Hamish McRae: Adapt now, or our children will suffer

Economic View

It is possible that the 20-somethings now entering the workforce in Britain will become the first generation for a couple of centuries that end up, on average, poorer than their parents?

Click here to launch the graphic

It is a deeply troubling thought, for while the combination of two world wars, the inter-war depression and the 1970s inflation meant many individuals are worse off than their parents, this has not been true for society as a whole. Harold Macmillan's misquote – that most people had never had it so good – has until recently still applied.

But now we are seeing something of a return to the gloom of the late Seventies, when commentators wrote of the UK facing not just relative decline but absolute decline. We have had five years of stagnation in living standards. Home ownership is falling. Productivity is falling. And now the Bank of England thinks that the country's GDP will not be back to its previous peak until 2015.

Of course we are not alone. If the UK faces a lean seven years, Japan has experienced two decades with very little growth. In the US, there has been growth but it has been unevenly shared, for the median income of working people is now no higher than it was in the 1980s. Across southern Europe people are having to confront a more savage squeeze on their living standards than they have ever experienced in peacetime.

There is, of course, a sharp contrast between this sense of decline in the West with the self-confidence of the emerging world. But that in a way makes matters worse for us. We can and should celebrate the way that millions of people are being lifted out of poverty every year in China and India – and recently in Africa too. But this success does rather rub our nose in our failure.

You could say that the emerging world's progress is the result of their application of technologies developed in the West – everything from production-line manufacturing in China to mobile telephony in Africa. But unless we can continue to innovate, to keep increasing our productivity, our own living standards will stagnate.

So are we condemned to stagnation? I think the answer to that is almost certainly not, but it is hard to separate the many different strands of evidence. The first difficulty is to distinguish between the cyclical and the structural. It has been a pig of a cycle and you would expect, as we all clamber up out of the dip, that living standards must inevitably be lower than they would be had we cantered on. As you can see from the main graph, the UK and US have had a different experience. In the US published GDP is back above its previous peak but employment is well below it; we have done the opposite, with higher employment but lower GDP.

So their productivity has improved but ours has declined. But, it is surely socially less destructive to keep as many people who want to work in jobs, particularly given the US's weaker welfare protection. At the moment our countries seem have a different choice of priorities but it may turn out that as demand rises we will converge again, with the US increasing employment and the UK productivity. The worry is that even in the US there seems to be a longer-term slide in the rate of increase in productivity, as the small graph suggests.

There is another reason why living standards have been held back. It is that consumption was artificially boosted during the boom by excessive borrowing and while individuals on both sides of the Atlantic have made a good start at rebuilding savings, our governments have barely begun to cut the deficits, let alone start to pay off debt. That too will hold back living standards for several more years.

But all this is cyclical. The issue that matters more than anything else, is whether there has been some structural change, some damage to the great engine that has increased wealth incrementally, year after year, since the Industrial Revolution.

The answer to that depends on your analysis of the forces that drove such growth. On the one hand the extent to which it was the exploitation of finite natural resources; and on the other the extent it was the result of human ingenuity.

You can see both drivers at work now. China is fuelling its economic boom by scooping up natural resources from wherever it can get them, as well as applying Western technology. But within the West we are still innovating, finding ways of doing things more effectively. Look at the way modern cars don't break down as they used to 30 years ago and deliver double the miles to the gallon, or the way we book our own flights on the internet, enabling airlines to achieve much higher load factors than they could before.

The problem is that human ingenuity is struggling to increase living standards against a several strong headwinds, some of which we cannot do much about. For example we cannot do anything about ageing societies. That is another welcome development, for who would want a country where lifespans were falling? But most developed countries have been bad at adapting to this shift. A smaller workforce relative to the numbers of young people and the retired inevitably reduces overall living standards.

Nor have we been good at matching skills to jobs. We cannot know what skills will be needed in, say, 10 years' time, so we have to teach people to be ready and be eager to retrain. Even now, a recent GE Capital study of medium-sized firms showed the managers felt the biggest thing that held them back was not shortage of cash but shortage of skilled people.

The point here is we could be doing better. But the relentless drive to do more with fewer resources evident in manufacturing has not yet spread to many service industries and to the public sector. Until we realise that, our children may not have as high living standards as we enjoy.

A big week for home and European economic announcements

There are three bits of economic news coming up this week that will deserve notice.

The first comes on Tuesday, when the eurozone finance ministers will have to decide if Greece gets its next tranche of money. If they don't hand it over in the next couple of weeks, Greece may well not be able to pay its civil servants or pensioners next month. So they will eventually do so. But they may not agree yet because the IMF does not accept the eurozone figures for the sustainability of Greek debt and therefore is unwilling to sign off its role in the financing. Indeed, legally it probably cannot do so.

The central message here is that Greece will eventually get not just this chunk of money but also subsequent disbursements. Expect that to give a short-term boost to the euro, even though nothing is changed in the medium-term.

The next event is on Wednesday when the Chancellor (and the rest of us) get the October public accounts. That will tell us all how far adrift the Treasury is in hitting its deficit reduction target for this financial year and, if you are cynical, the extent to which the Chancellor will try to massage the figures to give the impression he is still on track.

He cannot do much, given that he has the Office for Budget Responsibility looking over his shoulder, so this is essential input for the OBR's report, out on 5 December with the Autumn Statement. Bank of England minutes will also be published on Wednesday.

Then on Thursday, the focus will shift to Brussels and the EU budget. The thing to realise about this is that this is politics, not economics. The numbers are huge in absolute terms but small in terms of national finances.

The difference between what will be seen as a good or a bad deal for the UK is in the hundreds of millions, whereas we are borrowing a billion every three days. But politics matter and the interest for us will be the way in which this pushes the UK further towards the door marked exit.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Day In a Page

Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there