In a previous blogpost (part 1 of this discussion), I suggested that we had a cultural problem in the UK with not realising how rich we are by world and historical standards. This time, I want to suggest that we also have a problem because we think we are richer than we really are.
This is not to say that we are not rich (see last post). Nor is it to downplay the incredible improvements in manufacturing productivity and technology over the last century. Some of our wealth gain is absolutely real. But we are not as wealthy as a country as we may imagine, or as raw GDP growth figures might lead us to think. And this leads us to problems with understanding our situation and the real choices facing us.
So why aren’t we as rich as might think?
a) Moving unpaid “work” like caring into paid work boosts GDP and tax but not actual work being done. Over the last 50 years we’ve encouraged mothers of ever younger children back to work. While this should be an option for women, and some women very much want to work, the result is that we move from a set up where a mother with young children (say 3 and 1) stays at home and another woman works, to now where the mother goes out to work and pays for childcare to be provided by another woman. Similar things have happened with care for the elderly and disabled. Community and cultural activities which were largely run by volunteers are now run by paid staff. There are gains from this in terms of opportunities and, in some of the charity sector, standards. But overall the result has been a boosting of GDP figures without actual improvements in output. And as will become a theme of this post, that increase in GDP has largely gone to inflating house prices.
b) Much of our growth over the past three decades has been fuelled by cheap debt. Debt enables us to have now what we would otherwise have to save many years for. That can be good- where we would have had to rent at a higher price than the debt repayments, or where the investment leads to greater productivity. But much of the debt has been a way of inflating our feeling of wealth while loading the problems of repayment on future generations. Our national deficit and debt are both enabling us to live a higher standard now while risking lower standards in the future (as interest and loans are repaid). PFI for schools and hospitals was a classic noughties version of this. Pension promises are another. Quantitative easing from both the financial crisis and the covid crisis is another version of this, and the resulting inflation has recently made us notice how much poorer we are. Once again, a result of this debt (including two earner mortgages) has been rising house prices.
c) GDP for the country has been boosted by growing the population, while GDP per person has been stagnant and shrinking. Bringing in immigrants in growing numbers fills short term skills gaps. And it increases the overall population and so the economy (GDP). But while GDP has risen, the GDP per person has not. And the short term boost in workers has not been matched by corresponding investment in infrastructure. This means demand for houses rises (rising house prices again) and also for things like schools, roads, hospitals etc. The issue here is not immigration per se (I’m the son of an immigrant), nor even the level. The point here is that large scale immigration without corresponding investment in infrastructure boosts national GDP while making services squeezed and fixed assets (like housing) more expensive.
d) Lastly, many of the people reading this blog will think that the country is richer than it is because they think there are more wealthy people (people who are richer than I am) than there are. Many of us live in areas which have above average house prices and salaries, and associate with others in those situations. London, home counties, Oxford, Cambridge, Bristol etc. The effect is that people on £50k pa salaries feel poor (those salaries make it hard to buy a basic house in those places) and know plenty of people earning more. But £50K pa puts you in the top 15% of earners nationally. There are 5-6 times the number of people in full time jobs poorer than you than richer than you.
What are the implications of thinking we are richer than we actually are.
1) Failing to consider the trade-offs in our choices
Because we think we are a wealthy country, even if personally we often feel short of money, we assume that here is plenty of money available to do things we value or like. Improving the environment, health and safety, and personalised treatment, are all good things. But they all come with economic costs. We have acted like we are millionaires at a restaurant, not needing to look at the prices or worrying about wasting food. We have added costs to business and life. The problem is not that these things are bad- better health and safety is good. The problem is that we probably can’t afford all these things. And so we need to have a serious weighing up of the costs as well as the gains, and which of these good things we can actually afford. Politicians and electorate need to be honest about the fact that we will probably have higher taxes and lower services than we’d like because we are poorer than we think we are. We have to be honest that we can’t have every good thing we want, not because of some wicked politicians, but because we cannot afford everything we want.
2) Ignoring the growing structural inequality that asset price inflation causes
Much of our supposed growth has gone into inflating assets, and particular house prices. Rescuing banks in the financial crisis, quantitative easing, and mass immigration have all tended to increase the wealth of those who already hold assets (typically upper classes and older people) while piling costs onto those without assets (renters, the young, the lower classes). Increasingly, it is not possible to buy a house in much of the country without family help. This inequality is extremely bad for society! If OT Israel provides any sort of template for the modern state (and this is a debated issue), the idea that every Israelite received a piece of land to live on and farm seems core. Society should be ordered so that it is possible to do a normal full time job and buy a home. A lower GDP but with ordinary people able to buy their own home would be better for us as a society than an inflated GDP and houses out of reach for many ordinary people. The blindness of the “haves” (those on the property ladder) to the hardships of the “have nots” is the sort of thing the Israelite prophets exposed in their prophecies.
I’m not sure how we actually get to these solutions. I don’t know the economics of what will work. I don’t know how we shift the culture to prefer honest politicians to ones who promise low taxes and high spending. But I do think being honest about our limitations, our lower level of wealth, may enable us to have more productive conversations and perhaps to make more progress in growing a productive economy whose fruits are wisely distributed.
Jots and Scribbles 