This morning's video is slightly different in that it is, I am afraid, audio only. I really didn't feel like sitting in front of a camera yesterday, but I was happy enough to talk into a microphone. so that is what I did.
In the resulting monologue, I argue that William Beveridge, writing in 1944 in the report that became the foundation of the UK welfare state argued that too many savings in too few hands could be deeply destructive within an economy. Hence, the title for this blog post, which is a direct quite from him.
The YouTube version of this is here:
The audio version is available here.
The transcript is as follows:
Hello, this is Richard Murphy. I'm sorry that I'm not looking at you in this video. That's because I've had quite a vicious ear bug, and as a consequence, I'm not feeling at my best today. So, rather than show you me at, well, less than optimal performance, I thought I'd just record some thoughts. And it may not be normal practice for people who are lying in bed recovering from a bug to read Beveridge's 1944 report on Full Employment in a Free Society, which was, of course, one of the foundations of the UK's welfare state, but that's what I was encouraged to do this morning.
And in particular, I found a paragraph that supports one of the hypotheses that I often put forward, which is that savings are not a useful economic exercise. Now this frequently offends people because it is of course a natural inclination of many people to save and there is indisputably a value to people having some savings.
I would always argue that and always encourage people to have a rainy-day fund at the very least which will enable them to deal with the inevitable crises that come along in life. I am not arguing against that.
Nor, to some extent, am I arguing against savings for pensions, although I do, as many people who know me will realise, have some reservations about the way in which pension savings are put into shares, land and buildings, all of which are second hand in the way that they are purchased by these funds.
But that is not what I'm really talking about. I'm talking about here the economic consequences of saving. And Beveridge tackled this in his report. It's on He did so in paragraph 123. And I want to read it to you. He said this:
Saving, in itself, is merely negative. It means not spending. Saving may be desirable from the point of view of the individual who saves in order to ensure to him the means of spending and of independence later. Apart from this merit of securing independence, saving in itself has no social virtue.
He is, therefore, reflecting the point that I have made many times over, but he does so in a very specific economic context as well. He does so in the context of the arguments of J. M. Keynes, John Maynard Keynes, and by then, Lord Keynes, who was, in my opinion, the most eminent economist of the 20th century and who had made the point, in contrast to classical economists, and neoclassical economics that savings did not fund investment.
There was no obvious link between the two. And most certainly savings were not equated with investment by the mechanism of the interest rate because that simply did not work. What is more, as Keynes and Beveridge agreed, there was no reason why large quantities of savings within the economy were necessarily socially beneficial at all. In fact, as Beveridge agreed, supporting Keynes in the view, there was a socially destructive element to the whole idea of savings.
Now, we have to put this in the context of the period. He was writing during the course of the Second World War, and the vast majority of people in the UK did not have much to save at that time, except, admittedly, their rising wages because wages did rise during the course of that war.
But the vast majority of savings then, at that time, as is also still the case now, were owned by a relatively small proportion of society And it was this part of savings which caused the Beveridge the greatest concern.
He wasn't saying that the savings of those people who were putting money aside out of regular earnings to provide for the rainy day fund were in any shape or form a problem. He clearly understood that they were useful, and he also made the valid point that for everybody who was saving in that situation, there was probably somebody who was dissaving - drawing on those funds to meet the costs of that rainy day. And, therefore, they were very unlikely to create any form of economic disruption as a consequence of what they were doing.
But when it came to the savings of the very wealthy, he agreed with Keynes that these could be deeply economically destabilising. If the wealthy saved too much, and therefore became wealthier, they could in fact therefore remove so much demand from the economy. that some people would have insufficient to live on because there would not be enough economic activity undertaken to provide them with the means to earn a living. And others might just be forced into debt to make good the deficits that they were facing because of the lack of economic activity because of the excess savings of the wealthy.
This he saw as deeply problematic. He did in fact say that this undermined the whole logic that the savings of the wealthy were the underpinning of the investment that was the basis for the wealth of the economy.
The exact opposite, he said, could well be argued to be the case. They do not necessarily cause growth., The savings of the wealthy could, in fact, quite probably cause depression if they decided, using the term Keynes was making familiar, that their ‘animal spirits' were low, and therefore they did not wish to actually use the money for any constructive purpose including straightforward spending.
So, what there is in society is a problem when we have excess savings. That has made it particularly perverse, that in all the years since then, governments have gone out of their way to encourage excess saving, to the point that we now have financial worth in the UK of £15 trillion or so, which is six times or so greater than the national income.
Why is that worrying? Because they are so large that the use of those savings can by themselves destabilize the rest of the economy. And in a sense, Rachel Reeves is right to look at the role of pension funds in this because they own and manage over £6 trillion of that wealth. And a significant other large part is the value of land and buildings - that's coming to over five trillion.
So, those two are by far the biggest two factors in the recording of the value of financial wealth and so savings.
But if pension funds are actually taking money out of the economy, they're a drain. And yet we are spending roughly £70 billion a year of government income, or rather, lost government income, by way of tax reliefs and subsidies given to support these pension funds to increase their wealth in a way that might actually be wholly counterproductive.
Beveridge recognised that seeking to accumulate savings for those already wealthy- and by the way, the vast majority of people with significant-sized pension funds are already wealthy - the accumulation of wealth by those people as a goal in itself could be the cause of economic recession or a lack of growth, and their failure to use those funds in any way constructively, there being no obvious link between savings and investment, could exacerbate that trend.
So, what I've been saying for a long time is purely Keynesian. It underpins the thinking of the welfare state. And, what I've been saying for a long time reflects an economic truth, but it also reflects an economic truth that we have chosen to forget. The idea that savings are inherently of worth and that financial wealth must be preserved because it is the foundation of our investment and the prosperity of our economy is quite simply wrong.
The foundation of the prosperity of our economy is the putting of people to work in gainful employment at fair wages so that they can afford to live well. That is what makes a prosperous society and we have not put sufficient focus on that.
In particular, I'd ask the question, are we giving £70 billion a year of direct subsidy to that process in the way that we should be instead of giving that much money towards pension savings as we are? These questions are really important
It's fascinating to note that this point was understood in 1944 but here 80 years later, this issue still needs to be addressed.
We are over emphasising the importance of saving in our economy, and to this extent, Rachel Reeves is entirely wrong. And what we are not emphasising is the importance of investment in our economy, and to confuse saving into pension funds and other media as being the source of the investment is simply and straightforwardly incorrect. That is not what happens.
Therefore, we need to change our entire thinking on this issue. Beveridge was right. Rachel Reeves is wrong. Keynes was right. History has forgotten him. It's time we understood how savings can actually be negative for the benefit of our society, particularly when they are excessive and in the hands of a relatively small part of that society, which is the problem that we suffer in the UK.
And now it is time for us to put this right.
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I’m sure that fear underpins at least some saving, which could be addressed via a invigorated welfare state, a good guaranteed pension, comprehensive public provision of vital services, and full employment. Currently, if you have no savings or, worse, have debts, the wolves circle and life becomes horrendous. That, sadly, needn’t be the case. Beyond that, I find it bizarre that people spend their lifetimes amassing fortunes they will never spend, it seems so pointless. What could be done to help turn saving into useful investing, in a way that won’t expose people to the risk of losing it all?
Any sensible, practical and realistic culture would see people with the need to endlessly hoard wealth as ill and treat them accordingly. We, however, put them on a pedestal. How long can such a culture expect to last? Tick tock!
“People spend a lifetime amassing fortunes they never spend”….?
Well some, yes, but others use it as ‘bank of mum and dad’ to fund the next generations’ property purchases, or to enjoy countless (and climate destroying!) cruises, long haul holidays and other consumption – a lot of which doesn’t benefit the UK economy.
The key point I think Richard is making is that it’s the wealthy who save rather than really investing in productive assets or domestic consumption: so there’s a strong case for wealth taxes and/or taxes on the income from wealth; and certainly cutting the subsidies that encourage this saving in the first place.
You could argue that saving and the way it is done and who is doing it is an indicator of a poorly managed society?
In my view, the rich are ‘accrual mad’ when it comes to money and certainly know how to move money around – mostly to themselves (‘Making money’? The rich? I don’t think so).
When we save, we are genuinely making a sacrifice of something and that will get worse and nigh impossible as you move down the pay scales.
Keynes has not been “forgotten”….. rather it’s the powerful and wealthy who don’t like his medicine who have deliberately tried to erase/discredit his thinking.
A thinking born out of WW1 failed economic management, that managed the economy well during and after WW2 and was only discarded by neo-liberals on spurious grounds.
A “rainy” day or a “problem” could be having to fund living for 30years without any means of earning. For this a substantial sum is needed or you are just wholly dependent on the State. I think who are prudent when times of working to pay for later life should be encouraged and this is why tax incentives for saving and investing money are needed.
I have not argued for the ending of all pension tax reliefs
I have argued against disparate reliefs on them
Paul
“I think who are prudent when times of working to pay for later life should be encouraged and this is why tax incentives for saving and investing money are needed. ”
Surely those who cannot afford to save anything because their income is so low that they spend every penny on surviving need support even more. Currently the government gives away most money (both in real terms and in % terms) for pensions to those who have the most with a reducing amount for those who have less with nothing to those who have the least. Please explain how that makes sense?
Keynes and Beveridge ( both Liberals ) gave Labour the program to transform the country despite shortages of almost everything.
If we are in the situation of -‘the worst economic inheritance since 1845’ we need a similar transformation and that requires new thinking.
The thinking of the Labour Party immediately after the Second World was attempting to think out of the box whereas this current Labour government has boxed itself in with the selfish thinking of the rich. Any attempt by the party membership to stop this is ruthlessly repressed, closet or soft behind the curtains fascism is already here. See clearly and have no truck with it!
Where is the point at which savings becomes excessive? I don’t think there’s a simple answer. At the same time we need to be addressing the fact that many have little savings, 58% have less than £10k, and 10% have none according to the FCA survey.
Another issue is that the “rainy day savings” is now “torrential downpour savings”. Many of us will need care at some point which can cost tens of thousands per year, and although those with assets can realise them or buy insurance many can’t and if you spend many years in care your money may run out. Those without savings will have to take their chance with the local authority.
Many people are fed up with NHS waiting lists and are going private. New knees and hips are expensive.
As David says, an invigorated welfare state is needed, but it’s not on the horizon any time soon.
(I wish you a speedy recovery and note you praised the NHS staff in another post. My wife has had to use the NHS up here in Scottish Borders several times in recent years, and has been delighted with the service from GP, nurses, surgeons, consultants and ancillary staff. She tries to make a point of expressing her thanks and often the response is one of surprise that someone has actually thanked them for doing a great job under difficult conditions)
I always believe in saying thank you – but the reaction was similar. It costs nothing and delivers a lot. Why not do it? Anywhere, that is. I am always surprised that I am the only person who ever seems to thank bus drivers.
I can assure you that you are not the only person who thanks bus drivers……………..
Yay…
It just seems such an obvious thing to do
Richard it’s time you moved oop north. Every person thanks the bus driver as they get off. Most also thank them when they show their pass or get their ticket as they get on. I remember Jeremy Vine saying, years ago, to a caller – ‘oh, do you come from one of those quaint little places where people thank the bus driver’?
It’s rare here, or in London, in mmy experience
Happens a lot in my part of Somerset.
🙂
A positive chorus of thanks on our buses, from young and old. All is not lost.
Good news!
Don’t you take the bus on visits to Sheffield, Richard?!
I take the bus in lots of places
Next time – in about 15 minutes. This time, in London
sorry 1945
It’s a real dichotomy and one the government seems to struggle with; on one hand they want the fluid movement of money, resulting in useful (hopefully) work throughout the economy, and growth?, and they want the tax revenues that arise from the exchange of money for labour.. but on the other hand they push a message about people needing to save for retirement etc.
I have spare money, but being mid-50s any spare money I have is put straight into my pension pot rather than spending on stuff I don’t really need. I could be frivolous and spend on things or experiences but it rarely feels like value for money (because ultimately I don’t need it) and so I’d rather save for a rainy retirement (or rainy period pre-retirement), where there is a real prospect of diminished state support, or for when I find something that I really do want or need.
Young people also need to save, because they aspire, if they are lucky, to own their home.
Do the very wealthy “save”? Don’t they simply buy and hoard assets because they have too much income to spend?
Is the answer what we already know, tax the very wealthy properly and try and prevent dynasties of inherited wealth?
Your last para provides many of the clues
Yes, we need to tax incioem and gains from wealth appropriately
And in the end, we need proper inheritance tax as well
In my experience, there is a paradox with the whole issue of “saving”. Since the end of last year, the little word “security” keeps cropping up in conversations with clients new and old.
I know people who have more money than they will ever need but are totally insecure. I know other people who have almost nothing but are totally secure.
I suppose the conclusion that can be drawn is that if security exists at all, its a feeling not a number. Those who are content with “sufficient”, “enough”, and so on are happy people. Those who always want more are miserable (amongst other things).
I have always believed that our forebears got it right when thinking about “wealth” in the form of income, not capital assets. That’s setting aside the non-materialistic part of life (which is the most important).
As a fellow Somerset resident, I agree with Ian above that we do indeed say “thank you” to bus drivers.
Mark
I suspect you are rare amongst financial advisers in undertsanding this
Many seem to work to formulas, saying things like “You need £x to have a comfortable retirment and £Y for a modest one”, and so on.
Well, who decides what is comfortable, or modest? I don’t want to go on cruises. I don’t even want to go abraod any more: I have done that. I don’t want to buy massive new cars. If I have to have one more modest one in the rest of life, that will be good. My hobbies are cheapish: I have a good enough pair of binoculars that should do for a decade. I only bought camera kit for work. I am luckly, the house is in OK nick, but we won’t tinker for no reason. We cook form basic ingredients – because its good for you, and cheaper in most cases.
So how much do I need? Not as much as those who succumb to the vast amounts of advertising aimed at the early retired in age terms (even though I am not retired, and have no intention of being so) supposedly need. As a result my wife and I can be secure on less than the so-called ‘comfortable retired’ forecasts demand, so long as the blog covers its costs when the time comes that the income streams from most other work end – as they will over the next couple of years or so.
What is security? Omce needs are met, it mainly comes from avoiding excess consumption. But that is a Quaker view, I admit.
Richard
I think you’re right about the subjective “security”. My mum is 85, owns her semi, has 350k in savings and still won’t spend more than a couple of grand more than her pension (she has an additional small private pension which is probably ⅓ of the state pension). She’s just had a new kitchen and persuading her that it was OK to spend 12k on that was hard work.
On the other hand I have a mate who has just turned 60. He’s never worried about money, ducks and dives, never been interested in pensions or savings. Spends what he gets. Somehow he has always been OK (never understood how) but he’s the sort who will view a credit card debt as ok if he can afford the monthly minimum repayment.
Two very opposites and how they view being “secure”. Perhaps it’s better judged as to how well you are able to tolerate insecurity and sleep at night
Definitely closer to my mother than my mate in this respect! Even with a decent SIPP and ISA I still worry about what happens if the world markets go tit’s up. Perhaps some of us are just more anxious
In my experience as an accountant (now out of date, bit people mdon’t change much) 15% or so always saved, almost come what may, bevause they wanted the security of being able to pay everything that came in, and to have a bit over.
50% – 60% or so saved as and when, and were sensible.
The rest always struggled to find the money to ay their tax – even though they knew long in advance it was owing. We encoruaged them to pay on account by standing order, but it did not always work.
Your mum is in the 15% by the sound of it
I was brought up in such a household, where every pound was treated as important. It rubbed off, I admit.
Richard,
I have had a day out with the family -funnily enough the National Motor Museum if we are talking wealth.
So I might start with why are people saving?
Going back to the start of the Thatcher Government about a third of households lived in Council Houses so didn’t have to worry about the long term maintenance of a house. Average house prices were about 3x earnings so it wasnt difficult to save the sort f deposit required without help from family. Fewer young people went to University and those that did got a grant for living expenses and no fees to pay. If you were not in an occupational pension there was an earnings related element of the state pension and National Insurance benefits were slightly more generous.
So it was perfectly possible to make your way in life and to see your children prosper without having to build up a large amount of capital. To what extent is it these days? Well, its not impossible but much less likley so those that can will be attempting to save either to cover a much rainier day than they might have had in the past or to give their children a decent staff in life.
So, might I suggest that we need tackle why people are saving?
Lower house prices, student grants, better pensions, looking at National Insurance benefits, peoples conditions of employment etc might all firstly remove some of the needs to save and secondly by funding them from taxation might remove some of the money being ‘saved’ from the economy.
Thanks
Good analysis
We aren’t giving £70m of relief to pension funds, as you are looking at one side of the equation and not the other – the “double entry” if you like.
But of course you don’t want to recognise that tax on pensions is deferred, rather than avoided altogether, and the net number would be a much less compelling figure for your argument.
So you keep repeating then£70m lie.
Fortunately, the adults in the room know the score.
The tax on pensions is rarely deferred at more than basic rate and the NIC and corporation tax are never recovered. Nor is the higher rate cost usually recovered.
If you comment here it is wise to get your facts right. You got precisely everything wrong about what I propose. And for the record, I am not proposing an end to basic rate relief.
Bullseye Richard!!!!
Investment is the key to raising our standard of living. Our income and savings increase because of it. …You echo the Great Keynes who said
“Increased investment will always be accompanied by increased saving, but it can never be preceded by it. Dishoarding and credit expansion provides not an alternative to increased saving, but a necessary preparation for it. It is the parent, not the twin, of increased saving.” (Keynes 1939)
Thanks
My concern about savings and pension plans is in what they are invested and how are the profits made. I think if we really know this and most ordinary people don’t know where their pension plans are putting the money, we would be horrified. I suspect the profits are made out of not paying workers well, not ensuring their well being and safety, not caring about the environmental damage caused, buying up land for cash crops in other countries when the land should be used for growing food for the people of the country, manufacturing weapons, factory farming (think of the poor animals) and so on. I like the idea of the so called welfare state because it seems to help everyone, hurts no one and has some dignity.
Hope you feel better soon. I do like your blog, it’s so sane and sensible. Your talk on tax was super – many thanks.
Thank you
[…] By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Fund the Future […]