Frequent comparisons are made these days between the plight of the British economy and the state of the Japanese economy. But in reality the two situations are very different.
Japan’s colossal public debt is financed by internal savings. So in effect Japan owes its debts to itself. By contrast, at least half the United Kingdom’s debt is held by world investors who could take their money away at any moment, or demand much larger returns for lending it.
Behind this difference is a deeper one — Japanese people have saved massively but the British have not. It is true that British savings rates have been picking up slightly in recent times but there is still no comparison with the accumulated personal savings of the Japanese, estimated to be more than ¥1,500 trillion — an almost unimaginably large figure, and far in excess of all the government bonds issued by the authorities.
This raises an even deeper question still, and one which many economists forget to ask — namely, what makes people save more in one society than another, and more at one period of history than another?
All sorts of complicated theories are advanced for the decline of personal savings in the U.K., such as reliance on the welfare state, rampant consumerism and so on. But there is one quite simple and obvious explanation. People save more when there is plenty left over between income and spending, when the money is rolling in and there is a nice cushion of spare cash to invest or hold in the bank, the post office or the building society.
And the income stream tends to be higher than spending in every family when jobs are plentiful, new businesses are springing up all the time and lots of wealth is being created by the best brains engaging in vigorous private enterprise.
Of course good public services and good infrastructure are essential as well , but this overlooks the fact that all wealth creation originates in the private sector and all public spending comes from private enterprise and work, either via taxes of one sort or another or borrowing. It has no other source.
So there is no getting round the fact that private enterprise is the driver and that no society can prosper without a well-led and highly dynamic private sector, as even the communists found out in the end.
The lesson ought to be obvious. Domestic savings will only pick up, borrowing will only cease to be less dangerous, and the U.K. economy will only cease to be so fragile and vulnerable to international lenders when private enterprise really takes off again, and when innovation and daring new thinking, which lead to new designs and products, are given maximum incentive to flourish.
The rational observer of the U.K. scene would therefore conclude that the priority ought to be to give enterprise and talent its head, put the lowest possible taxation on new businesses and the lightest possible regulation, and have as many barriers to wealth creation removed and wealth as widely shared as possible. This would clearly be the fastest route to attracting investment, generating rising revenues, and at the same time reducing the swollen social spending (on unemployment benefits etc) which a recession inevitably produces, so giving the economy a double lift out of its fiscal and debt black hole.
But unfortunately rationality is not the prevailing feature in British public policy thinking just now. Instead, personal taxes are being raised, savings discouraged, and private enterprise more tightly regulated than ever.
Worse still, an anti-business, anti-enterprise and anti-talent mood has grown up in the public debate. It is not only bankers who have been demonized. Particular venom has been directed at the best British schools, such as Eton College, for producing so many able people as business, political and professional leaders. This is attributed to privilege and class. It is conveniently overlooked that Eton, and schools like it, produce so many good leaders (as well as some losers) because they have the very best educational methods, and because they promote individualism, original thinking and the wider skills that a sound and balanced wealth-creating society requires.
To resurrect class war at this point against the best in British education is not only pointless but fatal. It guarantees that the dynamic of wealth creation will be weakened, with slow growth, low savings and dangerously shaky public finances thereby perpetuated.
Ultimately the only effective way out of the trap of deep government debt must be through higher private enterprise growth, along with high saving and high investment, from which all wealth arises. Cuts in public spending are also needed, but are always a time-consuming political battlefield and often lead, paradoxically, to higher spending still in the short term.
And let’s not forget that while British politicians are waging class war and denouncing Eton excellence, Japan has set up its own version of Eton College, the Kaiyo Academy at Gamagori, to help generate just the kind of individualistic flair and fresh thinking that modern economic leadership needs.
If a new Conservative government takes over in the U.K. in 2010 this class war against so-called toffs and against top schools may ease off, not least because the Conservative Party leader and likely new prime minister, David Cameron, is himself an alumnus of Eton College.
But in the meantime, this is one more area in which Japan and the U.K. appear to be behaving somewhat differently.
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