Did the UK rely too much on borrowing?

[Kristina Burns]

Did the UK rely too much on borrowing for asset accumulation and consumption-smoothing, and overly erode its previous mutual, insurance-based forms of financial provision?

[Alan Shipman]

I would suggest that the UK turned to a debt-based approach because it lost (or never gained) the traditions of private and social insurance that operate elsewhere in Europe, and (as cause and/or consequence of this) has much higher levels of social and economic inequality.

In the UK, borrowing has become a form of saving rather than the opposite of saving. People take out a debt and are then contractually obliged to put money aside to service and repay it. Legal contracts are used to promote the setting-aside of income because the social and commercial culture work against it. The two main motives for household borrowing are to supplement income at times in life when this is inadequate; and to accumulate assets (mainly houses) which provide a 'buffer stock' of equity if income drops below consumption, in retirement or before.

With more developed systems of private and social insurance, people can anticipate income supplementation during times of inability to work without going into debt; can look forward to better-funded retirement without a buffer of housing equity; can get a good-quality state finaced education that substantially improves their level and stability of lifetime earnings; and can rent decent housing while they save the money to buy it. But the UK never developed a substantial system of private or mutual non-life insurance, mainly because of wide inequalities which made it impossible to pool risks across different classes, making cover affordable to all. And the state failed to develop an alternative, comprehensive national insurance that would force everyone into the same pool for cover on major risks.

The UK and US further eroded their social insurance arrangements in the 1990s and early 2000s, when strong global growth ensured a low level of claims on these arrangements. Now they are left requiring a rise in borrowing to deal with adverse social conditions, at a time when economic conditions restrict the availability of credit.

   

[Blue Peter]

In the UK, borrowing has become a form of saving rather than the opposite of saving. People take out a debt and are then contractually obliged to put money aside to service and repay it. Legal contracts are used to promote the setting-aside of income because the social and commercial culture work against it. The two main motives for household borrowing are to supplement income at times in life when this is inadequate; and to accumulate assets (mainly houses) which provide a 'buffer stock' of equity if income drops below consumption, in retirement or before.

This is a very nice description, and perhaps describes the underlying cause well. On the other hand, it didn't feel like that very rational description, more a like a blinged-up, celebrity-wannebe madness. 

I've also seen descriptions in terms of the distribution of economic growth, especially in the US. The mean or median inflation-adjusted wage has hardly budged for 30 years (in fact they seem to have fallen from 1972 to 2007). So, whilst those at the top have prospered, those at the bottom have not, and borrowing has been a way of making up for that. Given that the source of a lot of the borrowing has been the newly emerging low-wage economies, not only has the average UK/US worker lost their traditional jobs to the East, they have to borrow from those who now have those jobs in order to maintain a place in their own economies.


I suppose that these two descriptions aren't mutually exclusive, and indeed have fed off each other. They don't say much for the UK/US way of running an economy, though,


Peter.

[Dr Price]

I have lived in the US and the UK  and though it looks good on paper perhaps this is not the case. People lose everything they have  at vulnerable  times and die for lack of common medical care in the US at least in the UK they are looked after. The money and power rests with the insurance companies in the USA and to get compensation you have to fight for it. In vulnerable times people have no resources with which to fight nor should they have to . If they have paid for insurance the insurance should be obliged to honor the contract so I see it as a statement of incompetent oversight and bad management fueled by greed. There are no consequences for hospitals or insurance companies who deny service.The biggest verdict for a TBI was declared against a hospital in florida and it was only about the same amount that an average settlement would be to an individual. Less than 3% of people can afford to go to trial it pays them not to treat... A disabled adult can cost generations of expenses when just repairing them at the point of impact would be fiscally responsible. In the USA where you pay for medical less than i% of individuals will ever collect more than 100,000 dollars for a verified injury. This injury over a lifetime will cost the individual and society several million dollars. I sustained an injury in the USA which cost me a million dollars to treat without one overnight hospital stay...this is outrageous and not value for money . Private Insurance has not given Americans better healthcare or education their status is slipping on all fronts...AS blue Peter states the rich ger richer and the poor get poorer until that is dealt with there will be sustained losses because it causes the system to implode and destroy itself

Much of the financial difficulty in the world can be traced to unbalanced ethics which snowball. To improve financial viability why not put quality time, money and personel into creating strategies that will insure fiscal responsibility and ethical treatment?

With more developed systems of private and social insurance, people can anticipate income supplementation during times of inability to work without going into debt; can look forward to better-funded retirement without a buffer of housing equity; can get a good-quality state finaced education that substantially improves their level and stability of lifetime earnings; and can rent decent housing while they save the money to buy it.In Practice this does not work out all the money goes to rent and medical. They do not have a better standard of living in the USA it is very much have and have nots and tuition in a first tier university can run 75-100 thousand per year. But the UK never developed a substantial system of private or mutual non-life insurance, mainly because of wide inequalities which made it impossible to pool risks across different classes, making cover affordable to all. And the state failed to develop an alternative, comprehensive national insurance that would force everyone into the same pool for cover on major risks.

The UK and US further eroded their social insurance arrangements in the 1990s and early 2000s, when strong global growth ensured a low level of claims on these arrangements. Now they are left requiring a rise in borrowing to deal with adverse social conditions, at a time when economic conditions restrict the availability of credit. If they had considered the impact their policies would have on people long term as in 30 years out they could have  weathered the storm and if costs were kept to a reasonable level for services performed, there would have been available buffers but  instead when the the low claim scenario changed this  led to artificial ways of avoiding responsibility and instead of taking leadership  and instituting reform there was a blaming of the people that claimed services with little accounting from the top down required. I think this is evident when we see the many years that Madoff played the game without oversight or detection.