Money, banking & insurance

Generation bust

The structure of public spending has changed significantly over the past generation. Perhaps the most dramatic shift (in the UK and parts of Europe at least) has been the move away from government to private provision, especially in health and pensions. Nevertheless, the most dramatic trend of all - the ageing of society and how we will pay for it - has yet to bite.

Unfortunately, many governments are hugely in debt and with fewer people entering the workforce (and more leaving it) there are fewer funds for public spending. In 2011, 17% of people in the UK were over 65 and, in fifty years, this could be 26%. The shift is even more dramatic for the elderly. Those over 85 currently make up 2.3% of the UK population, forecast to be 7.3% in fifty years. As a result, state spending on pensions is predicted to rise from 5.5% to 7.9% of national income by 2060, even though state pension age is increasing to 68.

Health spending will rise even faster. It will consume 7.4% of national income by 2015 and 9.8% by 2060. If you include non-age related increases, the UK could easily be spending 15% of GDP on health by 2060. Thus health plus pensions equals 50% of public spending! This sounds high, but public spending on health, social security and social care has already risen from around 33% of public spending in 1979 to around 50% today. Over the same period, education, defence, housing and industry support remained stable or shrank.

So who or what will pay for all this? The most likely answer is tax. VAT (currently 20%) could go up or items that are currently exempt (food and financial services) or enjoy lower tax rates (domestic heating) could be taxed at the full rate. Given declining revenues from transport fuel duties (due to widespread electrification of transport) road pricing will almost certainly be extended and income taxes levied on previously taboo areas – for example, pensions tax relief.

Another likely target is wealth rather than income, especially wealth tied up in real estate. If the role of the state were to move towards that of an insurer –a safety net for individuals who cannot afford to look after themselves – then people might be asked to contribute the first ten or twenty thousand towards healthcare costs. For example, the state might only step in when healthcare costs go beyond a certain point or personal savings become exhausted. Could it be the idea of handing real estate down from one generation to the next is widely abandoned in favour of wealth de-accumulation while the owner is still alive?

There are a few fatal flaws with this argument. First, most of the numbers are based on extrapolations from current trends. What if, for instance, longevity started to reverse due to lifestyles? Second, there is little or no debate about the possible consequences of technology. Perhaps the future is much brighter than we think because of the productivity of machines. On the other hand, technology is creating less work, not more, and there has to be recognition that people are not going to have enough work in the future unless we reduce technology or create other kinds of work. This is a serious problem, especially for our youth and the middle aged.

A second thought is that spending on health is primarily the purchase of pharmaceuticals and expensive diagnostic machinery, which are sold at alarming premiums to governments all over the world. Is this really health? Until we move our health systems away from mass drug-taking, to healthy lifestyles that do not depend on drugs the debt issue relating to health will not go away. If drugs were not subsidised by governments, people would not be so willing to take them. Much drug taking is simply a way of avoiding making a change to a more healthy way of life. Easier to take an anti-cholesterol drug than eat less cheese. This is the most serious problem of all – lack of responsibility for one’s health. This is the challenge of a generation and governments are too weak to face up to it.

A cognitive elite

The richest 1% Americans had a gross household income of $US1.2 million in 2008, according to official US tax data. Some commentators say this is largely because this group is smart as well as rich. The 1% tends to send its offspring to elite schools and universities, who move to managerial positions in the professions and, crucially, intermarry with the sons and daughters of other members of the 1%. This ultimately confers a self-perpetuating cognitive advantage.

The 1% also lives apart geographically, with high concentrations in relatively small areas. South of 96th Street in Manhattan, for instance, the number of residents with college degrees increased from 16% in 1960 to 60% in 2000. A recent OECD report says income inequality within its 34 member states is at its highest for fifty years and the widening gulf is especially noticeable in seemingly egalitarian countries, such as Sweden and Germany.

Polarisation is nothing new although the trend does appear to be deepening. In the UK, the top 10% earns 12 times as much as the poorest members of society (compared to 8 times as much in the 1980s), and the top 1% doubled their income over the same period. Apart from growing inequality, another observable trend is we are actively challenging the idea that economic growth at the top is inevitably washed down to the bottom of society.

Charles Murray, who jointly wrote The Bell Curve in 1994 that controversially made connections between race and intelligence in the US, has written a new book: Coming Apart: The State of White America 1960-2010. He writes that this income or opportunity polarisation could lead to the disintegration of a white lower class unless there is a “great civic awakening” in America. This is when family (sanctity of marriage), pride in work, religion and community are all once again embraced.

The ultimate danger, according to Murray, is that cherished living standards for the great majority of Americans fall apart and with it the American Dream. The US government might attempt to fix this problem with state intervention, which is unlikely to work, especially if this involves pulling the top down to push the bottom up. His answer? Get the bottom of society to embrace the values held by the top of society. Good luck with that.

Chinese bulls

According to the head of Goldman Sachs Asset Management, Jim O’Neil, China could overtake the US as the world’s largest economy as soon as 2027. This would provoke a rethink of a number of global institutions, most notably the G7 and G8 economic groups, which are currently dominated by non-BRIC interests and thinking.

As an example, the G7 was formed in 1975 by the US, Japan, UK, Germany, France, Italy and Canada. China at the time was irrelevant economically speaking, as were the other BRIC nations - Brazil, Russia and India. Fast-forward to 2012 and things are transformed. Since 2011, the BRIC economies have seen their share of world trade double from less than 10% to around 20%. China is now bigger than Japan economically and Brazil eclipses Italy. Russia is now Europe’s largest new car market and China has skyrocketed.

Between 2001 and 2010 Chinese domestic spending increased by $US1.5 trillion (roughly the same as the entire UK economy). Overall, the aggregate GDP of the BRICs has almost tripled since 2001 and their share of world economic output is equivalent to one new Japan and Germany or five United Kingdoms.

Further BRIC economic growth is not inevitable but the most likely scenario, so perhaps it is time to redefine BRIC economies as ‘growth economies ’ rather than ‘developing economies’ and redesign a number of global economic and political institutions so they properly reflect the new world economic order. This will be difficult politically and psychologically to accept, but it’s something that needs to happen given that we really are all in this together.

The next new thing?

One day someone will make a fortune by enabling mobile payments. The latest attempt is Pingit from Barclays Bank in the UK. This is essentially a mobile application that allows registered users (currently Barclays account holders only) to send money via their mobile phone to anyone else with a mobile telephone number. This allows people to instantly split restaurant bills or send money to anyone in the world.

It’s not a new idea. M-pesa mobile in Kenya has been doing much the same in Africa since 2007, where mobile payments are now simply part of the economy. There is competition from Jack Dorsey’s Square in the US, Verifone’s PayWare system for tablet computers and, of course, Paypal. So what are the chances of Pingit winnin’ it?

The first point is signing up to Pingit means you receive phone spam from Barclays. You can avoid this by writing Barclays a letter or by physically walking into a branch. The second is more to do with innovation theory and practice. Barclays did partially invent the ATM, but when it comes to other significant financial inventions, one would tend to place bets with outsiders and non-financial institutions rather than an industry incumbent.

Potential money spinners

What’s new in terms of financial innovations? Not much, thanks largely to the perilous state of many developed economies, but there are still a few potential moneyspinners.

First up is Civilise Money, a crowd-sourced peer-to-peer ‘bank’ that aims to offer various transactional services to UK customers. It is allegedly one of the largest crowd-sourced ventures in the UK, raising GBP100,000 in only nine days and competes head on with the likes of Zopa (in the UK) Prosper (US) and iGrin (Aus). A similar, more local idea is Lucky Ant in New York (US), which aims to highlight one local business per month for its online community to either fund or support.

Next up is Ring, a crowd-sourced credit card by Barclays (UK). The idea here is transparency, with members able to discuss the service with other users, highlight problems and suggest future developments. (i.e. get free market research if you call it ‘community’) Members can see the card’s profit and loss accounts online too. Personally, this feels a little bit too contrived.

Danske Bank in Denmark last year provided a service to its customers whereby part of a bill could be photographed using a mobile phone and could then be paid by pressing a couple of buttons. Other, older ideas of note include Pre-Pay International, Swipe Good and Allow Card.

On forecasting

It is perhaps worth remembering the work of Philip Tetlock, author of Expert Political Judgement. Following a twenty-year study, Mr Tetlock concluded that experts of any professional or practical persuasion make very poor forecasters. At best, expert predictions do little better than randomly sticking a pin on a list of stocks or economic judgements.

So what can one do if one wants to make predictions? The answer, according to an essay published long ago by Isaiah Berlin (which harks back to the Greek poet Archilochus, 600sBC) is to develop a cognitive style that is promiscuous, self-doubting and meddlesome. This will, on most occasions, work far better than thinking that is based on a single worldview or logical idea.