Reinventing Prosperity - Graeme Maxton

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of workers. It was the exploitation that forced the workers to fight for their rights. And it was this fight that led to greater democratic rights for everyone.

      The fact that the United States’ minorities, and most of the rich world’s women, have much greater equality today is also greatly down to this era of economic growth. The years of growth freed the underprivileged from their chains, by offering them work and other opportunities, and by changing the way people think about equality.

      In the United States and some other parts of the rich world today, certain groups seek to deny how these social changes came about. Employees are put under enormous pressure to reject being part of any organized group that challenges the will of business owners today. Yet much of the success of the United States’ remarkable development does not rest with those who established the factories and wanted to keep all the rewards for themselves. It rests with the workers who demanded better working conditions and found the courage to fight for their rights. This is where the foundations of the United States’ freedoms lie.

      Today’s U.S. working class has been talked into believing that unionization is no longer necessary, and the middle classes think that it is not in their interests. As we will discuss in the next chapter, this lies at the heart of many of the changes that American workers have experienced since the early 1980s—falling wages, longer hours, and fewer benefits.

      The rapid pace of economic development during the twentieth century in the rich world is also the reason why its physical infrastructure is generally better than elsewhere, though this is no longer the case in the United States. During the boom years, as the working population earned more, taxes allowed Western governments to spend more. This allowed them to construct bigger and better hospitals, roads, ports, and tunnels, which extended their advantage over their developing world rivals.

      Bigger economies also gave the West more political clout. They offered the high-income world a stage from which to encourage others to follow its way of thinking. After all, why would the developing world not want something that offered so many advantages? Greater economic scale made it easier for the United States to demand less regulation and more open markets in other parts of the world. It allowed the United States and the rest of the developed world to nudge other countries onto the same economic path—often at a faster pace. There is only one way to develop, the developing world was told, and this is it. The era of rapid economic growth gave the rich world the chance to create new markets in its own image, to the benefit of its own citizens and businesses.

      For decades, economic growth was the magic dust that transformed almost everything it touched.

      As we will show in the next chapter, though, that magic dust has stopped working.

      THE OLD APPROACH NO LONGER WORKS

       For many years the pursuit of economic growth has not reduced unemployment. It has increased inequality.

      “Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of motives, will somehow work for the benefit of all.”

      JOHN MAYNARD KEYNES

      IN 1930, ECONOMIST John Maynard Keynes predicted that his grandchildren would need to work only fifteen hours a week.1 By the time they were of working age, he reasoned, there would be sufficient economic output and the citizens of the rich world would be able to spend their lives working less and doing more of what they wanted. The rich world could focus on leisure, science, and the pursuit of greater knowledge, he thought.

      Keynes’s prediction could certainly have been fulfilled by the end of the twentieth century. The average GDP per person in the rich world—at more than US$35,0002—was enough for everyone to live reasonably comfortably. The surge in social progress and output Keynes had anticipated in the 1930s had happened pretty much as he predicted, yet unemployment was high throughout the Organisation for Economic Co-operation and Development (OECD) nations, working hours were often longer than in the 1930s, and inequalities had widened.

      The problem was that the income, work, and wealth that had been created were very unevenly divided. By the early years of the twenty-first century, a small percentage of the population had become very rich, while tens of millions still lived in poverty—some of it extreme. The 2008 financial crisis widened the gap between rich and poor even further.3

      How did this happen? If economic growth improves average living standards and spreads the wealth more evenly, as economists say, why was the gap between rich and poor so wide—and getting wider? Was it simply a short-term problem, the result of the dot-com bubble bursting in 2000 and the 2008 financial crisis, for example? Or was something else going on?

      Source: U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements. https://www.census.gov/hhes/www/income/data/historical/inequality/

       Scale: Income in 2014-$ per household per year

      The annual income of the richest 20% of U.S. households doubled from 1970 to 2014 (top black curve). The income of the 40% poorest households did not change at all—it has remained constant in real terms for more than forty-five years. The middle-class households (those ranking between 40% and 80% on an income scale) increased their incomes by approximately one third over the same forty-five years. Only the rich got significantly richer.

      In 2008, many economists claimed that the financial crisis was an unexpected and temporary problem, a mere hiccup in an otherwise reliable system. They said that the problem could be fixed if governments stimulated more economic growth. With greater growth, unemployment would fall and average standards of living would start to recover. Thanks to the trickle-down effect, the gap between rich and poor would soon narrow again.

      At the time, we read this advice with a skeptical eye. We did not think these economists were correct. More economic growth would not solve the problems of unemployment and widening inequality, we said. Rather, we argued, it would make the problems worse.

      Most people seemed to think we were slightly mad.

      We saw that mainstream economists, bankers, and growth-hungry businesspeople had not understood that the economic environment had fundamentally changed. They had simply looked to the past, seen that economic growth had been remarkably successful for many years and, without examining the reasons for this, assumed that the pursuit of more growth was still the right policy for the future.

      If they had scratched a little below the surface, they would have found that the situation was not as it appeared. Real living standards for hundreds of millions of people had not been rising for many years, despite strong headline rates of growth. Moreover, the problem of widening inequalities and gradually increasing unemployment (and underemployment) had not started with the financial crisis in 2008, nor even with the bursting of the Internet bubble in 2000. It had started decades before.

      A deeper analysis revealed that economic growth had increased the average purchasing power of Western citizens only up to the early 1980s. After that, declines in the price of many goods led to continued reductions in the cost of clothes, cars, and groceries, and this had made people continue to feel better off. Easier borrowing had led to steadily rising house prices, which had made people think they were rich. There were all sorts of stunning technological developments, too, from the invention of the Internet to the introduction of life-changing gadgets such as cell phones and home computers. These had made the majority of people feel

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