End Of An Era

After the Second World War, the Labour party obtained a majority in the UK parliament for the first time, and Clement Attlee became prime minister. Under his leadership, the foundations were laid for the Keynesian welfare state as we know it today.

The government he led put in place the post-war settlement, based upon the assumption that full employment would be maintained by Keynesian policies, and that a greatly enlarged system of social services would be created – aspirations that had been outlined in the wartime Beveridge Report. Within this context, his government undertook the nationalisation of major industries and public utilities as well as the creation of the National Health Service.

This strategy was never successful, but limped along until  Margaret Thatcher realized that it could not succeed, took on the unions and began the unwinding of industrial nationalization. Unfortunately, she did not go far enough and allowed the social services to continue to grow. It is now clear that a dependency culture has been created, as the UK now has nearly 4 million households (19%) where no-one works, including some 300,000 where no-one has ever worked in their entire lives.

Melanie Nicholas and Andrew Ballinger are in their late 30s but neither has earned a penny since they were teenagers. Miss Nicholas worked briefly in a bar and Mr Ballinger was a bricklayer for a short time when he was 18. Mr Ballinger is the father of five of Miss Nicholas’s six children and shares a five-bedroom home with her in Rhyl, North Wales. Their income from benefits is just short of £700 [US$ 1,135] per week, which includes a disability allowance for Miss Nicholas’s heart condition, a mobility payment, income support, child benefit and council tax benefit. The heart condition, Miss Nicholas said in an interview last year, means she cannot do manual work. She would not be able to do office work because of potential health problems, such as dust. Mr Ballinger has said a major reason why he cannot work is that he cannot read nor write.

As the dependency culture sapped the countries’ output, government turned to debt to finance its spending – not only incurring direct debt, but encouraging citizens to borrow to maintain their spending in the face of ever-higher taxes. Substituting debt for income has run its course. The economy is so overloaded with debt that it cannot grow.

In the decade prior to the financial crisis, the UK economy became hugely dependent upon debt. Taking public and private components together,debts have increased at an annual average rate of 11.2% of GDP since 2003. The two big drivers of the economy have been private (mortgage and credit) borrowing, and huge (and debt-dependent) increases in public spending. Reflecting the growth in debt-funded activities, three of the UK’s eight largest industries (real estate, financial services and construction), which account for 39% of the economy, are incapable of growth now that net private borrowing has evaporated. Another three of the top eight sectors (health, education, and public administration and defence) account for a further 19%, and cannot expand now that growth in public spending is a thing of the past. This means that 58% of the economy is ex-growth, a figure that could rise to 70% if, as seems probable, growth in retailing is precluded by falling real consumer incomes.

Together, the severity of Britain’s indebtedness and the challenging outlook for the economy mean that the UK is now mired in a high-debt, low-growth trap.

While this analysis is about the UK, it is not hard to see that much of it applies equally to the U.S. It is time to recognize the failure of Keynesian or neo-classical economic policies and move on to a more realistic view of economic planning. One that, for example, acknowledges that banks are not intermediaries between savers and borrowers (as most of today’s economists have been taught) but actually create money when they lend.

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