Most people like to think that overconsumption caused our current crisis. Thanks to Alan Greenspan's stupidly loose monetary policy, we all borrowed and spent too much, and ended up with houses we can't afford, filled with tat we don't need. So we need to run down debt both private and public and consume less.
James Livingston doesn't agree. In his new book, Against Thrift, he argues that we in fact didn't consume enough. Worse still, having caused the crisis, underconsumption (now caused by deleveraging) is prolonging it needlessly. If we want times to get better we must laugh in the face of austerity. Saving for a rainy day is "a soul-crushing emotional trap as well as an economic dead end".
I can feel the sharp intakes of breath from regular readers, so let me say that behind the deliberately provocative prose there is some interesting stuff here. Livingston thinks that the rich have too much money; that bubbles are formed by those with excess capital pouring it into one nonsense after another; and that the solution is for it to be taken from them and given to poorer people to spend.
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He points to 1933-1973, a period when net investment in the US was low, but consumer spending was on a roll due to a rapid rise in government jobs (a transfer of cash from high-earning taxpayers to lower earners via the state), and when unions were winning constant pay rises. To Livingston, that suggests the real driver of growth is not so much investment as rising incomes and falling inequality.
That makes it very different to the period in the run up to our crisis one in which the share of returns allocated to profits rose fast and that to labour fell. US profit margins are now at a record high. In the last three years they've risen even as output has fallen.
Andrew Smithers of Smithers & Co puts this unhappy trend (unhappy because it isn't much good to labour) down to modern management. "The huge increase in bonuses linked to short-term measures of performance has naturally encouraged an increased willingness to sack labour, combined with a disinclination to lower prices and a preference for share buy-backs over investment."
Modern managers keen to keep bonuses up like to keep wages and staff numbers down. Those benefiting from profits have become richer, while those who benefit from rising output and from the share going to labour have become poorer. The former, who have a low propensity to spend, become Livingston's bubble creators chucking their ill-gotten cash around the globe in the search for a further return. The latter, scrabbling for the rent, fail to consume.
The result? A toxic mixture of bubbles and low growth. The solution? Redistribution. Livingston would have that happen via the state. I'd just hope that public revulsion might bring an end to the bonus culture.
You can read an extended version of this article on Merryn's blog.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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