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in an era of incredible and rapid social progress. And to all appearances, they were.

      But real wages in parts of the developed world had actually been falling. By 2014, more than half the U.S. working population was earning less, in real terms, than it had in 1979. The U.S. economy had grown by more than 140%, but the poorest 20% of the population had seen its income fall, whereas the richest 20% had seen its income more than double.

      Since as far back as the early 1960s, the minimum wage in the United States had been falling in real terms while the proportion of workers earning it had risen.⁴ In other words, an increasing number of people had been earning a lower real wage. Other employment benefits had also been cut. Significantly fewer companies contributed to the pensions of their employees in 2014 than in the 1980s, for example, and most of those that did still contribute no longer made any promises about what sort of pension their workers might receive. Company-funded health insurance had been taken away from huge numbers of employees, too.⁵ Union memberships had also sharply declined,⁶ strengthening the power of business owners.

      Despite falling wages, working hours had risen. In 1975, the average U.S. worker (including those working part time) put in 1,705 hours a year. A generation later, in 2011, they worked 1,863 hours—9% more.⁷

      Keynes would have found all this very difficult to understand. With so much economic and material progress, how could the working year have increased like this, particularly when productivity had been rising steadily? In 1979, the value of the output of every U.S. citizen stood at just under $25,000 a year (see Graph 3). By 2011, it had risen to $40,000—even in real terms. Yet wages had fallen and working hours had increased. This meant that businesses had been making people work harder, so increasing efficiency, while simultaneously lowering wages to boost profits.

      Why were they doing that?

      The short answer is that businesses were cutting wages and boosting profits because that is what the free-market economic system increasingly demanded. Stock markets and the finance sector had become more influential, and those who worked in those sectors, as well as company stockholders, expected ever-higher quarterly returns. There was enormous pressure from “the market,” in other words, for businesses to eke out the best returns, to shift their head offices offshore, to cut employee costs, to move factories to low-cost countries, to collaborate to reduce the costs of raw materials, and to demand less red tape, tax, and regulation. Without any strong counterbalancing force—from society, the unions, or employees—businesses were passing fewer and fewer of their gains onto their staff or society.

      On the surface then, there was progress. Economies were growing and businesses were doing nicely. Profits and productivity were rising, and stock markets were booming. Low interest rates and easy credit meant house prices were higher, too. Between 1980 and 2010, the U.S. economy expanded at an average rate of 2.9% a year,⁸ a remarkable clip for such an economically mature country, and it was much the same in the rest of the OECD countries.

      It looked, at least superficially, as if the pursuit of economic growth was still having its magical effect. This is why most economists and politicians would continue to claim that economic growth, and Gordon Gekko’s infamous greed, was still good. It did not matter to them that the underlying social trends showed something completely different. For those on Wall Street and the rich, the boom years and the pursuit of growth were still great.

      In reality, the rising incomes of the rich and changes to the tax system were widening the gap between rich and poor all the time. In 1960, the richest 0.1% in the United States paid an average effective federal tax rate of 71%. Forty-five years later, this had plummeted to just under 35%, whereas the average tax rate for 80% of the population had gone up.⁹

      Although the economy had been booming, poverty in much of the rich world had been rising. This was not what free-market ideologues had predicted (or even claimed was happening). Rather than spreading the wealth around, the boom had allowed a small percentage of the population to hoard a disproportionately large share of the gains, while the living standards of millions of people throughout the developed world moved in the opposite direction.

      The legacy of more than thirty years of rapid economic development is almost 50 million Americans living in poverty, with 44% of them in “deep poverty,” meaning their incomes are less than half the government-defined poverty level.¹⁰ One in every six households and one in every four people under the age of eighteen in the United States are now below the official poverty line.¹¹

      In the rest of the rich world, the picture is much the same. Real wages in the U.K. have been falling since 2003, and working hours have increased.¹² A growing number of people in Britain also now work under employment contracts that do not even guarantee them a certain number of working hours per week, so-called zero-hours contracts.

      Unemployment has risen throughout the rich world. Between 1980 and 2014, joblessness throughout the OECD averaged more than 7%, far higher than it had been in the 1950s and 1960s.¹³ In the European Union, it is still above 9% in 2016, with minorities and the young particularly badly affected.¹⁴ In 2000, almost 30%¹⁵ of U.S. college graduates under twenty-four were under-employed.¹⁶ Ten years later, 40% were jobless, with many also heavily in debt because of student loans. In much of southern Europe—Spain and Greece, in particular—youth unemployment remained above 50% in 2016.

      The length of unemployment periods has also changed. After World War I, people were typically jobless for a few weeks or months at a time, even when there were rising numbers of immigrants enlarging the job pool. In the late 1960s, fewer than 5% of those registered as unemployed in the United States had been without work for twenty-seven months or more. Today, 44% of those without jobs have not had work for more than two years.

      This raises an important question.

      With so many people out of work and lower average real incomes, how did the rich-world economies manage to keep growing? The GDP of the richest countries was more than twice as big in 2010 as it was in 1980¹⁷ (see Graph 2), but apart from a few brief periods, there has been continuous growth. How was it possible for these economies to continue to expand so quickly when fewer people had jobs and average incomes were stagnant or falling?

      The answer to this question is debt. For years, people in the rich world had borrowed to consume, to keep the economic growth juggernaut on the road.

      At the end of World War I, the total debts (credit card, housing loans, etc.) of the average American could be paid off with around three months’ take-home pay.¹⁸ By 1980, this had risen to eight and a half months. At the peak of the financial crisis, just over twenty-five years later, it was sixteen months—133% of an annual income. It has barely changed since, leaving millions trapped with such high debts that it is almost impossible for them to borrow more. And since debt requires regular interest payments and usually some element of capital repayment, people cannot pay off their debts without reducing their spending and negatively affecting their well-being. Declaring bankruptcy might help temporarily, but it also hampers their ability to borrow—and so spend—in the future.

      It was borrowing that greatly fueled the United States’ economic growth until the financial crisis. And it was much the same in most of Europe, as well as in Australia and Canada. Rising debt made it possible for people to maintain their spending.

      Unfortunately, borrowing as a source of demand growth is now mostly over, and spending has fallen back to something nearer the level that people on low incomes can afford once they have made the minimum payments on their credit cards and other debts each month. This is one of the main reasons why the rate of economic growth has remained low in recent years.

Is it possible to create economic growth by allowing people to borrow more?

      Yes, but only for a limited time. Debt-financed consumption can only last until the consumer has borrowed so much that the lender no longer dares to lend them any more. As long as the debt is rising, the consumer can maintain

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