Continuing to rely on asset-price appreciation to provide for our futures is a dangerous gamble
Any way one looks at it, the long-term growth prospects of the British economy appear pretty bleak in the absence of some quite seismic shifts in economic thinking and economic policy practice. Yes, you might protest, growth is back, inflation is low, unemployment is falling and there is no immediate prospect of a steep upward trajectory in interest rates. But, as even the Governor of the Bank of England and the Chancellor of the Exchequer both now concede, the growth we have looks alarmingly unstable and would appear to be predicated on the inflation of an all-too-familiar asset-price bubble centred on the housing market.
That is why the coalition’s much-touted Help to Buy scheme is currently in the dock and why the Chancellor’s recent Mansion House speech freely concedes the need of the Bank of England to cap mortgage loan-to-value ratios to temper the overheating in the housing market. But, of course, not quite yet … indeed, not in any way capable of yielding tangible effects (and thereby suppressing growth) this side of the General Election.
This is alarming for two reasons. First, and perhaps most obviously, it suggests (in what is now becoming a familiar theme in this blog) that Britain’s seemingly good economic performance in recent months is in fact a chimera – and that the quite conscious pump-priming of the housing market has merely served to mask the persistence of long-standing structural pathologies that remain almost entirely unaddressed. The growth crisis, in effect, has not been resolved – and that makes the debt crisis much, much more difficult to deal with in the medium term.
But, second, and much less appreciated, this has very major welfare implications. The reason is very simple. Since around the turn of the century, Britain has been moving increasingly consciously from a public model of welfare to what might be seen as a ‘public-plus’ welfare model – residual public welfare plus a more individualised and privatised ‘asset-based’ welfare. And the point is that austerity is driving a further residualisation of public welfare, just as the crisis has put paid to the steady asset-price appreciation on which asset-based welfare depends. It is time to twist or split – not, as the Bank of England and the Chancellor would seem to be conspiring to do, to postpone the decision until after the General Election.
To see why, we need to return to the crisis itself. As I have been suggesting, it was not just the Anglo-liberal growth model that was threatened by the bubble burst. So too were a range of public and social policies whose development had been predicated on the assumed continuation of growth in general and of a broader asset-led conception of growth more specifically. Chief amongst these is the pursuit of asset-based welfare. This was – and remains – an approach to welfare in which citizens are encouraged to acquire, as a form of investment, appreciating assets which they might later liquidate to fund their welfare needs. It has become associated in particular with the idea that citizens, rather than the state, bear the principal responsibility for ensuring that they have (or might have) adequate funds to meet their needs in retirement, ill-health or even unemployment without becoming dependent on their families.
In the context of an ageing population and with the projected steep decline in the per capita value of public pensions, asset-based welfare provided a means of squaring an increasingly tricky welfare circle. But the problem was that the stable and predictable asset appreciation on which it rested was, like the Anglo-liberal growth model itself, dependent on easy access to credit and the persistence of a ‘low inflation–low interest rate’ equilibrium. It was, in other words, fine only for as long as the benign conditions of the ‘great moderation’ persisted – and these were never going to last forever. Asset-based welfare was, in effect, a way of mortgaging the future capacity of citizens to provide for themselves with dignity on the vagaries of the housing market (and markets in other appreciating assets classes).
Put in such terms, asset-based welfare looks today like a rather risky and ultimately costly one-way accumulator bet. And it was. But, to those who assumed that the business cycle was dead, asset-based welfare was a very sensible public policy stance. For as long as asset-prices were rising and there was no prospect (in the absence of a business cycle) of them falling, it was almost bound to deliver a good return to those able to participate in the process. As such, it was perfectly rational for policy-makers to promote it as a strategy for supplementing more conventional means of meeting welfare needs publicly.
What of course made it all the more attractive to policy-makers was Britain’s creeping welfare residualism from the mid 1980s. This growing residualism reinforced the incentive to promote asset-based welfare as a means of partially compensating citizens for the growing mismatch between the benefits to which they were entitled and their expectations of the benefits they might receive.
But the problem was that the attractiveness of asset-based welfare to policy-makers in Britain did not make it a very good bet. Indeed, despite being so widely promoted and touted, it has actually proved extremely fortunate that the transition to asset-based welfare was rather more gradual and incremental than one might have been forgiven for thinking, given the hype. By the onset of the crisis only one major asset-based welfare programme was actually up and running – the Child Trust Fund. And even this was only fully operative from 2005. Yet, despite this, close to £0.5 billion has been lost from the value of these funds since 2008. The mortgaging of childhood futures on continued asset-price appreciation has proved one of the least mourned casualties of the crisis.
Or has it? For asset-based welfare has not gone away, even if it now assumes a quieter form. Indeed, as hinted at above, something equivalent to asset-based welfare (a privatised alternative to public provision) looks all the more necessary in the context of pervasive welfare austerity. But, as we now know all too well, the need for asset-based welfare to compensate for a shortfall in public provision has grown at precisely the point when stable asset-price inflation appears oxymoronic.
This is the asset-based welfare paradox. And it needs to be faced up to now. The choice is a stark one: ignore the lessons of the crisis and continue to mortgage our collective futures on the bet that asset-price inflation can be made sustainable indefinitely (twist) or share the burden of managing for our futures collectively and publicly (split). I guess that makes me a splitter.
This blog derives from a comment delivered at a public seminar at Le Ministère des Affaires Sociales et de la Santé (DREES) in Paris on stratégies nationales de croissance et protection sociale (‘national growth models and welfare provision’) on 26June 2014.