Puzzlement and Pain

My friend John Cole has sent me the following essay.  It reflects my views exactly and is packed with supporting evidence.

Is there a lack of joined-up thinking in how we run our economy and our lives?

My comments, which are largely critical, apply in the first instance to the UK but I suspect apply even more strongly to the US economy  - and to a lesser extent to the other G7 countries.

In 1930 Keynes was looking 80 years ahead to a time where productivity would have increased to such an extent that a perfectly acceptable material standard of living for the whole population would be available on the basis of the workforce working just three hours per day.  Materially there would be enough for everybody, plus far greater opportunities for leisure. People would have the time and the energy to socialise,  educate themselves and engage in and appreciate the arts, literature, music etc.

In those 80 years gross domestic product (GDP) per capita has grown even greater than Keynes had predicted.   What has not happened is the reduction in hours worked.  Yes, there has been some reduction  (from 48 p.w. to 35 p.w.) but not the reduction to 15 p.w..  Partly this is explained by the increase in consumption opportunities.  Large sectors of the UK and the US populations have become obsessed with increasing their material standard of living which might show itself in a large home, more domestic appliances and luxuries, a better car, and a second car, two foreign holidays per year and possibly a second home in the country – or a flat “in town”.

These last-mentioned luxuries are sometimes called “positional goods” by economists, I think because they help flag up our position in society.  Possessing them, you can favourably differentiate yourself from those who lack them.  You establish your place in the pecking order.  Consumption becomes competitive – not just “keeping up with the Joneses” but exceeding them.

In the standard nuclear family (mum, dad and two kids) if father's earnings were not enough to pay for that second car or foreign holiday, then mum went out to work.  As pay differentials grew and the top 10%  enjoyed incomes which accelerated not just in  absolute terms but relative terms, the remaining 90% struggled, if not to keep up, at least not to be left too far behind.  So hours worked did not fall as predicted by Keynes – and more families had two sources of income.

“Aspiration” in the 1980s and 1990s all too often became degraded into a narrow and individualistic materialism.  “There is no such thing as society”.   The glue which bound the UK together which had been strong in 1945, became weaker.  One way of marking personal success was to buy a private education for your child  and seek your health treatment via BUPA – two more “positional goods” for our collection. Once the wealthy  had  “gone private”  the voice arguing for quality public provision was weakened.   The NHS and pubic education lost powerful advocates because the wealthy no longer used these services and had become more interested in tax  subsidies for the private sector (see charitable status for Eton and Westminster, to name but two).

All the while, on the supply side, private sector firms sought to innovate, develop new products  in the hope of constantly expanding sales.  Our nuclear family was encouraged to consume more and more by a barrage of advertising.  Spiritual and community values became crowded out by a insistent materialism with its  display features.  The new was venerated whilst repairing and re-using the old was seen as out of date.  Too much was simply discarded and not re-cycled.  Our natural resource use might have been rather better.

So, where are we in the UK in 2013?

We are, for the third time since 2008, sliding into recession, due largely to a wrong-headed economic policy.  We are getting out of this recession  more slowly than any recession/depression in the last 200 years – we are still not back to where we were in 2008.  In consequence there are 2.5 million people out of work with over 1 million being youth unemployment.  For every job vacancy within the economy  there are eight potential applicants.

Against this backdrop the coalition government is insisting that all people on disability benefit be re-tested to see whether they are fit to work.  Many are the mis-assessments by Atos (the private sector company charged with the assessment task)  and patently very sick people are being classified as fit to work and being sent out, unsupported, into a hopeless labour market.

Youth unemployment is being masked by the number of  17y.o. and 18 y.o.  who remain in education, which might not be their first choice but saves them being categorised as NEET  (not  in employment, education or training).  Others do leave school and go on to government funded training schemes  which raise their skills, qualifications and confidence but lead all too rarely to  full time, secure employment at the end of the course, because the jobs are just not out there. Or rather, one job for every eight applicants.

(Recent reports highlighted the rising average age of police officers, due to the ban on recruitment for two or three years by many forces. Similarly many Fire Authorities have not recruited in the last three years.  Here are two avenues into employment and careers which have been closed off to today's young.  Note also that this change in the age profile of policemen and firemen will impact on the agility of the forces and also, in the long run, contributions to the pension pot).

At the other end of the age range the age at which the old are entitled to claim their pension is being raised.   The old are being required to work longer.   Given greater longevity, this makes sense – but  it has the consequence of not freeing up vacancies for the young who are looking for work.   Is this joined-up thinking?

Some people capable of working have no work. Others work part time – but would like longer hours.  Yet others are “under-employed” because they are in jobs which do not use their skills to the full – the graduate who is shelf-filling in ASDA.  At the other end of the scale are people who are choosing to work 60+ hours per week – big-hitting lawyers or tax accountants who are totally driven.  There are families where both parents work full time in order to maintain their hold on positional goods. A fair amount of work is being undertaken in the economy – is it too simplistic to say that the work is not being shared out equally – or fairly?  And there is much more work to do which is not getting done because, to give just one example, local government is being starved of funding by a government and a society which regards taxation as a loss rather than the source of funding for meeting collective wants.   Our “possessive individualism” is getting in the way again.

Finally, what has happened to the distribution of income and wealth in our society?  Since 1978 in particular, the distribution of income has become much more uneven, with the top 10% increasing their income much faster than the bottom 50%.  (In technical terms the Gini coefficient – a measure of inequality – has risen from a score of 26 to a score of 35 from 1978 – 2011).  The majority of the UK's increase in real GDP   in this period has gone to the top 10%.  The distribution of wealth and changes in that distribution tell a even more uneven story. In 1973 the top 5% of wealth holders owned 47%  of all wealth.  In 2003 the share of the top 5% had increased to 57%.   In April 2012 the Sunday Times “Rich List”  showed that the richest 1,000 persons in the UK, , just 0.003% of the adult population, increased their wealth over the last three years by £155bn. That is enough for themselves alone to pay off the entire current UK budget deficit and still leave them with £30bn to spare.

(In the USA the unevenness of income distribution is even more marked.  In 2006 the twenty five highest paid hedge-fund managers received $14 billion income between them.  This is three times the collective salaries of all the school teachers in New York City)

Wilkinson and Pickett, in “The Spirit Level” and other writings, have made a compelling case for more equal societies being healthier societies. It is not just physical and mental health, it is stronger social capital and greater community cohesion.  Just one indicator of this is lower crime rates.

By seeking to emulate the USA, by allowing the growth of inequality, by failing to share out work more equitably, by following a wrong-headed fiscal policy, by allowing the atrophy of our social institutions and collective bonds,  the UK is in danger of  going to hell in a handcart.

John Cole    18^th January 2013