The UK & The US: Same Problems, Different Results

July 6, 2011Marketsby David Smith

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United:Cameron and Obama are struggling to get their derailed economies on track

7 July 2011.

The economic policies of the US and the UK have run parallel since the 1970s when Britain’s Conservative Prime Minister Margaret Thatcher decided to emulate the neo-liberal economic agenda of US President Ronald Reagan.

Thatcher followed monetarist thinking and US economists such as Milton Friedman and Friedrich von Hayek. Together with the Chancellor of the Exchequer Geoffrey Howe, she lowered direct taxes on income and increased indirect taxes. She was also responsible for steering the British economy away from manufacturing towards a greater reliance on the financial sector.

Although the two British Prime Ministers who followed Thatcher were both from the supposedly left-wing Labour Party, Tony Blair and Gordon Brown followed similar economic agendas. Labour’s attitude to the economy was summed up by Peter Mandelson, the Trade and Industry Secretary, on a visit to Silicon Valley, in the US.

Mandelson was told by the dean of engineering at Stanford University that it was “just plain OK to get filthy rich” in the United States. Mr Mandelson replied that Labour was “intensely relaxed about people getting filthy rich”.

Danny Dorling, professor of Geography at Sheffield University, and the author of So You Think You Know About Britain, said: “It’s often a mistake to think in terms of left and right. Political parties tend to follow the prevailing economic ideology of the time, and that is what Labour did when they took over from the Conservatives. It’s also true in the US, where both the Democrat and Republican parties can broadly be described as right-wing.

“The key thing is that in the late 1970s, economic policy in the US and UK went in one direction and it took another direction in the other affluent countries. The way the UK and US have been governed since then has made them very similar countries and it often makes sense to see the UK as another State in the US.

“To give one important parallel, until recently the UK had the lowest public spending in Western Europe, but it was still higher than in the US. But President Obama is now spending far more than Bush, at the same time as the UK’s Conservative Government is cutting public services. The IMF says that by 2015, the UK will be spending a lower proportion of GDP than the US, so at some point soon we will be identical! It’s hard to find a country more similar to the UK."

The most important parallel between the two nations, Dorling argues, is growing inequality of income, which has been a direct result of monetarist policies.

“The US and UK have became progressively more unequal, whereas France, Germany, Japan, Scandinavia have not to the same extent,” said Dorling.

“Every year from the mid-1970s onwards the people who already had more have got even more, so that the top 1% have had the biggest increases in income and wealth, and the next 1% not quite as much and so on. In the US, 90% of people have had a drop of about 1% in real income since the 1970s. In the UK, we are seeing the first drops in real income now.”

Dorling’s views are backed up by data showing that the US is the most unequal of developed countries. The Gini coefficient, which measures the gap between rich and poor, is 0.38 in the US, well above the UK (0.34), Japan (0.33), Germany (0.30) France (0.29) and Denmark (0.26). What is more, inequality in the US has been increasing by an average of 0.5% per year since the mid-1980s.

The CIA World Fact Book, which ranks countries in terms of equality of wealth distribution, ranks the US as the 42nd most unequal country in the world. This means it has worse levels of inequality than Tunisia, which is ranked 62nd, and Egypt, which has been ravaged by civil war, but comes in 90th place. The UK ranks 92nd, making it only slightly less unequal than Egypt.