A new narrative is needed to combat inequality and cut the deficitby Will Hutton / March 10, 2015 / Leave a comment
This is a response to Ferdinand Mount’s critical review of Hutton’s latest book
Britain is moving into uncharted economic and political waters. This May’s general election is likely to deliver another result in which again neither of the two main parties command a parliamentary majority—a degree of political stalemate unmatched in modern times. Representation of both in Scotland is likely to be minimal, with its eventual secession from the union all too possible. Britain is at odds with itself and directionless. The future seems threatening rather than full of opportunity. Thatcherite and socialist certainties alike are exploded.
The collapse of socialism is an old story. It was the blind Thatcherite trust in the efficiency of markets and the inability of profit-seeking firms to make mistakes that contributed to the banking crisis seven years ago as bank balance sheets ballooned to an impossible size, only saved from implosion by the state that they so distrust. It is the Thatcherite indifference to the character of ownership—as long as the owner is not the British state—that has legitimised the extraordinary sale of public assets and private companies abroad over the last generation. Britain used to own more of the rest of the world than it owned us. No more—even our international investment position is now in deficit.
The country boasts a comparatively small number of globally significant companies: few of the many fledgling entrepreneurial start-ups scale up to something larger. The growth of inequality, increased social immobility, weakening productivity, over-stressed and inadequate public services cast lengthening shadows. The fall-out from the banking crisis has been the chief cause of wages stagnating for nearly a decade. The reaction to a large public deficit created by the collapse of tax revenues in a recession induced by the disfunctions of the private sector has been to cut public spending by an unprecedented degree. There has been a prohibition on raising taxes to play their part in the necessary adjustment.
Don’t envy Germany
Our standing as a great power has never been more in doubt. Militarily Britain has suffered embarrassing reverses in Iraq and Helmand, partly caused by cuts in our defence capability. The right, too ready to blame the country’s ills on foreigners, the EU, and immigration rather than accepting any responsibility itself, has created a dynamic in which leaving the EU has become a real possibility. Distrust of the foreign and the other are widespread.
Of course there are counter examples of things going well—hardly surprising in a large and diverse economy. But in the round this is not a story of success. I survey this panorama with alarm, and believe there are alternatives. Ferdinand Mount, reviewing my recent book How Good We Can Be, thinks I am wrong again. After all I first wrote in these terms 20 years ago, and the roof has not fallen in. Indeed given the problems in Europe whose Rhineland capitalism I used to extol, this out of time author needs a new narrative.
I submit that it is Mount—still genuflecting to the Thatcherite picture book villains of regulation, taxation, unions and the EU—that is in need of an intellectual make-over. In two recent books he observed that inequality in Britain is having deeply malign effects—a New Few at the top gorging themselves on undeserved, extravagant pay while demonizing the disadvantaged at the bottom. A former, if short lived, head of Mrs. Thatcher’s policy unit from 1982-83, he wants people, especially those at the top, to behave better. But he refuses to get to the bottom of why the phenomena he deplores are happening—or to will the means to change things. He wrings his hands.
My view is that British capitalism is suffering from discomforting, destructive trends. The “unowned,” purposeless British company in thrall to a myriad of uncommitted, myopic shareholders has become the new normal under the financial and corporate governance regime that has developed following Thatcherite laisser-faire maxims. These “ownerless” corporations tend not to invest and innovate: they typically have no long term strategy or purpose other than the immediate reward of directors and shareholders. In Britain the dice are loaded against the visionary founder, proprietor or manager who wants to build a great company. This decaying of capitalism, indulged and caused by the refusal to contest the imagined unimprovability of markets, is simultaneously a major cause of rising inequality and indifferent economic performance. It is true I first made this argument 20 years ago, for which Mount mocks me, but that does not make it any less true today. The trends have become even more marked.
Examples are legion. Yes, I continue to think that Rhineland capitalism with its emphasis on protecting companies’ long run purpose and values—interestingly now echoed by the mighty West Coast US tech companies—permits more great companies to prosper in Germany than in Britain. GEC and ICI are now dead, surrendering to the financial preoccupations of the stock market: their German counterparts, Siemens and BASF, are world leaders. Companies like Bosch and BMW, or Carlsberg and IKEA in Scandinavia, are well-owned and driven by a great sense of purpose: rather as Apple and Google are. It is Britain that treats companies like casino chips, with results that cascade into poor productivity, low innovation and rising inequality.
One of the reasons that the southern countries of Europe find it difficult to live with the euro is that they do not have a critical mass of great companies organized along these productivist, purposeful principles. If Greece, Spain, Portugal and Italy want to prosper alongside the northern members of the eurozone they will have reform their companies and reshape their social security systems so they combine more labour market flexibility with social solidarities. This is so-called flexi-security, which I advocate in my new book, that insists on the necessity of having more flexible labour markets (on this Mount is right)—but provides ordinary workers with the skills and transitional good unemployment benefits to handle the new risks (an issue Mount neglects). They will also need to modernize their states, in particular radically improving their capacity to collect taxes as part of a drive to fiscal sustainability.
Seen through this prism the euro is less a strait-jacket but more of a huge incentive to create well-functioning liberal democratic, capitalist economies in southern Europe, a drama playing itself out in Greece. I don’t know whether this will succeed, but a system of floating exchange rates in Europe—excusing weak economies from any need for reform and exposing a continent to the possibility of a wave of competitive devaluations—is no panacea either, whatever Mount may claim. In the much criticized euro’s defence it is also worth noting that without it, the banking systems of southern Europe and Ireland would now have collapsed—which would have provoked further impossible strains in our own banking system along with a European depression. Everyone can see the current strains, and the scope for calamity. But it is fanciful in the extreme to imagine that floating exchange rates would have no less attendant if different strains—but none of the incentive for deep reform.
My story is consistent. The reforms I urge on Britain—repurposed companies, supportive finance, commitment to innovation and flexi-security in the job market—necessarily need to be reshaped for Europe, but they spring from the same analysis, and there is sufficient evidence that they work. The approach to taxation needs to be similarly balanced, with rates set to deliver the services we want rather than confronting local government, the criminal justice system, education and defence with cuts that threaten their very marrow. Taxation as a share of GDP could rise by a couple of per cent without choking off the economy. It is the good baronet, fighting old fights with ideas we know are profoundly flawed, that needs a new narrative. It wouldn’t take much to fix Britain. But it won’t be done while Mount and his like continue to get such a reverential hearing.