Assets, inequality and the crisis.

Author:Prabhakar, Rajiv

The global recession has revived the fortunes of Keynesian political economy. 'Keynesian social democracy' was influential in both ideas and policy for much of the period in Britain after the end of the Second World War. However, this approach was eclipsed by the rise of free market ideology and policy since the 1970s (Marquand, 2008). Current events have, however, raised the profile of Keynesian ideas.

In his General Theory of Employment, Interest and Money, Keynes wrote that the 'outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes' (Keynes, 1936, 372). Building an egalitarian property-owning democracy was an important theme of a later generation of reformist thinkers such as Anthony Crosland and James Meade.

In this article I suggest that measures such as these could form part of a renewed Keynesian political economy and as such assets are still relevant today. However, such a stance would mean a change in the present direction of government policy, with more weight on tackling wealth inequality rather than stimulating a savings habit.

New Labour and asset-based welfare: kick-starting a savings habit?

Asset-based welfare is one of the most innovative parts of the Labour government's social policy agenda. Asset-based welfare suggests that the individual ownership of assets such as savings is an important part of individual welfare (Sherraden, 19991; Paxton, 2003).

The Labour government has led the world with the introduction of a Child Trust Fund (CTF) which provides all babies born from September 2002 with a [pounds sterling]250 or [pounds sterling]500 grant from government, with the higher endowment going to children from lower-income backgrounds. These grants are supposed to be placed in special accounts that are locked for 18 years. Up to [pounds sterling]1,200 can be saved into these accounts each year. At age seven, the government places a [pounds sterling]250 or [pounds sterling]500 top-up in these accounts (HM Treasury, 2003; 2006). The government has added to this agenda with the announcement of a Saving Gateway policy which provides for the introduction of special savings accounts for those on low incomes from 2010. Government will match 50p for every [pounds sterling]1 saved in these two-year accounts. Up to [pounds sterling]300 government contribution is available after a person has been saving for two years. The match is only available for those months that a person has been saving.

The dominant way that the Labour government has shaped asset policy is as a way of encouraging saving among the population (Finlayson, 2008; Watson, 2008). The 'CTF is a vital element in the Government savings strategy which aims to ensure that a range of savings products is available to suit people at all stages in their lives' (HM Treasury, 2003, 1). The titles of the initial consultation documents Saving and Assets for All and Delivering Saving and Assets highlight the connection between assets and saving (HM Treasury, 2001a; 2001b).

However, this rationale has suffered because of recent events on financial markets. One report noted that a third of a billion pounds has been wiped off the value of Child Trust Funds owing to falls in share markets during 2008 (BBC News, 2008). Liberal Democrat shadow chancellor Vince Cable remarked that:

the irony of this whole exercise is that a scheme that was primarily designed to encourage people to think about long-term savings, may have exactly the opposite effect. Because if--for the first time in their lives--people have actually saved money and they've saved it through this scheme and they've lost a lot, the lesson they're going to learn is this is not a very sensible thing to do. (reported in BBC News, 2008) Does financial turmoil undermine the case for asset-based welfare? Is asset-based welfare an irrelevance in the face of current financial events or worse a cause of present problems? The current financial crisis has affected many areas of economic activity, not just assets. Closures of prominent high street stores in Britain such as Woolworths as well as bail-outs requested by the US car industry highlight the general risks facing the economy. Problems are not unique to assets and so remarks about assets should be made in the context of general economic challenges.

However, on the specific point about the CTF, the effect on saving remains an open question. Falls in stock-markets have had a negative impact on those CTFs containing investments in equities. The overall impact on saving remains to be seen. CTFs are a...

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