How do we make “The Pinch” less painful?

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March 8, 2015 by Paul Goldsmith

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David Willetts, or “two brains” as he was once nicknamed, came to speak at my school this week. Willetts has been the Minister for Universities both in and out of government. He is retiring in May, which is a loss for British politics (although as Tony Benn said, retiring as an MP gave him more time for politics!). Willetts talked to us about his book “The Pinch”, which has been a very important contributor to our thinking about the challenges facing governments over the next few decades. He used an interesting analogy to explain that challenge.

In pre-historic times, when adults were hunter-gatherers, you could be defined by your ability to produce calories (get food) and your ability to consume calories (eat it). There were two times in your life when you consumed more calories than you produced, which were when you were very young and when you were very old. You were therefore reliant on those in between those ages to produce enough calories to feed themselves AND to be able to distribute their surplus to those dependent on them.

Any current welfare system is similar to this. Children and old people will consume more spending than they can possibly produce in tax revenue. Adults in work therefore have to produce enough tax revenue to pay for any spending needed on them PLUS on their dependents. The difference being of course that we pool our tax revenue to be spent as a government sees fit, meaning we as adults are left to distribute our spare disposable income on our dependents.

But the point is that there has to be enough production done to make sure that all those who are net consumers of spending can be looked after. The central point of “The Pinch” is that demographic changes mean that there are more net consumers and less net producers and that is a problem for our society that we have to face sooner or later.

In terms of policy, that means that the success of redistribution is limited, because there will be less and less to redistribute unless we somehow increase the productive capacity of those who are producing. There are of course several ways to do so, including improving higher education, attracting skilled immigrants (although that just increases “The Pinch” in other countries) and being brave enough to consider all possible solutions. This could include GM crops if it allows us to produce more from the land, better incentives to get jobs and wealth created and people back in work, investment in better technology so that our capital (man made aids to production) are more effective.

The problem with all of these is that their effect can and will only be seen long-term, and our political culture is too short term. So I hope that David Willetts stays involved in politics if only to help encourage our politicians to help alleviate “The Pinch” even whilst they are worried about their short term political survival. It won’t be an easy job.

 

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