There has been much talk in the media about the lack of housing in the UK. But many of us don't have to watch TV to know that there's a problem – we’re living the nightmare. ‘Generation Rent’ is not only experiencing a shortage of housing; there's also low wages, high rents and a fair bit of badly maintained and/or low-quality accommodation to contend with.

But simply building more ‘affordable’ housing for sale won't solve the problem. As soon as a house enters the market, its price will inevitably rise well beyond ‘affordable’ levels. If a local authority in London wants to buy back an ex-council home, for example, it will face an asking price around six times what the house was originally sold for.

There's nothing inherently wrong with renting a home – after all, most of Europe still does. There are, however, significant problems in Britain's private rental market – high rents, poor maintenance and low-quality homes being among the most common complaints. However, rather than supporting more public sector housing, various attempts to control rents and improve standards have been tried, but the problems continue.

Back in the day, local authority or ‘council’ housing was a very different proposition to many current privately rented homes. Not only were they built solidly in the first place (bizarrely, affordable housing has its own – and stronger – set of building regs); they were also properly maintained, and local government was in full control of the rents.

Council homes, however, were among the very first victims of privatisation, with Margaret Thatcher's ‘Right to Buy’ scheme reducing their numbers from 6.5 million in 1980 to around 2 million in 2019 – while making it difficult for more to be built. A recent article in The Observer, however, based on data obtained under the Freedom of Information Act, shows that the mass sell-off has not exactly resulted in the promised ‘property-owning democracy’. Instead, over 40 per cent of the council homes sold off in London are now in the hands of private landlords – with some owning up to six homes. Worse still, local authorities are now forced to spend tens of millions to fund rents that are higher than their own – on homes they used to own outright.

There are probably few people in Europe, let alone the UK, who aren't fed up with the fall-out from the 2008 financial crisis, the misery of recession and the austerity that's followed the crisis. However, if one of the aims of future policy is to reduce the number – not to mention the size – of these destructive busts, it's essential to understand what drives them.

Not enough people today remember, that for about three and a half decades following the Second World War there were virtually no financial crises; this was also a period when government policies were aimed at full employment and stable prices. The result was steadily falling public debt, rapidly rising living standards and improvements in income and wealth equality, leading some to call it the ‘golden age’ of capitalism.

That's odd, because since the 1970s living standards for the majority have stagnated, inequality has risen sharply and a major financial crash has come along about every decade – and, yes, that does suggest that the next one might not be too far off. So why was finance once so stable? And what caused the return of financial crises?

Like today, after the Great Depression and Second World War, many countries had also had quite enough of tough economic and social times. Financial crises – of which the 1929 Wall Street Crash that triggered the Great Depression was then merely the latest – had been a feature of capitalism since the Industrial Revolution, and many thought that they were an unavoidable part of capitalism.

However, the new post-war ‘Bretton Woods’ system of international financial regulation, together with tightly regulated domestic financial systems, resulted in 30 years without a crisis, where previous experience would have predicted at least three (and probably four) during that time. National financial systems and institutions were tightly regulated, the supply of credit was limited, and international capital flows were restricted. Major currencies were pegged to the US dollar, which itself was backed by gold – so exchange rates were essentially fixed. This both limited the funds available to inflate housing and stock market bubbles, and drastically reduced opportunities for currency speculation. The result was an international system that regulated both trade and – crucially – finance.

As a result of the 2008 financial crisis, taxpayers bailed out the UK banks and financial institutions that caused the trouble in the first place. Not only are we unlikely to see all of that money back, which should have been invested in real services, such as the NHS; we have also been made to endure nearly a decade of austerity as a result of that ‘investment’, degrading public services still further. In effect, we paid for the 2008 crisis twice.

Worse still, the 2008 financial crisis is very unlikely to be the last. Aside from the few decades following the Second World War – when we had international financial regulation – financial crises have usually come along every decade or so, which means that if we don't start to do things differently, the financial sector may well be tapping us up again before much longer. That certainly suggests that, at the very least, we need a system where bailouts are repayable, so that finance doesn't get all the profits while the rest of us just get saddled with paying for the losses. Ideally, of course, strong international regulation should instead vastly reduce the scope for these crises.

This depressing story, however, can be turned on its head. Obviously, if UK citizens can be forced to ‘invest’ billions in failing banks for, at best, no profit, then clearly we would be able to invest in other things instead – things that actually do make a profit – which can then be used to improve the public services we want and value.

Unlike many countries, at present the UK doesn't have a sovereign wealth fund. These are usually funded by exports of commodities, such as, in the case of Norway, oil. Finance, of course, is one of the UK's main exports, and would therefore be an obvious source of funding for at least part of an investment fund for the many.

This does, of course, raise the question of who decides how and when to spend some of the proceeds of this ‘citizens’ wealth fund’. Obviously, deciding how to spend extra money is a far more pleasant problem than trying to work out who picks up an unexpected bill – but it's still a problem.

The idea of privatisation of state-owned assets – such as energy, water and rail services – was originally ‘sold’ to us on the basis of more choice, better services and lower costs. A few decades on, it looks like these have entirely failed to materialise. Is that because privatisation is always a bad idea? Or is it because there were very good reasons why many services were state-run monopolies in the first place?

Choice is hardly a factor in rail travel, for example. Whether we’re racing for the evening commute or going to visit friends and family, we just get on the train that's going the right direction at the right time – just like we always did. We do get a change of operator when moving between franchise areas, but that's hardly a cause for joy. Then, of course, there are the regular rows over fare increases well beyond inflation, slow and inconsistent upgrades – and, of course, operating companies’ profits – to consider. As things stand, operating companies have to guess how much profit they’ll make. If they make less, the government tops it up, and if they make more, they pay the government back. This creates an obvious temptation to exaggerate profit forecasts, and profit is not all reinvested.

These problems aren't unique to rail. While not all of us use the network, very few can avoid dealing with the energy sector. Along with housing, both main political parties have routinely described the energy market as ‘broken’ – so what's wrong with it?

The bulk of the electricity and gas market in the UK is supplied by the ‘Big Six’ energy companies, whose job it is – in theory, at least – to deliver the choice, keen pricing and better service that we were promised. But, once again, the reality is that, in spite of regular encouragement by services like uSwitch, two-thirds of energy users have never switched supplier. Not only does this mean that ‘more choice’ has again eluded the majority of us; it turns out that these loyal customers are also paying more than they should, helping to maintain suppliers’ profits.

George Osborne justified his attempts to eliminate the UK's deficit, and eventually reduce debt, on the grounds that too much debt would damage the economy, increase borrowing costs and lead to a Greek-style crisis. So how much debt is too much?

The UK's figure of around 90 per cent of GDP was apparently enough to make George Osborne's eyes water – but Japan gets along quite happily with a far higher debt-to-GDP ratio of around 240 per cent of GDP.

Austerity was ‘sold’ to us on the false claim that a nation's accounts work like an individual, household or business budget. But since most of us can't set our own interest rates and would end up in jail if we tried printing extra money, there are some obvious problems with that argument.

A recent Guardian article, based on Office for National Statistics (ONS) data, gloomily concluded that ‘Household debt in UK [is] “worse than any time on record”’ (Inman, 2018), with British households among the most indebted of the major Western countries. The amount of debt that many of us are saddled with at the moment – around 200 per cent of household income (our equivalent to GDP) – completely destroys the argument for austerity. If a 90 per cent debt ratio is so critical – and national accounts work the same way as everyone else's – then why wasn't the government demanding that we pay it all off?

Nor is our debt the result of buying huge hi-tech TVs, new furniture and exotic holidays. Austerity makes wages go down in real terms, reduces government services, but leaves prices the same or higher – forcing people to bridge the resulting gap with credit cards or even the dreaded ‘payday’ loans. But there are limits – and we’re reaching them. Since we can't easily create more money, adjust interest rates or revalue the currency, citizens run out of credit capacity way before the country does. So the answer to the question of debt levels is all about affordability.

But what about the ones who got us into this mess in the first place? Before the 2008 crash, they had by far the highest debt levels of all. Many banks were leveraged by around 30:1 – with some going far beyond that. That level of debt – along with equally unnerving levels of risk – did, indeed, turn out to be too high.

What's the issue?

Much has been made of the UK ‘jobs miracle’ since 2010, but many are low-paid, insecure jobs that not only need supplementary benefits to become a living wage, but also contribute to low productivity.

Analysis

A new partnership between government and industry

Neither the UK's previous approach to nationalised industry nor the complete lack of interest by governments since 1980 helped industry thrive. Fortunately, these two extremes aren't the only choices available. Instead, the state and industrial organisations could work together, each contributing its own special skills – resulting in a much ‘smarter’ policy.

This might sound optimistic, but such cooperation already happens – and the UK can be incredibly good at it. The best example, so far at least, was initiated by a Conservative Prime Minister – and improved by the following Labour one – showing that politicians can indeed work successfully with organisations outside government. The transformation of the international competitiveness of Team GB – from zeroes in 1996 to the heroes they are today – offers clear insight into more effective industrial policy design.

If you look at the system that has been developed around the Department for Digital, Culture, Media & Sport's (DCMS) ‘arm’s-length’ operation, UK Sport, as an industrial sector that produces successful world-class athletes, its relevance to UK industry is hard to ignore.

Not only is this elite sport system highly successful, it was also born during a recession and following the British Olympic team's worst-ever performance in 1996. That leaves little excuse for not designing and implementing a proper industrial strategy now.

Nothing would have changed for Team GB, however, without government backing. This came in the form of the then Prime Minister John Major, who recognised sport's political value. In 1996, neither UK elite sport nor industry was getting much state support – to the point where Team GB cyclists, who now dominate the sport, even had to hand back their singlets so that others could use them in future events.

Following the financial crisis in 2008, and fearing that their financial systems would collapse if they didn’t, many governments invested huge amounts of public money to resurrect banks deemed ‘too big to fail’. But not all. Iceland's banks had grown too big to rescue, with loans amounting to ten times the size of the entire national economy. So, unlike in the UK, the Icelandic banks were allowed to fail, while Iceland prioritised its people over finance. As a result, Iceland today is in far better economic shape than most of the rest of Europe. The message is therefore clear: the state can choose what to invest in, what its objectives should be and what form the returns from that investment should take.

Listening to many in the media, as well as free market economists, it is easy to get the impression that the only choice on offer is between the ‘free market’ policies that produced the present situation and those described as ‘hard left’, ‘Trotskyite’ or even ‘totalitarian’, which apparently failed during the 1970s. But this is a smokescreen that obscures the real question: what policies do we need now, to address the problems we currently face? Turning the clock back to the 1940s, the 1970s – or, indeed, the 1980s – won't answer that question. A better bet is to look at new ideas and not to rely on dogma.

New ideas in themselves, however, may not always be enough. They will not have been tried before, so implementing them would, to some degree, be an experiment. For others, there may be something to be learned from economic history. In other words, what happened when similar ideas were tried in the past? What can we learn from this – and what might we do differently this time? Economic history reveals, for example, that much of the programme of nationalisation in Britain, following the Second World War was undermined by failing to look forward and invest in the future. Economic history should also have told former Chancellor George Osborne that austerity during a recession not only makes things worse, economically; it also makes people wonder how things could be done differently.

What's the issue?

The results of the consistent application of austerity policies – cuts in public expenditure and/or increased taxation – since the Conservative-led coalition government came to power in 2010 do not make for encouraging reading. Although politicians have claimed that austerity means ‘living within our means’, the reality for the vast majority of British citizens is very different.

Not only have critical public services been either withdrawn or severely limited by the progressive removal of social protections, both GDP and wage growth have also been constrained. Austerity has also failed to deliver its stated objectives – of rapidly reducing and then eliminating the government's deficit (the difference between its annual expenditures and revenues) and national debt (the accumulation of any previous deficits and interest charges plus the current year's deficit).

But the fundamental question isn't whether austerity is a ‘good’ or ‘bad’ policy. Rather, it is whether austerity is an appropriate policy, given a particular economic situation.

Analysis

Eight years after the turn to austerity in 2010, the UK's recovery from the recession, precipitated by the 2008 financial crisis, is its slowest in recorded history. The government's initial response was to rescue financial institutions deemed ‘too big to fail’ and engage in emergency fiscal and monetary stimulus, and by 2010, a weak recovery was underway, with GDP returning to growth of 1.7 per cent. But concerns about rising government deficits (which increased from 2.6 per cent of GDP in 2007 to 10.1 per cent in 2009) and high levels of public debt (which, during the same period, had risen from 41.9 to 64.1 per cent of GDP) caused an apparent sharp reversal in policy. ‘Apparent’ because, although the word hadn't yet been popularised, austerity has been the policy of all Tory governments since 1979.

The Greek sovereign debt crisis served as the catalyst for austerity in the European Union (EU). In the UK, although the government's deficits and public debt were a direct result of the bank bailouts and emergency stimulus measures, the crisis was redefined as a ‘crisis of debt’; it was (falsely) alleged that high levels of public deficits and debt were the result of excessive government spending.

We all know what infrastructure is; after all, we drive on roads and go to schools and hospitals pretty much every day. But what exactly is ‘social’ infrastructure?

One way to look at it is as the ‘software’ – like the transport, education, health and social care systems – that make us all able to live together. Social infrastructure is the collective contribution to our wellbeing, mostly provided by and for people but funded by the state, although exactly how varies from situation to situation. What it's good at is making life that bit easier and getting the best out of people. That means you’ll also really notice the hole it leaves when it's not there – and that's what happens when funding for it is cut.

By 2015, inequality in the UK had reached the point where the 100 richest people had as much wealth as 18 per cent of the entire population. Perhaps unsurprisingly, this also meant that some 14 million people – 4.5 million of them children – were now living below the poverty line. And public spending on their schools, their childcare and their housing had fallen too. That will seriously impact their life chances, making it very difficult for them to escape poverty for the rest of their lives. This makes a pretty strong case for investing collectively in things that will help them – and as a result, the economy – out.

However, instead of being invested in to help those struggling with poverty at critical stages, our social infrastructure has been rapidly hollowed out. Since the coalition government took office in 2010, public services, council funding, benefit entitlements, school budgets and student maintenance grants have all been cut.

Aside from the more obvious results – such as schools being able to provide far less help for children who fall behind – what does this poverty actually look like? In an interview with The Guardian in April 2018, the headteacher of a primary school in Nottingham made it clear that it was about rather more than not having ‘on-trend’ trainers: