Is it back to the 1970s for the UK economy? Yes, but not in the way you think | Philip Inman

B.ritain is suffering a catastrophic economic shock that resembles the one that knocked the economy sideways in the 1970s, but strike action by workers offered below-inflation pay rises ranks low on the list of similarities.

The UK is being affected by inflationary pressures and steadily rising wage demands, but both remain modest by comparison with the 1970s. Much more important are the circumstances of 21st-century life, which are very different from those that prevailed almost five decades ago.

For one thing, the 1970s was a decade of widespread trade union membership and relatively high benefits for workers made unemployed. Millions of pensioners, on the other hand, huddled for warmth around a two-bar electric fire, forced to scratch a living on Europe’s lowest state pension.

It was a time of mass production, mass consumption and the public ownership of utility companies and major employers in sectors including telecoms, rail, coal, steel and automotive. People worked by the hundreds of thousands in the same industry, for the same employer. From cars to insurance, there wasn’t the variety you see today.

People of all ages and income levels consumed many of the same things, from sausages, mash and baked beans to cathode-ray tube TVs. Today’s economy is dominated by niche production and niche consumption, where what you buy defines you much more than what you do to earn a crust.

These days workers are largely unprotected from loss of income, so those lacking transferable skills have to bow down before their employer. Strikes are sporadic and confined to relatively small groups.

This makes almost everything about inflation different. Pensioners carry political weight, hence the 10%-plus rise in the state pension next year. Meanwhile, weakened and divided workers are facing a huge drop in living standards.

The 1970s resonate only if the comparison is with investment levels. Crucially, when Marc Bolan topped the charts, only meagre sums of money were being devoted to Britain’s long-term industrial future, and the same can be said for the period of Stormzy’s rise to fame over the past decade. More precisely, over the past six decades, public investment has been erratic, with ups and downs during Labor and Tory governments, giving the private sector little confidence that it can ride on the coat-tails of government spending.

A study in May by the Bank of England rate-setter Jonathan Haskel and Stian Westlake of the Royal Statistical Society found that from 2007 to 2019, the UK’s failure to invest as much as its US counterparts did in patents, research and software – often termed the “intangible economy” – had resulted in the loss of £2,144 per household, or 0.5 percentage points of GDP a year.

According to the Office for National Statistics, UK private business investment is more than a third down on pre-Brexit levels. As a result, Britain enters each crisis lacking the momentum that would allow vulnerable industries to protect themselves from its worst effects.

Next year, businesses boasting the latest kit and up-to-date processes will probably be thriving, and those that entered the downturn still using Windows 7 to process orders will have failed by the wayside.

On a positive note, the UK’s manufacturing sector produces much the same value of goods today as it did 15 years ago. But the number of manufacturing firms has shrunk, as has the number of people they employ. With the car industry on its knees and investment in the green economy focused almost entirely on windfarms, the value as well as the size of the manufacturing sector is likely to shrink.

There is trouble ahead for services firms too. They have relied on waves of graduates from British and European universities washing up on their doorsteps, willing to do almost any job that needs doing.

This year, major cuts will limit access to higher education. That’s a blow because productivity gains made in the UK before the 2008 financial crisis – since when productivity has flatlined – came thanks to a better-educated workforce.

Plenty of studies have shown that graduates took jobs well below their capabilities and were technically underemployed. But employers, without lifting a finger or spending a penny, had someone performing a task who was better qualified than the employee they replaced.

It is the kind of expensive trick that cannot last, and will leave the UK with a lower-grade workforce to match lower investment. If we are witnessing a rerun of the 1970s, it’s the lack of investment that chimes, not the potential for inflation busting pay rises.