of these were precisely what their parents were able to enjoy.
Finally, economic justice is about an economy that builds the common good – the things that we share and value in common, from the natural environment through to public services. It recognises that our national wealth is so much broader than household income or company profits. The good economy values the common good and invests in it.
So why is the economy today not functioning as it should? And where do we go from here?
The British Economic Muddle
The Commission argues that the problem is that we don’t have a British economic model – we have an British economic muddle. Great strengths sit uneasily alongside profound weaknesses. Many of these weaknesses stretch back for more than a quarter of a century, and are the product of deliberate policy choices that have created an economy where too much power is concentrated in too few hands.
To start with, we have both world-leading businesses and world-lagging productivity. As Paul Krugman once observed, “productivity isn’t everything – but its almost everything”. UK productivity is 18 per cent below the average for the richest G7 countries, and has stalled since 2008. Our leading firms are as productive as elsewhere, but we have a longer ‘tail’ of low-productivity businesses, in which weak management and poor use of skills leads to bad jobs and low wages. A third of adult employees are over-qualified for their jobs, the highest proportion in the EU. This has been enabled by a labour market which is one of the most flexible, or deregulated, in the developed world. Too many sectors have effectively fallen into a low-pay, low-productivity equilibrium.
One of the reasons productivity is so poor is our investment problem. While we have one of the world’s largest financial sectors, we also have a lower rate of investment than most of our major competitors. Public and private investment is around 5 per cent below the average for developed economies, and has been falling for 30 years. Corporate investment has fallen below the rate of depreciation – meaning that our capital stock is falling – and investment in research and development (R&D) is lower than in our major competitors. Among the causes are a banking system which is not sufficiently focused on lending for business growth, and the increasing short-termism of our financial and corporate sector. Under pressure from equity markets increasingly focused on short-term returns, businesses are distributing an increasing proportion of their earnings to their shareholders rather than investing them for the future.
This affects our capacity to compete in global markets. We find ourselves both succeeding and failing in international trade. The UK has a trade surplus in services, but an overall current account deficit which (as a percentage of GDP) is the largest of all the G7 countries. This indicates a serious problem of competitiveness, made worse over recent decades by an over-valued currency. The UK’s manufacturing sector now makes up just 10 per cent of GDP, lower than in most of our major competitors. The UK’s exports are concentrated in a small number of sectors and many of our industrial supply chains are highly dependent on imports.
In the period since the financial crisis, we have experimented with bold monetary policy, but are constrained by pre-Keynesian fiscal orthodoxy. Since 2008, the UK economy has been supported by extremely low interest rates and a major programme of “quantitative easing” (unconventional money creation) by the Bank of England. Fiscal austerity – public spending reductions and tax rises – has left the UK’s recovery in this period slower than almost all our major competitors. Growth is now being fuelled again by consumer spending, based on rising debt and falling savings. With monetary policy having little further scope to deal with a slowdown, there is a strong case for increased public investment now to drive demand.
This connects to the fifth problem. While the economy depends on public spending, but we’ve not been sufficiently willing to pay for it. Public spending cuts are putting increasing pressure on the services on which our economy and society depend. These pressures are set to increase as the UK’s population ages, particularly in health, social care and pensions: as the working-age proportion of the population declines, we will face a growing “fiscal gap”. Public spending as a percentage of GDP is around 40 per cent, around the developed world average. Yet taxation in the UK is considerably lower than the average, at around 33 per cent of GDP, and total tax receipts at 37 per cent. The complicated nature of the British tax system, and the significant “tax gap” between taxes owed and those collected, suggest that this is a field open to reform.
A decade of disruption ahead
Looking to the future, there is a “decade of disruption” ahead that will present both challenges and opportunities. Brexit will be a momentous change to Britain’s economic governance and trading relationships. While there remains considerable uncertainty about its impact in both the short and long term, it will clearly require – and may create opportunities for – the British economy to become more resilient and competitive, focused on higher productivity and export performance.
But Brexit is only one aspect of a deepening globalisation that will continue to challenge the UK’s role in international trade. As the international economy moves east and south, trade in data and services, in particular, will grow. With emerging economies increasingly able to compete in higher-value products, the UK will need to secure access to global markets in services, and to take advantage of new technological opportunities for advanced and more localised manufacturing.
At home, the magnitude of demographic change on the horizon raises big questions. The population aged over 65 is forecast to grow by a quarter (from 11.6 million to 15.4 million) by 2030, while the working age population grows by just 2 per cent. An ageing population will lead to rising demand for spending on health and social care and pensions, and for immigration to bolster the labour force.
The biggest disruption, however, will come from technological change: the so-called “fourth industrial revolution”. It has huge potential to improve living standards, but will need to be managed to ensure the gains are fairly shared. Automation will change many jobs through advances in artificial intelligence, machine learning and robotics, but higher unemployment can be avoided if the productivity gains are translated into higher earnings and are re-spent in the economy. Society will also need to address the growth of digital companies with near-monopoly power in some markets and in the control of data.
And as we face these challenges, we do so from a position where environmental degradation is reaching critical global and local thresholds across a number of fields, including climate change, air pollution and global habitat loss. “Green growth” offers significant opportunities for the UK, which is already a leader in some low carbon and environmental industries. But it will require a much stronger policy framework, including for the almost wholesale decarbonisation of the economy by mid-century.
Where do we go from here?
What’s clear is that the British economy is in need of fundamental reform. A little bit of tinkering at the edges won’t meet the measure of the moment. Wholesale change is required. That’s why the Commission argues that we need an ambitious agenda to rewrite the rules of British economy. That means rethinking the institutions, frameworks and rules that govern the economy, and confronting the concentrations of economic power that hold back economic success.
Directionless change is simply upheaval. So if change is to be made for the good, the ultimate destination must be clearly articulated. This has happened before: for example, in 1942, William Beveridge articulated a vision of “full employment in a free society”. That formulation helped the Atlee government to forge a new economic and social settlement for Britain. That’s why the Commission sets out a new vision for the British economy in 2030 – a vision of an economy where “prosperity is joined with justice and that builds the common good”.
In its interim report, the Commission promotes three principles for reform. First, putting the economy on stronger institutional foundations that enables long-term prosperity through greater certainty that supports investment. Alongside a new vision, the Commission is exploring the indicators and institutions of economic policymaking, including a stronger partnership between governments, business, trade unions and civil society. The Commission is looking at a new approach to macroeconomic policymaking, including fiscal, monetary and exchange rate policy. Moreover, it is exploring a wholly new settlement for the UK’s nations and regions, including new powers and institutions.
Second, making the British economy more competitive, more innovative, and better set for long-term success. That means a new approach to industrial strategy, aimed at strengthening innovation, raising productivity in the “everyday economy”, and using “missions” to address major challenges, including reducing the economy’s impact on climate change and the environment and responding to an ageing society. It requires a better way of promoting both entrepreneurialism and market competition, particularly through open data and a new framework for digital monopolies. This requires deep reforms to the finance sector to support long-term investment, both through banking and equity markets, and major reforms of corporate governance to promote long-term business success.
Third, wiring the economy for justice. Promoting better paying and more secure jobs, including strengthening the role of trade unions, regulating unjust practices in the labour market, promoting better work/life balance and eliminating the gender and ethnic pay gaps. Substantial reform of the tax system, to make it fairer, smarter and simpler. And new measures to spread wealth more fairly, including better taxation, new approaches to housing and widening the ownership of firms. As the interim report finds, redistribution, while always essential, is also a measure of failure: the more it is necessary, the more unfair the economy is in the first place.
Reform of this magnitude has happened twice before in the last century. The established economic order broke down first after the Great Depression of the 1930s and then again after the oil shocks and “stagflation” of the 1970s. In both cases economic crisis led to a major shift in economic understanding, policies, and institutions. The 2008 global financial crisis has precipitated a comparable breakdown in the economic settlement of the last three decades. And in the same way that the postwar Keynesian settlement was established in response to the first breakdown, and the ‘free market’ or ‘neoliberal’ settlement by the second, we believe that a new settlement must now be forged today. That is the task of the Commission’s work in the year ahead.
Tom Kibasi chairs the IPPR Commission on Economic Justice