Is It Time For Another Windfall Tax?

Just over a week ago, the FT reported that corporations across the world were sitting on record amounts of cash. By the end of 2012, the non-financial members of the global S&P 1200 index, which comprised 975 of the world’s biggest companies, including household names like Apple, Pfizer, Toyota, Google and Microsoft, had accumulated $3.2tn in cash. This was 62% up on the $1.95tn they held in 2008. Goodness knows what the figure would have been if financial firms had been included. Various figures get quoted for the size of UK firms’ cash piles, but £440bn seems to be a fair assessment. To put this figure in some context, the British Government’s annual deficit is around £100bn, while the national debt weighs in at about £1,200bn.

What’s going on?

The economist Richard Koo coined the phrase ‘Balance Sheet Recession’ having looked at corporate behaviour in Japan during the 1990s. He observed that when debt gets so large a crisis occurs that forces companies to address their liabilities. In these circumstances businesses cease to behave like the profit maximisers of standard economic theory. Instead, the focus of their operations becomes the generation of cash to pay down their debt to what they consider safer levels. The Great Recession appears to be this type of recession, with companies, and indeed consumers trying to hoard cash to reduce their debts and form a safety barrier to protect against further economic bad news.

UK Business investment

Source: Quarterly Survey of Capital Expenditure - Office for National Statistics

The fact that companies have ceased to be profit maximisers in the conventional sense is borne out by the figures for business investment. Although this rose 1.4% between Q2 2013 and Q3 2013, it’s lower than it was a year ago. In fact it’s been pretty flat for 4 years and would need to increase by over 25% to get back to the level it was at the beginning of the crisis at the start of 2008. Clearly, although we saw modest growth return to the UK economy in 2013, private sector investment played no role in this. We can’t say we have balanced, sustainable growth until it does. Projections for rising growth in 2014 and beyond appear to be based on an assumption that it will. It remains to be seen whether such a belief proves to be well-founded.

Keynes famously wrote about the ‘animal spirits’ that were necessary to generate confidence, optimism and the investment and risk-taking that were essential to propel growth in a capitalist system. He argued that when the ‘animal spirits’ of the private sector failed, as manifested in recession and depression, they had to be replaced by the sober resolve of the public sector to spend to restore growth and generate employment. So far, it would appear that the ‘animal spirits’ of UK Plc are flagging and this at a time of record low interest rates. Essentially the private sector is saying that for 4 years they haven’t been able to find enough profitable projects to invest in, even though their captial is free. Instead they would prefer to sit on it and see its value eroded by inflation. This is hardly a ringing endorsement of free market captialism.

Indeed this unwillingness by the private sector to invest lies behind the idea recently popularised by the economist Larry Summers that perhaps the world economy has entered a period of ‘secular stagnation’. If businesses cannot or will not raise their investment spending, then there is no foundation to the belief that capitalist economies will, if left alone, return to levels of full employment following a crisis.

We know that the UK economy is around 15-20% smaller than it would be if it had grown at its pre-crisis trend rate and that we still have high levels of unemployment and underemployment. Yet companies are sitting on large quantities of unemployed capital. In these circumstances hasn’t the time come for us to start to consider levying some form of windfall tax on corporate cashpiles? In 1997 the new Labour Government raised a windfall tax on the privatised untilities that raised around £5bn. This was used to fund the New Deal which was a successful welfare-to-work programme designed to tackle long term unemployment. It was also used to fund captial investment for schools. If the case for a one-off levy was compelling then, it must be even more so today.

Now Even George Osborne Is A Friend Of The Minimum Wage

Few can doubt that Labour's Cost Of Living Crisis Campaign is making headway following George Osborne's volte-face on the Minimum Wage last week. On the 10th January the Chancellor was warning against a 'self defeating' inflation busting increase in the Minimum Wage. However, last Thursday he was trying to grab the limelight by calling for, er, an inflation busting increase in the minimum wage. In 6 days what had been seen as 'self defeating' had transformed into something that the 'economy can now afford'. You could hear the irritation in Business Secretary, Vince Cable's voice as he sought to explain this development in an interview on BBC Radio 4's Today Programme. What could have happened in less than a week? I suspect the arrival of the latest Tory Party focus group polling on attitudes towards falling living standards, rising inequality and fairness.

Before the Minimum Wage was introduced we heard dire warnings that it would cost jobs. This proved to be unfounded and those Conservative MPs who opposed its introduction now seem to be in favour of its retention. Nonetheless, every year when it becomes time to review its rate, various business leaders and their supporters in Parliament and the media warn us that if it is increased too much then jobs will indeed be lost, often citing the fact that we are in a global marketplace therefore not insulated from competition. I think this argument is overdone. 

The economy is split into 2 categories, the tradable sector and the non-tradable sector. The tradable sector refers, as its name suggests, to those areas of the economy whose output can be internationally traded, or exported. It is made up largely of manufacturing and business, including financial, services. The non-tradable sector relates to those businesses and organisations that produce goods and services for domestic consumption as they can not be exported. These include areas like government, care, hospitality, food service, education, retail, and construction. If someone is working in the non-tradable sector, then their job is not exposed to international competition. Home-helps for the elderly can not be outsourced to a firm in China and customers in UK pubs can't be served their drinks from a call centre in India. Yet where do the majority of people on the Minimum Wage work? In the retail, hospitality and care sectors.

So how would a substantial rise in the Minimum Wage lead to a loss of jobs due to the workings of free markets in a globalised economy? Its hard to see how paying someone £6.50, £7.00 or even £7.50 an hour rather than the current £6.31 would suddenly cause an upward push in wages rates that would suddenly make UK-based hedge fund managers, investment bankers, lawyers and accountants internationally uncompetitive. It is perhaps easier to imagine a detrimental effect at the marginal end of UK manufacturing as these firms would be forced to pay more to retain staff, pushing up costs and thereby reducing competitiveness. 

Yet the relationship between a developed country's wage levels and its export prowess appears to be a counter-intuitive one. According to the World Economic Forum, Switzerland is the most internationally competitive nation in the world, And it's not all cheese, chocolate and cuckoo clocks. Although it has a now rather tarnished reputation for international banking, what is not widely known is that it is a world leader in state of the art industrial machinery and chemicals. Indeed, in per capita terms, Switzerland has the highest industrial output in the world. Behind Switzerland, Finland weighs in at number 3, ahead of Germany in 4th place (the UK is back in 10th place). These are not low wage economies, seeking to slug it out with China by trying to directly compete in the low wage, low skill, assembly of consumer goods. They have managed to evolve from this sort of early state industrialisation to devote themselves to more high-skill, capitally intensive and consequently high wage, advanced manufacturing. The figures speak for themselves: Switzerland exports 52% of its GDP annually, as does Germany; for Finland the figure is 41%; for the UK its 32%. Moreover these countries were doing this while we were preoccupied with our invisible earnings and maintaining the City of London in its pre-eminent role as world leader for banking and other financial services and latterly as the global HQ for investment banking, derivatives trading hedge funds, private equity and the like.

Maybe the time has come for us to escape from our Stockholm syndrome relationship with bankers and embrace the fact that there are very real alternatives for UK PLC.

Cut Welfare By Building More Council Houses

It must be fair to say that the Coalition Government's Welfare Reform policy has encountered some difficulties over the last few months. One good thing about the ConDems attempts in this area has been that there rather ill-informed efforts have had the effect of exposing the real problems. One of these, which seems finally to be gaining some traction in our public discourse is that the lack of supply of social housing is the major cause of the now £24bn housing benefit bill. Over-occupation, unwillingness to work, claims by under 25's and immigration have been exposed as sideshows. The real culprit is private sector rents that are unaffordable even for those in full time work. This story was taken further when Daniel Boffey, writing in Sunday's Observer, pointed out that:

'Across the capital at least 36% of one-time council homes are now rented out privately but that proportion is even higher in some of the poorest areas where average private-sector rents, often paid by tenants on housing benefit cost as much as £230 a week more than council rents.'

Ed Conway, the Economics Editor for Sky news, has an illuminating piece on his blog about the role of the Thatcher government played in creating the current housing crisis. This is based on previously secret papers from 1984 that have now been released by the National Archives. Thatcher was determined to cut the Government's deficit and to that end a big cut in the housing budget was proposed such that between 1979/80 and 1985/86 the public housing programme would be cut by 52%. Both Ian Gow, her Housing Minister and Patrick Jenkin, her Environment Secretary, argued against these cuts, with Gow going as far to warn that to proceed would lead to increased homelessness. Jenkin made the point in Cabinet that at the time 'the formation of new households was running at 190,000 a year.' He estimated that 75,000 new public sector houses would need to be built to cope with this, although he was prepared to go down to a figure of 40,000. However, Thatcher thought that 15,000 to 20,000 would be adequate, egged on by her then advisor, now Tory MP, John Redwood, who wrote in a note to her that, 'We should be robust about increasing council house sales and reducing the level of new build.'

There seems to have been a firmly-held ideological belief that as the public sector withdrew from the housing market, it would create space that the private sector would quickly fill. Thus warnings about increased homelessness could be dismissed as it was believed that they would prove false because they were based on a lack of understanding of the workings of free markets. Sadly, the truth turned out rather differently than the disciples of Adam Smith had promised, as this chart, reproduced by Conway in his post, demonstrates.

It is no wonder then that, despite the Coalition's constant attempts to blame the previous Labour Government for the Deficit in general and uncontrolled Welfare spending in particular, the rapid rise of Housing Benefit came under the Thatcher and Major Governments, not under Blair and Brown, as this chart from the IFS clearly shows.

It is pretty clear now that a decision to reduce spending on council housing coupled with the Right to Buy policy, came together under the previous Conservative Government to create a perfect storm of rising prices, rising rents and rising welfare benefits to pay those increasingly unaffordable rents. Moreover, it is becoming clear that more and more housing benefit is going to relatively wealthy private landlords. In other words, it's become a tax payer subsidy to the private rented industry.

The UK is now a world where a family can be in an identical house to their neighbour, but are having to pay, with taxpayer support, 2, 3 or 4 times their neighbour's rent, because their neighbour is lucky enough to be in public housing. Surely, in these circumstances the time has come for us to borrow more to invest in Council Housing as a means to reduce the nation's Welfare bill.

The Entrepreneurial State

Today George Osborne announced that further cuts of £25bn will be made to the Welfare bill after the next election. Paul Johnstone of the Institute of Fiscal Studies pointed out that this would mean taking money from the poor, the sick and disabled and those with children, essentially the most vulnerable in our society. Robert Chote of the Office of Budget Responsibility didn't disagree. Over the next 4 years, we in Lewisham will have to implement around £85m worth of cuts, along with other Labour authorities across the country. Strangely, councils run by Coalition parties in more affluent areas have been protected from such severe budget reductions. Their residents clearly won't be required to endure quite the same levels of austerity as ours. Large cuts to Welfare spending coupled with disproportionately larger cuts to Local Government in the more deprived areas of the country gives a lie to the assertion that 'we are all in this together'. Just like some passengers on the Titanic were in first class, enjoying a luxurious trip and able to get to the lifeboats a lot faster than their fellow travellers in third class when disaster struck.

The Chancellor's remarks today should come as no surprise. He is merely restating what was implied in December's Autumn Statement. Osborne has set out the Government's course so that by 2018-19, according to the OBR, its "consumption of goods and services - a rough proxy for day-to-day spending on public services and administration - will shrink to its smallest share of national income at least since 1948, when comparable National Accounts data are first available". This was the time when the post-war Labour Government was setting up the Welfare state. The Act that set up the the NHS, the crowning glory of Labour's achievement, didn't take effect until 5 July 1948. So, in short, the Coalition want to reduce government back to the size it was before the Welfare state was set up.

This motivation to reduce the size of the Government surely comes from an ideological view that the state is a burden on the economy sucking up resources that could be more efficiently used in the private sector. That this position is still so widely held over 6 years after a financial crisis created in the private sector and from the effects of which we are still reeling is disappointing.

The argument that the State has a positive role in the economy is not one that you hear articulated in bold terms very often. You might hear the case being put for the need for state intervention to correct market failure and deal with 'externalities'. If markets don't capture the full costs of pollution to society, then Governments should act. If the private benefit (profit) is too low to get a bridge built but is outweighed by the social benefit, then the Government should intervene. This sounds very technocratic and therefore not too radical and leftwing. However, the argument for more regulation to correct the excesses of free markets makes many advocates of an active role for the state feel a bit uneasy. It's one thing to call for more social justice, but this can lead on to demands for more 'fairness' which can seem naïve and immature, opening one up to charges of being a rampant 'redistributionist' 

So it has been a great encouragement to me to finally get down to reading Marina Mazzucato's book The Entrepreneurial State over Christmas. Mazzucato argues that we need to see the state not as a necessary evil but as an engine of dynamism and entrepreneurship in the economy. If we do, then we no longer need to believe that the state 'crowds out' more productive investment in the private sector because we can see that the state can not only invest where it is too risky for the private sector, but it can invest to develop projects that deliver a much bigger return than those promoted by the private sector. I think that this idea is far more difficult to brush aside than it would have been 10 years ago, bearing in mind that we now realise that much of the R&D that was going on in the banking sector before the Great Recession was used to develop products that turned out to be 'financial weapons of mass destruction', to quote Warren Buffett. To support her argument Mazzacuto shows that, 'there is not a single key technology behind the iPhone that has not been State-funded.' These include the Internet, GPS, touch-screen display and the new voice-activated personal assistant (SIRI). The algorithm that led to Google's success was funded by a US public sector grant and the 'molecular antibodies, which provided the foundation for biotechnology before venture capital moved into the sector, were discovered in public...labs in the UK.'

Perhaps we need to be more confident in putting the case for a major role for the State to play in generating growth and creating wealth, by building an economy founded on research, invention, innovation and technological advance.