#51. Hopes and fears in corporatist Britain

Though 63% of the electorate did vote for other parties, David Cameron looks politically unassailable, and cannot be held to ransom either by backbench Conservatives or by the SNP.

The big question now is whether Britain strikes out in a new direction, or continues along a corporatist route which has created a low-productivity, debt-dependent economy.

* * * * *

Hindsight is wonderful thing, and in this instance tells us that we should not have been all that surprised by the outcome of the general election. There was a huge (14.4%) swing against the coalition, but David Cameron’s genius lay in ensuring that the entirety of this pain was inflicted on the hapless Liberal Democrats. His party’s own vote, meanwhile, increased fractionally in a climate of fear that Labour’s economic wrecking-ball might swing into action with the help of the invading Scots.

Of the 14.4% of the voters who deserted the coalition, very few (a net 1.5%) switched to Labour, the rest going to the SNP, the Greens and, above all, UKIP. Britain’s quirky electoral system took care of the rest, ensuring that the Conservatives secured a Parliamentary majority with less than 37% of the vote, whilst UKIP’s 12.6% – 3.88 million votes – resulted in just one seat in the Commons.

The first-past-the-post (FPTP) system has its defenders – mostly in the established parties which it benefits – but can hardly be described as democratic. It is particularly unsuitable in a country which also lacks a separation between the executive and the legislature. As a result, Mr Cameron – like Tony Blair and Gordon Brown before him – can now exercise almost unlimited power even though 63% of the electorate voted for other parties.

* * * * *

Be that as it may, the selection of a new government creates both hopes and fears. Some of the fears are justified, but others are unfounded. Mr Cameron is not going to be held to ransom by his own MPs, for two reasons. First, such is the fragmentation of the opposition that it is hard to see any sort of Parliamentary coalition being formed against him.

Second, Mr Cameron’s success makes him a giant amongst midgets in a political elite remarkably devoid of talent or charisma.

The SNP’s 56 seats confer little or no Parliamentary power on the Nationalists, whilst the government has time enough to finesse the promised referendum on Europe.

Hope, of course, is pinned primarily on the fact that the Conservatives can now govern without the brake so often imposed on them by the Liberal Democrats. This, optimists think, may now enable the government to cement the economic recovery, and to tackle the issue of immigration.

With this come justified fears, many of them concentrated on the contradictory promises made during the election campaign. The government is committed to eliminating the fiscal deficit, and to legislating to tie its own hands over the big money-raising taxes, none of which must be increased.

But, far from specifying the cuts that will be necessary to make the numbers add up, the government is instead committed to handing out money, notably to the NHS, pensioners and first-time house purchasers. This suggests that unprotected departmental budgets may face severe cuts, most notably in the funding of conventional defences which have already become dangerously inadequate.

* * * * *

To look at how this might pan out, our best guide is the observation that the Conservatives, like Labour, are a corporatist party.

Whilst commentators examine every political twist and turn to determine whether Britain is moving to the Right or the Left, the far more relevant direction has been the shift towards corporatism and away from individualism.

Corporatism, it must be noted, is by no means confined to the private sector, but emphatically includes state organisations as well. The remarkable immunity to consequences that has protected irresponsible bankers and miss-selling businesses has applied equally in instances of public sector failure, of which Stafford and Rotherham are but two examples.

Essentially, corporatism empowers the big battalions, be they private or state, and confers enormous powers, privileges and immunities on those who run them.

This said, it is the power of the private corporates that needs to be subjected to particular scrutiny in the current environment. This will, for instance, be the touch-stone where the European Union is concerned. The corporate elite is strongly in favour of continued membership, which provides both market access and a price-lowering supply of labour. What the elite does not want from Europe is interference in Britain’s deregulated financial services industry, which is one of the key-stones of the ‘corporate economic preference’.

This economic preference is internally-contradictory, in that it wants both low-cost labour, on the one hand, and free-spending consumers on the other. It is this contradiction that has mired Britain in debt, because low-earning workers can only be high-spending consumers as well if the gap is filled by borrowing.

Successive governments have delivered this combination, together with the deregulated banking “flexibility” needed to fund it through easy lending. They have also delivered extensive corporate immunity, and huge state subsidies in the form of “corporate welfare”. The latter was estimated at £35bn by a recent study, a number which does not include the additional subsidy provided by in-work benefits paid to millions of low-wage workers. It is striking that, despite the minimum wage, zero-hours contracts and unpaid internships continue to be tolerated.

You will not need to be told that I dislike corporatism – in principle I am always on the side of the individual, not the organisation – but I should stress that, objectively, corporatism is bad for the economy, and for society more broadly.

In economic terms, corporatism is bad because it stifles competition, and also because it promotes a low-wage, high-consumption economy, surely a dangerously-conflicted economic model.

Obviously, the combination of cheap labour, high consumption and easy access to borrowing has driven Britain (and, for that matter, America) dangerously into debt. But it has also biased the economy away from output that can be marketed globally, and towards internally-consumed services instead. Since 2000, manufacturing output has decreased by 26% in real terms, and the broader category which I call “globally marketable output” (GMO) has fallen even further.

For these reasons, Britain now needs to borrow £100bn annually from overseas just to keep the consumption party going. Strikingly, the trade deficit is now compounded by big net outflows of interest and remitted profits, reflecting the role played by asset sales, as well as by borrowing, in an effort to sustain an economic system that, whilst internally contradictory, suits the corporate play-book to a T.

* * * * *

Could it be different? The answer is yes, but defying the corporatists would involve an unprecedented political conversion back to the individualism that, in the past, was an integral part of Conservative DNA.

Britain could, for instance, redress the balance by increasing the minimum wage, enforcing the law rigorously, and encouraging employers to pay the living wage. All of this would help the economy by increasing earned (rather than borrowed) spending power.

At modest cost, the small- and medium-sized businesses which drive innovation could be exempted from the archaic and increasingly iniquitous system of Business Rates.

The “revolving doors” between government and the corporate world could be blocked by setting a high (but strict) limit on the earnings of those who leave government for the private sector. The message would be that government service can (and should) be rewarding – but is not a road to riches.

Government could strengthen competition laws to benefit the consumer. It could vow to clamp down on corporate misbehaviour, dropping the seemingly-innocuous term “miss-selling”, and holding executives, rather than hapless shareholders, responsible when misbehaviour occurs. It could apply the same logic to the public services, to ensure that senior managers are held responsible for major failings.

It could prosecute tax-evaders as rigorously as it already prosecutes those who cheat the welfare system. It could end the “non-dom” tax concession, because opportunity – rather than tax-shelter – would be the offer that attracts desirable foreign investors to Britain.

In order to finance industrial regeneration, government could start to tap the vast amounts of potential investment locked up uselessly in the “capital sink” of an over-valued property market. It could inject high-return stimulus by enabling local authorities to go back to building affordable properties for rent (something which could, in part, be funded by dropping the HS2 white elephant).

Please note that none of these proposals involves “attacking the rich”, because better treatment of working people, and the injection of earned (rather than borrowed) spending power into the economy, does not require an incentive-eroding onslaught on the successful.

Meanwhile, the interests of the corporatists – be they private or state – should be subordinated to the good of the country as a whole.

* * * * *

These are things that could be done, all of which would stimulate investment, innovation and skilled employment. They are workable but, it must be admitted, are extremely unlikely to happen.

It is no consolation at all that the ‘low-wage, high-spend, borrow-the-difference’ model will in due course be brought down by its own contradictions.

15 thoughts on “#51. Hopes and fears in corporatist Britain

  1. Good article, Tim. I am unfamiliar with the UK economic model but the whole of the western economies sound very similar. I see you use Corporatist, which I assume equates with Neo-Liberal philosophy, a term we see in Australia and the uSA, although they also have Libertarian as a name .Corporatist sounds more accurate, since individual liberty is not involved in reality but as aslogan to mask real intent.
    In heavy type you say ” Britain needs to borrow 100billion pounds….”. Surely that is a mistake. It would mean being indebted in a foreign currency [always a bad idea]. Then why cannot the BoE simply pay whatever the bills are? Being Monetarily Sovereign the UK can never run out of its own money and can inject new money into the economy to pay down any such debt – which is what exactly?
    Britain could improve it industry by eliminating corporate taxation. It’s being evaded already not just avoided. The government could then force companies etc to pay living wages without losing out to competitors overseas who don’t pay living wages. Let’s get out of this race to the bottom. The improvement in the economy would soon make up for the lost tax. Also tax today does NOT fund government expenditure. That is done by the Central bank paying government invoices. No need to borrow at all.

    • John

      Corporatist is my term, which I prefer to neo-liberal (or neo-con) because it embraces public sector as well as private corporatism – it’s the collectives (and those who run them) versus the individualists.

      Data for the current account shows borrowing from overseas of £100bn last year. Of course, being UK official data it is reported in GBP, which doesn’t mean that the actual borrowing took place in £ – indeed it almost certainly didn’t.

      Basically, imports exceed exports – nothing new there – but foreign investors now own a big chunk of UK businesses, so profits are remitted out, together with interest on debt, of course.

      Yes, the BoE could simply print the government’s invoices, but this could undermine the value of the £ – a bit of a problem when nearly 6% of GDP comes from foreign creditors…………….

    • Hi Tim, again. Just checking back on correspondence added since my comment.
      I don’t know why you say that when a government gets its bills paid through the CB, it could undermine the value of the pound. I see that as a non sequitur. All new money has to come from the CB, so it needs pay funds into the economy all the time. Whether or not it is inflationary, that depends on whether the money supply gets to exceed the economy’s value. The CB can adjust the money supply to compensate through bond auctions,setting interest rates, including interbank rates, etc.
      If the CB is paying back overseas investment loans it has little choice except to buy dollars[say] to remit overseas. It’s better off than the commercial banks who cannot “print” the interest cost. Bur really, apart from day to day needs, the CB [or Treasury] should only deal in pounds particularly when wanting to borrow, and they should never borrow in their own currency. They can just pay, at any time! Even if dollars are wanted, the CB buys the amount in Pounds and that gets converted to dollars in the creditor’s reserve account at the CB. Often this payment never leaves the country. This is what being monetarily sovereign is all about.
      It’s why UK doesn’t have the issues in the EU that Greece has now they have given up their monetary sovereignty.

  2. You should be battering on Douglas Carswell’s door with this. Political parties all have a more or less unsophisticated core base vote, and UKIP targetted theirs with immigration – for better or worse. It helped garner 4 million votes, but maybe dumbed the party down & limited its future. A reorientated UKIP, pointed more intelligently at anti-corporatism is the way forward? Try to catch the party during this period of crisis?

    • Indeed – UKIP’s best move, in my opinion, would be to become the standard-bearer of individualism vs corporatism. This would gain them suppport similar to the broader European anti-incumbent movement, but WITHOUT the left-wing baggage of parties like Syriza.

      However, I don’t know Douglas Carswell, or anyone else in the UKIP heirarchy for that matter.

      Interestingly, Facebook have said that they won’t use suppliers who pay less than $15/hour, whilst the Bank of England has given a broad hint about the relationship between low pay and weak productivity.

  3. Tim, your proposals are echoes of past Labour policies (Labour introduced the minimum wage in 1999 whilst previous Conservative Governments were viciously opposed to it) and I generally agree with you but not on the economy being biased away from output that may be marketed globally. What about Business, IT and financial services? These are all marketable globally.

    The fact is Britain was always poor at “making things” that’s why it’s car and motorbikle industries et al went bust. I remember the bad old days when you bought something “Made in Britain” and it was an evens bet whether it would actually work!!

    Germany, on the other hand always made things that worked and in spite of it”s high priced products continues to export more than it imports thanks to a Global recognition of German high quality despite it’s best efforts at rebalancing.

    On a personal level I am an ex British bike enthusiast having owned 2 Norton Dominators, a Triumph Bonneville, Daytona and a Tiger Cub along with a couple of BSA Bantam’s and C15’s.

    Being an objective person I just couldn’t deny the far superior quality, performance and reliability of the Japanese competition, eventually capitulating and riding Japanese machines which were a pleasure to ride as I was no longer listening for a new squeak or rattle in addition to the plethora of other rattles.

    It’s become so bad now that earlier today I was purchasing an Office chair which met all my requirements when the salesman assured me it was obviously good quality as it was “Made in Britain” not like most of the stuff from China. My guts fell when I heard that, but I decided to take the chance and push on with the order as it seemed a good chair but now I await it’s delivery with some trepidation based on 48 years experience of products “Made in Britain”.

    • Thank you. I think on “globally marketable output” (GMO) I may not have explained myself clearly.

      By GMO, I mean things capable of sale on world markets. This does not mean that they must actually be exported, but that they have to be competitive, i.e. priced at global levels. If a TV made here is too expensive (or poor quality), it will not sell at home (customers will buy an imported one instead), any more than it will sell abroad. So, “globally marketable” really means “globally competitive”, or “priced globally”. This, then, is “hard currency output”. This isn’t just manufacturing, but obviously includes agriculture, minerals, etc..

      Within 2014 Gross Value Added (a measure of output) of £1,586bn, GMO was £186bn, or 12%. At constant 2014 values, GMO was £251bn in 1997, so has fallen by 26% in real terms. It was 22% of the economy back then, compared to 12% now.

      Service exports are indedd vitally important. In 2014, net exports of services were £86bn. But this is still only 5% of the economy. So, the economy consists of:

      Globally-competitive output 12% + net services exports 5% + internally-consumed services 83% = 100%

      What concerns me is the expansion – both absolute and as a share of the economy – of internally-consumed services. These are not priced globally, but by what the home market will take. Look a bit further into this and you will see that, as my former colleague Robert Peston pointed out not long ago, there would be no growth at all in the economy but for shoppers and restaurant customers. Private sector “administration” is now £82bn, almost 5% of the economy. Real estate (selling houses to each other) is £182bn, or 11.5%. Retailing is £180bn.

      So our economy is dominated by services that we sell to each other – too dominated by them, in my opinion. Meanwhile, we are huge net importers of manufactured goods, and we do not export enough (services or anything else) to pay for them. This situation could worsen, for two reasons. First, our net trade in energy is worsening sharply as North Sea output declines. Second, our financial services industry has suffered terrible reputational damage.

      Now, to keep the consumption party going, we have borrowed heavily from abroad, and we have also been big net sellers of businesses and similar assets. The result is big net outflows, from interest and dividends.

      Another point is that GMO industries, needing to be competitive, need skilled labour, generally well paid. Internally-consumed services often do not, so employ low-skilled, low-paid workers (just consider wages in hospitality and retail as examples). Replacing factory workers with fast-food or checkout staff lowers overall skills and wages.

      On buying British, I feel the same way, though for slightly different reasons. Far too many British suppliers, in my experience, are “quick-buck” merchants. If I buy British I am too likely to get poor service, often defended by one-sided “terms and conditions”. Maybe I’ve just been unlucky, but I’m fed up with getting poor service and excuses from British firms. The ethic seems to have shifted from customer service to “whatever we can get away with”. This is a noticeably different ethic from, say, German or Japanese suppliers. This may come down to a broader question of “the national ethic” – a subject for another time!

  4. Thanks Tim for another insightful article. I’ve spent an informative evening or two going over your previous pieces on Corporatism and it’s all rather chilling! Your final few sentences point to a Britain heading to a really unpleasant place. I’ve recently fallen out of love with democracy as it seemed to be unable to plan for the long term. I never truly subscribed to the conspiracy theorist camp but now I have to consider the possibility that there is a form of conspiracy but that the ‘big plan’ is just plain bonkers! or more evil than we can imagine.

    On the replies for to your previous article Paul was asking Phillip about his actions to protect his future. ~Phillip hasn’t replied yet so in his absence – Paul: my own prepping, as I’ve said before includes a smallholding, being off-grid, self-sufficiency and so on but the real essence of what I’ve done has been to invest in me. My own skill sets include everything necessary to live a comfortable, self-reliant life within an accepting/receptive community and that really doesn’t have to cost that much. It is, of course, never ending…

    • Not sure but It probably depends whether you can buy the small holding debt free and where you are going to buy it.

    • Nick, I wish I could say I saw the imminent financial crisis coming 30 years ago but I can’t. I did, however have an inkling that my own particular set of circumstances may create an impoverished retirement. I did something about it then, 30 years ago. I can’t now in all honesty preach the same as land and property prices now make what my wife and I did prohibitively expensive. I don’t presume to know what is best for you and yours but am happy to offer advice if you wish.

  5. Tim, thank you for another excellent piece getting to the heart of the matter. Some years ago I sent a letter to the local newspaper to highlight some of the very worrying trends that you discuss. Here’s the piece:

    Claude, who lives in Barnoldswick, was not happy. He’d not had a decent pay rise in years and now his car had been badly damaged in an accident and he would have to buy a new one. Today, however, he would have to go shopping by bus.

    He liked to start the day with a cup of tea. He filled the kettle with water (supplied by Yorkshire Water, owned by Kelda and part-owned by the Singapore government’s investment arm) and switched it on (using electricity supplied by e.on a German company).

    Claude felt a bit cold and went into the front room and lit the gas fire (using gas supplied by Scottish Power, owned by Iberdrola a Spanish company). He picked-up a holiday brochure for his forthcoming vacation in America. He would be flying from Heathrow (the airport owned by BAA plc now in the hands of Group Ferrovial, a Spanish company).

    After breakfast he walked a short distance to the bus stop. On the way he called at an ATM machine to get some money (at the Yorkshire Bank, owned by an Australian group) and then called at the local newsagents to buy his weekly National Lottery ticket (supplied by Camelot, owned by the Ontario Teachers’ Pension Scheme).

    When he arrived at the bus stop in town he met a long-time friend who worked for what used to be Abbey (now part of Santander, the Spanish bank). The bus arrived (Burnley and Pendle, now known as Transdev Blazefield and owned by a French company) and they boarded the vehicle.
    Claude told his friend that he was looking for a new car and hoped to be able to buy a Mini (made by BMW, a German company).

    When the bus got to Colne it was diverted via the North Valley Road and they passed Aldi (the German owned discount store), McDonald’s and KFC (American companies) before joining the main road at Queen Street.

    A few stops later Claude got off the bus to visit Asda (owned by WalMart of America).

    As he walked to the store he saw a lorry delivering supplies to the supermarket. The tractor unit was a Scania (made by a Swedish company, owned by the German groups Volkswagen and MAN). Claude wondered whether the truck was carrying his favourite: Cadbury’s Chocolate Buttons (now owned by Kraft, an American food company) or Yorkie bars (made by Nestle, a Swiss firm).

    The only bit of good news seemed to be – and it must be good news because the metropolitan elite were crowing about it in the national newspapers – is that rises in house prices had created 50,000 new property millionaires. Unfortunately for Claude this did not include his house in Barnoldswick, which he felt was a shame because he’d then be able to withdraw some more equity from the place to buy his new car. This would be really helpful just now, what with the lack of pay rises and the cost of petrol, gas, electricity and food going-up all the time.

    This is, I know, globalisation and it cuts both ways; many UK companies own businesses overseas. I know that many of the overseas companies named above will be part-owned by UK investment houses, but I have a real sense of unease at the way in which the political class seem to be content to see us selling out to the rest of the world without a care in the world.

  6. A very good article. But why are Business Rates archaic and increasingly iniquitous? It seems to me that it is the big corporates and property owners who would like to see them removed, For example Tesco http://www.bbc.co.uk/news/business-26326508 Removing rates would benefit big businesses that own their own buildings, or the big landowners that rent the buildings to them. It would also help Starbucks to pay even less tax. It will not help small businesses.

    Imagine it was announced that Oxford Street was going to have no Business Rates. The shop tenants have competitively bid the highest rents that they can afford for the revenue they can get from the great location. If we removed the rates, they would just bid the rents up against eachother and the landowner gets to collect the location tax instead. Land value taxes are the least distorting taxes. Tax employment and you get less of it. Tax enterprise and profits and you get less of it. Tax land value and the land remains.

    • OK. Well, Business Rates are unrelated to profit or even turnover – indeed they are payable even if the property is empty. This is a huge deterrent to new businesses. In my area, small shops typically pay £1000 per week – assume a gross margin of 20% and they need turnover of £250,000 just to pay this, even before spending on stock, rent, staff etc.. Second, businesses get very little for this – whereas the homeowner’s council tax pays for waste collection, small businesses face hefty extra costs for this. The system is unfair to brick-and-mortar businesses versus on-line competitors. It has had a hugely detrimental effect on high streets.

      So a profit- or sales-based tax would be fairer.

      On the question of big companies, abolishing BRs would increase profits, but that could be recouped through Corporation Tax. I know that the govt is very poor at collecting taxes from multinationals, but that’s a separate issue.

      Finally, I’m in favour of exempting small companies from BRs – not, as a priority, large ones.

  7. “Huge deterrent to new business”. Yes but removing business rates would not remove the cost, it would just transfer this tax to the landlord. I quote Winston Churchill for a nice illustration of this,

    “Some years ago in London there was a toll bar on a bridge across the Thames, and all the working people who lived on the south side of the river had to pay a daily toll of one penny for going and returning from their work. The spectacle of these poor people thus mulcted of so large a proportion of their earnings offended the public con-science, and agitation was set on foot, municipal authorities were roused, and at the cost of the taxpayers, the bridge was freed and the toll removed. All those people who used the bridge were saved sixpence a week, but within a very short time rents on the south side of the river were found to have risen about sixpence a week, or the amount of the toll which had been remitted!”

    “The system is unfair to brick-and-mortar businesses versus on-line competitors.” I’m not sure that fairness is a good reason to block efficient developments that bring down costs and increase choice for the consumer. Similar sentiments drove the Luddites. If we want to preserve high streets then we should form a full policy around that, but your excellent article above is about fighting Corporatism.

    “Second, businesses get very little for this – whereas the homeowner’s council tax pays for waste collection” No. It is a misconception that council tax pays for local services. Typically 75% of council money comes from central government grant. The problem is the other way around. The councils do not get to keep business rates, so what incentive do they have to improve high streets to help bricks-and-mortar businesses? Any uptick in rates goes to central government, but the outlay is theirs! The government is starting to address this, for example in Croydon where the council wants to spend billions improving the area for businesses, by letting the local council keep the extra business rates.

    “Finally, I’m in favour of exempting small companies from BRs” That might work, but locations that tend to be desirable for small businesses would just see their rents rise for the same reasons as above.

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