Miliband, Obama and Lagarde on Reforming Capitalism
I was in Washington last week for a series of meetings at the IMF and World Bank as part of an ITUC delegation, so I missed Ed Miliband’s big speech on the economy and initially only saw the headlines. Naturally enough the headlines focussed on the major tax policy announcements but when I actually got a chance to read the whole speech, I was struck by how these policies where in some ways the least interesting things he said.
We can debate the merits of the design of a mansion tax and the various methods of boosting the incomes of the low paid but more generally the desire to tax the wealth of the best off and use the proceeds to relief some of the squeeze on the worst off is surely correct.
But whilst the policy direction may be correct, the bigger news for me were the wider implications of the speech – a theme Stewart Lansley has picked up today at Shifting Grounds.
What was especially striking to me last week in Washington was how the themes of Miliband’s speech echoed not only those of Barack Obama’s State of the Union but also the tone of much of the recent discussion of inequality coming out of the IMF.
Today, we are increasingly two nations: with high skill, high paying jobs for those at the very top but low-skill, low paid, long hours jobs for too many people.
That’s because over the last three decades, we have seen fewer and fewer middle-income jobs in Britain.
That’s fewer jobs in skilled trades and more jobs paying less, with greater insecurity.
We must turn this round.
So a One Nation economy needs to support businesses that create sustainable, middle-income jobs.
That means a modern industrial policy that supports the sectors that will create those jobs of the future like the green industries that are so important for our country.
And an end to the short-termism which prevents many businesses investing.
But we gather here knowing that there are millions of Americans whose hard work and dedication have not yet been rewarded. Our economy is adding jobs – but too many people still can’t find full-time employment. Corporate profits have rocketed to all-time highs – but for more than a decade, wages and incomes have barely budged.
It is our generation’s task, then, to reignite the true engine of America’s economic growth – a rising, thriving middle class.
Inclusive growth is certainly a top concern of policymakers. The message is resonating widely.
I was not surprised, therefore, to see that the World Economic Forum’s most recent survey puts “severe income disparity” at the very top of global risks over the next decade. Excessive inequality is corrosive to growth; it is corrosive to society.
I believe that the economics profession and the policy community have downplayed inequality for too long. Now all of us—including the IMF—have a better understanding that a more equal distribution of income allows for more economic stability, more sustained economic growth, and healthier societies with stronger bonds of cohesion and trust. The research reaffirms this finding.
What is less clear is how we achieve more inclusive growth in practice. Certainly, universal access to decent education is the non-negotiable starting point. Beyond that, I believe policies such as robust social safety nets, extending the reach of credit, and—in some cases—minimum wages can help.
Above all, inclusive growth must also be job-rich growth.
Miliband, Obama and Lagarde are all, on one level, arguing the same case – what is needed is not just growth but jobs rich growth that actually sees rising incomes for those in the middle and below. This is not just socially desirable but crucial to long term economic stability and sustainability.
This point was reinforced by an excellent article in the Washington Post last week:
Middle-class income growth looks even worse for those recoveries. From 1992 to 1994, and again from 2002 to 2004, real median household incomes fell — even though the economy grew more than 6 percent, after adjustments for inflation, in both cases. From 2009 to 2011 the economy grew more than 4 percent, but real median incomes grew by 0.5 percent.
In contrast, from 1982 to 1984, the economy grew by nearly 11 percent and real median incomes grew by 5 percent.
Today, nearly four years after the Great Recession, 12 million Americans are actively looking for work but can’t find a job; 11 million others are stuck working part time when they would like to be full time, or they would like to work but are too discouraged to job-hunt. Meanwhile, workers’ median wages were lower at the end of 2012, after adjustments for inflation, than they were at the end of 2003. Real household income was lower in 2011 than it was in 1989.
The picture in the UK, as anyone familiar with TUC or Resolution Foundation research is well aware, is similar. Median weal wages in the UK are set to be at 1999 levels in 2016 – the current squeeze on real incomes follows a long period when real wages did not keep up with economic growth.
The case the Miliband, Obama and Lagarde are essentially arguing is that we need growth that doesn’t look like the growth we had before the recession where too much of the rewards went to those at the very top.
Of course saying that you want more inclusive growth is all well and good, but isn’t the same thing as outlining how you intend to achieve it.
The need to design a more inclusive economy means moving beyond traditional macroeconomic policy making, something recognise by thinkers such as Nick Pearce and Gavin Kelly. They set out an economic programme back in September that was notable in that it moved the debate beyond discussions of fiscal and monetary policy. As I wrote at the time:
It is their suggestions on ‘economic radicalism’ that I find especially interesting. In many ways it fits into what I call ‘reforming capitalism’ and the issues that they highlight–the need to raise real wages, the case for banking reform, the problems of Britain’s existing system of corporate governance, the lack of investment, etc – will be familiar to readers of this blog.
They acknowledge that many of these problems predate the crisis of 2008.
One striking feature of their economic reform agenda is how little of it is to do with the traditional levers of fiscal and monetary policy. I think this is exactly correct, the debate about economic policy has to be about far more than taxation levels and spending programmes…
For far too long, the political debate about the economy in the UK has concentrated on fiscal and monetary policy and generally ignored much else (with some occasional technocratic initiatives on skills/training or competition policy on the side that generate less interest).
Pearce & Kelly’s call for ‘economic radicalism’ seems to reject this approach, it takes the debate inside the ‘blackbox’ of the firm to look at corporate governance, it talks about the structure of the banking and it looks at the scope for raising wages.
What is really required is not just changes to our taxation system or spending priorities but a fundamental redesign of our national business model. Recent work from the TUC, Lord Heseltine, the Resolution Foundation and the Bank of England’s Andy Haldane all point in the same direction. Seen in a traditional macroeconomic frame this is essentially about supply side policy – as both the TUC’s Budget Submission and our most recent Economic Report argue the UK requires not just an immediate boost to demand but also fundamental changes to banking, industrial policy, corporate governance, skills policy. The aim of growth has to be to support rising living standards for those in the middle and below and achieving that requires more than just a fiscal stimulus or some changes in tax policy.
So whilst there is much to welcome in Ed Miliband’s tax announcements, I suspect in the longer term it was his remarks on banking reform, corporate governance changes and skills policy that will more significance. Fundamentally this is a debate about refoming our model of capitalism.