7. The ‘up’ escalator stalls
Is the world becoming a better place to live? Or a worse one? Given the amount of doom and gloom there is around us — from climate change to Brexit to various social ills and problems — you’d think things are spiralling terribly out of control. Yet as recent books like Stephen Pinker’s Enlightenment Now and Hans Rosling’s Factfulness show, things are getting consistently better on almost every front.
One of the most telling metrics of prosperity and wellbeing is life expectancy: the lower life expectancy is in a given society the more likely it has deep social, economic and/or political problems.
The good news is that life expectancy is rising in (nearly) every part of the world. In parts of Africa the advances have been astonishing. For example, between 2003 and 2013, average life expectancy in Kenya jumped 10 years. That means that, on average, a person starting that decade was no nearer to death ten years later. Their likely age of death was receding as fast they were ageing.
Hunger is another telltale metric. In 1947, half the world was undernourished with about 600 deaths from famine per 100,000. Today, 13% of the world is undernourished. That is still far too high but the improvement is massive. Now, deaths from famine are close to zero. If they happen at all it’s in war zones. The cause is man-made conflict, not poverty itself.
Then there’s simple poverty: not having enough income to survive with health and dignity. In 1965, the World Bank estimated that 2 billion people were living in extreme poverty (with an income of less than $1 a day). By 2018, that figure had more than halved and is on course to reach zero by 2026. That is just breathtaking progress.
There is a simple reason for these astonishing advances in life expectancy, nutrition and poverty. Once a country has discovered secrets of wealth creation such as necessary infrastructure, know-how and trust-building institutions they create a sort of ratchet effect, a virtuous spiral of accelerating momentum where one advance generates the conditions for further advances that generate even more advances, and so on. In other words they create an almost automatic upward escalator that inexorably propels economic growth and improvements in standards of living forward.
I’ll explore the ‘secrets of wealth creation’ in detail later, but my key point here is that once wealth creation gets going, it’s like a supertanker at top speed: it actually takes an awful lot stop it or even slow it down.
The great exception
Now take a look at this graph.
The graph shows the cumulative growth in real income for each percentile of the world’s population between 1988 and 2008. Starting on the left it shows the poorest ten per cent of people, then the next poorest ten percent and so on until we get to the richest ten per cent on the right. If we look at the box numbered ‘1’ for example, it shows that the ‘next poorest ten per cent’ saw their income grow by 50% in the twenty years from 1988 to 2008. The box numbered ‘3’ shows the richest ten per cent seeing their income grow by nearly 60%.
Now look at the box numbered ‘2’. This covers the ‘next richest ten per cent’. Their income only grew by around 10% over the same decades. What the graph shows, in other words, is that virtually everybody around the world got richer — a lot richer — except for one group: the ordinary citizens of the once-prosperous industrial nations of the US and Europe.
In fact, things are worse than what the graph suggests because it only takes us to 2008. Since then, the situation for most citizens of these nations has stagnated or got worse (see below).
Is it just a coincidence that the rising tide of improving prosperity has missed the citizens of Universe One, who happen to be living in countries where Universe Two’s financial cancer now dominates? Is it a coincidence that this Grand Exception kicked in just as the free market revolutions of Margaret Thatcher and Ronald Reagan took off — when financial markets were left ‘free’ to make money out of thin air? I don’t think so.
The rest of this blog focuses on two core messages. First, as with any cancer, the richer Universe Two gets, the poorer the citizens of Universe One get. This is not about ‘poverty’ as some unfortunate but unavoidable ‘natural’ occurrence. It’s about impoverishment — an act of policy. Second, this isn’t just about the distribution of wealth. The further financial cancer spreads the sicker the host body gets: our very ability to create wealth is being neglected, dismantled, destroyed.
From the late 1970s onwards, not only was there a ‘bonfire’ of regulatory restrictions on the ‘freedom’ of finance to make money. At the same time something else happened. The once-advanced industrial nations started ‘de-industrialising’ at breakneck pace. Complete industries that were once pivotal to western prosperity, including coal mining, steel making, car making, ship building and manufacturing generally, were either closed down or shipped abroad.
Everyone knows this happened. But very few realise the scale of what happened. Put simply, as Richard Baldwin writes in his book The Great Convergence. “A century’s worth of rich nation’s rise has been reversed in just two decades.”
Back in the 1970s, when the free market revolution began, the rich industrialised nations of the world (the G7 of the United States, Germany, Japan, France, Britain, Canada and Italy) accounted for 70% of world manufacturing. In contrast, China, Korea, India, Poland, Indonesia and Thailand accounted for around 2%. By 2010, the G7’s share had fallen to less than 50% and the ‘Industrialising Six’ accounted for nearly 30%. This gargantuan shift in manufacturing capability has been accelerating even further since then.
Result? The G7’s share of world income, as calculated by the World Bank, is now back to what it was at the beginning of the 19th century. For over a century and a half the G7 enjoyed burgeoning industrial production and prosperity. Then, in the mid-1980s the upward spiral was first checked and then, as Baldwin puts it, started “torquing downwards at a mighty pace”.
Investment and productivity
You won’t be surprised to discover then, that investment in the real economies of these nations is in decline. As I demonstrated in a previous blog, banks have virtually stopped lending to corporations, and corporations have reined in investment in research, development and productive capabilities preferring instead to build cash mountains and pass as much money as they can to shareholders. As I showed, in recent years they have handed more money to their shareholders than they actually earned!
When investment into the real economy gets throttled back, productivity suffers. This matters, because productivity and real wealth creation march hand in hand. As the OECD stated in a recent review, ”Over time and across countries, higher productivity is reliably associated with higher wages, higher consumption levels and improved health indicators.”
Thanks to the industrial revolution, productivity has been burgeoning in western industrialised countries decade after decade, driving living standards upwards. Between 1967 and 2007 UK productivity more than doubled, which meant that over time we as, as a nation, doubled our total output for every hour we worked. That’s pretty impressive. We baked a much larger cake, so everyone had the opportunity of a bigger slice.
But since 2007, productivity has effectively flatlined. If the pre-2007 trend line had not been broken, productivity per hour in the UK would have been 18.5% higher than it is now. In other words, we would all be 18.5% richer than we are now.
That’s not a little blip. It’s a sea-change.
Pay, poverty and wellbeing
What comes with stagnant productivity? The answer, of course, is lower wages, lower consumption and worsening health indicators. Which is exactly what is happening.
Let’s start with incomes. Between 1999 and 2007 UK citizens’ real disposable income grew by 21%. They were still on that upwards escalator. But since the financial crash, the trend in average real disposable income has gone into reverse. More and more people are getting poorer, not richer. Since the financial crisis of 2007–8, on average, peoples’ real annual wages have fallen by £800. The worst hit are those aged between 30 and 39 who are now earning £2,100 a year less than people of the same age group in 2008. That’s a drop of 7.2%. Overall, labour’s share of national income (as opposed to that of ‘capital’) has fallen every year for the past 35 years.
With that comes increasing poverty. According to the Joseph Rowntree Foundation, one in five Britons (that’s 14 million people) now live in poverty — 8 million of them in work. Three out of four children living in poverty in the UK today have parents in work.
(When it comes to the word ‘poverty’, we are talking about a new, western post-industrial type of poverty. The old, World Bank definition of poverty is income focused, say, ‘earning less than $1 a day’. The new type of poverty is outgoings focused. If you are earning $50 or even $100 a day but then all of this money (and perhaps more) immediately goes out to pay for food, rent, electricity, transport (and, in America, healthcare) and you are forced to choose which of these you pay for, then, as Umair Haque puts it, you are “constantly living at the knife’s edge, on the brink of ruin, one small step away from catastrophe”.)
Meanwhile, as you would expect, debt levels are growing. In the late 1980s the ratio of household debt to income hovered at around 80%. Today, it’s 133% and rising. In the ten years from 1997 to 2008, total debt owed by households tripled, from £500 billion to £1.45 trillion. According to the Money Advice Service 8.3 million people in the UK are currently over-indebted and unable to pay off debt or bills. With 22% of the UK population with less than £100 of savings, there are huge numbers whose daily lives are blighted by the anxiety that comes from living on the brink of ruin.
At the same time, the rich have been getting richer. Much richer. In the years after the Second World War, the share of income going to the top 10% fell from 34.6% (in 1938) to 21% (in 1979). Since then this trend towards increased equality has gone into reverse, with the share of the top 10% rising from 21% to over 30%. But this is just income. If you factor in ownership of assets, the trend is even starker. The total wealth of the richest 10% of households is now 315 times higher than the bottom 10%.
The take-out from all this is very simple. The growth of Universe Two’s financial cancer has resulted in a massive transfer of wealth from poor to rich, from the makers of this world to the takers. This while our very ability to create wealth from production and productivity is being rapidly undermined. The cancer is killing the body from which it emerged. And the effects are showing.
Take life expectancy, the bellwether metric of a country’s prosperity and wellbeing. As we’ve seen it’s been rising fast across the world … except for the UK and the US. Over the last three years life expectancy for 60% of the UK’s women has actually fallen. reversing a century’s worth of steady improvement.
This trend isn’t even, however. The women whose life expectancy is falling are those bearing the brunt of ‘austerity’, while, life expectancy of the better-off 40% has continued to rise. In fact, the richest ten per cent have added 84 days to their life while the poorest ten per cent saw 98 days shaved off theirs. (The figures for men follow the same pattern but are not so extreme. with life expectancy falling for the poorest 30% of men.) Overall, since 2015, actuaries have lopped 13 months off the predicted lifespan of UK citizens.
That life expectancy should start to fall is not surprising when you consider that, in addition to stagnant or falling incomes, service provision for the less well off has been slashed. In the UK, local authorities represent the front line of such service provision. They have seen their funding cut by 49.1% over the last seven years (2010–11 to 2017–18) (The fall is reduced to 28.6% if rising council tax bills are added into the equation). It’s not possible for budget cuts of this order of magnitude not to have direct human consequences.
What about hunger? Until very recently, hunger was something that happened in other, poorer parts of the world. When discussing poverty, it was a commonplace to note that ‘poverty’ in rich countries like the UK or US was very different to the poverty of other countries where people were actually starving. And it was true. Until recently. Food banks were unheard of in the UK at the turn of the 21st century. But now there are over 1200, serving half a million UK citizens with food parcels: a continuing rising trend.
Falling life expectancy. People going hungry. These are not relative statistics. They are absolutes. Countries like the UK are no longer just experiencing relative decline. The upward escalator of improving living standards (not just wages and income but things like life expectancy) has stalled and is now going into reverse. For the most vulnerable sections of the population, we are experiencing absolute decline with all the misery and despair that this brings.
A fading dream
In November 2007 US President Barack Obama devoted an entire speech to the American dream — the dream that the lives of each generation would be better than the previous one. But “while some have prospered beyond imagination in this global economy,” he said, “middle-class Americans — as well as those working hard to become middle class — are seeing the American dream slip further and further away.” It was a theme he would return to again and again.
Speaking to the Conservative Party conference ten years later in 2017, UK Prime Minister Theresa May said she had joined the party many years ago because the party “had at its heart a simple promise that spoke to me, my values and my aspirations: that each new generation in our country should be able to build a better future. That each generation should live the British Dream.” But forty years later, she admitted, for “too many people in our country that dream feels distant, our party’s ability to deliver it is in question, and the British Dream that has inspired generations of Britons feels increasingly out of reach.”
The fading of the British (and American) Dream represents a seismic shock to citizens’ collective psyche. For generation upon generation citizens had come to take the Dream for granted. They just assumed their childrens’ lives would be better than theirs and were glad for it. With the fading of this Dream growing numbers of people feel increasingly hopeless, ignored, humiliated and desperate. You can see the shockwaves around us in political upheavals across most western nations.
It’s not just in Britain and America. In recent research, just 7% of French people said they thought they would experience a better standard of living than their parents, 74% said things would get worse. They were joined by 63% of Spaniards and 59% of Italians thinking things were getting worse. (Meanwhile, 71% of Indonesians, 73% of Indians and 81% of Chinese were optimistic about the future.)
This is the hole we have dug for ourselves — or that has been dug for us. And it is getting deeper and deeper.
Next blog in this series: 8. The Nature of the Beast
Previous blog in this series: 6. The Attack on Democracy
Books and articles I found particularly useful researching this blog include:
- Steven Pinker, Enlightenment Now: The Case for Reason, Science, Humanism and Progress, Allen Lane, 2018
- Hans Rosling: Factfulness: Why Things Are Better Than You Think, Sceptre, 2018
- Richard Baldwin, The Great Convergence: Information Technology and the New Globalization, Harvard University Press, 2016
- Office for National Statistics, Productivity economic commentary https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/articles/ukproductivityintroduction/januarytomarch2019
- Robert Joyce and Xiaowei Xu, The IFS Deaton Review, Inequalities in the twenty-first Century, IFS 2019
- United Nations General Assembly: Visit to the United Kingdom of Great Britain and Northern Ireland: Report of the Special Rapporteur on extreme poverty and human rights https://undocs.org/A/HRC/41/39/Add.1
- Umair Haque, Why America is the World’s First Poor Rich Country or, How American Collapse is Made of a New Kind of Poverty, https://eand.co/why-america-is-the-worlds-first-poor-rich-country-17f5a80e444a