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Bookmark and Share Dr Stephen Spratt is Director of nef‘s Centre for the Future Economy.

Bail-outs have now boosted UK national debt to staggering levels but have done little to stop the rot in our financial sector. By refusing to acknowledge the deep structural failings in the banking system, the Government is storing up debts they’ll probably never have to deal with, and no future government will be able to meet without decimating core public services. Banks that really have become too-big-to-fail leave the UK very vulnerable and must now be broken up. Soon to-be-published plans for banking regulation must go much further than tinkering with corporate governance and transparency. We need to separate investment banking from retail banking. We also need local banks that are in touch with their customers and able to respond to the needs of the dynamic small businesses on the frontline of our economy that will lift us out of recession.


Bookmark and ShareVeronika Thiel is a researcher and project manager on nef’s Access to Finance team.

bank-of-england1As a social scientist, I am predisposed to like surveys. But sometimes, you do wonder about their merit. Sometimes, they just state the obvious. The Financial Times and the BBC, among other media outlets, reported on a new survey by the Bank of England that showed that high-income households are struggling with their debt, especially unsecured lending, such as overdrafts and credit cards.

*Yawn* Oh, really? I do apologise if the sarcasm won’t travel in this blog as much as I’d like it to, but common decency prevents me from using more obvious similes here.

Of course, richer people will also struggle with debt. Given the level of consumer debt in this country, that’s hardly a surprise. We are at the beginning of a recession, inflation is up, and the heyday of easy credit that allowed people to fund a big-spender lifestyle is over. It was only a matter of time.

The only news is that this now affects the upper income classes as well. The first signs of the crisis, however, appeared much earlier. Personal insolvencies have shot up dramatically since 2003, as the graph based on Government data below shows.

Insolvencies in England and Wales, 1997-2007

Insolvencies in England and Wales, 1997-2007

The fact that individual insolvencies were up despite the easy availability of credit, and that they are a measure of last resort, should have rung alarm bells back then. But it didn’t, at least not in the right places.

So many households have struggled with debt for a long time, especially those without access to cheap credit from banks. For them, the credit crunch has been happening for a long time. They had no choice but to pay for essential goods such as a new fridge or a boiler by using a doorstep lenders, who charge often around 250% APR. Other households will have to go down this route now as well.

So while I have sympathy with those wealthy people who are now finding themselves in unexpected hardship, let’s not forget that for many much poorer people this has long been a reality.

In an ideal world, the newspaper headlines wouldn’t simply tell us what we already know. They’d give us some real news, such as: we need to stop funding our lives with credit, and we need to start a discussion on living wages and benefits. Now if I found a survey that suggested this as an outcome, I’d be all ears again.

Bookmark and ShareVeronika Thiel is a researcher and project manager on nef’s Access to Finance team.

Job Centre

The government announced today that single parents on benefits with children over one year are expected to find work or else face sanctions.

This is a move that beggars belief, for several reasons.

Firstly, couples on benefits with children are not expected to find work until their children are seven. This smacks of discrimination against lone parents – are we still making a moral judgment based on the marital status of a parent?

Secondly, this move makes rather blatant assumptions about the availability of good-quality childcare in every part of the UK, something that is clearly not the case. Where are parents supposed to leave their children?

Thirdly, starting to work costs money upfront. Not only for childcare when the parent is working, but also for childcare when going to interviews. For suitable clothing. For transport to and from work. For lunches that need to be bought when at work. Who covers the cost for that?

Fourthly – and most importantly – the minimum wage does not provide a living wage, especially not when seeking good childcare. Already, millions of people on low incomes or benefits take out revolving loans with doorstep lenders at interest rates of up to 186% to cover basic costs of living. Forcing lone parents into work without ensuring that their wages can cover increased costs of good quality child care will only add to their debt load.

We finally need to start a discussion on living wages and living benefits, and of stable jobs worth doing for a living. Furthermore, it needs to be acknowledged that many low-skill jobs are very unstable, and many companies operate a hire- and fire policy. In a current recession, this will only become more common place. Full employment is now more unattainable than ever. Building skills and confidence as the Government proposes to do is a good thing, but it is not the only prerequisite of securing a stable job – the availability of jobs is a rather more important factor.

The Government needs to provide far more carrots than a vague promise that only those who will not take steps to return to work will be sanctioned. I can’t imagine that the level of trust in the Government is very high among benefit recipients, and applying the stick is certainly not going to change this.

Bookmark and ShareSam Thompson is a researcher and a consultant at nef‘s centre for well-being.

With timing so precipitous as to border on the comic, Chancellor Alistair Darling chose to announce a cut in VAT in the same week as Buy Nothing Day, today’s annual jamboree of anti-consumerism that urges us to forsake all consumer spending for 24 hours. Suggested activities on the BND website include temper tantrums – “Sit on the floor in any shop with a friend and chuck a mental. Shout things like ‘I don’t want anything anymore!” – and zombie shopping excursions of like-minded individuals dressed in ghoulish garb and “shuffling from shop to shop chanting BUY, BUY – BRANDS, BRANDS!” All good fun, but as anyone familiar with Oxford Street on a normal Saturday will know hardly an effective way to grab attention. The protesters will blend in seamlessly.Bliss!

But whatever your view of BND, you might still find it a little odd that our Government is somehow trying to elide consumerism and civic duty, two things that are – or should be – about as far apart on the individual-society spectrum as it’s possible to get. Whilst not, perhaps, as banally distasteful as George W Bush’s exhortation to Americans to respond to 9/11 by going shopping, there is something discomforting about the Government’s plea. For as unemployment rises, property prices plummet and millions live in fear of their next credit card bill, this should be a moment to step back and reassess whether the way we consume has taken us nearer to, or further from, the kinds of lives we really want.

For years, we’ve lived with a poisonous combination of messages: on the one hand, constant bombardment from advertisers intent on telling us how hollow our lives are without magical Product X and, on the other, staggeringly easy access to credit with which to acquire Product X on the never-never. There are plenty of reasons to worry about this. Perhaps the most obvious is the indisputable link between Western levels of consumption and unsustainable environmental pressure. We can’t expect to keep living as we have been doing and stave off irreversible climate change, let alone repair the damage to ecosystem services and biodiversity caused by our profligacy and attain some measure of global social justice.

There are significant downsides at the personal level too. For instance, recent research from the renowned Institute of Psychiatry in London shows that personal debt “mediates” the relationship between poor economic circumstances and mental health difficulties. In other words, the further up to your neck you are in debt, the higher your chances of developing clinically significant anxiety and depression, largely irrespective of how much you earn. It’s not hard to imagine why this might be. The stress of working just to keep up repayments and the fear of defaulting are constant and gnawing, and that’s without having to deal with the feelings of shame and inadequacy if things really go wrong. There will be plenty of former bankers and traders in serious emotional distress at present, and that is not something anyone should be celebrating.

There is also a more subtle, but no less damaging aspect to all this focus on personal consumption. People who are strongly motivated by the idea of getting rich and famous are what psychologists (despairingly) and marketeers (delightedly) refer to as “materialistic”. The scientific evidence for negative impacts from materialism is pretty overwhelming; they range from poorer personal relationships through fewer good moods and lower self-esteem to increased prevalence of psychological symptoms. Ironically, given the consumption-as-moral-imperative line implicit in the VAT cut, materialistic people have been shown to be generally more selfish and less inclined to help others, even when there it little personal cost involved. Fascinatingly, in one study, the extent of individuals’ materialistic outlook was shown to be positively correlated with their ecological footprints.

If Western-style consumerism, with its attendant values and attitudes, aren’t making us happy, what might do? Possible answers are provided by nef’s mental health equivalent of “five fruit and veg a day”, which we distilled from the evidence on improving well-being and warding-off mental health difficulties. What we came up with was a list of simple, everyday activities, arranged around five core concepts: Connect… Be active… Take notice… Keep learning… Give…

There is a reason that none of these suggestions involve consuming more or striving to get richer, and it has nothing to do with our ideological preferences. The reason is that they are based on the best available scientific evidence, and the best available evidence is unequivocal. The road to well-being is not paved with gold, but lined with friends and family, punctuated by opportunities for enjoyable detours, and is more about the journey than the destination. The happiest people in the world are those who spend their time engaging with life to the full, sharing experiences with friends and savouring the moment. The least happy are those who spend it slumped in front of the TV wishing they were Paris Hilton. And that, as they say, is a fact.

It is all enough to give us cause to reflect on what would really be the best way to spend this Buy Nothing Day Saturday. For those of us who are consuming way beyond our means (and the Earth’s) it is about time we started buying less every day. Do that, and the evidence shows our lives are likely to be richer as a result.

Bookmark and ShareJosh Ryan-Collins works on sustainable procurement and commissioning at nef.

robinhoodThese are truly astonishing political times. A Conservative Shadow Chancellor is criticising a Labour Prime Minister for planning enormous working and middle-class tax cuts. Meanwhile, the combination of tax cuts with a big expansion in borrowing threatens a currency crisis, with sterling already having fallen by a quarter against the dollar in the last three months.

The UK’s many creditors, mainly Asian investors who have lent with confidence to our high rolling banks, are starting to get itchy feet. UK debt is now priced considerably higher than German debt and there is a real danger of currency speculation leading to a ‘rout’ of the pound as Will Hutton suggested in the Observer yesterday. Brown and Darling are rumoured to be at loggerheads over how big the cuts and borrowing package will be, with the Chancellor taking over the role of Prudence against a bullish Prime Minister.

Perhaps unsurprisingly, it is the Liberal Democrats who seem to be offering a more sensible solution to the current problem. They are also offering tax cuts to ‘working people’, 4p off the basic rate of income tax, but funding it through taxes on the very rich and green taxes, hence keeping the public debt, and hopefully currency speculation, in check.

The question is why on earth Labour is not making similar arguments. If there was ever an opportunity to make a robust economic case for a progressive, re-distributionary tax policy, this it. Labour has, of course, been redistributing “by stealth” since they came to power but have singularly failed to build a moral and political case for redistributive policies, a failure many on the Left have attributed to a deference to the City.

Well, any deference to the Masters of the Universe has now disintegrated and it’s time the government got serious about tax. Not least because of the well-documented development, under their stewardship, of a new cadre of ‘super rich’ who increasingly have nothing at all in common with the middle classes.

nef‘s Happy Planet Index showed a strong link between well-being and economic equality. Put simply, well-being is relative, so that countries with more polarised income and wealth distributions have lower well-being than those with more even distributions, even if they have higher average earnings.

So raising income tax for the highest earners and perhaps also examining a wealth and land tax (not to mention an even more politically palatable windfall tax on energy companies), combined with green taxes, could satisfy both uncertain creditors and voters. Gordon Brown has shown no reticence in abandoning his golden rules on fiscal policy in recent days; if he wants to save his reputation for prudence, it might be time to take an equally aggressive approach to progressive taxation.

Bookmark and ShareSam Thompson is a researcher and a consultant at nef‘s centre for well-being.

Further to last week’s post about credit card debt, here’s an interesting nugget from the British Psychological Society’s research digest.

Hundreds of participants were given a credit-card bill with an outstanding balance of £435.76 and asked how much they could afford to pay off, given their real-life finances. Crucially, half the participants were shown what the minimum compulsory payment was and half weren’t.

The presence or not of information about a minimum payment didn’t affect the proportion of participants who said they’d pay the balance off in full. However, among those 45 per cent of participants who said they’d pay only some of the bill, the presence of information about the minimum required payment had a dramatic effect on how much they said they’d pay.

Among the partial payers, those who saw information on the minimum required payment (which was £5.42) said they’d pay off 70 per cent less than those who didn’t see information on the minimum payment.

It also turns out that people who pay more than the minimum but less than the total every month are unconsciously influenced by the minimum require payment – the higher it is, the more they will pay, and vice-versa. The reason has to do with anchoring, a cognitive bias much studied by behavioural economists.

It’s well known that credit card companies make a lot of money from people who maintain outstanding balances but keep up-to-date with their minimum monthly payments, so I don’t suppose they will be too unhappy about this particular finding. By advertising a low minimum payment they can pull off the happy trick of appearing benevolent and making more money. But for the many people who rely on credit cards, these are not trivial results – the study’s author estimates that in practice people could end up paying double the amount of interest they need to, simply as a result of this biasing effect.

This is a nice illustration of how behavioural economics can shed light on issues of practical importance – rather as the authors of this year must-read, Nudge, have been arguing. (Needless to say, nef was ahead of the curve on this particular trend.)

Bookmark and Share Dr Stephen Spratt is Director of nef‘s Centre for the Future Economy.

It was not so long ago that Gordon Brown claimed to have abolished ‘boom and bust’. As we enter what everyone now thinks will be a deep and prolonged recession this claim is looking – being as generous as possible – a little over optimistic.

The government is keen to stress that the current crisis was not ‘made in the UK’, and it is certainly true that this is now a global crisis that no country can insulate itself from completely.

Having said that, we have long heard claims that the UK is in a better position to weather economic and financial storms because of our stable economy and sound system of financial regulation and macroeconomic policy…

If this is true it is a bit odd that only a few weeks ago the OECD argued that the UK was, in actual fact, the worst placed among the major developed economies. Rather than being in a better position than everyone else, it seems that we are in actual fact in the worst.

Why might this be?

If everyone on earth consumed as we do in the UK, we would need the resources of more than three planets like earth to sustain us

If everyone on earth consumed as we do in the UK, we would need the resources of more than three planets like earth to sustain us

The most obvious reason is that the crashing financial sector is much more important to the UK economy than to most others – even the US. At least until very recently, the financial sector accounted for 10 per cent of UK GDP, and a quarter of all income tax, and had been growing in importance since the 1980s at the same time as the importance of manufacturing has steadily fallen.

This has not just happened of course – successive governments have championed the growth of the financial sector, much to the irritation of manufacturers who have long complained that economic policy has been skewed towards the needs of the financial rather than the real economy. This seemed fine during the ‘long boom’, but looks very unwise now.

The second factor is consumption. As with the financial sector, the UK has the highest level of consumption (around 90 per cent of GDP) of any other G7 economy. Again, this has been growing steadily since the 1980s at the same time as investment has become less important.

The final piece of the jigsaw is debt. UK household debt is the highest of the G7 economies at 109 per cent of GDP and has also been growing fast in recent decades.

This does not sound like a stable, well-balanced economy equipped to withstand turbulent times, but one that has become increasingly dominated by the financial sector, and which is fuelled by unsustainable consumption based on ever higher levels of debt.

When commentators talk gravely about the dire impacts of falling consumer spending they do so with good reason. The UK economy has become less stable, less diverse and more dependent on consumption and debt – which has obviously been of great benefit to the financial services sector – than any other major economy.

As we look to rebuild from the ashes of the current crisis it is vital that we do so in a way that invests for the long-term to build a diversified, sustainable economy, where finance is the servant and not the master.

Bookmark and ShareSam Thompson is a researcher and a consultant at nef‘s centre for well-being.

From the Washington Monthly (hat tip Matt Yglesias), comes this rather alarming chart:

Growth in credit card debt vs growth in real wages

Growth in credit card debt vs growth in real wages

Now, this is the country that brought the world the Hooters Mastercard (“It says Hooters on the card!” No kidding.) so perhaps we shouldn’t be too surprised. But who would bet against there being a similar trend in the UK?

There are several reasons we might want to worry about excessive and unsustainable borrowing, but one we should be talking about a lot more is mental health. As the new Foresight report makes clear, much of the latest research implicates debt as a major causal factor in clinical mental illness.


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nef employees blog in their personal capacity. The opinions expressed here do not necessarily reflect those of the new economics foundation.