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"... James Montier and Philip Pilkington of the global investment firm GMO say that the system that arose in the 1970s was characterised by four significant economic policies:
- the abandonment of full employment and its replacement with inflation targeting;
- an increase in the globalisation of the flows of people, capital and trade;
- a focus on shareholder maximisation rather than reinvestment and growth; and
- the pursuit of flexible labour markets and the disruption of trade unions and workers' organisations.
"... 'Labour market flexibility may sound appealing, but it is based on a theory that runs completely counter to all the evidence we have,' Montier and Pilkington note. 'The alternative theory suggests that labour market flexibility is by no means desirable, as it results in an economy with a bias to stagnate. It can only maintain high rates of employment and economic growth through debt-fuelled bubbles that inevitably blow up, leading to the economy tipping back into stagnation.'
"This quest for ever-greater labour-market flexibility has had some unexpected consequences. The bill in the UK for tax credits spiralled quickly once firms realised that they could pay poverty wages and let the state pick up the bill. Access to a global pool of low-cost labour meant there was less of an incentive to invest in productivity-enhancing equipment.
"The abysmally-low levels of productivity growth since the crisis have encouraged the belief that this is a recent phenomenon, but as Andy Haldane, the Bank of England's chief economist, noted last week, the trend started in most advanced countries in the 1970s."