Wednesday, 25 February 2015

"Five sticking plasters which will fail to transform the UK into a truly capital-owning democracy"

Some meddler from Policy Exchange has dreamed up five random measures which he thinks would encourage saving, see City AM.

Like all politicians, he ignores the fact that the main point in saving when you are earning well is to be able to dis-save (i.e. spend more than you earn i.e. use up your savings) when you aren't. It's about maximising the marginal utitlity of consumption. On an individual level, over a lifetime, the optimum savings ratio is precisely zero (you can't take it with you!), so on an aggregate whole-population level it must also be zero. But hey.

The infuriating thing is that he actually identifies much of the cause of our collective lack of savings in his opening paragraph:

As a nation, we are bad at saving. While the reasons for this are many and varied, the belief that house prices are a one-way bet..."

Correct. There is an easily identifiable, long run negative correlation between house price inflation and saving; people respond very quickly, so in 2008-10, people started saving again. If you kept house prices low and stable, that would be an extra 5% saving per year. And we know how to achieve that.

... the design of our welfare system...

Well yes and no. Asset-based means testing is spiteful, pointless and badly designed. If it somehow budged people into dis-saving in the bad times it would be OK but by and large, it discourages a lot of people from saving in the first place.

To the extent that they absolutely have to do asset-based means testing (to minimise cost of welfare state), at the very least they should only assume a reasonable return on savings (rather than making it all-or-nothing) and include housing wealth as well as proper cash savings and investments. And there is no need for means-testing, we already have a tax system to take away part of people's income.

But means-testing seems to be politically popular (or else they would have got rid of it years ago).

... and the inability of humans to properly judge their future financial needs all contribute to UK households putting less aside than their counterparts in other G7 counties."

The vast majority of the UK population doesn't have any spare income so it's a flawed sample, and other countries aren't quite as Home-Owner-Ist. Either people are struggling to pay off sky high mortgages and rent; or they are merrily doing mortgage-equity withdrawal and pissing it away.

Once you understand all this, it must be pretty obvious that all his silly gimmicks (like handing out free Lloyds and RBS shares) or having compulsory 12%-of-salary pension contributions are pointless at best and counter-productive at worst.


Random said...

Cut taxes. Best way of getting people to save money as they get to keep more of their own money.
A tax shift to LVT as well as unfunded tax cuts would improve the savings rate.

Mark Wadsworth said...

R, well yes, obviously, rule off, underline, new page.

Lola said...

Hah. I have just written almost exactly that in my mind in shortened form for my next monthly local newspaper financial snippet.
Great minds eh? Well, yes in your case maybe - mines getting increasingly addled...

Piotr Wasik said...

"other countries aren't quite as Home-Owner-Ist." really? my uninformed anecdotal impression is that wherever you go in Europe (where you can find good jobs in various industries, i.e. in big cities), you will find houses or flats sell for hundreds thousands of euros.

It would be good to see up-to-date stats on big European cities with house prices, rents and some convenience factors like property size or commute time. Do you know of any please?

Mark Wadsworth said...

L… think alike.

PW/Flashman, I'm generalising. Of course there are expensive houses and high rents in other European countries, but it is not an obsession like it is in England (Ireland and Spain were, for a decade, counter-examples).