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. 

The US vs. The UK: A Social Comparison

For decades, politicians in the US and the UK have paid scant attention to growing income divides, believing in the “trickle down” effect of wealth created by the rich. But Richard Wilkinson, a professor of social epidemiology at Nottingham University and an expert in public health, has assembled a mountain of evidence from all over the world that extreme inequality has a damaging effect on the physical and psychological wellbeing of whole societies.

He uses the information to create a series of scatter-graphs which document the prevalence of a range of social ills. The evidence was published in the influential book The Spirit Level, co-written with Professor Kate Pickett of York University.

Wilkinson found that on almost every index of quality of life, wellbeing, deprivation, or social mobility, there is a strong correlation between economic inequality and social outcomes. Almost always, Japan and the Scandinavian countries are at the favourable end, and the UK, the US and Portugal – very unequal countries - are at the high end, with Canada, Australasia and continental European countries in between.

 “Our research shows the psycho-social effects of inequality, which have more to do with feelings of superiority and inferiority than absolute living standards,” Wilkinson said. “Living standards are the drivers of social comparison, but most of the outcomes are behavioural, so things must go through the mind. Increasing inequality leads to more downward prejudice and shaming and stigma. The ones at the top are brilliant and capable and the ones at the bottom are lazy and stupid. That’s why inequality hurts.”

The social outcomes have nothing to do with total wealth, or average income. The US is the world’s richest nation, with high average incomes, but it has a level of violence - murder, in particular - that is far higher than any other Western nation. Longevity is also affected by inequality: Greece has half the GDP per head of the US, yet Greeks have a life expectancy of 79.5 years, compared to 78.3 years in the US, which is the lowest level in the developed world. The UK’s average life expectancy is also higher than in the US, at 79.4 years at birth.    

Although the UK fares badly compared to most OECD countries (and is the worst developed nation in which to be a child according to Unicef), its social problems are not as pronounced as in the US. Rates of illness are lower, for example. Diabetes, for example, affects twice as many Americans as British. 

“The UK is near the top on many of the measures, but the US is a good way out in front on most of them,” said Wilkinson. “Our health is better, violence is lower, the teenage birth rate is not so high, the murder rate is nowhere near as high, and the obesity rate is not quite so high. These are important differences between the two countries.”  

The Spirit Level also comes up with more surprising correlations, such as the erosion of trust in more unequal societies, and perhaps most disturbing of all, the link between growing economic divides and mental illness. Around a quarter of British people, and more than a quarter of Americans, experience mental problems in any given year, compared with fewer than 10% in the more equal countries of Japan, Germany, Sweden and Italy.

If Wilkinson is right, then the difference in levels of inequality is the most important distinction between the US and the UK, and many differences in social outcomes stem from this key factor. But there are other interesting points of comparison.

Round Two: The US vs. The UK

Clearly, the two economies are closely tied together by over-dependence on the financial sector, which caused them to crash in 2008 and both nations have stuttered in their attempts to bounce back from the crisis. Growth, for example, has been disappointing. The UK’s Office for Budget Responsibility recently said it expects GDP growth for the year to remain at 1.7%. The situation is only slightly better in the US, where the Central Bank predicts the economy will expand between 2.7% and 2.9% this year.

The $47,000 average American salary is higher than in the UK, where it is around $35,000, but the UK’s unemployment rate of around 7.7% is slightly better than the US rate of about 9.1%. The unemployed in the US also suffer greater hardships.

“It’s far worse to be unemployed in the US because the benefits are much lower, so unemployed Americans will take any work on offer,” Dorling said.

Dorling points out that many other privileges which are taken for granted in the UK do not exist in the US. For example, there is no Federal law requiring a US employer to provide time off, paid or otherwise, to employees on nationally recognised holidays, whereas Bank Holidays in the UK are paid; and the US is also the only Western country which does not mandate paid parental leave. All female employees in the UK are entitled to 52 weeks of maternity leave, with compensation of around 40% of salary.

Related: The UK Economy

Related: The US Economy

“Although the UK has a much better safety net, benefits are being cut by the current government and people on benefits are seeing their living standards fall faster than anyone else in society,” said Dorling. “We are heading towards the US model, but we aren’t there yet. In the US, there are still around 40 million people on food stamps, which can only be exchanged for food.”

Maternal death rates are also higher in the US than in any industrialised nation. An American woman is three times as likely as a mother in Ireland to die from pregnancy-related causes and twice as likely as in Britain.

Another interesting point of comparison is the level of personal debt, which is high in both countries, but worse in the UK, where average household debt is £56,000 ($89,000). The total UK personal debt at the end of May 2011 stood at £1.452 trillion ($2.24 trillion) and British families now owe a record 173% of their incomes in debts, whereas the level in the US is 136% of average household income (still very high). 

When Americans do become bankrupt, it is often related to healthcare bills, which is rarely an issue in the UK, where the National Health Service provides free treatment. According to The American Journal of Medicine, medical bills are a major factor in more than 60% of personal bankruptcies in the US. Of bankruptcies caused by medical bills, about 75% involved individuals who actually had health insurance.

This is one reason why Obama’s healthcare reforms are one of the most significant crusades of his presidency. Some elements of the Patient Protection and Affordable Care Act, which became law on 23 March 2010, have already kicked in. Insurance companies can no longer withdraw coverage, or deny coverage for children with pre-existing conditions, or impose caps on benefits. Children can also now stay on their parents’ policy until they are 26. Some preventive treatments, such as mammograms, are now free.

The US Government also now provides temporary subsidies for small businesses to fund coverage for their workers. From 2014, two more important measures will take effect. One is the network of state insurance exchanges, which should enable individuals and small businesses to pool their buying power and drive the price of insurance down. The other is the ‘individual mandate’, obliging virtually everyone to buy insurance or face a fine. This should also drive costs down.

Outlook: The US vs. The UK

 So what will the future hold for these two nations, whose politics and economies are so inextricably linked? Whatever happens, the UK is certain to imitate much of what is pioneered in the US.

Related: UK Economic Forecast

Related: US Economic Forecast

“We are always very influenced by American stuff,” said Wilkinson. “I often think other countries are protected by not speaking English, so their ‘thinking ideologies’, from academic journals to soap operas on TV, are different. As academics, we read the same journals, and contribute to creating the same frames of reference. When American academics look at another country, it tends to be an English-speaking one.”

 Dorling finds another disturbing parallel between the political elite in the UK and in the US.

“We have a cabinet in the UK largely made up off privately educated millionaires. We think of class and privilege as British traits, but in the US, almost every senator is a millionaire. In fact, in electing millionaires, we are becoming more like the US. Even Obama went to the most expensive private school in Hawaii, just as David Cameron went to the most expensive private school in the UK. If we go back 30 or 40 years, MPs and senators were drawn from a wider spectrum. This is important because governments want to help, but what they know is constrained by their experiences.”

Despite his disillusionment with politicians, Dorling sees grounds for optimism.

“The real optimist in me thinks that a second, slightly less serious, financial crisis would grant the Conservatives and Liberals the power to do something about it by taxing the rich. We have some of the richest people in the world in the UK, so higher taxation is a good source of income, but it’s a lot harder for the Labour party to do it. For the Conservatives, it would be a remarkably easy thing to do and a huge vote winner. They could say they were taxing people with estates worth over £2 million for the good of the country and only lose a couple of votes for a few millionaires,” he said.

David Smith,

EconomyWatch.com