This is an approximate transcript of a talk Mark E Thomas gave to the Harvard Advanced Leadership Program on 21 July, 2020.
And we now have the video, which includes the Q&A, available here.
As Doris said, I’m going to talk a bit and try to leave a lot of time for discussion.
My key point is that in both the US and the UK, a process of mass impoverishment has taken hold of the economy, and we need to act to reverse it:
- because on current trends before we get to 2050, neither country will look like a modern, civilised democracy – our civilisation will have failed;
- because in reality the barriers that stopped us from tackling this problem are myths, not reality; and
- because the types of action that we need to take a certainly not trivial – but they are not revolutionary either.
Let’s take each point in turn.
On current trends we are set for failure
I suspect you have seen a chart like this before. These data have been widely publicised. But it’s still worth pondering how such a huge increase in real GDP can translate into such a negligible increase in wages. Overall, many Americans are poorer now than they were 40 years ago, when you might expect them to be twice as rich.
This next chart indicates how that happened.
As on the first chart you can see growth in real GDP of almost 150% translating into virtually no growth in median wages. But now you can see where the money went. There have been two key drivers of this divergence:
- rising inequality – both in the declining wage share of GDP (and rising profit share) and in rising inequality within wages – and
- falling productivity growth – quite a bit of the GDP growth came simply from growth in the population.
What is really scary though is what happens if you extrapolate past trends into the future. In the past, what we saw was that once taxes, transfers and benefits in kind are taken into account, the bottom 20% of the population has seen their incomes protected, but the overall picture has been that the better off you are, the faster your income has been growing. And the growth rates at the top of the income spectrum have been significantly faster than the growth rate of the economy, which means that the middle segment is increasingly squeezed.
If that same pattern were to continue, the result would be a further hollowing out of the American middle class. The whole of the bottom 60% would be seeing falling incomes. America in 2050 would not offer a comparable standard of living to northern European countries: it would look a bit more like South Africa does today. A small enormously wealthy elite who live surrounded by tight security to protect them from the mass of the population many of whom are living in, or not very far away from, poverty.
The next chart shows the picture for the UK, which is broadly similar except that mass impoverishment is a slightly more recent phenomenon in the UK. You can see that broadly speaking up to 2007 people were getting a little bit richer, but that since then even though the economy has grown a little – actually very little – most people are poorer now than they were in 2007.
What would happen to the UK by 2050?
As with the US, it depends which trends we follow. If we were to follow the pre-2010 trends, then the median wage earner would be about 50% better off than today. But if we follow the post 2010 trends, they will be substantially worse off.
And now of course, there is COVID 19, which has hit every economy badly – especially the US and the UK. If we follow that up with another round of austerity, as some people are pushing for, we could easily see an even worse result. Median earnings might decline by as much as 30%.
What determines which trends we follow? Government policy. Imagine if we had leaders like Franklin D Roosevelt in the US and Clement Attlee in the UK. We would be looking at enormous, visionary rebuilding programmes in the medium term and carefully designed support programs for businesses and for people in the short term.
In fact, these examples seem so obvious that it is surprising that all governments are not following them.
But there is a big barrier. We have persuaded ourselves that we simply can’t afford to do that sort of thing.
And that brings me onto my second point, that the barriers to action are myths not reality.
The barriers to action are myths not economic reality
Government finances seem to be the obstacle. In the US, you’re used to seeing terrifying-looking debt clocks showing that the US government owes $26 trillion. The message is clear: unless government cut spending dramatically, the world will collapse.
It is similar in the UK. We see newspaper articles about ‘economic Armageddon’ and about the irresponsibility of leaving such huge debts for our children and grandchildren. The ratio of Debt to GDP has reached around 100%, and this has triggered a whole slew of articles about how it is all going to be ‘paid back.’
But let’s just take a quick look at the facts.
Most of the data on this slide come from the Bank of England, which has compiled 300 years of economic history for the UK. And the very end comes from the Office for Budget Responsibility estimates. As you can see the OBR is estimating that debt is around 100% of GDP.
Is that a problem? There are already many voices telling us that 100% is ruinous and that we need to prepare for another round of austerity. But that’s not what the rest of the data show.
In fact, 100% is not staggeringly high, it’s not even rather high, it is almost exactly the average level of debt that the UK has held over the last 300 years. There is no factual basis for the debt hysteria.
In fact, even if the debt went a long way above a hundred percent, there would still be no reason for hysteria. Just before the Industrial Revolution really took off, around 1820, debt to GDP was over 200%. Immediately before the Golden Age Of Capitalism (the post-war period 1945 – 1980) debt to GDP was over 250%.
These were the two most successful periods in the UK’s economic history. Very high debt is demonstrably not an obstacle to growth. And the growth itself reduces the rate of debt to GDP – in fact in all our history, the only way of reducing the ratio.
So you will hear a lot of noise about ‘ruinous levels of debt’ and the supposed ‘need to get government finances under control.’ Almost all of that will come from politicians and journalists; and almost none will come from serious economists at reputable universities – and now you can see the reason.
In fact, the last thing that we should be worrying about right now is the level of government debt. We need to protect both sides of the economy: businesses and people. Supply and demand.
And that brings me onto my final point: the actions we need to take are important but not at all revolutionary.
The actions we need to take are not trivial but not revolutionary
Perhaps surprisingly, given the scale of the problem, the actions we need to take are individually neither particularly radical, nor very complex.
In fact there are really only five actions we need to take.
The first action is a democratic reset. At the moment there is nothing in our constitution which prevents the government enacting a policy that it knows will be harmful for 99% of the population. It is simply taken for granted that they would never do that. The last 10 years show us that we cannot rely simply on taking it for granted; we need constitutional protection.
We also need far more in the way of checks and balances than are currently present. Looking at the state of the US today shows that democracy is fragile and risks being captured by powerful interests representing only a very small fraction of the population. All countries need to learn from the US experience.
The second action is self-evident: we need to base policy on facts not myths. The dominant policy of the last decade has been austerity – and this was justified on the basis of the state of public finances: the level of debt to GDP. But as we saw in Part One, as a matter of fact, this is no justification. Austerity was based on a myth, not the facts.
The third action is Formulating policy for abundance and solidarity. Although it’s true that policy formulation is very complex, fundamentally there are only four types of policy. Every policy either grows the pie or it does not grow the pie; and it either shares the pie fairly or it does not.
That gives us this picture.
At the top right are the shared growth policies which both grow the pie and share it fairly. Take fundamental research, for example, we have been gradually funding less and less of this – and yet it is the engine of our future prosperity. Or education; or civil infrastructure; or healthcare – all of these things help everyone in society. We want to see far more of these.
At the top left are policies which do grow the pie, but they don’t share the benefits fairly. Very aggressive automation, for example, could enable us to produce lots more valuable goods and services, which might be good for society as a whole, but would also lead to many job losses. If we do nothing balance these policies, the pie may grow, but many people will find their slice shrinking dramatically.
Over the last 40 years, in the United States, the pie has grown dramatically but many people have seen their slices shrink – and this is because of captured growth policies such as automation and free trade with low-cost countries which led to the hollowing out a lot of manufacturing jobs in the States. We need to see these policies balanced.
And this brings us to the need for the policies on the bottom right. These policies can be used to balance type I policies so that everybody shares in the benefit that growing the pie can offer. So if we did have aggressive job automation over the next 10 years, some of the casualties could be mitigated by retraining and direct job creation schemes, and some of the balancing would need to come from a strengthening of the safety net. A good policy portfolio is a balanced policy portfolio.
A recent example is President Macron’s attempt to introduce a fuel tax surcharge in France to help tackle climate change. It was probably a good idea for the economy as a whole, and certainly for the environment, but it hit the poorest in French society disproportionately hard. It may have grown the pie, but the slicing was not fair.
As a result the gilets jaunes movement sprang up and Macron was forced to abandon his policy. Had he been a bit more intelligent in his policy formulation, he would have seen the need for a balancing policy. It would have been easy for him to announce a green dividend to be paid to the poorest 25% in French society, funded by a fuel tax increase.
Finally there are the vulture policies which neither grow the pie nor share it fairly. A no-deal Brexit would be an example. The government’s own analysis shows that no deal Brexit would be expected to shrink the pie. When that happens many people are bound to suffer, even if some hedge fund managers do extremely well. We simply should not implement vulture policies.
So if we look back over the last 10 years, we can see that the main reason for a lot of our problems is that we’ve had a preponderance of Type I and Type III policies, and far too few Type II and Type IV policies.
The fourth action is to invest wisely in the future. Because of austerity we have been unwisely under-investing, and there is a great deal of catching up to be done.
And finally, the fifth action is to ensure clean, competitive markets. Competition is supposed to ensure that good businesses drive out bad ones. But too often today, it works the other way round. One of the easiest ways for a business to be competitive is to externalise its costs: to pollute without paying the costs of clean-up, to avoid taxes, to underpay staff – and leave the rest of society to pick up the bill for this. And so an ethical business finds itself at a disadvantage when competing with an unethical one. We need to fix that.
So how are we going to ensure that these five steps become reality?
This slide shows what The 99% Organisation is in the process of building.
In June last year, this slide would have been blank. Nothing existed: no book; no website; no organisation – nothing but an aspiration.
That aspiration, of course, is to change policy along the lines that we have been discussing.
So a little under a year ago, we published the book 99% and set up The 99% Organisation: an inclusive, non-partisan volunteer organisation whose aim is to prevent further mass impoverishment.
There are 650 people in the UK who need to change the way they vote – our representatives – and they need the votes of their constituents (that’s us).
So the 99% organisation is setting up local groups in each constituency whose ultimate objective is to reach a point where they can apply sufficient pressure to change policy. One question I had for you was whether you might want to set up local groups in the United States. We can talk about that in a minute.
But, of course, local groups can’t apply pressure on their own, and we are putting in place a series of pressure points which the local groups can use to make their points to Representatives.
First, there is the book, 99%, which sets out in far more detail than I have time to do today both the problem and the solution. It also contains a lot of facts, many of which will be new to most Representatives, and which will strengthen their hand in making their own arguments.
We are gradually working to improve our publicity – the book 99% was named by the Financial Times as one of the best economics books of 2019, and we have been gaining an increasing profile on social media. The next stage will be to get a higher profile on mainstream media.
We talked about the need to create clean, competitive markets – and we have recently kicked off a joint project with Imperial College London, the Impact Project and the Institute for Public Policy Research to produce a prototype league table of businesses which externalise their costs. That is a first step in what will be a long journey to reengineer the profit motive and make externalisation impossible.
And we are starting other projects with other organisations which will create further pressure points over time.
So, to summarise:
- in part one, we saw that the US and UK face a stark choice – but also that it is a choice: we can choose the future that we move towards and that we leave to coming generations;
- in part two, we saw the extent to which key policies are based on myth and rhetoric rather than fact;
- In part three, we saw in outline the kinds of policy shift – and shift in mindset – that will be needed to move us towards an attractive future for our children.
And you now know something about the 99% organisation and its plans for change.
Thank you very much indeed for your questions so far. Please do sign up and join us: we need your help.