What Britain must learn from the misfortunes of middle America

The great American middle class is hurting – and has been for a generation. While middle-income households in most advanced economies have been hit by the great recession, the US middle class, the great majority of working families, has not seen the good times for longer than most.

Stagnating middle incomes in the US date back to the mid-1970s. Many American families failed to share in growing national prosperity, with the exception of the Clinton years when a booming jobs market fed through into a 10% increase in typical household incomes. Things then slid backwards in the 2000s. Typical family incomes were falling before the deep recession that hit in late 2007 and have plummeted since.

Put it all together and the American middle class has lost decades of progress – and over the same era productivity in the US economy grew 60%. For the American middle class, the great recession didn’t represent bad news after good times – it was a crisis piled on top of an underlying problem.

British policymakers would do well to reflect on the American experience – not least as typical wages in the UK stagnated from 2002-8, when we had growth. The question is whether the plight of the US middle class arises from the particularities of the US political and policy scene. Or is the “US disease” – the declining prospects of low-and middle-income families – in danger of spreading?

There can be no doubting the scale of the mistakes of US policymakers over the last decade. Rather than generating the trickledown growth that was their selling point, the Bush tax cuts helped drive the US fiscal position from surplus to deficit, while exacerbating inequalities. And it wasn’t just politicians who got it wrong. US regulators, notably the Federal Reserve, failed to identify and intervene in the massive housing bubble. To the contrary, Fed chairman Alan Greenspan celebrated risky financial innovations, arguing that self-correcting markets would appropriately price risk.

Yet it would be misguided to seek to lay all the blame at the door of American politics. The causes are deeper rooted and longer running. At the heart of stagnating incomes has been the poor performance of the US jobs market. Job growth during the 2000s expansion was the weakest on record, while losses in the great recession were the largest since the depression of the 1930s.

Today’s new technologies appear to be more labour-replacing then labour-enhancing and many assembly-line workers have lost their foothold in the middle class, falling back into lower value-added jobs in sectors like retail and care.

At the same time, rapidly rising prices for key goods and services that open the door to opportunity and security – like healthcare, higher education and (before the bust) housing – have outpaced inflation. Even as the price of many everyday consumer products has fallen sharply, the good things in life feel more out of reach.

Although the experiences are very different, the US does offer some lessons for the UK. Be wary of calls for excessive deregulation, for instance in relation to protections like the minimum wage that support working people. Avoid changes to the tax system which reinforce underlying market inequalities. Don’t protect tax expenditures that benefit the affluent while cutting support for low and middle income families. Do what it takes to support high employment levels – otherwise family incomes plummet. And ensure that the gateways to a better life – from childcare, to health, to higher education – remain open and affordable to all.

A recovery alone will not reconnect living standards to economic growth. However hard it may be to secure steady growth, it will be harder still to achieve broadly shared prosperity. For the UK, as we contemplate a lost decade and hope of a better one to come, now is exactly the time to chart a better course.

This article first appeared on the website of The Observer