The British growth model is well and truly broken. If further evidence was needed, it came from figures from last month showing that households had become net borrowers for the first time since the records began in 1987. They took out nearly £ 80 billion in loans last year, the highest amount in 10 years. Only £ 37 billion has been deposited in the banks. It echoes the boom period before 2008, and we all know how it ended.
The Office for National Statistics also reported that the use of short-term unsecured loans, such as credit cards and payday loans, has exceeded £ 200 billion: a record. Nine out of ten new car purchases are made through hire-purchase or some other similar type of arrangement. Rather than serving as a corrective, the financial crisis and its consequences have just reaffirmed that we remain addicted to this growth path fueled by debt.
British sociologist Colin Crouch has dubbed this “privatized Keynesianism”. While the traditional Keynesian economy relied on government spending to stimulate aggregate demand, privatized Keynesianism relied more on household spending.
But because we live in a time of historically low levels of wage growth (it fell again last week), the only way to finance these expenses is to increase the debt. This type of growth pattern conjures up images of frenzied shoppers, multiple bags in their hands, rushing from Primark to Topshop and back again, putting everything they buy on the credit card.
Framed in this way, the British middle classes can distance themselves from what they perceive to be crude consumerism. But in reality, we are all a part of it. The middle classes have led the way with their use of mortgages, while low-income people have used credit cards and payday loans.
When house prices rise well beyond income, homeownership has powerful wealth effects for those on the ownership ladder. Borrowing on the back of rising house prices is fueling new consumer cycles. The government has cracked down on the buy-to-hire market in recent years, but years of easy credit in the 2000s, coupled with financial deregulation in the 1980s and 1990s, made this type of investment a mainstay of the UK economy. If you want a summary of British political economy over the past 30 years, look no further than the BBC’s Homes Under the Hammer program.
Those who bought their homes when average incomes were still linked to house prices did well, but it was a raw deal for everyone. On the £ 2.7 billion increase in wealth since 2007, two-thirds went to people over 65 in the form of earnings related to housing and retirement. In contrast, 16-34 year olds saw their wealth drop by 10% over the same period.
Privatized Keynesianism has always been an unsustainable way of organizing our economy. It is, as the German economist Wolfgang Streeck said, just a way to “save time”. However, this kind of growth regime has entered its morbid phase. The inequalities it generates have become so brazen that few can claim not to notice them. In the decade after the crisis, restrictions on loans blocked the gains of privatized Keynesianism for baby boomers and lucky millennials able to take advantage of Mommy and Daddy’s Bank. The rest of the younger generation were left out. High levels of personal debt increase levels of stress, anxiety and resentment.
This broken model reshaped Britain. We are a nation of consumers, not producers, which is reflected in our systematic balance of payments deficit. The UK has not had a trade surplus since 1998. Much of our service sector economy is geared towards administering the needs of those enjoying the benefits of an overvalued housing market. Consumption-driven growth supports strong demand for services that rely on a relatively unskilled workforce, including the growing “gig economy”. It has changed the shape of our labor market, emptying middle-level skills and widening the gap between the high-skilled and the low-skilled. We have created a new precariat to meet the needs of the rich.
Our model of debt-fueled growth has also changed the political and social geography of the UK. We no longer have a national economy as such. High-quality manufacturing jobs – once concentrated in the North and Midlands – have given way to low-skilled jobs in the service sector, distribution warehouses, supermarkets and call centers. Highly skilled jobs in the service sector tend to be concentrated in London and the South East. The government’s industrial strategy celebrates innovation poles such as Silicon fen in Cambridge. He has nothing to say about what Labor MP Rachel Reeves calls the everyday economy.
If the model is broken, what is the alternative? The UK needs to rebalance its growth, relying less on consumption and more on production. The financial sector is not as big as many think it is, but it weighs on the UK economy in a modern version of dutch disease: Regular inflows of foreign capital simply allow us to depend on asset bubbles rather than raising wages as a path to prosperity. They strengthen the pound, making it increasingly difficult to achieve the increasing levels of exports needed to support a different growth model.
We also need to dramatically raise the skill levels and status of many jobs in the service sector. It is a national scandal that those who care for our loved ones – our children and our older parents – are paid so little and given so little attention in our national economic strategies.
Corn transform the UK economy demands something even more fundamental: we need an entirely new social regulation. One of the greatest ideological achievements of Thatcherism was the destruction of the idea of society embodying the common interest. And without a sense of the social, we cannot hope for real changes in our economic model. Weaning the British middle classes of their dependence on property will generate enormous resistance from all – from landlords to lawyers – who have a vested interest in preserving the status quo. This can only be overcome by appealing to the common good.
American historian Christophe Lasch once wrote that a properly democratic society should not aim to create a competitive environment where the most able succeed and the others fail. Instead, it should aim to raise the general competence of the company as a whole. This should be our goal once again. To achieve this, we need to find a sense of what society means.