I was in discussion with a friend last week who raised his concern about the shortage of savings in the UK, which, he suggested, provided an explanation for our slow economic growth.
I think it's fair to say that the friend in question was surprised by my suggestion as to how we should deal with this. I put it to him that if we really wished to increase the rate of saving in this country then the most obvious thing to do would be to reduce our rate of consumption. And, I suggested the best way to achieve that would be by reducing the amount of advertising that takes place within our economy when the sole goal of that advertising is to promote that excess consumption which is reducing our rate of saving.
A tax on advertising might, I said, be a perfect way to achieve this goal. This could be very easily achieved by simply preventing companies from reclaiming from HM Revenue & Customs the value added tax that they are charged when they incur advertising expenditure. The consequence would be a 20% increase in the cost of advertising in this country.
My friend was horrified. “But,” he protested, “reducing consumption would in turn reduce demand in the economy, and that will be completely counter-productive”. I did, of course, point out that this was only true if you thought economic growth based upon the value of resources consumed was the only definition of well-being, but we did not pursue that argument further.
Instead, I asked how he thought we might, without increasing earnings, increase savings unless we cut our consumption, and he admitted that he had no answer to that question.
Then I pointed out that savings were, in the way that we make them in the UK present, in any case, almost wholly economically unproductive. They are either stored in the form of cash balances at banks, and banks never lend deposits made by customers to those who ask for the loans (which I had to explain to him). In that case, these balances served little economic purpose.
Savings are, alternatively, almost entirely used for the purchase of either second-hand shares that are already an issue and are quoted on a stock exchange, or for the purchase of second-hand assets. He protested that this was not true, as private equity proved. However, as I pointed out, private equity almost entirely invests in companies already in existence, and has a notoriously poor track record in adding value to the companies in question whilst delivering enormous returns to the private equity operators who fleece every pound of value out of them that they can.
Unless, in that case, we change the way in which we save so that money put aside by those who think that they undertake this activity is actually used as the capital that might underpin new economic activity, as I have proposed with regard to investment for a green transition, then the act of saving has almost nothing whatsoever to do with the creation of new economic activity in the economy.
If, in that case, we also demand that consumption be reduced to boost this already economically redundant activity, the consequence might be that we end up with a double whammy for growth if that is the economic objective that is desired.
I cannot be sure that my friend was persuaded by my arguments, but he certainly went away most mightily perplexed as he should have been. The proposal that he had made to me made absolutely no economic sense, given the outcomes that he wished to achieve. But that is neoliberalism in a nutshell.
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Reducing demand in the global economy is pretty much essential when your consumption is 1.7x the level of planetary resource capacity and recovery.
Anything else is that well known death loop. Advertising plus built in product obsolescence are key contributors. Taxing it is an essential first step.
Excessive consumption has to be curtailed, and how tax is used to incentivise that process is little discussed. However, unless there is a managed decline, there will be an inevitable crash.
The biocentric fringe relish the resource crash scenario, and the return to hunter gatherer society. I do not, but despair at the lack of foresight that is driving us to a cliff edge, when a gradual slope is the rational alternative.
Mankind doesn’t seem to do rational, just Ponzi.
@Tony
I mostly agree with your comments. I love your last sentence (I’m afraid I may not be able to resist stealing it sometime).
However, your perspective seems a tad Malthusian. I don’t think there is a snowball’s chance in hell of selling managed decline to the population (as you say humans don’t do rational).
Mercifully, I’m more optimistic and don’t think managed decline is necessary. Firstly the population is declining, or set to decline, over the next few decades worldwide. China is a case in point, who’s population did decline last year, albeit only slightly. They are now trying hard to encourage women to have multiple children (a policy unlikely to succeed judging by other countries, Singapore, South Korea, that have tried it). Secondly we are moving towards a greener world. Not as fast as desirable. Not as fast as we could. And no thanks to politicians after dozens of ineffective COP meetings. But the economics of green energy is inexorable; we have passed a tipping point. If we can survive the next few decades, and I think we can despite the likes of recent hurricanes etc, then the population will be shrinking and green energy the norm. I’m not at all panglossian, but I don’t think managed decline is necessary, though rationality would be nice. 🙂
China was a bit of a special case though. They implemented the 1 child policy in 1979 through to 2015. When you look at https://www.statista.com/statistics/282119/china-sex-ratio-by-age-group/ you can see the impact of that – a huge skewing of male to female ratio towards males. This was I believe down to the cultural norm favouring males, and if you could only have 1 child, and could afford to do tests during pregnancy and then secretly abort, you might chose a boy over a girl.
So now there are fewer females around childbearing age, which should wash out over the years. Another impact of this is that there are a lot of young adult males who have no chance of finding a woman to settle down with.
There is the standard observation that has been repeated across countries that develop, that birth rates naturally fall though, so China will probably settle down to below replacement rate even when the male/female ratio stabilises back to roughly equal. Note though that before the 1 child policy, they were averaging 6 births per woman.
Please do not ever accuse me of Malthusianism. I read and discarded his model over 50 yrs ago as a 1st yr undergrad.
It is simply not correct that every reference to finite resource capacity has anything to do with Malthus and his class riddled outline.
Food production does not follow arithmetical growth, nor population a geometric progression.
It did not in 1800 and does not now.
It is overshoot in resource consumption that is the biggest problem, and unfortunately, although energy growth has been shown to have decoupled from GDP growth in some hard cases, overall resource and energy growth has sadly only mirrored the Jevons paradox.
There is no way that equilibrium can be reached without degrowth, and the inertia in consumer capitalism makes it highly unlikely the cliff edge avoided.
Advertising is one of the main ways artificial ‘needs’ are generated.
Taxing it sets an agenda for future restrictiom, but is only the first step.
@ Richard
China’s FR fell below the replacement rate of 2.1 in 1990/91.(statista)
However, there is a dynamic demographic feature called ‘population momentum’, which means absolute totals can continue increasing for years after the FR has fallen below 2.1, as there is still a relatively high concentration of people of child bearing age and propensity in familial terms, as there is a relatively high number of young(er) people.
@ Richard Kirby
Somebody long ago pointed out the folly of the one child policy in China. Nobody (In China) apparently wanted girl children (That in itself is dubious in its wisdom if your concern is for your welfare in old age, because girls can marry up the social order where it is very unusual for boys to marry up.)….but the point was that if couples could produce children in abundance until they produced a male heir the (approximate) 50/50 ratio of male to female children would occur without anyone feeling particularly hard done by. As it was, girl children died mysteriously and frequently….or so it is said. Quite unnecessarily.
China has a long and distinguished history of civilisation, (Since our forbears were wearing woad) but they got this badly, and I suspect, uncharacteristically wrong.
The one child policy was numerically illiterate. And not popular either from what I gather.
@ Andy
The Chinese have made many mistakes, Mao’s great starvation being a horrendous error, but I don’t think the 1 child policy was one of them, on balance.
It was actually a strange mix of policies, def not all of which worked equally well, but as it had an aggregate impact of a 400m lowering of China’s total population up to 2016, and that certainly had a knock on effect in terms of freeing up industrial production, some of that positive, some not, but the next generational impact was preventing yet more population growth.
I do not think a China with another 500m+ people is a good thing demographically.
I wouldn’t endorse state authoritarianism as an approach but I only wish India had some serious concerns in demographic management.
Given female literacy is under 30% in many states, then following the Kerala model of investing heavily in education, health and social equality would certainly have a beneficial impact in slowing and lowering overall population growth in the sub continent.
What you say to me makes perfect sense.
Added to this lack of savings are also other factors:
Low wages (I have lost 25% of my income since 2010).
State retrenchment in services leading people to pay for services (NHS/dentistry)
Privatisation and use cost increases because of misuse/loss of reinvestment funds lining investor/manager pockets (Water/Utilities).
Debt servicing and insurance costs – all going up – VAT on insurance is for me unforgivable – sorry if you disagree Richard.
You already pay the equivalent of VAT on insurance….
Oops sorry……………to follow on, our modern state does not see any of these things as joined up and inter-dependent.
The cult of individuality even inculcates our conceptual thinking meaning that each factor is just looked at as an independent variable – as Steve Keen points out, Neo-liberals never question where money comes from – and because of that they are completed disinterested in how spends in the economy interact.
It is nothing but wishful ignorance and reduction-ism gone mad.
In addition to making all advertising more expensive some should be banned outright.
Ban all gambling adverts. The fact this has not already happened is corruption (yes, a strong word… but carefully chosen) – free tickets, donations etc. from the gambling companies to MPs.
Much to agree with
@ Mike Parr
Gambling is certainly more ruinous than some of the other ‘vices’ banned from advertising.
You smell corruption and I think you might well be right.
I think your friend may be typical of many, maybe most. Probably even some on here may have thought like him originally. Certainly I did until a few years ago when I read a certain author who said something like, I (ie me) don’t have any money, ‘cos it’s all government money. I thought “this guy is crazy, doesn’t he know Mrs T told us government doesn’t have any money of its own it’s all taxpayers’ money?”
Need to get MMT onto the school curriculum.
🙂
@ Geejay
“…Need to get MMT onto the school curriculum.”
Fat chance of that when it is not being taught to the teachers; not even the teachers of economics.
The actual quote (I hope) was –
‘ Let us never forget this fundamental truth: the State has no source of money other than money which people earn themselves.’
Now you could argue about what she meant by ‘earn’ but it is surely the case that, just as money has no value of itself except as a means of exchange, and then only if the particular ‘currency’ is trusted, so Governments raise money by various means – taxes, borrowing, printing – but all of that, they raise in our name – that we are trusted as a population/country with our skills and natural resources.
The Government doesn’t give money to anybody. The Government’s function is to decide by which means money should be raised on behalf of the country, and how it should be allocated.
It should against our ‘famously’ unwritten constitution for any Government representative to say that they have ‘given’ money – when they mean ‘allocated’.
Money does not get value as a means of exchange
Money gets value from work at the end of the day
Everything else is always a footnote to that
Richard – I take it you mean, that what matters/has value, is not money but what we do with our skills and effort using the natural resources around us, or, to put it another way, what matters is what gets done.
So we are in agreement. I think.
In my opinion banning all advertising would have a large and positive effect on our society. It won’t happen though.
Getting rid of billboards and bus (shelter) ads would be a good start, as would all other non-consensual forms of advertising.
We should change the culture so that we are permitted to ignore advertising if we want to. But you already can, someone on the neo liberal side would say. They clearly have never seen a promotion which came at you so strong it was literally in your face.
@Pearl Nicholas
“…never seen a promotion which came at you so strong it was literally in your face.”
I don’t know what you mean.
In commercial advertising terms I can’t think of any thing that good(bad).
In political terms we’re not talking ‘advertising’ we’re talking propaganda (a ‘nice’ distinction) In that sphere I’m with you and unless Richard knows better I’d say there’s no tax at all on propaganda. But somebody somewhere IS picking up the tab. It is not without costs.
While reading economics at university (standard stuff, brilliantly taught, early days at Essex) it became clear that the whole idea of long-term growth couldn’t go on. I had a pal called Richard Douthwaite, an he and I discussed this for ever; both of us knew that monetary prices were nothing at all to do with value. His first book was called The Growth Illusion; mine was called Green Parenting (both much later, written in the late 80s.) They both depended on rethinking what real value was – but obviously this was not what most indoctrinated people wanted to hear. I remember, for example, a very nice ex-con coming to my front door wanting money so he could buy a readymade dish for dinner. He hated begging, but it turned out he knew how to cook cheaply and had the right facilities. And could therefore spend his time doing that, rather than getting depressed on people’s doorsteps. But most people, sadly are imprisoned by their indoctrination.
I have several of Richard’s books
Thanks for the comment
Douthwaite – I wish he was still with us – along with the ‘Growth Illusion’ he wrote a great ‘how to’ book called ‘Short Circuit’ about creating local sustainability measures in communities. It can be done. But not when carbon addicts are shoving wads of tenners in politicians pockets……..
Hmmmm….
If productive savings is good for society…..(?)
Somebody needs to invent building societies perhaps…..(?)
Miranda Green, Financial Times is pitching the new conventional wisdom, on Sky News. We are in a fiscal fix, but what we need is investment, suddenly led by the Government and public funding. and we can also change the fiscal rules. to give ourselves more room to move We are going to change the economics by changing the accounting rules. Where has all this been in the last fourteen years? Nowhere, and I wouldn’t have looked in the FT to find it. Economic discussion is being reduced to pulp by neoliberals trying to rewrite the rules and history to cover the fundamental inadequacy of their prescriptions and understanding.
Her position – I have watched some of what she said – seems like panicked reaction to need rather than being driven by dogma.
Panic would help explain the silliness of her predicament.
Except that from Reeves to Green – they think (or hope, not without reason), that they can ‘get away with it’, without the British public noticing. Well, maybe not Reeves or Labour. But the FT? There is another edition tomorrow, to whitewash today.
Isn’t it called “playing fast and loose with the economy?”
Unless rules are properly thought through, and designed to be stuck to, then there is no point in having them at all. Imagine a football team saying they don’t like the offside rules, and find some excuse for changing them – when dozens of teams have trained to them. Reeves has said on any number of occasions, doing her virtue-signalling “I won’t play fast and loose with the economy” – which, if she is changing the rules, she is actually about to do. Starmer should rein her in, rather than the honest Louise Haigh.
There are no such things as fioscal rules.
I presume you do know that, don’t you?
If so, how can she play fast and loos with them?
Thinking through the consequences of VAT on advertising, that would have the unintended effect of getting more tax from the activities of Google and Facebook, or reduce their income, and they really wouldn’t like that… any politician trying to go up against their financial interests will find it difficult.
A lot of free-to-use sites such as local news rely on advertising so could go to the wall, free apps like Duolingo etc. So the impact of VAT would need to be understood on the wider market?
You mean we might need to oay for media?
Television might have to focus on content, nopt production values?
Things like that?
Have you ever wondere3d why YouTube content and Twitter content is so popular? Could it be that the content produced with very large advertising-led budgets is not calued that much?
Yes, lose ad revenue and a subscription based system will be required. Not saying that’s a bad thing! But in the meantime companies will go to the wall while a transition of consumer behaviour from free to subscription occurs and probably a lot of consolidation.
Subscription levels would be more closely tied to the value customers would place on the service rather than the value of their data or their eyes on an ad. That’s a different model with different outcomes.
Funnily enough I pay for YouTube Premium to get rid of adverts (there are other benefits like music and listening to videos with my phone shut away while walking the dog).