One of the biggest economic stories to come out of the pandemic is the massive increase in the amount of money households are putting aside in savings. In the UK, the savings ratio reached 27% of disposable incomes in the second quarter of 2020, up from 6.3% in the third quarter of 2019. In the US, the figures were 25.8% and 7.2% respectively.
The dramatic uptick in savings rates in the US and the UK represents a stark reversal of the pre-pandemic trend of falling savings. For example, 2017 was the first year since the Lawson boom when households borrowed more than they earned, either reducing their saving or taking out new debt to compensate.
The rise in debt seen before the pandemic can be traced back to the financial crisis. Before 2008, household debt had grown to its highest levels ever in countries like the US and the UK. The crisis, which saw rising unemployment and falling wages, encouraged households to repair their balance sheets – i.e., pay off debts and save in order to protect themselves from the impact of the recession.
The problem was that the more people saved, the less they spent; and the less they spent, the deeper the crisis became – especially in an economy like ours, in which household consumption accounts for around 70% of total output.
This ‘paradox of thrift’ is nothing new, Keynes wrote about it just under a century ago. He argued that in the wake of a crisis in which everyone was trying to repair their balance sheets, it was up to the state—which could borrow cheaply and was unlikely to default—to backstop demand by spending when no one else would.
Of course, after 2008, states all around the world did exactly the opposite. In the UK, massive cuts to public services were introduced in the name of fiscal ‘responsibility’, which was in fact the most irresponsible course of action at the time.
Austerity ensured that the recovery from the financial crisis was the slowest since the 1930s. The ten years since 2008 saw the longest stagnation in wages since the Napoleonic wars and as a result, many households struggled to repay their debts and build up savings.
Enter ‘independent’ central banks. They cut interest rates to zero (or near zero) and embarked on an unprecedented experiment in quantitative easing, through which central banks created new money in order to purchase assets from private investors.
On the one hand, central banks were forced to keep interest rates low after the crisis, otherwise they would have choked off the recovery. On the other hand, low interest rates often weren’t passed on to less well-off retail customers, instead benefitting those who already owned assets. And quantitative easing simply served to raise asset prices across the board, providing a massive giveaway to the wealthy.
What the whole post-crisis monetary experiments showed is that there is not one economy, but two: one for the rich, and another for everyone else.
The former can use their high incomes (or family connections) to acquire wealth and use it as a form of private insurance. When they’re hit with a recession, they can sell or borrow against their existing assets to protect their standards of living.
And when the recovery begins again, they can use their wealth as collateral for more borrowing, which allows them to acquire yet more assets. As Piketty showed in Capital, the fact that the return to wealth often exceeds the return to labour continuously deepens the divide between the haves and the have-nots.
Those on low incomes and without personal or family wealth aren’t so lucky. During recessions when they see a fall in wages or unemployment, they’re forced to borrow to make ends meet. Without any collateral, and often with poor credit, they’re charged usurious rates of interest by our oligopolistic banking system.
When the recovery comes, they’re too busy repaying the debt they accrued during the crisis to acquire any new wealth – and as soon as they’ve repaid their old debts, they’re hit by another crisis and forced to take out even more.
The divide between the two economies has become even deeper during the pandemic. Wealthy professionals are disproportionately likely to have kept their jobs, own their own homes and have private pensions. Their wages have remained relatively high, they’ve been given a break on their mortgages, and they’ve been forced to reduce their spending down to essentials. The money they have saved has been invested in financial or housing markets, which have torn away from the real economy.
Meanwhile, those who were on low incomes before the pandemic are disproportionately likely either to have lost their jobs or seen a fall in pay. Most of their spending already went towards essentials, meaning they’ve been less able to save. Many already had substantial debts and are now struggling to make ends meet: a study from the ONS has shown that 20% of adults in the UK have gone deeper into debt as the pandemic has progressed.
If they’re still in work, those in this group are less likely to be able to work from home, meaning they still have travel expenses. They’re also disproportionately likely to contract the virus, meaning they’ll have to take time off work on the UK’s extraordinarily low sick pay of £95.85 per week. Trade unions have been warning that many workers are refusing to get tested out of a fear of losing out on pay.
Central banks struggle to cater to both groups – and increasingly they’ve stopped trying. In an economy in which millions of people (and, as I’ve written previously, corporations) are trapped in a cycle of debt, it’s effectively impossible to raise interest rates. But extremely loose monetary policy mainly benefits the wealthy, exacerbating the divide between rich and poor.
Monetary policy wasn’t designed to deal with these distributive issues: fiscal policy was. Taxing the rich and investing in public services and social security both smooths the business cycle and reduces inequality.
The problem is that our government was elected by those with wealth: home ownership is one of the most important factors in determining whether one votes Conservative. Meanwhile, the bottom half has been dropping out of the electorate en masse since 1997 as both parties have utterly failed to represent their interests when in government.
In other words, there is no technocratic fix to the solution of inequality: our economy will only start to serve the interests of working people when our democratic institutions represent them.