That there is ‘no money left’ is presented to us as an economic fact of life. The Conservatives have embraced it and the Liberal Democrats accepted it. Led by the authors of ‘In the black Labour’ we are at risk of falling in with the inevitability of public squalor and private misery. Yet let the fog of this delusion lift briefly and we see around us the extraordinary wealth of a modern developed nation. The imperative that apparently forces us to accept a significant reduction in the quality of life of the majority of the population is almost entirely political. We should reject it.
There has been as yet no large scale loss of producing power, loss of skills or natural resource loss that justify inadequate healthcare provision, social care and wages. The negative impacts of the recent crisis have almost entirely been at the level of financial balance sheets, and the money and credit flows that these appeared to justify. Since much of the flows in the past decade were built on loans to those unable to repay, assets built on these loans and the insurance of these loans, this money never represented anything other than wish-fulfilment. This is not wealth that has been lost, but wealth that was never there in the first place.
Even after the crisis the current market value of the UK’s non-financial assets is reckoned at around £7.5 trillion (million million), down from an equivalent (and probably inflated) £8.1 trillion in 2007. These assets are probably worth about half the value of the UK’s workers, who are just as numerous and skilled before the financial crisis as afterwards. Surprisingly the UK’s aggregate financial position appears relatively healthy, in that the country’s total overseas debts only exceed all the debts owed to us by around £200 billion (thousand million), which is only 3% of our wealth.
So we were a wealthy country before and are a wealthy country today. And we are not hopelessly in hock to the rest of the world. Why is it then possible to paint such a disastrous picture of our economic situation? The answer is that wealth, however much there is, cannot sustain people unless it is used to provide them with what they need.
There are two important and related reasons why the UK’s wealth is not doing its job. The way it is distributed means that the least wealthy half of households share rather less than £700 billion of it, which means around £70,000 (including houses and future pension rights) per household on average for this group, with 10% having £9,000 or less. The most wealthy half of households therefore share £6.8 trillion, or £650,000 per household, with the top 10% having £800,000 or more.
Such a skewed distribution of the nation’s wealth has a seizing-up effect. There has been no great incentive for those with comfortable and very secure existences to put their wealth to real use (whether through creating public or private value) when they could simply see it passively accumulate through financial engineering. As a consequence of this engineering, based largely on fantasy returns, we have the second problem that a lot of wealth is now based on debt whose repayment was, and is still, in some doubt. The way this debt is distributed means that the incentive to accept its devaluation, and so release the financial logjam, is lacking.
What should a government with the political will to tackle these problems do?
If we want real assets to produce and for blocked financial assets to be resolved, flows of money, goods and services should be encouraged over the maintenance of wealth. This generally rules out confiscatory income, profit and consumption taxes. I think there are therefore two main strategies.
Firstly, we should shift control of productive wealth toward those who have the incentive to see it used to produce real goods and services – ordinary working people who are not already awash with wealth and whose lives have genuine scope for improvement. This implies a greater involvement of employees and communities in business decisions, perhaps on the German social market model, the stakeholding model that was widely debated in the 1990s, or some new model of our own.
Secondly, let’s change the incentives for those who currently hold the nation’s wealth. If the tax burden for any given total revenue is greater on static wealth (land, property and purely financial assets) than on incomes and profits, there is an incentive to make that wealth work, or if it can’t work because it is based on unpayable debt, to offload it at a compromise value.
Combined, these measures constitute a recipe for sustained growth of real value for the whole population instead of a wealthy minority. Certainly, the public finances (both on and off balance-sheet) need to be sustainable within broad terms, and a monitoring body such as the Office for Budget Responsibility can play a useful part in this, but to see this as the primary framework for policy is to follow the Liberal Democrats headlong into the ‘austerity trap’ set by the Conservatives and their wealthy business and media allies.
Diarmid Weir writes on economics and policy at http://www.futureeconomics.org