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We've never had it so bad as our kids are finding out

By Hamish McRae

It is possible that the 20-somethings now entering the workforce in the UK will become the first generation for a couple of centuries that end up, on average, poorer than their parents?

It is a deeply troubling thought, for while the combination of two world wars, the inter-war depression and the 1970s inflation meant many individuals are worse off than their parents, this has not been true for society as a whole. Harold Macmillan's misquote - that most people had never had it so good - has until recently still applied.

But now we are seeing something of a return to the gloom of the late Seventies, when commentators wrote of the UK facing not just relative decline but absolute decline. We have had five years of stagnation in living standards. Home ownership is falling. Productivity is falling. And now the Bank of England thinks that the country's GDP will not be back to its previous peak until 2015.

Of course we are not alone. If the UK faces a lean seven years, Japan has experienced two decades with very little growth. In the US, there has been growth but it has been unevenly shared, for the median income of working people is now no higher than it was in the 1980s.

There is, of course, a sharp contrast between this sense of decline in the West with the self-confidence of the emerging world. But that, in a way, makes matters worse for us. We can and should celebrate the way that millions of people are being lifted out of poverty every year in China and India - and recently in Africa too. But this success does rather rub our nose in our failure.

You could say that the emerging world's progress is the result of their application of technologies developed in the West - everything from production-line manufacturing in China to mobile telephony in Africa. But unless we can continue to innovate, to keep increasing our productivity, our own living standards will stagnate.

So are we condemned to stagnation? I think the answer to that is almost certainly not, but it is hard to separate the many strands of evidence.

The first difficulty is to distinguish between the cyclical and the structural. It has been a pig of a cycle and you would expect, as we all clamber up out of the dip, that living standards must inevitably be lower than they would be had we cantered on. The issue that matters more than anything else, is whether there has been some structural change, some damage to the great engine that has increased wealth incrementally, year after year, since the Industrial Revolution.

The answer to that depends on your analysis of the forces that drove such growth. On the one hand the extent to which it was the exploitation of finite natural resources; and on the other the extent it was the result of human ingenuity.

You can see both drivers at work now. China is fuelling its economic boom by scooping up natural resources from wherever it can get them, as well as applying Western technology. But within the West we are still innovating, finding ways of doing things more effectively. Look at the way modern cars don't break down as they used to 30 years ago and deliver double the miles to the gallon, or the way we book our own flights on the internet, enabling airlines to achieve much higher load factors than they could before.

The problem is that human ingenuity is struggling to increase living standards against several strong headwinds, some of which we cannot do much about. For example we cannot do anything about ageing societies. But most developed countries have been bad at adapting to this shift. A smaller workforce relative to the numbers of young people and the retired inevitably reduces overall living standards.

Nor have we been good at matching skills to jobs. A recent GE Capital study of medium-sized firms showed the managers felt the biggest thing that held them back was not shortage of cash but shortage of skilled people.

The point here is we could be doing better. But the relentless drive to do more with fewer resources evident in manufacturing has not yet spread to many service industries and to the public sector.

Until we realise that, our children may not have as high living standards as we enjoy.

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