My post on the Reverse Robin Hood started a lengthy and interesting discussion – thanks to Andrew Oakley and Tom Ruffles for their comments. Part of the discussion came to revolve around the role of risk and unpredictable elements in people’s personal financial situations – and I must admit that I am woefully unqualified to comment upon this. Down in the City of London there are extremely highly paid analysts who sit all day fiddling with formulae to try and predict market fluctuations, and this country must have tens of thousands (at least) of highly trained and highly paid experts in exactly this area – underwriters. I have no idea how successful these methods are, but I’m assuming they must have some value. After all, if you know the outcomes of ten thousand decisions made previously, then maybe another 40 year male with a fairly academic past and many years freelancing and living without visible source of income becomes predictable. Sure, you might make errors in regard to individual outcomes, because you can never have all the data -and the same applies to market analysts – but you might hope that on average you would do well (– though as we shall shortly see, I am not actually convinced this is true!)
I think at the heart of the discussions of the last piece was the question of individual responsibility for financial outcomes. The poor may always be with us – unless we manage an imaginary “true communist” equality of money, which would end the moment someone bought something, by definition someone is always poorest. It is certainly true that we don’t seem fond of absolute measures of poverty, and this can lead to problems in our understanding and policy decisions – poor children in the UK today are probably a lot better off that say poor children in the UK in 1950 -most have shoes and a meal a day at least?
I think, and I may be wrong, that Andrew thinks most financial outcomes are predictable, given good planning and money management. Tom and I (and again this is my impression, speak up if i am misrepresenting you) are more inclined to believe that random factors may play a large role in how ones personal finances pan out. I don’t think any of us think its all one or the other: Andrew clearly accepts that random factors can cause problems, but simply believes they can often be mitigated by shrewd money management. Tom and I suspect that some situations may place one in a position where no matter how careful one is, you may end up in real trouble. Yet clearly many people who end in financial trouble have been extremely reckless, and at least partly instigators of their own downfall. (And I would go as far as to say that the State does much to cushion the blow these days compared with in the past, and that equally our culture is geared to actually promote fiscal risk taking, indebtedness and bad financial management by individuals. But I would say that, I don’t have any credit card etc, wouldn’t I?)
The Deserving (and Undeserving) Poor
In fact it seems to me we are rehashing one of the great debates of the last few centuries. It certainly filled the 18th century mind – and it was a major theme of 19th century thought. We are back on the question of the deserving versus undeserving poor.
In my last piece I commented on how I missed the security of the bi-weekly giro, and having my dole money guaranteed. I sympathised with those who work, and are on bitterly low incomes. I may have here been apparently aiming at a deserving/undeserving poor distinction, but that was not my intention – I was actually trying to point out that for many self employed, freelance and entrepreneurial types there lives are marked by a greater degree of uncertainty in financial matters than for those who receive state benefits. If you look at what the average UK soldier serving abroad is paid, or many low grade civil servants, you will notice they face the same problem. Those in manufacturing also have the problem – the uncertainty of th future of their jobs. So at least on the dole you can plan, to some extent, and know it will never be more than 13 days till your next payment — assuming they are still bi-weekly – the days when I used to sing a little song to thank God (and the British taxpayer) for my giro have long since passed…
Now once we get in to the deserving/undeserving poor debate we instantly hit problems, and are conditioned by our Right Wing or Left Wing political roots. After all, the modern Conservative and Labour parties were shaped by these questions, and the response, be it Socialism or Social Darwinism or whatever is deeply ingrained in how we see the world. People always say to me “I’m not interested in/don’t understand politics” Actually they are an ddo – they just don’t feel any interest in what happens in Westminster, and don’t understand the minutiae of the British system or what the parties stand for – but they generally can grasp the actual politics, because it comes down to Big Questions which are easily graspable, if impossible to easily answer.
I’m not going to rehash all the thought of two centuries and political responses here on the so called deserving and underserving poor. I will note it is my gut feeling that no one hates the undeserving poor more than the deserving poor do – the British Working Class appears to me to have a real horror of “benefit scroungers”, “junkies”, “drunks” and “gamblers” and others they categorise as the undeserving poor. I’m not actually convinced the categories are all that important – if you place genuinely stupid people (and half of British citizens are below average IQ for a British citizen after all!) in a situation where they are offered easy interest free credit, mortgages for huge amounts based on nothing more than what you can lie to claim you earn, and then bombard them with shows about exotic foreign holidays and advertisements implying their lives are not worth living without the Gizmogadet 2000 what do you honestly expect to happen?
Politicians Are Predictable
Before I start the heart of my argument though, I guess we should consider wht this deserving/undeserving dichotomy may not be useful. To Labour, well it’s obviously nonsense: they see people’s financial situation as situated in a wider social context, so that market forces and teh economy are responsible for poor people, not the fact these people are reckless or lazy. To the Conservatives – well Cameron has told the fat and the poor it’s their own fault. That’s me told twice then! In fact he is keen to qualify this —
“Of course, circumstances — where you are born, your neighbourhood, your school and the choices your parents make — have a huge impact. But social problems are often the consequence of the choices people make.”
So both political parties manage to continue the debate by stating the bleedin’ obvious, in line with their Left and Right wing prejudices. Of course if you are laid off because your factory closed because US mortgage brokers gave money to people who never could or would repay it, it is not your fault if you suffer financial catastrophe. And of course if I go out and spend all my weekly disposable income on, I dunno, Dominos Pizza (thats easy – one medium 11″ pizza, one chicken wings starter for dinner tonight — and I have absolutely nothing left after that for the rest of the week for food, electric, water or gas bills — job done!) then it’s my own stupid fault. I could have bought pasta, cous cous, jacket potatoes, some cheese, butter and a loaf of bread, and still had a fiver for the bills.Trust me, I bloody know! 😦
So Labour blame the economy & society, the Conservatives the individual. Or rather that is there emphasis – both clearly realise that both are true. The Victorians tried a slightly more novel approach – the Poor House, where you were locked up, separated from husband or wife (to stop you breeding more poor kids) and set to work, while being lectured on the folly of your choices. I dunno if it worked, because it was not really for the benefits of the inmates, but rather designed to inspire horror and a real terror of ending up in there. Many of these buildings still stand, bleak reminders of the social trends which culminated in the inscription over the gate at the concentration camp at Auchwitz – “work makes you free”. Yeah right…
We have heard a lot in recent weeks about Labour’s pledge in the Queen’s Speech to abolish child poverty. I’m genuinely baffled by this one – the major cause of child poverty might just be poor parents who don’t look after them properly or can’t, because they have no money? No if those parents are poor because of the credit crunch and losing their jobs, or are poor because their parents spend all their money on SKY TV and drinking down the boozer, whether Labour or Conservatives are right, what difference does it actually make to the poor kids? Might I hazard a guess that poor kids of the undeserving poor are just as miserable as poor kids of the deserving poor? Neither chose which family to be born in to after all?
Let’s go budget!
Still, at last I will address my main point – how predictable is financial disaster? Using this handy budget calculator and basing my figures on an 18K salary, with no kids, renting in a cheap area (in this case Derby) I can assure you that a couple will struggle to survive, let alone save. In fact I worked out after the cost of getting to work, bills, council tax, rent, and a £50 weekly food shop their disposable income is less than a hundred pounds a month. Unless one partner is earning maybe 21k + a year, you can’t afford to actually have a homemaker or stay at home partner anymore, because our economy is predicated on dual income households now. In my figures I was scrupulous to keep costs to an absolute minimum – these puritans do not drink, smoke, go on holiday or eat out. (They do have internet and phone though!) Yet they can not possibly hope to weather any unexpected financial set back, and are budgeting only £10 a month for clothing. They might be able to put maybe £10 a month in a savings account – but to get interest much above the rate of inflation they need to tie their money down for a long period – which is exactly what you don’t want to do if you are trying to save against sudden unexpected costs. And let us remember that HSBC have declared that current account customers don’t want interest on their money, as they would prefer it went on higher rates on other accounts! I don’t recall them asking me, I must have been out that day. 😦
Now a lot of this comes down to energy costs – maybe they will fall. Here Labour’s analysis scores points, because gas, electric and petrol prices have a major effect on most households finances, but are not controllable by the individuals. Rents have remained pretty much static, while of course mortgage costs have generally plummeted again with the drop in interest rates. Unless you are Governor of the Bank of England this is again outside your control — I have no choice but to pay the rent, my main priority, and I always do. These factors do seem n the buget I looked at to make a huge difference.
So financial responsibility, what you spend your money on – sure it is important. But it only cuts in when you cease to be poor. In my situation it does not seem to make a lot of difference – when your disposable income is under £80 a month, you ain’t gonna have many choices to make.
CJ & the Beggars
This actually reminds me of something which appalls many of my friends. When I have money, I sometimes slip a quid to a genuinely messed up looking beggar on the streets. “but they will spend it on drugs or booze!” they cry. And I reply “good for them!” Why? Because actually when you are really poor, it’s not the lack of money which really degrades and makes you miserable – it is the fact you no longer get to make many choices. I can reliably predict what I will eat next week, and the week after, and the week after that. I won’t be buying much, because I can’t. I might get to make the choice between two titles in a second hand book shop if I am lucky. Poverty erodes choice, and erodes personal responsibility – because you can’t learn how to be responsible when you have nothing to be responsible with.
The Inevitable Passing Reference to the Credit Crunch
As Axel and others who have listened to me moan over the years know, I had long been predicting a Credit Crunch based on the fact that UK mortgages no longer bore any resemblance to actual bricks and mortar costs or annual incomes and salaries. This was not based on any economic brilliance on my part, but upon a simple understanding that if people defaulted and banks stopped lending, well a lot more people would face the situation that the deserving and undeserving poor face every day – No Credit. In fact a good way of telling how depressed a part of town is is to go in to a shop, and look for the felt tip sign posted above the counter “Strictly No Credit”. Then go to the richer part of town – and see the Store Card adverts, and the endless encouragement to take interest free credit (“subject to status” – in other words if you are CJ and you have wandered in here, piss off!).
The Undeserving Middle Class
Many of the “undeserving poor” may actually have high incomes I guess – and far more choices – they just made bad ones, and are now faced with ruinous credit card debts for that holiday they enjoyed in some hot exotic location, the repayments on their flash car, and the huge amounts they spent at Waitrose and Threshers or wherever rich people shop. A couple of generations grew up expecting a nice house, nice car, nice holidays and well nice things – hell I’m heading in to a Jamie Reid single cover for the Sex Pistol’s
Perhaps when we talk about the undeserving poor, who blew their money on bad choices, we actually mean the British Middle Class- the people who actually had the capacity to make serious financial choices in the first place? Maybe that is why this is so deeply ingrained in Cameron’s view of poverty – because he reflects the deserving, hard working and frugal middle classes, and the deserving poor working class (who make the best of very limited means), who can’t imagine how people would make reckless choices like investing in the markets, pensions or shares? I jest of course – but I do notice that bastion of Conservatism the Daily Mail seems a lot more worried about “House Prices Plummeting” than about how those working for the NHS on 12k a year like Lisa are meant to pay their share of the rising gas bills? Should we not castigate those foolish enough to irresponsibly put money in houses in the belief property prices will never fall, or who could not read the small print that reminded them that the value of their investments could go down as well as up? But enough teasing the noveau pauvre! It may shock many people, but I love the British Middle Class, who encapsulate much which is great about our nation – I just get tetchy when one group are labelled undeserving, profligate and irresponsible, but others who made equally bad decisions, but are seen as unfortunate victims of greater forces – regardless of the party proclaiming the double standard. Maybe it is just my inherent left wing biases showing?
It seems clear to me that the middle class investor who lost big in the Credit Crunch and the working class person who lost their job are equally victims of circumstance, and that they can not really be held to blame for their choices – but the investor did get to make more choices in the matter than the person laid off. Yet for some reason they attract more sympathy? I actually feel deep compassion for both – ’tis rough on all at times…
So Let’s Get Back To The Point
So how predictable are financial emergencies? This was where we started, and where we return. I’m going to look to an unlikely source to resolve this – after all I have no statistical data at hand – David Hume, the great Scottish Philosopher. (Of course I recall Dire Strait’s song Industrial Disease (link contains sound)– listen to it and you will get the joke – but anyway…) Hume made famous The Problem of Induction: nd the second part is relevant here –
presupposing that a sequence of events in the future will occur as it always has in the past (for example, that the laws of physics will hold as they have always been observed to hold.)
Which brings me back to those market analysts and underwriters, who try to generalise rules from past data, and who try to make models that predict based upon that data. How well do they perform? I dunno, I’m guessing that is sensitive commercial data. My guess is not that well. Some will get lucky, some unlucky, and ost will perform as well as the data they have available and inherent unpredictability of financial markets allow. Because yes, as I have been hinting, I think markets are fundamentally unpredictable, and I think personal finances are similarly chaotic.
The Tory emphasis on sound fiscal planning and personal responsibility makes a lot of sense and to some extent is rooted in our Judeo-Christian heritage (but then read Job!). The fundamental assumption is that people are to a large extent responsible for their personal financial outcomes. I question this assumption on a number of grounds. Firstly, the playing field is not level. I have done pretty well in some ways in terms of education and using the talents I have – I’d like to believe that I might have done better if I had more opportunities when younger, and particularly if I could have got a PhD in something I wanted to so I could keep lecturing, the single thing I was best at. Hey, shit happens. A few knocks, set backs and I sunk forever in to the great unwashed. It happens. Others start off much worse off, and do much, much better. But no one can pretend on average we are an equal opportunity society yet. Born poor, you tend to stay there you know? (Darwin in one of his few reactionary moments argues this was good, or humanity would cease to struggle and evolve. This was why he opposed Trade Unions and industrial reforms. Shame, he was remarkably liberal in most ways!) Still for 10K I could have returned to lecturing – and then I could have had a slightly rosier future. But I never had it, could never borrow it, and my studentship applications never worked out.
Secondly, the future is not predictable. Why? Because we do not exist in a financial vacuum. All kinds of decisions from others, from the gang of muggers who decide to use your head as a football, to the decision of American mortage brokers, to government policies, to the laws of the land and moral responsibility, set limits on personal freedom and choice, and upon the outcomes we face. The citizens of Herculaneum and Pompeii might have saved and practiced Stoicism and financial probity, but on August 23rd, 79AD, they learned that living under an active volcano was not so wise.
I saw plenty of right wing US claims a few years back that the victims of the 2003 Asian Tsunami should have chosen to live somewhere safer — but few explanations as to how that was a financial reality for them, or how they were meant to assess the risk they faced. I suspect a lot of them may have not fully paid attention to the subduction class in their plate tectonics education at school, as obviously this must have comprised part of their elementary school education? Well maybe not. Maybe they lived where they did because they knew no better, and because their families had always lived their, their livelihoods were there, and Alfred Wegener’s theories on Continental Drift passed them by because they were dreaming of affording another goat next year? Can anyone really blame them for not knowing their worlds were about to catastrophically change? No – because very few people if any knew that.
And this is how I perceive the world: we are perhaps little more in control of our lives than those people were. Financial outcomes are not predictable. All we can do is try to save when we can, to alleviate poverty and distress where possible, and to try our damnedest to actually help people make informed choices, and drag themselves through. We are like doctors – preventative medicine is laudable and a great cause, and we should encourage sensible health measures – but if a new disease like SARS or a new Flu breaks out, a new unforeseen disaster – we can only fight to save the victims. We might have made all kinds of contingency plans, and perhaps like Mormons we have stockpiled a months canned food for this scenario or similar, but ultimately, if a hacker cleans our bank accounts out, we can only check if we were following sensible security precautions. If the bank’s computer system was compromised. and yet we can’t make a mortgage payment while we try to get compensation sorted, whose fault is it?
Chance, risk, the unpredictable, the irrational and unpredictable actions of others – for long I have worried that our economists assume markets are rational, when all the evidence shows me that humans are often quite irrational in their economic activity – all these things clearly impact upon us. Of course our personal responsibility is vital; of course we must plan to make the best uses of our resources to cushion us against the blows of fate – but ultimately, rugged individualism is possible only to the extent one has the power to make choices, and the resources to prepare – and the poor have far fewer options here??
I’m sorry to write so much – thanks to everyone who took part in the previous discussion. I fired this off in an hour, in one sitting, so it might not make a whole lot of sense. Thansk to anyone who troubled ot read i tthrough.