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We Need to Talk About the Middle

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MILIBAND
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The fight for the votes of those on middle incomes is usually seen as the key to winning elections. So when politicians turn their attention to 'the Middle', they channel the spirit of Harold MacMillan, whose note to the Conservative Party Research Department upon becoming Prime Minister in 1957 read: "I am always hearing about the Middle Classes. Find out who they are and what they want, and we will see if we can give it to them."

But the condition of middle Britain today is a world apart from that of the 1950s. Paying attention to the plight of the Middle is no longer simply a matter of distributing goodies to capture their votes. In 2013, the problem of the Middle has become the central economic challenge facing our country. It is at the heart of our growth crisis as well as our living standards crisis. It is a problem of inequality as well as a problem of productivity. And our failure to resolve it has implications for our competitiveness abroad, our solidarity at home and the sustainability of our welfare state.

The economic problem of the Middle in Britain today has three strands that are woven together.

First, the Middle is experiencing a crisis in living standards. It began about a decade ago, when the real wages of those on middle incomes started to go into decline, and it is still going. On our current trajectory, families in the Middle will continue to see their incomes fall up to the end of the decade. For the 30 years after 1978, households in the middle 10% of the income distribution captured about 6% of all income growth in Britain, while those in the top 10% captured 38% - over six times as much. The Middle saw its stake in national prosperity decline even before the financial crisis, and sees no prospect of arresting the decline now that we live in tougher times.

Second, this crisis of living standards in the Middle has generated a problem of inadequate demand in our economy, one that is significantly hampering our ability to recover from the prolonged economic downturn. Again, this stems from a longstanding problem of our economy. The share of UK GDP going to wages rather than profits fell from just under 64% of GDP in 1974 to under 54% today. An economy characterised by high profits at the top and lower wages in the middle depressed demand long before the economic crisis. But with flatlining growth, the decline of income for the Middle has gone from being a break on prosperity to a structural obstacle to recovery.

But both the living standards problem and the problem of 'low demand' have their roots in a third, and broader, supply-side problem that affects the Middle: our economy is too dependent on a low-skill, low-wage model of competitiveness. One measure of this is the UK's historic (and continuing) deficit in skills - in particular intermediate technical skills, where we rank 21st among OECD countries. This in turn explains part of the productivity gap between Britain and our major competitors. In the long run, strengthening the high-skill/high-wage parts of our economy, and thereby boosting productivity-per-worker of those in the Middle, is essential to altering the relative shares of national income that go to the top and the rest of Britain's workforce.

The problem of the Middle is therefore partly about living standards, partly about low demand, and partly about the kind of economy we have. But what can be done in response?

David Cameron and George Osborne's response is familiar to those who lived through the 1980s. It is to opt for one last heave of the same philosophy that the 2008 financial crisis exposed as so damaging to our economy. The Tories' approach rests on faith in the Neoliberal Trinity of trickle-down economics, ever-greater deregulation and a rejection of the role of government in industrial policy. But this simply won't work as an answer to the structural problems in our economy. As Stewart Lansley has shown, compared to the "postwar consensus" period from 1945-1979, the period after Margaret Thatcher's election in 1979 period delivered a worse record on investment, productivity, growth and unemployment.

Trickle-down has been shown to be theoretically heroic and empirically untrue. The idea that the key to our economic turnaround is further deregulation of one of the most deregulated economies in the advanced industrial world is somewhere between dubious and ridiculous. The truth is that David Cameron's metaphor of a "Global Race" masks a view of competitiveness that sees Britain engaging in a race to the bottom, competing internationally on the basis of low skill and low costs without a plan for building a more productive economy at home.

Addressing the problem of the Middle requires a different approach, one which Labour has begun to flesh out during our first two years of Ed Miliband's leadership. It requires tough action on banks, pension companies, energy companies and doorstep lenders to tackle the escalating costs of living for the Middle. It demands a commitment to find new ways in which the tax system can more fairly distribute the burden of support, both in lean and better times. It needs to explore ways in which the Living Wage, increased transparency over pay and bonus levels at the top, and new methods of setting pay in the workplace can arrest the growth of income inequality and move towards a fairer distribution of rewards.

Most of all, it requires that we have the courage to set out a vision of a different model of economic growth that offers the prospect of greater prosperity for the Middle. That is why Ed Miliband has put the building blocks of a more responsible capitalism at the heart of a One Nation approach to Britain's economic future: sensible regulation on the scope and functioning of financial markets; financial institutions that more effectively service companies' needs, from funding start-ups to supporting long-term research and development; a new responsibility shared between companies, workers and government to transform our workforce's skills; and government action to build infrastructure and strengthen the high-value-added sectors whose demand for skills is greater.

This is a social democratic approach to building a stronger economy and a stronger Middle. It will be hard, and though some steps can be taken immediately, others will take time and new kinds of partnerships. But the prize for getting it right is not simply a matter of improving the living standards of middle-income Britain, crucial as that is. Because a range of pressing problems facing Britain have their roots in the problem of the Middle.

A more prosperous Middle rooted in a more productive economy offers a high-skill/high-value-added model for how we pay our way in the world in the 21st Century. And a Middle whose wages are higher and more resilient will ease the pressure on a welfare state that has increasingly taken on the burden of supporting those in work whose incomes don't enable them to get by. Counter-intuitive as it may be, social democrats should be confident that addressing the problem of the Middle can truly be in the interests of all.

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