A couple of days back I was writing about the likely fall in smoker spending in the aftermath of smoking bans, using figures from Lecroix in Spain and Klaus in Denmark. In the continuing discussion on that thread, Klaus wrote:
Everybody in Denmark (and UK, I suppose) think that consumption fell off when “the crisis” kicked in by fall 2008 – but this graph shows that consumption started to fall off immediately after the smoking ban in the summer 2007. The recession was kick-started by the smoking ban, and a negative economic spiral was evident.
It was not just because of the smokers changing their ways – it was also because of the changing ways of their friends & family members. I think it quickly became a trend in more or less the whole population – the home culture.
It is not difficult to imagine the mechanism behind it: When politicians suddenly restrict an area very hard, people will go other places to avoid the restrictions. When these other places are private homes, consumption will obviously fall. But why was the falling consumption not made up for by nonsmokers, i.e. people still visiting restaurants & public places as usual or even more after the ban? Because their consumption was already as high as it could be. That’s how capitalism works – you use the money you earn minus what you save.
Bottom line: The smoking bans in UK and DK could have kickstarted “the crisis” in both countries because of the consequences to the private sector of sudden falling consumption.
The way Klaus sees it is that smoking bans introduced in the UK and Denmark in 2007 had economic consequences a year or a year and a half later, in 2008. But in the UK, where the smoking ban came into force in July 2007, the Northern Rock bank was already having liquidity problems by September 2007, and was taken into public ownership in February 2008 – long before the effects of the smoking ban were likely to have worked through the economy, and to the Office of National Statistics and the Bank of England – which started referring to a negative ‘demand shock’ in its Quarterly Report at the beginning of 2009.
But there’s another possible explanation of what might have happened in the UK, which is based upon the privileged position of banks. I keep most of my money in bonds, savings accounts and shares, and when I liquidate any of these assets, I usually get a cheque sent to me which I then pay into the current account in my bank. And when I want to buy something, like a bedside lamp, I either buy it with cash or with a cash card which draws on my current account. And I think that this is how many people run their financial affairs. And what that means is that my bank is able to monitor my spending and saving, and maybe build up a profile of my normal spending pattern. And I imagine that banks do monitor their customers’ spending and saving patterns, for a variety of reasons.
If so, then sometime in late July 2007, a worried cashier would have collared one of the bank’s senior managers and blurted out: “Frank’s stopped spending! He used to buy a pint of Stella every day, as regular as clockwork, and now he’s hardly buying any. And he’s buying less petrol for his car too!” Probably the senior manager would have retorted that I might have fallen off my bicycle again, and I’d be back on the booze in a week or two, and there was nothing to worry about. “But it’s not just Frank, sir!” the cashier would have continued. “It’s also Dave and Harry and Ed. About a quarter of our customers have pretty much stopped spending!” And the senior manager would have turned white, and sat down heavily in the nearest chair.
And later that night, as they pored over the figures, they would have found that a quarter of their customers had not only slashed their spending, but had actually started saving at rates never seen before. And what happens when money starts flowing out of the economy and into savings? It means that trade slackens, fewer goods get sold, prices fall, and businesses lay off workers and start going bankrupt. This ominous sudden fall in spending signalled a rapidly approaching recession. And the banks became unwilling to lend money to start up new enterprises in such a darkening climate. In fact, they became unwilling to lend money to almost everyone, including other banks.
Only the banks, the listening banks, could have seen the recession coming, because only the banks had this ‘insider knowledge’ of what was happening through the accounts of their customers. And so it would have been in the banking sector of the UK economy that the “crisis” would have started, long before the effects of the fall in spending had fed through into the UK economy, with pub closures and staff lay-offs.
It may well have been perfectly obvious to the banks that it was the smoking ban that was doing the damage – or it may not have. My bank didn’t actually know that I religiously bought a pint of Stella Artois every day until 1 July 2007, because I always paid for it with cash. But it would have known that my spending had slowed considerably, even if it didn’t know why.
In fact, the refusal of the banks to lend money was ascribed to the ‘sub-prime mortgage crisis’ which had its origins in the USA, and had in August 2007 led the French bank BNP Paribas to freeze funds in sub-prime. And perhaps there was some truth in it. If so it was highly politically convenient to blame the crisis on something that was happening thousands of miles away, rather than something that was happening right here on our own front doorstep. Or, more accurately, the front doorsteps of Britain’s pubs.
And Danish bodega doorsteps. And also French bistro doorsteps. Because, oddly enough, France also had brought in a public smoking ban in February 2007.
And there would have been considerable resistance within the Labour government, which had just brought in the UK smoking ban (and were proud of it), to any notion that the smoking ban had been the cause of the crisis. Although one person agreed that the smoking ban was having an effect:
Chancellor Alistair Darling has admitted the smoking ban is forcing pubs out of business…
Mr Darling told journalists at Westminster “there is no doubt the smoking ban made a difference” in killing off boozers after the British Beer and Pub Association told MPs the number of failing pubs is now “accelerating rapidly.”
In saying this the Chancellor was being politically incorrect, because everyone knew that the smoking ban had been ‘a great success’ from Day One, particularly among smokers, who are always delighted to be banned from smoking. Any suggestion otherwise was almost treason.
But my suggestion today is that the UK smoking ban kicked off not just the mass bankrupty of UK pubs, but also triggered the subsequent ‘credit crunch’ as banks watched millions of their customers stop spending and start saving, and responded appropriately.
And if it did so in the UK, and not in the USA or anywhere else, it was because US bans were being brought in piecemeal, a town here, a town there, a state here and a state there, and the effect was largely invisible in the US banking sector. But in the UK a gold-plated, well-enforced, no-exceptions smoking ban was imposed on over 60 million people in one of Europe’s larger economies on one single day: 1 July 2007. The resulting shockwave running through the entire UK economy was registered as an earthquake by UK banks, and a warning of much worse to come, and they responded with appropriate (and fully justified) alarm. If the same didn’t happen in France, which is also one of Europe’s larger economies, it was because the French ban allowed exceptions, and was not enforced, and was widely ignored.
And if banks still don’t want to lend money, 5 years later, it’s probably because they’ve yet to see their customers start spending again. Which of course they won’t do until they get their pubs back. Or at least, Frank won’t.