Rejoice! John Redwood has discovered the root cause of poverty

Tory MP's comments on gambling show why casting poverty as the result of individual spiritual failure is seductive - because it gets the government off the hook.

Clear your desk, economics. Sociology, your services are no longer required. One man, working alone, has solved a problem which decades of study in these academic fields could not touch: John Redwood MP has uncovered the root cause of poverty. And, in the casual style of the true intellectual radical, he didn't announce this revelatory finding in a research paper or at a press conference, but with a simple comment on a news story.

Asked about the proliferation of bookmakers in poorer areas, Redwood said,

"I put it down to the fact that poor people believe there's one shot to get rich. They put getting rich down to luck and think they can take a gamble . . . They also have time on their hands. My voters are too busy working hard to make a reasonable income."

There it is, the Redwood explanation of inequality. It's simple, it's comprehensive, it's devoid of empathy and it's seething with contempt for those struggling to get by: if you're poor, it's because you just don't understand that you have to work hard to succeed. You think wealth can just be chanced on as you faff about with betting slips, while the well-off just get out there and strive for their fortunes.

And as a former employee of N. M. Rothschild investment bank, Redwood has had ample opportunity to observe meritocracy in action. Sorry, not meritocracy. I meant to say he's had ample opportunity to observe the assumption of vast riches through the dumb accident of inheritance. That's the one.

Casting poverty as the result of individual spiritual failure is seductive because it gets the government off the hook. It's not George Osborne's catastrophe economics that mean people are left struggling to stretch a shrinking income over an ever-increasing cost of living, it's just in their nature to be poor. Nothing to be done about it.

And Redwood's not the only Conservative to grasp at essentialist explanations for poverty. Iain Duncan Smith loves this stuff, spouting neuroscience-ish guff about how deprived children grow up to have "small brains" (the researcher IDS quoted said the politician had distorted his work), and offering sweeping psychological judgements about unemployed people's reluctance to take risks.

In Redwood's version the original sin of the poor is that they're too willing to gamble, creating a weird composite figure of the Tory version of a poor person: someone who's too cautious to move for a new job, but happy to take the odds of beating the bookies. The idea of a correlation between gambling and unemployment is, of course, nonsense: in 2000, the Gambling Commission found [pdf] that "people in paid work were by far the most likely to have gambled in the past year".

Bookmakers don't appear in deprived areas because the jobless are compulsive gamblers, but because empty shops on ailing high streets mean cheap premises. Your social class does influence the sort of gambling you're likely to take up, though: John Redwood's constituents in Wokingham might be too busy to make bets, but perhaps some of them will squeeze in a visit across the boundary to Reading where they'll soon have a choice of two super casinos.

When it comes to gambling, the house always wins, and there's a similar dreary inevitability in Conservative attitudes to poverty: if you're poor, it doesn't matter whether you take your chances or play it safe: the Tories will find a way to hate and blame you for your circumstances either way.

John Redwood, in happier times. Photo: Getty

Sarah Ditum is a journalist who writes regularly for the Guardian, New Statesman and others. Her website is here.

Ralph Orlowski / Getty
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Labour's investment bank plan could help fix our damaging financial system

The UK should learn from the success of a similar project in Germany.

Labour’s election manifesto has proved controversial, with the Tories and the right-wing media claiming it would take us back to the 1970s. But it contains at least one excellent idea which is certainly not out-dated and which would in fact help to address a key problem in our post-financial-crisis world.

Even setting aside the damage wrought by the 2008 crash, it’s clear the UK’s financial sector is not serving the real economy. The New Economics Foundation recently revealed that fewer than 10% of the total stock of UK bank loans are to non-financial and non-real estate businesses. The majority of their lending goes to other financial sector firms, insurance and pension funds, consumer finance, and commercial real estate.

Labour’s proposed UK Investment Bank would be a welcome antidote to a financial system that is too often damaging or simply useless. There are many successful examples of public development banks in the world’s fastest-growing economies, such as China and Korea. However, the UK can look closer to home for a suitable model: the KfW in Germany (not exactly a country known for ‘disastrous socialist policies’). With assets of over 500bn, the KfW is the world’s largest state-owned development bank when its size is measured as a percentage of GDP, and it is an institution from which the UK can draw much-needed lessons if it wishes to create a financial system more beneficial to the real economy.

Where does the money come from? Although KfW’s initial paid-up capital stems purely from public sources, it currently funds itself mainly through borrowing cheaply on the international capital markets with a federal government guarantee,  AA+ rating, and safe haven status for its public securities. With its own high ratings, the UK could easily follow this model, allowing its bank to borrow very cheaply. These activities would not add to the long-run public debt either: by definition an investment bank would invest in projects that would stimulate growth.

Aside from the obviously countercyclical role KfW played during the financial crisis, ramping up total business volume by over 40 per cent between 2007 and 2011 while UK banks became risk averse and caused a credit crunch, it also plays an important part in financing key sectors of the real economy that would otherwise have trouble accessing funds. This includes investment in research and innovation, and special programs for SMEs. Thanks to KfW, as well as an extensive network of regional and savings banks, fewer German SMEs report access to finance as a major problem than in comparator Euro area countries.

The Conservatives have talked a great deal about the need to rebalance the UK economy towards manufacturing. However, a real industrial policy needs more than just empty rhetoric: it needs finance. The KfW has historically played an important role in promoting German manufacturing, both at home and abroad, and to this day continues to provide finance to encourage the export of high-value-added German products

KfW works by on-lending most of its funds through the private banking system. This means that far from being the equivalent of a nationalisation, a public development bank can coexist without competing with the rest of the financial system. Like the UK, Germany has its share of large investment banks, some of which have caused massive instabilities. It is important to note that the establishment of a public bank would not have a negative effect on existing private banks, because in the short term, the UK will remain heavily dependent on financial services.

The main problem with Labour’s proposal is therefore not that too much of the financial sector will be publicly owned, but too little. Its proposed lending volume of £250bn over 10 years is small compared to the KfW’s total financing commitments of  750 billion over the past 10 years. Although the proposal is better than nothing, in order to be effective a public development bank will need to have sufficient scale.

Finally, although Brexit might make it marginally easier to establish the UK Investment Bank, because the country would no longer be constrained by EU State Aid Rules or the Maastricht criteria, it is worth remembering that KfW’s sizeable range of activities is perfectly legal under current EU rules.

So Europe cannot be blamed for holding back UK financial sector reform to date - the problem is simply a lack of political will in the current government. And with even key architects of 1980s financial liberalisation, such as the IMF and the economist Jeffrey Sachs, rethinking the role of the financial sector, isn’t it time Britain did the same?

Dr Natalya Naqvi is a research fellow at University College and the Blavatnik School of Government, University of Oxford, where she focuses on the role of the state and the financial sector in economic development

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