Good sense from Osborne

John Rentoul

osbo2 300x168 Good sense from OsborneThe Chancellor has just delivered a thoughtful speech to the American Enterprise Institute in Washington. I thought this section, rebutting Ed Miliband’s “broken link” and “hollowed out middle” theses, was clear and persuasive:

I believe that if we reward hard work and support people’s aspirations to provide a better life for their family then there is no limit to what human enterprise can achieve.

I bring this same optimism to the second of today’s pessimistic predictions – that even if growth is sustained the benefits will accrue to the few not the many.

This prediction – that the link between living standards and economic growth has broken – also leads its proponents to the same prescription: more government spending on welfare and the costs of economic dependency.

But it too can be proved wrong if we follow a different approach.

To begin with it is not well supported by the facts.

As Greg Mankiw has pointed out for the US, on a superficial reading the data appears to show that real median incomes grew by only 3% over the entire period from 1979 to 2007. That sounds like there is a big problem.

But in fact once you take account of changes in household composition, lower taxes, healthcare benefits and other forms of remuneration then that number turns into a 37% real terms increase.

Of course that’s not to say that inequality doesn’t matter – it does.

The Great Recession made our countries poorer and times have been difficult for British and American families.

But in the UK the evidence shows that growth supports rising living standards.

Recent work by academics at the London School of Economics and our own analysis at the Treasury has found no evidence that employee compensation has become detached from GDP growth in recent decades.

Previous results that appear to show a break disappear once you take account of rising pension contributions and payroll taxes.

That is one reason why the labour share of national income in the UK has stayed constant over the last decade.

Nor does the evidence support the so-called “hollowing out” hypothesis in the UK – the idea that middle-skill and middle-income jobs are disappearing with most of the growth in employment either at the top or the bottom of the distribution.

While some traditional mid-level occupations have shrunk or moved down the income scale, new ones have been created to take their place.

So we have fewer middle-paid production line and secretarial jobs, but a lot more middle-paid jobs in IT and professional services.

Overall there has been little change in the proportion of people in middle-income jobs in recent years.

And after rising during the industrial restructuring of the 1980s, as it did in many countries, the level of inequality in the UK has been fairly constant for two decades, and according to the latest data is at its lowest level since 1986.

The only consolation Miliband can take from this is that at least George Osborne feels he has to devote a large part of an important speech abroad to demolishing his analysis.

Ed Miliband: setting the agenda.

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  • newfriendofed

    I gather from the bragging headlines that the first of the pessimistic predictions (not mentioned here) was that austerity would derail growth. It is truly bad news if Osborne is right that it did not because it means that the pain he admittedly inflicted on us was necessary. I think it is very important, however, to note that Paul Krugman has just written a blog that shows that Osborne is fiddling the data. In fact growth occurred only when he surreptitiously eased austerity. I can’t demonstrate this myself but I would guess he has also fiddled the stats to make the case so admiringly quoted here.

  • Pacificweather

    And I thought it is just Tony Blair who is delusional.

  • JohnJustice

    I agree newfriendofed. Osborne has form on fiddling the figures.

    Even if he isn’t in this case the analysis he refers to is about what has happened up to few years ago and ignores underlying trends highlighted by economists such as Tyler Cowen (Average is Over) that point to middle incomes flattening or falling and to middle income jobs disappearing and not being replaced to the same degree in the near future.

    As such what he said did not represent a rebuttal of Miliband’s concerns. Rather it was about Osborne, in typical fashion,putting a spin on the data to score points over Miliband and it seems that some people are actually falling for it.

  • aardvark10

    What an amazing person this John Justice is. “Osborne has form” without a shred of evidence, but then “even if he isn’t in this case” and still goes on to decry his undoubted achievements, achievements praised by the IMF and many others. And this is from a man who saw absolutely nothing wrong with Blair’s conduct in going to war in Iraq, despite mountains of evidence that he distorted the intelligence. It’s typical of the left that any news they don’t like they simply disbelieve it. The only surprising thing is that no one has quoted David Blanchflower. The fact that this man still writes for the Indy even though he has been wrong about nearly everything over the last few years says much about this newspaper (remember Johann Hari?).

    In fact Osborne deserves a lot of credit. For many years the most unpopular man in British politics, he has stuck to his guns throughout and eventually won through. It was said at the beginning that Balls would make mincemeat of him in parliament, but precisely the opposite has happened and Balls is now the subject of ridicule. Osbourne really does not need to score points over Miliband. Miliband’s total lack of any credible policies does all the points scoring for him.

  • porkfright

    A better title would have been “Yet more Flim-Flam from Osborne”.

  • JohnJustice

    Osborne’s “achievement” is to preside over the upswing of a natural business cycle aided by an unprecedented increase in the money supply, unsustainable consumer borrowing (again) and a house buying boom that will all end in tears. This followed a downswing which was deeper and longer than it needed to be due to his austerity programme.

    And having cheerleaders like you aardvark says it all about his credibility.

  • aardvark10

    Direct quotation from the ten volumes of David Blanchflower’s “Myths and Legends”.

  • Ciaran Goggins

    A better life? So, Giovanni, is that why we are flooded out with 2 million Poles?

  • newfriendofed

    A bit of further internet research has revealed that Mankiw, who Osborne quotes as if he knows the facts, is famous or notorious as an economist associated with Bush and Romney. He is associated with the argument that the top 1% deserve all they are getting. He is also a main opponent of Piketty and the thesis of growing inequality. It is very naive of J. R. merely to accept what, at best, is a controversial right wing view, as if it is simple good sense.

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