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The British patient lives on

14 August 2013 By Edward Hadas

Four decades ago, everyone knew that the UK had a social problem. Class divisions stunted the development of a substantial, well-educated middle class, leaving the economy in a strangely Victorian state – divided between a gruff working class, which was prone to strikes and obstruction; and the incompetent elite, which seemed unable to adjust to the end of Empire.

Times have certainly changed. Britain is now prosperous and predominantly middle class. Union strangleholds have given way to flexible labour markets. The country is a magnet for global talent, drawn by a cosmopolitan culture, not to mention the use of the leading global language. High value-added international services are its speciality.

But something is still wrong. A country with so many advantages should be doing better. Think Switzerland – another country of social peace, high skills and a post-industrial economy. The Swiss run a hefty trade surplus. The country has a very low unemployment rate, low inflation and a fiscal surplus. The nation’s biggest monetary challenge is to keep the currency from rising.

By those counts, the UK looks almost like an anti-Switzerland. Both the inflation rate and the fiscal deficit are uncomfortably high and hardly falling. Unemployment remains a serious problem and there is a fairly substantial current-account deficit. The flexible labour market has not led to strong export growth, despite a 20 percent fall in the currency’s value five years ago.

What’s the problem?

In narrow economic terms, I think the best explanation is what might be called a Double Dutch disease. The Netherlands found out a half-century ago that substantial easy revenues from resource extraction distort the economy. They inflate the currency, seduce politicians and demotivate would-be entrepreneurs. The UK, a net fuel exporter through the 1980s and 1990s, had a Dutch-style energy windfall in North Sea oil. In the following decade, a strong position in cross-border finance allowed it to double up on potentially debilitating cashflows.

However, inadequate responses to these economic distortions did more damage than the distortions themselves. Successive British governments wasted much of the oil and gas bonus and failed to set policies which might counter the dangers that come with the national equivalent of a rich heir’s trust fund. Similarly, when the financial sector was flying especially high, members of the establishment mostly bent over backwards to favour the business. They rarely worried that the sector’s huge profits and extravagant pay might degrade the rest of the economy.

In short, the elite which should have looked out for the national economic interest too often squandered opportunities or served themselves rather than the common good. This is the behaviour of a self-satisfied and out-of-touch ruling class.

It looks like the old inefficient order has not totally disappeared. Instead, it has lived on in a muted form. That impression is only reinforced by the prevalence of what I call imperial dreaming. Too much of the British political establishment sees the UK as a country with a distinct and superior political and economic vision. It’s something about tolerance, free trade and the virtues of competition, and surfaces in political talk of Britain “punching above its weight” and “commanding influence”. But the details hardly matter, since almost no one outside of the country thinks the UK has much to teach.

Too many intellectual resources have been offering smug lectures to an empty global classroom. The effort would have been better spent on improving relations with the rest of the European Union or improving the most dysfunctional housing market of any major developed economy.

It is not just the residue of the elite which has persisted. While most old working class families have migrated upwards socially, there has also been a lot of social decay. The portions of the UK population which are undereducated, overly dependent on government benefits or prone to anti-social behaviour are among the highest of all developed economies.

Although there are many programmes to attack such problems as persistent joblessness and teenage drinking and pregnancy, the residue of old class conflicts has been an obstacle. The desire not to give the rich special treatment has distorted both education and healthcare – increasing cost far more than quality. Much of the country’s fiscal weakness, and probably a good portion of its inflation, can be traced back to high spending on social programmes – which would be lower without the baggage of history.

I don’t want to exaggerate. The trends are clearly away from a Marxist dystopia of class conflict. The country’s aristocratic and proletarian burdens are shrinking each generation. You can still identify people’s social class by the way they talk, but mostly that class is firmly middle.

Indeed, the British middle class has expanded so much that as an economy and a society the UK looks more like its European neighbours today than like itself 50 years ago. That is good news.

 

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