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By Root 1654 0

Employers can set these up—it doesn’t have to be a government policy. Financial regulators can insist that banks and finance companies play their part in the way they structure accounts. For example, do they make it more or less automatic that money in a checking account above a certain limit is “swept” into a savings account, where customer inertia is likely to leave it? The banks would rather have it sit in the checking account earning zero interest. But the way many banks exploit customer inertia at present—in exactly the opposite direction by requiring people to make an effort to get the best rate of interest available for them—is nothing short of scandalous. Is it too easy for people who cannot really afford the repayments to get credit cards and loans? The evidence of the boom and crash suggests it is.

Economic incentives can be strongly supplemented by other, social or behavioral, influences. During the Second World War governments turned to the power of advertising and appeals to patriotism to persuade citizens to save massively in the form of purchases of government bonds. The message would be different now but the scale of the challenges might well justify a similar technique. But it doesn’t all have to be down to the government. When I was a child there was a savings club at my school, to teach us the habit; we all put in a penny or so each week (I think my parents gave me six old pennies as pocket money). Schools and places of worship could do the same now, under community banking legislation. Parents and older relatives have a massive influence on children’s behavior; perhaps an online business could supplement their range of gift vouchers with savings vouchers for doting grandparents to give as birthday and holiday presents.

Some economists would argue that an increase in thrift shouldn’t come too early, as the first priority is to make sure the economy pulls out of recession, especially when central banks have to stop printing money and raise interest rates, and when governments have to start cutting deficits and spending. For a year or two this is probably correct. Yet over the horizon of five to ten years, the people of a number of OECD countries, especially the United States and United Kingdom, will have to reverse the bad habits.

An increased amount of domestic savings will also be needed so companies can invest in future growth. The behavioral change needed on the part of business is to invest for the longer term. Many businesses (there are exceptions) currently demand that investment projects pay back in just two years; projects that would be profitable over the longer term are hard to get funded now. Of course this requires more financing but it’s something to be encouraged (and the structure of tax incentives can help here). Businesses also need encouragement to look at the non-tangible aspects of investment returns as well as the financial returns, and a comparison of alternative plans should include the social and environmental impacts as well as the financial prospects, but also an assessment of purpose. What are we doing this for? There are many small ways in which governments can encourage businesses with a purpose in place of the blander and bigger businesses that have come to dominate the Western economies. They will differ from country to country. One example of a small measure that struck me as obviously sensible came from an article the novelist Jeanette Winterson wrote about her small community food store near London’s historic Spitalfields Market. Why, she asked, couldn’t the government encourage small enterprises with a lower tax rate on their premises? Why did she have to pay the same rate as a large supermarket chain?10 Other countries will have different levers governments can use to indicate a sense of values and priorities: every tax code has its follies.

INSTITUTIONS

It will be clear from the example earlier of governments’ impotence to respond to the financial crisis that there is a problem with politics. In fact, there are many examples of the ineffectiveness of conventional