Libertarians and the Banks

by D.J. Webb

We were told today by the Office for Budget Responsibility that rising longevity will mean another blow-out in the public finances by 2062. Health, pension and social care spending will all rise rapidly.

I am not trying to play devil’s advocate in the Libertarian Alliance here, but to flag up a necessary discussion. All libertarian analyses so far have tended to just affirm that privatising everything will solve this problem. True, if health, retirement provision and social care provision are all privatised, and presumably income tax and national insurance abolished, it would remove the implications for the **public** finances of demographic ageing.

But the implications are still there for the economy as a whole. The difference is that, after privatisation, it becomes a private financial problem. However these matters are handled – this is the key point – spending in these areas will have to rise as a proportion of GDP. Even if that spending is purely privately undertaken, it will still need to rise as an overall percentage of UK GDP.

This point has not been taken on board by libertarians. My personal view is that the extended family was a good mechanism for the handling of some of these affairs. Take, for instance, China, where it is illegal not to provide for your ageing parents. Casually assuming the state will pick up the tab is just not permitted in China. However, someone has to pick up the tab, and rising spending on age-related services has to have an impact on the real economy, even if the spending is private. Similarly, there was a time when daughters-in-law assumed they would have to care for their mothers-in-law eventually, although that may not be a system easily replicated in the modern day, when people expect to live longer. Possibly, were the family to be made responsible for their ageing relatives, they would have to club together to bring in nurses and carers at their collective expense.

As you can see, privatisation doesn’t solve the problem. It possibly even exacerbates it. The system (whereby pensions are drawn from current taxation) taxes money being made in the present to cover bills falling due in the present. As those bills climb, the taxes to fund them would climb, but at any rate no attempt is made to “pre-fund” the age-related costs that will fall due in the future. There seems no way round the fact that bills falling due in 2062 will need to be met out of money being made in 2062. Tins of beans can be stockpiked, but care home services can’t, so, however retirements are financed, current national income will always have to be the source for current expenditure in these areas – and privatisation does have the additional effect that it fails to distribute the rising costs equally among the productive population. Presumably, if these services were privatised, one person may have no living parents and would incur no costs; another person may have two ageing parents suffering from long-term illnesses and face crippling costs.

Removing the state from these areas is generally accomplished by financialising the services. Everything is becoming a financial service nowadays. Pensions, student loans, health insurance, pet insurance, nursing home insurance, etc, are among the products that are set to expand rapidly in the future, with the problem in tow that our lives will be even more mortgaged to the banks and other financial services companies than they are today. Libertarians need to be thinking of how to get the state out, without getting the banks in. As far as I know, no one has addressed this problem.

Financialising retirement provision is done by investing for the future. As more and more services are privatised and financialised, a larger and larger wave of investment funds will have to find a productive home every year from now on. Even during economic slumps, this wall of money will carry on coming, raising the risk of malinvestments. Investing money in a financial product is not a guarantee of an income in 2062. This is because it is not at all the same thing as stockpiling tins of beans. Money is just 1’s and 0’s on a screen. Investment of huge sums means that asset prices (property and stocks) are, over the long term, likely to be looked to to provide the appropriate return to finance the investors’ retirement plans. However, the strong likelihood is that this will have the effect of constraining the growth in private consumption spending, permanently – holding back one part of the economy – while probably not finding adequate outlets for good investment returns. Property bubbles and stockmarket bubbles are the likely result, and if the real economy (growth in productivity when it comes to producing goods and services) has not expanded sufficiently by 2062, these investment products simply will not pay out as much as the investors hope. Inflation is a likely result, as goods and services are simply more expensive than expected in 2062, with much lower real income returns than investors had hoped.

In the final analysis, the existing state pension system, by failing to pre-fund, recognises the economic fact that in the real economy, current spending on the aged must come out of current national income. Even if investments are made, they do not change the fact that productivity has to assume a certain steep climb over the next fifty years in order for current spending on the aged in 2062 to be easily met out of national income in 2062 without a sharp fall in pensioner welfare. From the point of view of the real economy, it makes no difference if pensioners in 2062 are spending money derived from income drawn down in 2062 from an investment vehicle set up in 2013 or spending money drawn from income taxes in 2062: it will still be the case that current national income is being spent. So to that extent, other than placing tins of beans in hangars, it is not possible to pre-fund pensioner provision. Investment vehicles appear to do so, but will only pay out enough in 2062 if productivity in the real economy has risen sufficiently.

One could ask whether investments will help the economy to grow faster. Ours is already a capital-rich society, and, presuming the state successfully encourages us to start saving more for our own futures, will become more so, as our economy become geared towards savings. This may mean more funds are available for businesses to tap, as more and more money will be constantly on the search for profitable investment, but the likely bubbles and inflation along the way pose the question of how satisfactory the returns will be. Put another way, we may ask whether cutting the state now would help to improve productivity growth rates over the next 50 years, allowing the investment vehicles to produce an adequate return.

It would probably be the case that libertarian economics gave a shot in the arm to productivity increases over the next 50 years, but our likely trajectory is to continue with a large state, but require greater and greater private provision. It seems to me this is a recipe for disaster. Red tape and taxes now will prevent sufficient increases in productivity. The real economy is more likely than not to disappoint over the next 50 years, even as more and more people try to pre-fund their retirements, and take out health plans and much else besides, with the result that these financial vehicles underperform. We need to be thinking more along the lines of how to reduce the rise in costs in areas such as social care, which are ultimately underpinned by land prices, high living costs (as a result of taxes and land prices) and insufficent operation of a free-market in such provision as care homes all charge the maximum the local authority will pay. Instead of huge and complex social health insurance vehicles, how can we make sure hospital operations can be performed cheaply as well as well: transferring the cost to the private sector does not ensure it, and may even simply result in a doubling of surgeons’ salaries and a huge rise in compensation suits, with lawyers picking up most of the benefit. State-backed insurance systems may simply allow doctors to pay themselves large salaries. Insurance systems may subvert the principle of local pay negotiations conducted by each hospital, by providing a constant stream of money that allowed pay to rise and rise every year. How could we ensure that health insurance schemes forced costs down by means of the bargaining power of the insurance companies? This is not, at least, how the system works in the US.

It seems to me that we are on the verge of a huge increase in the role of financial services in our lives, with a considerable risk of the formation of financial bubbles to dwarf anything seen in 2008. Simply calling for the state to get out of the way doesn’t solve this problem. If not handled well, the rolling back of the state greatly exacerbates the problem.

3 responses to “Libertarians and the Banks

  1. People didn’t seem to like the article – but I am thinking more along the lines of a healthcare system cheap enough to use without insurance. For example – do you take out lifelong insurance in case of having one day to buy a new suite? It’s true they cost £3000 or more sometimes – but would you pay £10 a month for life to cover that risk? or do you just pay it when you need it?

    Why is it that in America some operations cost $50,000, or more? I would say the insurance products boost the doctors’ salaries and defeat a proper market pricing. Then you have the compensation culture and the insurance the hospitals take out against lawsuits – I would argue there should be no cash compensation payments. Eg a dead baby should not = a lottery payment. Maybe it should = the doctor struck off for life, but no money should change hands. The only exception is where someone is rendered quadriplegic through a hospital error, when the hospital should pay for life-long are. But most of this compensation culture should just be stopped.

    Look! Unless the doctors are being paid $10,000 per operation, there is no reason why an operation should not cost £1,000 or £2,000 or £3,000 in the case of the most complex ones. Like the cost of a suite. True, there is expensive equipment there, but it is not single-use equipment.

    There may be other factors, such as insufficient people studying medicine in university. And this nonsense of sending nurses to study for degrees.

    Come to think of it – why are dentists’ fees so high? Often you are there 30 minutes – anti-competitive practices seen to be rife in healthcare.

    So I am thinking more along the lines that we need healthcare that you don’t need an insurance product to pay for – or where the insurance payments would be lower because the overall cost is not inflated.

  2. David,

    I’m very busy at the moment so I’ve only skip-read, but I at least “liked the article”. In particular, you’ve hit a particular nail on the head in pointing out that elderly provision comes from current production, and whatever money you stockpile, a loaf of bread eaten by a pensioner has to be produced at the time by somebody else. As such, questions of monetary policy kind of miss the point.

    If your elderly population is rising, they become an ever greater burden on *current* producers of goods and services, however the funding works. And that’s the problem of a society with an ever increasing lifespan and expectations of standard of living.

  3. Yes, thanks for that Ian. Also I see a future where people leave university owning £50,000, struggle to buy houses worth an average of £250,000 via mortgages, take out insurance to cover the risk of nursing care (I think the govt was thinking about making this compulsory) and also take out hefty health insurance to cover medical care – and and then pay income tax, national insurance and council tax on top – and they will see 75% or more of their income purely devoted to servicing the state (and its debts) and these private-sector financial vehicles, with little left for genuine consumption. We’re getting deeper in it.