You may if you are particularly devoted recall the analysis in Slash and Grow – about whether exports, households or investment can lead us out of recession.  The bearish view is that households can’t, because they are very indebted and need to keep saving, after a credit crunch has shown them how dangerous it is to be reliant on debt. Oh, and the banks also don’t want to offer credit, as they fear for their capital ratios.

But you might also argue that it is not just gross debts but net wealth that matters.   To use the archetypal example, it does not matter if I have debts of 3 times my income if I also own assets of 5 times.   The wealth effect is something long investigated as one of the channels through which assets affect economic demand.

Mark Thoma on Economist’s View has a graph relating US wealth to its savings rate (and the savings rate is the inverse of the consumption rate).  As you would expect,  it is downward sloping – the wealthier the economy, the less it needs to save.  Now the US has had a much worse housing bust than we have.  From their current position the US is expected to increase its savings rate from 5 to 7%, according to the graph.  But the UK is in a different position – housing up 10% in a year, and our savings rate already much higher.

So the question is can the UK expect more growth from its relatively wealthy households?  My answer – as I observed in Credit Where It’s Due – is not necessarily.  Yes, wealth has recovered.  But it is still too concentrated in the top deciles, where the propensity to consume from added wealth is much lower.   I keep coming back to the idea of wealth taxes as an answer to more than one problem ….


One thought on “Will growing wealth pull us out of the recession?

  1. I think that the housing market is illusory, because the purchasing power does not exist for the nominal prices to be achieved.

    Firstly, employment prospects in the real world are already bad, and post-election, likely to get worse no matter what parties get in.

    Secondly, the level of prudence being exercised by the banks (due to systemic and window-dressed shortage of capital) in terms of deposits/ratios etc means that these price levels are unobtainable for the vast majority of people.

    I agree with you on the taxtion of Wealth and IMHO levies on privileged property rights are the simplest, fairest, and most unavoidable way of addressing the current unsustainable wealth inequality.

    First, a tax on land rental values (a ‘Location Benefit Levy’ as Dave Wetzel calls it) first advocated by Adam Smith, and then passed down through radical liberal tradition through Mill and Lloyd George, until the House of Lords stymied it at the cost of neutering themselves for good.

    Second, a levy on the exclusive use of Commons such as radio spectrum; airline landing slots; the creative commons (eg copyrights, patents and other IP) ; and on non-renewable resources, particularly carbon;

    Third, a ‘Limited Liability Levy’ on investors’ privilege of limited liability, imposed on gross – not net – corporate revenues and replacing Corporation Tax. This alone sweeps away an entire industry of largely unproductive professionals in the public and private sector.

    Finally, the Credit Commons, where those who have the use of society’s implicit guarantee of their credit should pay for the use of it.

    I think you’ll find that the only other tax necessary would be a flat rate income tax.

    Chance of implementation? Zero. Because it is the privileged managerial and owning classes who control the political and legislative process.

    But there are other ways to skin the cat and to implement such changes bottom up.

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