I am currently sat in one of our American offices. Having arrived last week, and spent some time jumping between different venues meeting colleagues and clients, I’m now just about over the jet lag (although am coming home at the weekend). But one thing I struggle even more to get acclimatised to is the American attitude to economic growth and incomes.
With the increasing emphasis on stepping back from providing any sort of limitations or even guidance to private business, the UK government has bought into the idea that capital (money, to you and me) can flee across borders as quickly as it likes. If we don’t makes it easy for money to do what it wants, the argument goes, it will simply go elsewhere. If that means no job protection for workers, inflation-busting price rises and sky-high salaries (if not always profits) at utilities and other service firms, we are told that that is a price worth paying. Otherwise, where would the jobs come from?
The problem is that I’m not sure it is a price worth paying; and every time I come to the ‘land of the free’, my opposition to this narrative hardens. America has, by most metrics, some of the least fettered businesses in the world. Sure, there are some regulations – you’re not supposed to sell cars that kill their drivers when they start up – but most serious studies find that barriers to entry and the cost of red tape are generally as low in the US as in any other major economy, give or take the odd statistical wrinkle.
This is supposed to help generate roaring growth. But there are two problems with this notion. First, outside of the emerging world – where liberating markets genuinely can have a long-term impact – the result of product and labour market reforms in advanced economies generally doesn’t lead to an explosion in economic growth. The best you can hope for is some lift in the level of GDP; but several studies have shown that, over longer horizons, trend growth is remarkably invariant to government size, regulatory regimes, or other factors. Some much more regulated economies match the growth performance of the US, once things like labour market and demographic developments are taken into account. Deregulation and business-friendly policies do not permanently raise GDP growth, once an economy becomes reasonably established.
Second, even the growth that do you see is not evenly distributed. This reflects both the decline in the labour share over a long period of time, as returns to capital have outpaced workers’ share of the pie, and the fact that the rich tend to own more assets (equities, bonds, houses) than the poor. America has some of the worst inequality metrics in the world.
What really astonishes me is that the right-wing narrative over here is so completely pervasive that even Democrats struggle to challenge it, or simply don’t bother. Almost everyone in America seems to believe in the ‘dream’ of becoming rich themselves, and implicitly do not want to give up that wealth when it arrives. But with the chances of genuinely making it to the top so ridiculously small, the end result is that the vast majority of people remain stuck at the bottom, unable to accrue wealth, while those few at the top hoard their captured riches like Smaug. (There are notable and praiseworthy exceptions, of course.)
My growing concern is that the same narrative has taken hold back home in the UK. Do we really care about each other that little? Are we really prepared to gamble our own futures, and those of our children, on such ridiculously small odds? Russell Brand may be engagingly preposterous in many regards; but I hope that the vein of concern that he has tapped into is not as transient as the laughter he entices. Similarly, I am definitely not a fan of Ed Milliband; but almost by accident his cost of living argument has hit upon a real and important issue. The challenge for economists, meanwhile, is to describe a system that puts concerns about these massive disparities right at its heart, without losing the benefits that market economies can offer when they work well.