(or – The Wisdom of Crowds, Part 2)
No, my title is not taken from the Michael Douglas/Sharon Stone movie of 1992. (That was singular, “Instinct”!) I’m interested, rather, in a range of instincts that citizens of many societies seem to have, that are increasingly overridden by public policy.
Not too long ago, thrift was a virtue. To incur debt was strongly discouraged. Debtors’ prisons in Europe were a symbol of society’s disapproval. When families needed to be self-sufficient to survive, creating some reserve of savings (whether a surplus harvest or money saved) was a normal response to future uncertainties. Families and societies who failed to create a buffer literally died out. Saving was a “basic instinct”. What happened?
Somehow (and Keynes was perhaps not the only one to blame), the idea took hold that the virtues of individuals became faults at the level of society. While saving was still accepted at the individual level, Governments were urged to borrow more and more. Initially, this was proposed only counter-cyclically in a downturn. Today it is regarded by many as an obligation of government. Prudence is called “austerity and is a “bad thing” in policy discussion.This has now reached such an extreme that in European fiscal politics, “austerity” no longer means saving too much, it means not over-spending enough! Spending only 110% of income, compared with some previously higher level.
This policy environment creates problems well beyond the Government’s own accounts. The financial policies that citizens read about encourage everyone to spend more than their income. “Consumer spending” is encouraged as if it were a public good. George W Bush, after an earlier financial crisis, publicly urged Americans to spend as if it were somehow patriotic. China is regularly accused of saving too much. The general tone of policy discussion, by talking about the “savings glut”, now implies the idea of saving is fundamentally destructive.
The last politician I recall who reflected “basic instincts” in her public policy was Margaret Thatcher in the UK in the 1980’s. As the daughter of a grocer, she often commented that the need for thrift and common sense with money that characterised her father should underlie government policy too. Many professional economists scoffed at this idea is if it was obviously stupid. Borrowing for productive investment somehow became conflated with borrowing for consumption. Commentators would criticize all parties for not borrowing ”enough”, regardless of the purpose of the borrowing.
This atmosphere of debate, when twinned with loose central banking and massive credit creation, has inevitably created societies that have over borrowed at every level. Governments, companies, individuals: each in aggregate has huge debts now. And this is without accounting for the mountain of other state liabilities not formally recognised in government balance sheets.
Let’s now consider why the basic instinct to save is so “basic” and why Governments are imperilling us by suppressing it.
Imagine a person’s lifetime cash flow before the modern age of welfare. The childhood years were obviously a time when the family had to support the individual. But by perhaps the age of 10-12, most children were making a contribution. Child labour was universal. On a small farm, it would have been easy for youngsters to make a meaningful contribution to the fields or the household. The cost of living for those kids would have also been very low. Their net positive contribution to the family would have been obvious. Having more children would not therefore have been seen as a risk in the long run but a blessing.
At the other end of their lifespan, provided the risks of death from disease or violence had been overcome, “retirement” would be occasioned only by weaker physical strength. It was likely to be short. Support would be provided by sons, daughters and extended family. Again, the costs would be low.
The long run net “cash flow” of such a life would see income generated by an individual exceeding his expenses from perhaps the ages of 15 to 60. (These are not researched figures. I am intending simply to give an indication of the broad issues.) Assuming a life expectancy of around 65 (excluding disease and warfare), only the first 15 years and the last 5 would see a deficit to be funded by the extended family. I am certainly being conservative here. The years from 12-65 might be a better estimate of productive life, but staying even with my conservative estimate, we have 45 years of productivity out of 65, or nearly 70%. Absent welfare, the surplus over those 45 positive years needed to cover the deficits in childhood and old age. This is of course averaged across generations. But in the absence of welfare, available then in Europe only from the Church, this lifetime cash flow had to be positive, or the community would quite literally die out (some did). It is therefore not difficult to see that the instinct for thrift and for saving is Darwinian, at the level of the family.
Let us now examine what the welfare state, based on the Western model, has done to this instinct for survival. Welfare states vary internationally of course but almost all involve heavy subsidies in the early years of life and in old age.
Schooling is impacted in three ways. First, it is provided “free”. That is, if you pay taxes to fund schools, you pay these regardless of whether you have children. Indeed you are likely to receive a tax-free allowance for having children, so the childless pay even more to fund schools for those with children. This means that the parents are no longer impacted by the cost of schooling. It is invisible to them.The second impact is making school compulsory. The parents cannot any longer trade off the long run benefit of further years of schooling against the cost of not having their child working. The trade off is imposed by the state, and if you keep your child from school you will be arrested (in the UK at least). The third impact results from the progressive extension of subsidised schooling. From a school leaving the age of 10 initially in 1880, the compulsory school in the UK has been extended in steps to 18 (with some opt outs after 16). In many countries, state funding extends to college level even if it not strictly compulsory it is heavily subsidised. Once more obscuring the trade off between more education and generating an income. In Uruguay, for example, all college education is “free” and as a consequence 100% of the age cohort attends college. In Germany, many students now take two Masters degrees and may not begin their working life until their late 20’s. This means that the income earning period of individuals today has been hugely reduced compared with less than 150 years ago.
Let’s now look at the other end of the life spectrum. We see exactly similar impacts of public policy. First the health care costs of old age are obscured for the individual family. A “free” health service at the point of use, creates unlimited demand by hiding its cost. Once more, the taxpayer who does not use the public system still pays. Once more, much of the system becomes “compulsory”. You cannot opt out from choosing to pay for this level of health care.
Apart from obscuring the true health costs of old age, public policy on pensions distorts the income side. By promising “adequate” state pensions, citizens in many countries are encouraged not to save or at least to save less. The MPF scheme here does the same. Yet many state schemes are unfunded (as are civil service pensions here). Not only is the citizen encouraged not to save, the state does not save in his stead. As in childhood, the impact of these state provision shortens income earning life. The state pension schemes in Europe led inevitably to employers automatically retiring their workers at 65, then 60 and in some cases younger still (see Greek civil servants for example).
Add the two sets of policies together and we have a working life, in extreme cases, of from the ages 27 to 57 only. Yet life expectancy has extended in many countries beyond 80. 30 years of productive work may now have to pay for 80 years of life. No longer a ratio of 70% but below 40%. Now, you may say, productivity is much much higher than in the premodern period of my example. Indeed it is but by how much? Who can tell? My message here is that there is no longer any transparency about the cost for this. And no ability to act if there were. An initial thought would be that if productivity were easily enough to cover these costs, Government finances would be in great shape everywhere from all those taxes from productive activities during working life.
Yet all around us are the signs of an enormous miscalculation by policy makers in the so called “developed” world. Pension schemes are going bust. Retirement ages are being compulsorily extended, breaching promises previously given. Fiscal policies cannot raise more tax revenue. And despite the huge cost of publicly provided health and education systems, users are deserting them. One key reason for middle-class angst in Europe is that many parents who are already paying for the public education and health system through taxes are paying a second time for private provision even at great cost to their family finances. (Some of my readers perhaps?) For them, the lifetime net cash-flow of that additional child is not looking so good. The child’s ability (or intention) to care for mum and dad in their old age is also waning.
As a result of all this, couples earn income much later, they therefore marry later. And the net financial impact over a lifetime of that additional child is not so clear. So population growth slows. Is any of this really a surprise?
What is happening is that the quality failure of public services has pushed the costs back on parents and made them more visible. “Basic instincts” have according led to slower population growth. Yet instead of reflecting upon these personal decisions by many couples, what do policy makers do? They double down; try to borrow more; add more incentives to have more children; promise more tertiary education not less; not admit pensions schemes are bust; ignore their unfunded costs; hold interest rates low to help governments borrow more, thereby making the pensions schemes ever more insolvent.
Left to themselves, citizens might make sensible decisions on these very important matters. But our condescending policy makers and politicians, worldwide, will not permit it. For them, crowds have no wisdom.
Watch out for our Hong Kong administration going further down this road to certain ruin as our city ages.
本能 (或 群眾的智慧2）