Money, money everywhere and not a drop to drink

Water, wealth uncreation and turning the means of life into financial assets

The scandal of Thames Water – £14 billion in debt and seemingly incapable of fixing leaks or avoiding untreated sewage being pumped into rivers – says so much about our allegedly democratic political system.

The Conservatives, naturally, want renationalisation – should it become unavoidable – to be a strictly temporary stop-gap before, as with insolvent banks after the 2008 crisis, water is returned to the good hands of the private sector.

But the other team, Labour, are also against permanent nationalisation. In fact, together with the water industry, they are racking their brains to come up with plausible alternatives to it.

Such an absurd situation, at a time when large pluralities of voters, including Conservative ones, want the water ‘industry’ to be taken back into public hands, is perhaps more understandable in the light of the last New Labour government’s intimate ties to the water companies.

Ruth Kelly, for example, former cabinet minister under both Blair and Brown, is head of Water UK, the trade association for the water companies and naturally regards nationalisation as anathema. Angela Smith, former Labour MP and one of the founders of (Don’t) Change UK, vehemently opposed Labour’s previous policy, under Corbyn, of renationalising water. She was quietly readmitted to the Labour party last year. Ian Pearson, former New Labour environment minister is a non-exec director of Thames Water, the UK’s biggest water company, which also employed the ex-Labour cabinet minister and one time Trotskyist, Gus Macdonald, as its  European advisor between 2006 and 2016.

Such an elite consensus is symptomatic of the British oligarchy which masquerades, less and less convincingly with every month that goes by, as a model democracy. The Conservatives are obviously in favour of the continuation of privately-run water – it was Thatcher who privatised it in 1989. But the opposition Labour party is so well ensconced in the (fraying) order of things, that it is just as ideologically opposed to a change in the status quo. Notwithstanding obvious errors like the Brexit referendum, which released so many exorcised ghosts from the closet, British ‘democracy’ is about persuading the public to acquiesce in a state of affairs they dislike more and more as time passes.

But if the water ‘industry’ illustrates the hollowness of democratic decision-making, it also exposes something fundamentally rotten in the way we approach our economy as a whole. The water companies are, it has been reported, collectively in debt to the tune of £65 billion, up from nothing when they were privatised. “The staggering combined debt pile built up by the UK’s 12 water companies means that huge swathes of cash are being spent on interest payments,” fumed the Daily Mail a few weeks’ ago, “money that could be spent cleaning up polluted rivers or fixing leaky pipes.”

But no-one seems to ask why they are in debt. It can’t have been to fund infrastructure investment as the sewage-tainted rivers and seas and unplugged leaks wouldn’t exist if the infrastructure was properly maintained, let alone upgraded. The real reason is both more prosaic and depressing. Deliberately placing companies in debt, in order to extract money from them, is a core part of the strategy of their immensely wealthy owners.

The technical term for this is a ‘leveraged buyout’. The idea goes back to the 1960s but really only took off in the 1980s and ’90s. One American writer on “asset-manager capitalism” describes it thus:

[Traders realized] they could buy a company with borrowed money, using the company’s assets as collateral for the loan. They then transferred the debt to the company, which in effect had to pay for its own hijacking, and eventually sold it for a tidy profit.

The root of Thames Water’s debt affliction stems from the time it was bought by Australian asset manager Macquarie in exactly such a leveraged buyout in 2006. According to Money Week magazine, “by the time it was sold again in 2017 its debt had ballooned from £3.4bn to £10.8bn”.

Incidentally, Macquarie’s interest in the UK’s Water ‘industry’ has not abated. In 2021 it completed a “debt investment” in Anglian Water and acquired a majority stake in Southern Water.

According to American economist Michael Hudson, asset managers and ‘activist shareholders’ now look upon companies generally as “cash cows”. Rather than “plowing [sic] profits back into the corporation to expand the business by new long-term investment, research and development,” he argues, “the company is urged to pay out its earnings as dividends and buy back its stock to bid up its price.”

Share buybacks, illegal until the Thatcher and Reagan eras, have become routine for corporations. Among UK water companies, the owners of South West Water and Yorkshire Water have both initiated share buybacks. The effect of a firm buying back some of its own shares is to reduce their overall number, thus increasing the earnings per share that shareholders receive. However, there is a cost. The money used could have been deployed to invest in the business or, in the case of water companies, modernise infrastructure or reduce bills. According to one critique, “By systematically draining capital from America’s public companies, the habit … corrupts the underpinnings of corporate capitalism itself.”

Politicians aside, many British people are outraged that these predatory capitalist practices are being used to degrade a vital public service such as water provision, without which life would be unbearably hard. But the uncomfortable fact is that such predatory practices are degrading capitalism as well.

The peril of damaging the delicate flower of ‘wealth creation’ is invariably raised whenever the idea of public ownership or more regulation or taxation is mooted. Sir Keir of Starmer-land, leader of something called ‘the Labour party’, says that ‘wealth creation’ and economic growth must happen first if money is to become available for public services.  But today’s financial managers, in the water industry or elsewhere, aren’t doing anything to create wealth. Instead, by stopping infrastructure or capital investment from occurring, they’re destroying it – to no-one’s benefit but their own.

And this is before the fact that they invariably avoid paying any tax on their ‘wealth creating’ activities is brought into the equation. Because water firms – and many other companies – are drowning in debt, they pay very little tax on their “special dividend payments”. Thames Water, for example, admits it doesn’t currently pay any corporation tax “because of the Government’s Capital Allowances scheme and the impact of our interest costs”.

We have been lulled into accepting the fiction that wealth creation is synonymous with rich people doing whatever it takes to become even richer – that a high share price is a sign of economic vigour  – when, in reality, their labyrinthine money-making schemes can be its utter antithesis.

Arguments contesting the duplicitous concept of wealth creation have generally taken the form of arguing that other people – workers, entrepreneurs or consumers – are doing the real work of creating wealth. The owners, by contrast, do very little, apart from becoming legally entitled to receive it after it has been generated. This is what Marxists call (surplus) value. But even one takes the highly dubious wealth creation ruse at purely face value, it involves the creation of jobs and products or services by someone. How are we to react if, in fact, no value is being created, besides the ‘wealth effect’, the translation of capital gains made in the stock market into luxury consumption?

At this point someone will be sure to pipe up about pension funds. They loom large among the investors in water companies (and electricity firms), either as clients of the private equity investment firms that own them, or as partners in consortia that run water companies directly. For example, the Universities Superannuation Scheme (for academics in the UK) and the Ontario Municipal Employees Retirement System both own large stakes in Thames Water.

But pension funds are as desperate for ‘yield’ as anyone else, in order to pay for the pensions of current and future retirees. They illustrate the absurd quid pro quo we have got ourselves into – that we must accept sewage being pumped into rivers and seas, and bills that keep rising while tax is avoided, in order to ensure barely adequate occupational pensions for thousands of ordinary people.

This is not a choice we should be forced to make. As should be obvious since the financial crisis, the stock market is not, despite superficial appearances and the best efforts of governments through ‘quantitative easing’, an eternally bountiful cash cow – either for money managers or pension funds. The old pension system in the UK – a better basic pension and an occupational (SERPS) scheme – both based on the pay-as-you-go principle offered more stability than endlessly trying to squeeze as much as possible from unwilling companies or privatised utilities that neglect their primary functions in favour of making money.

Still there is something archetypal about water. Along with energy, health services, ports, nursing homes, waste management, car parks, telecommunications etc., it is a real asset with a guaranteed cash flow that makes it irresistibly attractive to asset managers. This is, according to one author, “a society in which the key physical systems supporting social life and its reproduction—so-called ‘real assets’—are increasingly owned by institutional investors [pension funds, insurance companies, university endowments] specifically through the mediation of dedicated asset managers [the plunderers] and their investment funds.”

However, it seems peculiarly odious that water, so basic to the preservation of life, is treated in this manner. One of the first things acts of a Corbyn-led Labour government would have been to renationalise water, while his successor is brainstorming ways to head off the threat of that common sense option being taken. Nothing else illustrates quite so starkly which side they are on.

 

Addendum: Last week ITV broadcast a programme called 'Dirty Water – what went wrong', an investigation into why there were more than 300,000 sewage spills in England & Wales last year. But the programme shied away from the real reason things have gone horribly wrong – privatisation. Specifically a system in which asset managers buy water companies by placing them in debt and then get them to pay for the privilege of being bought out – in the process sacrificing the basic function they are supposed to have, which is to ensure clean water. The programme suggested that bills would have to rise to pay for the investment in infrastructure that will have to take place to avoid the mass contamination of water in the future. But bills have already increased by 40% in real terms since privatisation, with the result of sewage being pumped into rivers & seas across the country. So where has all the money gone?  You don't need me to tell you.

The experience of England is not unique. In the book Our Lives in their Portfolios, author Brett Christophers relates how private equity companies have acquired water systems across cities in America with the result that bills have skyrocketed while the systems themselves have been left in a terrible state. In England & Wales all but three of the water companies in England & Wales have been removed from the stock market by private equity firms.

The incidents are not exceptions, says Christophers. "Rather, they are the more or less inevitable upshot of core features of the model by which asset-managers society operates. They are, in short, a feature not a bug".

I look forward to a TV programme about that.

'Most economists simply do not understand finance' - An interview with Harry Shutt

Harry Shutt is a freelance economist (he has carried out more than 100 assignments for the World Bank, the United Nations Development Programme and the European Commission) and the author of Beyond the Profits System (2010), The Decline of Capitalism (2005), which predicted ‘an unavoidable financial crisis … on a scale far greater than any previous one’ and The Trouble with Capitalism (1998). Unusually for his profession, he is no cheerleader for capitalism, rather asserting that the profit maximising corporate system is a relic from the past whose continuance is doing immense harm to public welfare. In this interview he reflects on Jeremy Corbyn, the real purpose of Quantitative Easing, why economic recovery under the present system is impossible, the necessity of a basic income and what future economic enterprises might look like in an era of the rapidly diminishing value of capital.

As unlikely as it looked a few months ago, a Jeremy Corbyn-led Labour government now seems a distinct possibility in the not too distant future. What’s your opinion of Corbyn and Labour’s social democratic programme and where do Labour’s blind spots lie?

From a Left perspective Corbyn’s election to the Labour leadership was obviously a step in the right direction, as also was his relative success in this year's general election, based on a relatively radical manifesto and a strong campaign. However, the election manifesto, which was quite widely praised, has some serious drawbacks in my opinion. One of them was on the question of social welfare, where they didn’t promise to reverse the cuts, which was pretty extraordinary. And they didn’t come out with any alternative to the Tory strategy. In that regard, there’s been a further report on the impact of Universal Credit – it’s from the Citizens Advice Bureau and they’ve called for it to be suspended. Labour ought to be calling for this. But they simply haven’t got any other ideas. Even theoretically, Universal Credit is a complete disaster and could never work in practice.

More fundamentally, there is no mention in the manifesto of the problem of the massive national debt – which has doubled since 2010 despite the desperate efforts of the present government to contain it – other than a commitment to bring it down by the end of this parliament (2022). Yet there is no indication of how this is to be done, nor any mention of the macro-economic constraints to action or of the very real threat of renewed financial crisis.

Your position differs from many left-wing economists in that you say that not only has recovery not happened since the crash of 2008, but, in the circumstances of enormous and growing debt (financial, corporate and personal) and ultra-low interest rates, recovery is simply not possible. Hence investors and entrepreneurs are forced into ‘fictitious’ areas of activity – financial speculation – in order to make a profit. But why exactly does a combination of an enormous debt overhang and near zero interest rates preclude any genuine economic recovery?

As noted by at least one other economist (Steve Keen), most economists simply do not understand finance. If they did they would realise that the prevailing low interest rates are the result of massive market manipulation officially orchestrated by the US and other leading world economies. Likewise they would recognise that the main purpose of Quantitative Easing is not to stimulate economic activity but to buy up public debt and other financial securities at prices far higher than their true market worth, thereby holding market interest rates far below what they would be if they were to reflect the true value of financial securities. In other words the current record levels of stock market prices and unprecedented low interest rates are the result of a gigantic state-sponsored fraud (probably the biggest in history). As such it must be recognised that this QE-based fraud is unsustainable and is bound to end in a monumental financial crash, with dire consequences for the entire world. What is most astonishing to me is that other economists (particularly on the Left) are unwilling or unable to recognise this.

Some left wingers regard low interest rates as an opportunity for the government because they mean it is able to borrow money cheaply and, for instance, build social housing or install ultra-fast broadband and free public wi-fi. I know you regard such thinking with disdain. What are your reasons?

Because of the existing or prospective insolvency of most of the borrowers the only institutions likely to lend at such low rates are ones associated with the government itself. So those who use this argument are simply asking for the government to borrow from itself – or print money by any other name.

The three things you mention are all desirable. But why should we borrow even more to pay for them when a) we are already in debt up to the eyeballs and b) the private corporate sector has such huge excess reserves of capital (‘surplus value’)? The LP manifesto was extremely timid in proposing higher taxes on corporate profits; note also that in 2010 the Lib Dems proposed reversing some of the generous concessions on Capital Gains Tax (CGT) given the City by the New Labour government (of course dropped when they entered the Coalition), but the LP manifesto makes only one very vague reference to reversing CGT give-aways. The general point is that there is no substitute for a huge redistribution of income and assets, whether before or after (or perhaps during?) the coming financial collapse.

An American investor said at the start of June that ‘the worst crash in our lifetimes is coming’ - Do you think that it’s just a matter of time before a seismic economic crash happens?

Yes

You’ve written that ‘there is no painless way of achieving a transition' to a new economic model. But people are understandably frightened of what a mammoth economic crash would lead to. It might usher in Fascism, war-lordism or even nuclear war. Is there any way of moving to a more rational economic system without the roof caving in so to speak?

No, the point of no return was probably passed in the 1970s.

You’re a strong advocate of a Universal Basic Income. But unlike many basic income proponents, who imagine it as kind of fall-back to enable people to navigate the ‘gig economy’, you’re adamant that UBI should be ‘the primary mechanism of income distribution in the modern economy’. If basic income will largely replace income from work for people does it therefore need to be set at a generous level – much higher than just subsistence?

Not necessarily. People will still have the opportunity to engage in paid employment / self-employment to supplement their basic income stipend. But the UBI must be sufficient to permit people to engage in non-remunerative activities without financial hardship (bear in mind they will also benefit from the NHS and other publicly financed universal services).

Your last book was subtitled, ‘Possibilities for a Post-Capitalist Era’. Under a post-capitalist economic system, if enterprises no longer maximise profit and people don’t receive much of an income from paid employment (they get most of their living costs from tax-funded UBI), how will universal services like the NHS and education be paid for? Won’t tax revenue dwindle to a virtual trickle?

The pattern of employment, value added, income distribution, pricing, taxation etc under a post-capitalist economy remains to be determined as the system evolves. But consider that (e.g.) if it costs little or nothing to produce things (as in the “Zero marginal cost society” – ZMCS) then people won't need much income to procure them. The likely knock-on effects of this on the cost of public services are obvious.

Adam Smith is commonly thought of as the father of market economics. But he was against the corporate form (he thought that ownership and management should not be separated) and advocated small-scale enterprises. Similarly, you regard modern-day corporations as huge vested interests working to the detriment of public welfare. In any case, you believe that the era of the mega-corporation – enterprises that require massive capital investment and employ thousands of people – is coming to an end. So, in future, what will economic enterprises look like?

Again it's hard to foresee. If capital is no longer scarce and its value correspondingly minimal there will be little profit in trying to accumulate it in large quantities. Likewise rapid technological change and the increasing difficulty of restricting access to it will make it hard to capitalise on “intellectual property” as mega-corporations currently do, especially with the advent of the ZMCS. In this scenario I envisage enterprises (whether community or privately owned) as mainly small-scale serving local economies. Note that Shell and other oil companies are already preparing for life after petroleum, though most are not anticipating the equally certain devaluation of most other activities of high capital intensity.