Food banks, payday loans and the housing bubble: Britain's Wealth Delusion

George Osborne and David Cameron are feeling quite pleased with their economic policy these days, now that Britain's economy is showing signs of clear growth. The Conservatives are now able to claim, using figures to back them up, that the economy is improving.

Yes, things are improving, at least on the surface. Unemployment is down. GDP is up. Housing prices are up. But at the same time, credit consumption is escalating, and living standards are at their lowest for decades. Also, the lack of investment by banks into businesses is becoming the norm. If this is a recovery for the country, why doesn't it feel like it?

Britain is being run like a developing country

The basic answer to this question is that because the government has learned nothing from the financial crisis. As Adtiya Chakrabortty makes clear in this excellent article, Britain's economic model is no different from any in the developing world. The Conservatives are giving living proof to the concept that it is possible to have increasing GDP in a country at the same time as a decreasing standard of living.

This is the frightening reality for many people in Britain. And here's why: GDP is a simple calculation of averages. If the wealth of the top quarter of earners (for example) has sky-rocketed, while the wealth of those in the bottom half has declined in real terms, you still get an increase in GDP. This is basic maths, but it also paints a distorted view, as any average sum can. So relying on GDP in this situation is not helpful to finding out the reality on the ground; in fact, it can be positively deceptive.

The Conservatives either are too dim to understand this basic point, too blinded by their own ideology to see through their delusions, or too indifferent to care.

I've mentioned before that Britain really is ran more like a corporation than a nation-state, and therefore the government is encouraged to see GDP as a simple number; shown to Britain's investors (shareholders) to boost UK PLC's "share price" in the world. The fact that UK PLC's "employees" (its electorate) are having their wages and living standards cut in real terms in order to achieve this is immaterial. The government only really sees the GDP figures. 

UK PLC also explains why the government is so keen on "fracking", an expansion in nuclear power, and expanding Heathrow. These things will all improve the country's "rating" in the world. Who cares if it's foreign companies that benefit most from it, at the expense of the actual electorate?

Yes, employment is up, but so what? What kind of jobs are they? Mostly low paid, part-time or temporary, and the idea of getting a stable job these days in The UK is laughable, unless you are in the top ranks of society. Many of the jobs created are in the service sector, where zero-hour contracts are becoming the norm.
In this way, the jobs market in The UK is also more and more resembling that in a developing country, where employment is too heavily dependent on unreliable and highly fickle service industries. The government encouraged young people to get degrees; so now we simply have low-paid service sector jobs filled with graduates. What's the use of that? These service industry jobs are the first to go when there is a downturn.

The wealth delusion

The "recovery" is in large part due to consumer spending. The country has yet to recover from the worst financial crisis since The Depression; much of the spending that's happening on the high street is simply either by eating in to more affluent people's savings, or getting by from month to month on payday loans, and adding even more to the dependence on credit. This is not a sane economic model: it is mass delusion.

This is a dangerously complacent attitude, because it simply suggests that many British people are too weak to face the reality: that many people in Britain are poor. If more and more people are using credit to survive, and are using food banks to survive, this means the country's economic model is broken. But nobody is willing to admit it. The truth hurts, and so people would rather live in an "Alice In Wongaland" view of reality. This is also a time where we are seeing a rise in diseases commonly associated with malnutrition in the developing world (rickets, for example).

The government meanwhile takes the view that food banks are a sign of the "Big Society" - or at least, Cameron does; Iain Duncan Smith seems to take a different view: that he'd prefer to pretend that the problem doesn't exist, and that he's certainly got nothing to do with it.
Calling food banks a sign of the "Big Society" is a sickening joke to those who really use them; the government is helping to create a problem (or at best, is doing nothing to reduce it), then praising people who come the rescue. "Food poverty" is the biggest sign yet that Britain, far from entering a real "recovery", is entering a new era of poverty unprecedented in modern times.

The government puts a great deal of stock in house prices, and George Osborne's "Help To Buy" scheme. Apart from the obvious inflationary dangers that this poses to the market (which are already apparent), Osborne himself admitted that the idea was to make people feel richer - so that they would vote the Tories back in again. So Osborne is openly acting in a cynical and irresponsible way towards the economy.

Not only do people now have much less disposable income to get a mortgage than ten years ago (Britain is fast becoming a nation of tenants), but interest rates are at historically-low rates. The only way is up. And when the rates do begin to climb in the coming years, the housing market will create a whole new generation of "negative equity" victims. 

Using housing prices as a marker of wealth, as the Tories do, is as useless as it is cynical. It is inflation in the value of property, nothing more. When the value in "your house" increases, it doesn't mean "you" are richer. If you you bought a house thirty years ago for £30,000, and it's now worth £200,000, you are not £170,000 richer. Why? Because all property in the market has increased by the same value. Unless you are selling a house outright (eg. after a restoration project), downsizing, or moving to a different country with a cheaper housing market, you are not gaining anything.

The obsession with property prices in another sign of Britain's wealth delusion.

Germany doesn't have a wealth delusion, because it's clear where its wealth comes from: manufacturing, and other sectors of the economy.

Britain's economic model is reliant on banking and the kindness of foreigners.

George Osborne, The "Wonga Budget" and the dark arts; house prices and Broken Britain

George Osborne's latest strategy is to trap Labour into committing to the Conservatives' spending plans (thus  making the "opposition" march to the government's financial tune, and offer the electorate an economic fait accompli).
In the meantime, "Gideon, Master Of The Dark Arts" continues the cynical strategy of divide and rule with the electorate of "strivers versus skivers", while using a hideous manipulation of numbers to pretend that the economic crisis can be blamed on the unemployed and welfare claimants, and that the only answer is to therefore bleed the helpless and the blameless, leaving the corrupt and indolent rich to continue to profit from the suffering (as Jonathan Freedland has said in his recent "Wonga Budget" article).

The behaviour of the Chancellor is so Machiavellian you almost couldn't make it up. It seems that part of George (the dark side: Gideon, Master Of The Dark Arts), almost enjoys his notoriety and unpopularity. Watching him shamelessly goad the Labour party as being the "welfare party", while also offering them to hoist themselves by their own petard, is a sickening spectacle to be seen happening in Westminster. As controller of the Tories' election strategy, as well as master of the economy, Osborne seems to revel in it, even though he is one of the most disastrous Chancellors Britain has had.

With the Tories tanking in the polls, and Ukip hoovering up much of their lost support, Osborne's strategy might seem smart (if utterly cynical) in the short-term, but is likely to be political suicide in the longer-term. I've said before about why Ukip are doing so well in the polls (and have created a new four-party political system).
But by drawing Labour in to the Tories' spending plans, it merely creates less and less to differentiate between the "big Three", to the advantage of Ukip rather than the Tories. Ukip have benefitted from the "consensus" that has existed around the three main parties; now Osborne is trying to create a "new consensus" around the idea of austerity being inevitable, with the welfare state being squarely to blame (neither actually being true in the slightest!). So if Labour buy into this "new consensus", more Labour voters
may well defect to Ukip instead, as has already started happening.
The hideous irony here is that Farage and Ukip's economic policy (when it makes sense) is even more "austere" in its view on public spending (though it is profligate in certain areas such as defence); so Labour voters who defect to Ukip because they're disillusioned with Labour turning its back on its compassionate principles will be voting for a party that is even more heartless towards the helpless than the Tories are.

It will be Farage who has most to celebrate from the latest "strategy" of Gideon, Master Of The Dark Arts.

It's difficult to know where to begin, in order to adequately explain why Osborne has been such a disaster for Britain.

I tried to explain this earlier, but but a good starting point, seeing as the figures came out just the other day, is the shocking state of the property market. It is now obvious that talk about "average UK house prices" is a nonsense, a kind of logical insanity. There is no meaningful "average" when between 2007 and today, average house prices in London have gone up by 5%, while in the rest of the UK, they have gone down by 9%; in Northern Ireland, they have gone down by a jaw-dropping 52%.
From these kind of yawning disparities, it is illogical to draw a meaningful "average", because whatever average you get is statistically meaningless - it's like comparing the GDP of Hong Kong to rural China, and saying that the "average" person has so much. How many of the people who live in those places could be called "average", and what is the use of such figures? The only "use" of such figures for Osborne is to use "average" house prices as an absurd and ludicrous bench-march to claim that the economy is improving.

It's for this reason that Osborne's greatest "achievement" (i.e. economic disaster) has been take the politics of divide and rule to the country on a financial level, and create two separate countries, divided clearly by house prices, the make-up of their economies and rates of employment.
On one hand, you have London and the Home Counties (population roughly ten million), which are as economically separate from the rest of the geographical UK that they may as well be a different country. Here, house prices continue to sky-rocket, the cost of living continues to soar, while salaries (high compared to the rest of the UK) struggle to keep up. Although unemployment is not high and there is plenty of work (both skilled and unskilled, and mostly in the private sector), people still struggle to save up money for a house, which can take more than ten years. Furthermore, there is a shortage of multiple-occupancy accommodation, making it even more difficult for families to economically survive.

It is the above part of the country that Osborne understands as meaning "The UK", and which he uses as his model to justify his economic policy. This explains his "bedroom tax" on people living in houses with empty spare rooms, for example; more on that in a moment.

Then there is the rest of the geographical UK. This is the larger part, where house prices have been on a continual downward spiral, the rate of unemployment remains stubbornly high (especially with the young), there is little incentive for private companies to invest (unlike in London), and the public sector provides a significantly larger proportion of the employment.
London-centred (and utterly ignorant) Osborne claims the large size of the public sector outside of the Home Counties is the reason why the economy there is stagnant (and all the more reason to neuter it); but history tells you it is due to a combination of factors, such as the collapse of heavy industries and mining in the post-war period, culminating in the Thatcher era.
While London's economy is diverse and service-based, the rest of the UK's is not - many regions specialised in producing certain goods upto the Second World War (Sheffield for steel, Stoke for pottery etc.). The fact that Osborne is so brainless he doesn't know simple British history (or is so heartless he doesn't care), is the most damning indictment of all. But almost all Tories have had the same view of the UK for decades, Thatcher being one of the most famous. So that lack of diversity meant that the public sector stepped in to take up the slack in the (inefficient) private sector. That is still true today for many parts of the UK outside of the Home Counties.
The "bedroom tax" was another classic example of Osborne's combination of economic brainlessness and emotional emptiness. While London has a lack of multi-occupancy housing, much of the post-industrial North has a surfeit of it. In cities and towns across much the North, single people struggle to find one bedroom flats and houses, because the houses were all built for families before the Second World War, for example. So this situation is the exact opposite to that in London. The differences in the local economy, added to the differences in the housing market, make The UK a country economically divided in two.

Having a government in London, of London and for London, is economic insanity for the rest of the country.

This is what it means to live in "Broken Britain". The UK, economically-speaking, is not fit for purpose, because, economically, it is two countries. While all large countries have disparities between the capital and the regions, in The UK, the differences, when laid about simply and clearly as above, are striking and unmistakable.

Having one economic policy for two economic realities is economically-crazy. This is what the Euro-zone is finding out, as Germany has an economic policy that works well for itself, but is creating an economic catastrophe in Southern Europe.

The Conservatives' plan is therefore to treat the rest of the UK as an out-sourced franchise of the Republic Of London.

The Future Of Britain

Realistically, what is Britain's future as a nation-state and power in the world in the coming decades?

In truth, it is not that hard to make some educated guesses based on what is happening in Britain now, where the direction of global politics is going, and what the predicted trends will be.

As I've said in my earlier post here, Britain in 2012 is a nation-state in stagnation, and socio-economic dysfunction in many of the regions outside of the South-Eastern England. The stagnation is due to the financial crisis, while the dysfunction is a combination of longstanding structural failings in long-term strategic thinking by government and the private sector, exacerbated since 2008.

The British economy since the decline of the manufacturing sector thirty years ago (accelerated by Monetarist/Thatcherite economic policy) has been increasingly dependent on the financial sector as the main driving force behind economic growth. This strategy, backed by the financial sector and followed trustingly by the government ever since, was meant to ensure a stable future for Britain in the 21st century. It has produced the opposite.

Looking at it objectively, this is obvious: it is reckless and naive to rest the hopes of nearly sixty million people on the success of the banking sector. But this is what has happened to British economic policy in the last thirty years.
Britain likes to compare itself economically to Germany, as a comparable economic power. But this is unfair: Germany does indeed have a strong economy, one that these days effectively keeps the Eurozone working and itself from feeling the effects of the economic crisis. But Germany's economy is based on two prongs - its financial sector, yes, but also its vigorous, efficient and dynamic manufacturing sector, that provides a healthy flow of exports.
The British government, under the supervision of the shortsighted financial barons, allowed its manufacturing sector to atrophy and wither. Furthermore, unlike Germany, the British government's attitude to unions has been aggressive, with catastrophic results on union membership and wage stability.
It is often forgotten in Britain that Germany's unions have a seat on the corporate board. This is not seen as an aggressive move on the part of the unions; it is seen as a co-operative approach between employee rights and employer rights. It means that companies make decisions together with their employees, rather than resembling a war-zone. The difference between Britain's workplace and the German workplace could not be greater.

 The arrogance of the banking sector and right-wing economists explains how this happened. This combination of arrogance and what I call "post-Imperial complacency", is why Britain:

1.  imports the majority of its foodstuffs (because it is cheaper for the huge private behemoths like "Tesco" etc.), forcing the home agricultural sector into penury.
2. has an ever-growing "North-South" divide (because the private sector sees Britain outside of the London metropolitan area as an economic inconvenience, forcing an ever-growing "brain drain" from the regions) 
3. has a dysfunctional housing market from lack of private and public sector planning and motivation. The  "North-South" divide means that while house prices in the depressed regions stagnate and some areas become depopulated, the London area becomes massively overcrowded, with an ever-increasing cost of living. It makes Britain an increasingly economically-polarised nation: the regions trapped in a cycle of lower and lower incomes and economic prospects; the capital trapped in a cycle of higher and higher costs. Over time, it means that the two parts of the country may become impossible to reconcile economically, with those in the regions unable to relocate, while those in London unwilling to move to the economically stagnant regions.
4. has a mountain of debt, some government-incurred due to bailing-out the banks, some due to government overspending, and the rest due to personal debt brought about through irresponsibility. 
5. has a fast-growing population, much of it from the families and direct descendants of immigrants. But due to lack of government strategy and planning, there are fewer and fewer places in schools for them, resulting in overcrowding or family relocation simply to find a suitable school.
6. Has a generation (or two) of graduates who are to have a mill-stone of debt around their necks for much of their adult life, but without any suitable employment. In other words, Britain is becoming a nation-state of the highly-educated under-employed.
7. Has an increasingly dysfunctional employment market, as a result of the combination of points 1,2 and 6, as well as the over-dependence on the financial and (fluctuating) service sector. The number of long-term unemployed is reaching levels not seen for decades, and looks like a "new normal" is emerging of a permanently-unemployable underclass. Furthermore, the proportion of part-time and temporary jobs is increasing, so it appears that Britain will have an increasing portion of the population without stable career prospects.

These issues are all a direct result, in one way or another, of the government's economic strategy of the last thirty years. When you put all your eggs in one basket, as the UK government has done with the financial sector, the result is always predictable. It's simply a matter of time.

So that is the domestic state of affairs in Britain. From that we can make some educated guesses about what will happen to Britain's role in the world.

Britain's future in Europe is the most pressing foreign policy issue these days, and looks likely to dominate until the matter is decided one way or another in a referendum. The weak and directionless leadership of David Cameron, exploited by UKIP's Nigel Farage, is adding to the sense of drift and swift decline of Britain's reputation in Europe. It appears all-but-certain there will be a referendum on the Europe question in the next few years, either before the next election or shortly after. But any UK government is deluding themselves if they think they would be able to "re-negotiate" Britain's terms in the EU. For one thing, it would represent a dangerous precedent to what is a highly-centralised organisation. The EU leadership could not risk the contagion of other nations also wanting to "re-negotiate", leading to a chaotic and unruly clutch of European squabbles.

No, any referendum would be either "in or out"; "out" most likely meaning some kind of "free trade association" similar to that which Norway has with the EU. Judging how things stand, that vote is most likely to be "out", leaving Britain semi-detached from the centralised EU bureaucracy by the end of the decade.

That decided, it would leave Britain more reliant on its non-EU economic partners. In the next five years, we are likely to see the influence of three powers becoming more obviously apparent: China, Brazil, and Turkey. 

China is obvious. It's influence in Africa, South America and Europe is bound to increase further, and as the Chinese middle class gradually increases, we can expect to see the effect of the stronger yuan (renminbi). Brazil is becoming an increasing rival to China in Sub-Saharan Africa, taking advantage of Brazil's more benign influence in Africa compared to China's more naked neo-Imperialism. This rivalry is likely to be the next "scramble for Africa", soon to appear in the news.  Much of South America looks to be already in the pocket of China, but the Far East is where most experts in geopolitics think any future Chinese conflict may occur. While Japan is not likely to lose its status as the most advanced economy in the world for a fair while yet, a conflict between these two cannot be ruled out, though it may not occur until China itself feels either threatened (by Japanese paranoia towards China) or over-confident (about asserting its claims to disputed naval territories). This all depends on the balance between hawks and doves in the Chinese leadership, and by impression is that, for the time being, the Chinese are happy to be the world's mercantile power, if not its military one.

Having already mentioned Brazil's growing influence in Africa, this will put Europe (and Britain) in a dilemma.  Who to support? Brazil is obviously closer to Europe culturally, as well as sharing an apparently benign interest in expanding its trade links to Africa. But the sheer size of China's influence on Europe as well as in Africa, may result in some difficult choices in the coming decade for Europe and Britain. The USA also may face some awkward choices in the coming decade regarding China and Japan.

I mention Turkey because of the Middle East. It already looks like Turkey has had an early advantage in gaining access to the Egyptian economy, due to the "good neighbour" policy of its Islamist government. As well as already gaining an increasing share of trade in the Balkans, Turkey looks likely to do the best out of the legacy of the "Arab Spring". In Egypt, Turkey has already gained friendship with a market of equal population size to itself. Then there is also Syria, which looks likely to become a strong economic partner to Turkey when the civil war finally is resolved one way or another. Turkey already has a strong economic hold on Iraqi Kurdistan. Furthermore, other EU countries may look to Turkey as a more convenient and agreeable trading partner than China for some of its imports. So Turkey's future economic prosperity looks to be secured in the region for the long-term, with its policy of "New Ottomanism".

Where does this leave "post-Imperial" Britain, set to be semi-detached from Europe, and with a dysfunctional economy? Looking at the situation with realism, and looking again at the common links that the USA and the UK share with their shared view of globalisation, it would not surprise me if Britain, in a new period of post-EU uncertainty, turned to its greater Anglophone cousin across the water by the end of the decade, for the warm embrace of combined "Anglophone Neo-Imperialism". 

As I'm sure some would be bound to say at that time, "there's more that unites us than divides us".

What the 2011 UK census tells us about post-Imperial Britain

The main points that stand out for me from the 2011 census are:
1) atheism is increasingly the norm,
2) London's white British population is a minority in the city,
3) the immigrant population has increased by around three million in the last ten years,
4) there are now more than half a million Polish people in the UK,
5) the tenant population has increased by more than half.

Britain is a post-Imperial power, and has been since the rapid disintegration of the Empire after the Second World War. In a nutshell, what has happened to the UK since then is the effective implosion of its Imperial society. Whereas in the 19th century, Britain spread its social values to its colonies around the world, after the end of the Empire, its former colonies have sucked back to the "homeland" like a collapsing star sucking matter back in on itself. The "homeland" of the former British Empire is now a teeming microcosm of its former Imperial population.

This was inevitable. And what I write here is neither a condemnation or otherwise: this is simple observation, free of judgement.

An Imperial power the size of the British Empire cannot discard the great majority of its Empire in the space of little more than twenty years and expect to continue unscathed. Until the 1950s, Britain was an island of generally homogeneous white people that still ruled a vast colonial population. But that "Golden Age" of Empire was destroyed by the effects of the Second World War. After the war, the bankrupt "Empire" was shown to be a financial conjuring trick, and suddenly the "homeland" needed more people to re-build the economy. So it turned to the colonial populations.

Britain, like France and Portugal, were European, post-Imperial powers looking for a way to survive when it was clear that Imperialism was no longer financially viable and practical in a Cold War world dominated by two huge continental superpowers, the USA and USSR. For the broken European powers to survive, they pooled their talents around a new Franco-German centre, based on trade. After a couple of false starts,  Britain joined the European club, thus put the final nail in the coffin of Imperialism. Britain's last formal colony, Rhodesia (Zimbabwe), was relinquished shortly after Britain joined the European club, the (then) EEC.

Britain, always being largely ignorant of continental politics and society, has been considered the black sheep of Europe. Thus its critical voice was always easy for the others to ignore. The expansion of the former EEC, now EU, into Eastern Europe, has had an immediate effect on the population of the "homeland"; now more than half a million Poles live permanently in the UK - a tenfold increase on ten years previously.

Since the 1990s, Britain's increasing role has been as the "conscience of the world"; in order to replace its middling role in the Cold War, it has largely embraced the American belief in an "open door" policy to immigration. This largely accounts for the unprecedented rise in the immigrant population in the last ten years.

The effect of this on British society in general is clear from the 2011 census. London, like New York, is one half of the Anglophone twin cities of globalisation. These two cities symbolise everything that globalisation represents, and are living examples of it. Boris Johnson is another living example: born in New York, now mayor of London, and a passionate promoter of both cities, and the concept of globalisation generally.

As I've said before, "Globalisation" is the direct result of the Anglo-Saxon economic model propounded by the British Empire and the USA. It is also largely interchangeable with the core ideas of Economic Fascism, as I've also said elsewhere. The fact the "the world lives in London", or New York, doesn't change the fact that the same economic model that brings people around the world together, also makes the rich richer and the poor poorer.

The story of 2011 in Britain is now of economic stagnation in a society of unprecedented diversity. But what this really masks over is the danger of communities in general slipping apart. I don't mean in stark terms of race, religion and so on, but more in terms of more social insecurity, and more psychological distance between people, exacerbated the socio-economic plan of the current Conservative government. As fewer and fewer people can afford to buy homes, or as more and more jobs become temporary and part-time, it makes it more and more difficult to make real roots and develop a real sense of "community". This is the real danger: people no longer talking to their neighbours because they never know who they are (or when they're at home) for long enough, and people not making real workplace connections because they never see the same people from one day to the next.

This is the other story of Britain in 2011. That Britain, long the arch-proponent of globalisation and economic liberalisation, became a victim to it in 2008. But the culprits were not affected, nor punished. It was everyone else who was a victim to it, and the average person on the street who has continued to suffer. This is what accounts for the rise in tenants in the UK, for the first time in living memory, as people see the "homeland" of the former British Empire become a third-rate nation-state. Britain imports most of its goods, manufactures little, and has a national housing shortage; if it were not for the amoral practices of the financial sector in London artificially flattering the state of Britain's economy as a whole, the country would be on a par with failed state.

That said, it is the amoral practices of the financial sector, who have had the ear of government for thirty years, that are responsible for the economic stagnation and social dysfunction outside of the Home Counties.

 "Strength in Diversity" is a great slogan for 21st century Britain. Another way of putting it is "The Empire Coming Home". Both are technically correct, but the second is heavy with loaded xenophobia. The stark future facing Britain is not of "rivers of blood" as Enoch Powell said, but of "streets of desolation", as whole areas of the UK gradually turn into economic black holes.

A market without regulations is like a legal system without laws

The free market liberals, of both the Tea Party-types in the USA, and the Conservative ideologues in the UK, love the idea of markets ruling everything.

They see markets as being the best way of dealing with goods and services. They see government as getting in the way of the private sector, who should be best to be left alone (where the phrase "laissez-faire" comes from).
Their rationale is very simple: markets are the best way of dealing with goods and services because markets are "self-regulating": in other words, prices are controlled by demand (i.e. customers) and supply (i.e. how much of something there is). so a high supply product (like bread) would be cheap, whereas a low supply product (like caviar) would be expensive. Also, there is naturally more demand for bread than caviar.

The same logic works for salaries: commonplace jobs with a large pool of labour offer lower wages than those with a high skills requirement and this have a far small potential employee pool.

Enough of the economics primer. What happens when you put this into practise?

There are plenty of real-life examples of how this unregulated "free-market" works in real life. In the main, though, it doesn't. Here's why.

Look at the property market in the UK. There are those properties that people can mortgage or rent. This all depends on supply and demand. According to the theory, if  customers alter their behaviour (by wanting more of a product), a supplier should naturally react to customer desire: that's how the market works, by suppliers naturally reacting to customers' demand. Does this happen in the UK property market? No.

The housing stock in the UK has remained far below consumer demand for years, decades. It didn't help when the last Conservative government, under Thatcher, sold off thousands of council houses to the private market, without building any sufficient replacement government housing. But that's a separate matter. The question is WHY does the private sector (the market), fail to react to consumers' demands for a large increase in the housing stock? The answer is because of one of the fundamental flaws in the principle of the "free market": short-termism.

The private sector is often terrible at strategic, long-term thinking and looking at wider economic concerns. As businesses are driven by profit, they find it difficult to set aside money for "investments" which take a long time to set up, can be risky, and the financial benefits cannot be seen until some time in the future. Simply, the incentive for businesses to think long-term is too small. As a result, industries that have been privatised see a gradual decline in things like infrastructure and trying to look ahead to future trends.

This is why housing and construction in the UK has shrunk significantly, especially since the onset of the recession: businesses see too much risk and too little potential gain. Even though it's obvious that consumers need more housing, the "free market" is too fearful of risking money on long-term projects. The same thinking is true of the banking sector where it comes to giving out loans to help small businesses and individual entrepreneurs. Even though it can be rationally explained that any risk would be worth it considering the potential wider gain to the economy for encouraging business and wealth generation, banks, like the "free market" in general, are weighed-down by short termism.
George Osborne, the Conservative government's supposed economic heavyweight, has set his reputation on believing that the private sector will create the recovery. But everything tells us the opposite.

Continuing with the housing market, the rise in the cost of rents can be easily explained. Banks are reluctant to give out mortgages, forcing customers onto the rental market. As a result, although the cost of mortgages overall has gone down slightly, the cost of rent has rocketed. This may well result, for the first time in decades, with many younger people being unable to buy a mortgage and stuck in a high rent property. Again, because the private sector is unable plan strategically, this has meant the rental housing stock has remained static while demand has increased. So here is where the market doesn't work: landlords simply see an opportunity to make more money, and with the customer held hostage by the limited number of rental properties (and likely to remain so for the foreseeable future), everyday people are getting shafted. And will continue to do so for years if things stay as they are.


If the private sector is meant to be so risk-averse, why was there a construction boom in Spain? Because they saw no risk. There was a housing boom in the UK too, but not a construction boom on the same scale. What the housing booms in Spain and the UK had in common was the over-valued inflation of prices; but the reasons behind were slightly different.
 In the UK, the boom was fuelled by mortgage lenders losing their previous aversion to risk and giving mortgages to people who were not financially reliable. They forgot one of the basic rules of the market: not to invest in high-risk ventures.
In Spain, the boom was fuelled by construction firms losing their previous understanding of the demand for housing, and creating a huge over-supply. They forgot another basic rule of the market: that as supply increases, price goes down (and will, eventually).


The property market is just one example that quickly comes to my mind. Another one is education.

The introduction of competition was meant to improve secondary educational standards. But how are those educational "standards" measured? By exam results, because that's the easiest way for the "free market" to measure education. The government therefore supported this method when competition was introduced into secondary education.

The result? Schools have turned into exam-preparation centres, concentrating on the exam results the students get at the end of their education, rather than actually how useful or effective that "education" will be in the real world. Students know a great deal about how to pass exams, but not a lot about how to transfer their education into real-world skills useful to the economy.
Another side-effect of this "results" obsession is that schools focus on encouraging subjects that are easier for  students to excel in, in order to improve the schools ranking (and thus attract further revenue). This is a further reason why you have students leaving school with qualifications that may well be of little use. The "free market" has the opposite effect of that intended, because everything becomes a race to reach the lowest common denominator: to maximise results in order to minimise risk.
One last point is the government's introduction of a free market even in examination boards: schools can choose which "testing centre" they think is the best. That was the theory, anyway. The reality has been the opposite: schools, in order to maximise results and minimise risk, have often chosen the exam board that offers the "easiest" set of exams, to give students the best chance of getting a good result, therefore boosting the school's published results.

So what happens when the "free market" is let loose? You usually get a maximisation of profit at the minimisation of risk. If the government wants the private sector to act in a rational, strategic, open-minded way, then they need to read basic economics again.

To trust that the "free market" is the best way of dealing with economy, is to hand over running your economy to people with the mental age of five-year-olds. Unregulated markets, by definition, are, as a general rule, incapable of thinking long-term or strategically. Yes, the market has an important role to play, but it can only be a sane instrument if it is regulated by government.

The "free market", by definition, is an example of anarchy, because no-one is in control of it; it "controls" itself.  It's like having a legal system without anybody to enforce the laws. The "free market" is a system based on blind optimism.

Any government that supports the "free market" is also blind.

The Benefit Cap and Britain's "Benefit Cheats"

The UK government, and David Cameron in particular, have hit on an idea that would help reduce welfare and also be popular with the public. The idea to cap welfare benefits per family at no more than the national average income (around £25,000) seems suddenly to make great common sense to the government and a lot of people.

Except that the House of Lords loathe the idea and have blocked it. And suddenly government are asking what right they upper house have to block the democratically-elected parliament from carrying-out its programme.

Now might be a good time to step back and look at the underlying issues behind the "cap", why it would even be necessary for a family to need £25,000 in government subsidies, and why there is an outcry over "benefit cheats".

First things first: how are an unemployed family able to be given a government subsidy worth the average national income of a working person?
The simple answer is because that sum of money applies mostly to large unemployed families in the London area: more than half of that "subsidy" goes on rent; much of the rest on bills; leaving a pretty modest amount if you have two parents and five children. Don't forget, that's seven people living in one of the most expensive cities in the world. If they lived in, say, Middlesbrough, where rent is a fraction the price in London, then naturally they would get a lower subsidy.

The government, in its enthusiam to grab a headline (no change there, then), forgets to mention that the benefits a family receive are means-tested; it depends on the cost of living of the place in the UK you live. So the idea of a national "cap" is not only wrong-headed, it's also absurd. It means that unemployed familes with several children that live in London (who anyway would face a tiny number of flats big enough to house them), would be forced to move out of London entirely. In other words, forced clearances of large families from the capital.

But that's only the tip of the iceberg. What the issue of the "benefit cap" really highlights is the shocking cost of living in the UK, especially in London. That's the real scandal.

Yes, the real scandal is that due to the insanely high cost of rent in places like London and the South East, in order to prevent masses large unemployed familes from having to live on the street, the government has to fork out a subsidy worth a working person's average national income. That's no fault of the unemployed family; that's the fault of the shameless and unregulated landlords, who the government completely fail to control.

That in itself is an appalling indictment of the state of the insanely-inflated property market in the UK, in London in particular. Let's remind ourselves that the price of rent nationally is still going up; utility bills are going up; and the cost of everyday living is still going up. Meanwhile, wages remain stagnant. The result: people in the UK are getting deeper and deeper into real and virtual poverty.
In this kind of economy, many young people find it impossible to save money to buy a house. Meanwhile, almost zero interest rates give no incentive to save what little money they have in any case. Banks are reluctant to risk giving people with no savings a loan to make any possible investments. And year on year, costs keep going up while wages remain flat, meaning that annually the average person may well be five per cent (or more) poorer than the previous year. This is a slow-motion downward spiral to poverty on a national scale.

Well, thank god we have a welfare state. But the outcry against "benefit cheats" is also largely missing the point. Let's use a hypothetical example.
A worker who lives in the south-east has a job that makes £20,000. After deductions for tax and national insurance, that takes away upto 15% of his income at least. Then there's the rent, which hacks off another 40% of his income (if he's lucky) . Then there are bills, which takes off another 10%, leaving him with only 35% of his salary left. Oh, and if he has a car, there's insurance, road tax and fuel (say another 10% of his annual salary at least). So, in reality, what he has to survive on per year (for food and enterainment) may, in theory be around £5,000 per year. Divide that into fifty-two, and you have under £100 per week - to pay for everything else.

However, if you are unemployed, you qualify for JSA (around £70 per week), and the council helps to pay for your rent. This is obvious; unless the government expects people to become homeless soon after becoming unemployed. There are other things, like being able to qualify for free college education in many cases, in order to give an incentive for you to re-train and have a chance of getting a better job. All well and good, as you would hope for in a civilised country.

So this poses the problem: that many people who earn less than the average national salary would feel justified in being envious of the unemployed, who have much less to "worry about" - such as paying the rent and bills. Clearly there are many cases of people defrauding the government out of welfare, but it's not the majority by any means; and in any case, it's difficult to imagine the situation being done in a different way that would not destroy the moral fabric of our "civilised" society.
No, the main reason for this insane state of affairs is the scandalous (and to my mind, economically inexplicable) cost of rent and housing in the UK, as well as the added factors of increasing cost of living. The latter, I understand, is partly down to global factors somewhat out of the government's hands, but the price of property is something that the government could easily regulate, if it ever had the guts. Or at least find the core causes of the problem, and deal with it.

In the UK, then, the insane cost of property is one of the real factors that explain the call for the "benefit cap" and the envy that working people feel towards the unemployed.

So far, few people have made this link known to the government, sadly.