Matthew's RSA blog

Savings Gateway

Maybe it was the end of a long day but I was pretty churlish about the Government’s pre Queens Speech on Radio 4 last night. In fact there is much in the announcements I like.

For example, while I understand the concerns of small businesses, the overwhelming employer view of the right to flexible working has been positive and I don’t see why this shouldn’t be the case with its extension.

I also hope consensual progress can be made on Lords reform and party funding.

But I particularly welcome the announcement on the savings gateway. This was a policy that was first advocated by the think tank IPPR when I was its Director. It is the sister policy to the Chid Trust Fund, both being aimed at tackling the growing inequality in asset ownership and the high proportion of people who have no saving at all.

By incentivising low income savers the policy encourages thrift and responsibility and so it can be seen as explicitly ‘pro-social’. When we were debating the idea several years ago some economists said it was wrong to encourage poor people to save as the ‘utility maximising’ thing for them to do was to spend all they had. But poorer people themselves tend to disagree.

Even if they only save a few pounds a month it gives people something to fall back on bad times and a nest egg for special occasions and life changes – the kind of thing many of us take for granted.

Free as ...

This week I’ve been recalling the iconic line from Withnail and I, “Free to those that can afford it, but very expensive to those that can’t”.

This sprang to mind while reading in the Guardian about Freeconomics – Chris Anderson’s idea that companies are giving away many of their goods for free, and opening up new revenue streams elsewhere. For example, a colleague recently upgraded her phone with a particular network, and in return received not only a free new phone, but also an i-pod nano.

The business model here is based on the assumption that since i-pod will only play i-tunes formatted songs, Apple is broadening its consumer base. Given how cheap manufacturing has become, thanks to globalisation, it is actually a cost effective way of distributing goods and then making people pay for the services later.

In large part major corporates are responding to the rise of what Matt Mason (who spoke here yesterday) calls The Pirates Dilemma – which is about how corporations can compete / collaborate with the people who distribute their intellectual property without paying royalties or receiving consent.

The new economics of the internet is part of a more general reappraisal both of the ‘big’ economics of markets, risk and regulation but also the day to day economics of our own consumption patterns. Things can change quickly.

Twenty years ago the value of a family house in the London suburbs was equivalent to the cost of about 400 good quality video players. Now, even with the housing market slowdown, you could buy 16,000 multi functional DVD players for the price of the same house. In the 1980s we would have expected to pay a lot more for an item of clothing than a basic foodstuff but now you can get a perfectly serviceable t- shirt for less than a good loaf of bread. It’s easy to get disorientated about the real costs and value of stuff.

With food and raw material shortages, and climate change, a key issue in the politics of consumption is waste. Whether its white goods with built in obsolescence or the tons of good food we chuck into dustbins every day I wonder whether we are approaching the end of the disposable society.

We have no idea how much producing a kilo of meat costs in environmental or economic terms, we have no idea what the real costs of making our i-pod are in labour or any other sense. We suspect corporations of overcharging for cheap goods – and they may well be in some cases. But what we must do is regain some perspective on consumption, for the good of our planet, or even just for our own peace of mind.

Money, money, money

Investment and the sub-prime crisis aren’t normally topics for my blog – but recently two pieces, one in the Times and the other in the FT caught my eye.

On the one hand you have the always entertaining Jonathan Guthrie in the FT. He points out that the sub prime crisis is leading to an inevitable bonanza for litigators. In the US this has already begun in earnest, and Guthrie suggests it will soon start in the UK.

As he memorably puts it ‘Rating agencies must feel as vulnerable as a nude gymnast performing squat jumps in a porcupine farm’. If the US model is anything to go by they have reason to be nervous, as pension firms sue ratings agencies for diminution of share value.

In the Times Jamie Whyte, author of Bad Thoughts: A Guide to Clear Thinking, says that the idea that, in the light of the sub-prime experience, we should regulate to protect investors from bad advice and bad investment is tantamount to arguing that because we should regulate romantic relationships to reduce the possibility of people being jilted.

For Whyte the very idea of regulation in an area of free choice is problematic; ‘Once risks are known, regulating them is worse than useless. It can only move the price of risk away from, and usually above, the market price. It encourages financiers and investors to seek profit in areas where the regulators are not imposing their burdens – namely those where the risk are poorly understood’ 

Now, Guthrie is not advocating litigation merely predicting it, and litigation is not exactly the same as regulation (although if successful litigation establishes case law it will tend to have a similar impact to liability imposed by regulation). But these articles point to two different views of the rights of the consumer or investor.

Whyte relies on the principle of caveat emptor, while Guthrie suggests that people who have taken bad advice will naturally seek redress against those who gave them the advice.

The RSA’s Tomorrow’s Investor will be exploring just this dilemma. We will expose a selected group of small and ‘indirect’ investors to a comprehensive picture of how decisions are made about ‘their’ money. We will explore how sound are these decisions and also their ethical dimension.

At the end of the forum the question is whether, when the investors have these insights, it makes them want be more active, to have better protecting or more effective intermediaries. I’ll make sure we send Jonathan and Jamie our findings.