Britain has gorged itself in the last few years. As a nation, in the decade to 2007 our spending on holidays more than doubled to £1,068 per annum and spending on other forms of entertainment rose by 76% to £250 per month. But it was in housing that the UK really splashed out. Between 2001 and 2006 UK house prices rose by a staggering 90%.
To fund all this a spending binge has been accompanied by a borrowing binge. Between 1997 and 2008, the number of credit cards rose from 36 million to 71 million and consumer debt has now topped £1.4 trillion. 80% of UK consumer debt is made up of mortgages and 1 in 10 adults now spend more than their income.
Any sign that this bingeing might lead to a hangover was blithely swept aside. In 2004, when consumer debt broke £1 trillion, Hilary Cook, an investment director at Barclays Stockbrokers, said “We are borrowing against assets which have gone up massively, interest rates are still relatively low and we all have jobs,”
In these grizzled times of shrivelling credit and dwindling house prices, we might afford ourselves a wry smile at such attitudes. Like the confident predictions of the Federal Reserve in summer 1929 that “the fundamentals of the economy are sound”, with hindsight we can see that Del Boy is about to fall through the bar.
But if a little more restraint would have been welcome in the fat years, it is worth remembering Adam Smith; “What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom”. Reversing this, we can ask if this prudence was displayed by our leaders.
The answer is no. For all his nicknames incorporating ‘Prudence’ or ‘Capability’, for all the hackneyed descriptions including ‘dour’ and ‘responsible’, and for all the ‘Golden Rules’ of fiscal probity, no one in Britain has spent borrowed money on quite such a colossal scale as Gordon Brown. Between 1999 and 2008, government spending rose as a share of GDP from 37% to 42%. In cash terms, he will spend £163 billion more in 2007-2008 than he did in 1999-2000.
Despite the fact that the economy has been on an upward swing with an attendant rise in tax revenues, it still hasn’t been enough to cover the tab for this truly legendary session. Although government spending was 42% of GDP in 2007-2008, tax receipts are only 36.8%. Like the British people, Gordon Brown resorted to borrowing. The fiscal deficit has risen from -0.1% in 2001-2002 to 2.7% in 2007-2008.
If politicians are meant to lead by example then tens of thousands of British people have followed Gordon Brown’s example right into debt, negative equity and bankruptcy court.
It might look as though this binge followed by hangover is the old ‘boom and bust’ which Keynes regarded as an inevitable and wasteful failing of capitalism. But a friend of mine bought a flat 18 months ago, at the top of the market. At the time he commented that “Property never loses its value”. Now HBOS is predicting a 9% fall this year.
This friend grew up in the same suburb as me and saw the same crash as me in the early 1990’s. Like me, he saw negative equity and repossessions. Yet, he, and millions of others, continued to believe that the bubble would never burst. And this wilful ignorance is not an inherent part of the capitalist system. There is nothing in the economics of Adam Smith or Milton Friedman which dictates that people will delude themselves. Perhaps, as William Stanley Jevons wrote in 1867, “These periodic collapses are really mental in their nature, depending on variations of despondency, hopefulness, excitement, disappointment and panic”
A recent study by psychologists at Stanford found that compulsive spending was linked to depression and anxiety. More recently scientists have located the areas of the brain that control (or rather don’t control) spending, the nucleus accumbens and the insula. However, the Stanford report claimed that only “5.5 percent of men and 6.0 percent of women” are compulsive spenders, not the sorts of numbers which would explain the binge.
We have seen in the last few years, with people betting on an ever upward trend, a type of mass delusion which has its own psychology. What is clear is that psychology gives us a set of tools which can help us understand the uneconomic behaviour of homo economicus.
This ability for self delusion, as demonstrated by my humble friend and Ms Cook of Barclays, has a long history. Writing on just such another bout, JK Galbraith commented that “Men have been swindled by other men on many occasions. The autumn of 1929 was, perhaps, the first occasion when men succeeded on a large scale in swindling themselves.” It wasn’t the last.