Other People's Money – The Degeneration of Thatcherism

 “The problem with socialism,” Margaret Thatcher famously said (or perhaps nearly said), “is you always run out of other people’s money”.

Subjecting everything to a merciless cost-benefit analysis was the core Thatcherite credo. ‘Lame Duck’ nationalised industries were privatised and left to sink or swim in the unforgiving waters of private sector, ‘uneconomic’ coal pits were shut down no matter what the cost to the communities dependent on them, and internal markets, pledged to scythe through waste and bureaucracy, introduced into national institutions like the NHS and the BBC.

Therefore, it’s one of history’s great ironies that in the 21^st century her party – the Conservatives – are, under the guise of ‘free market’ policies, more profligate with “other people’s money” than any socialist government ever was, or, if one wants to be optimistic, ever could be.

“Socialism”, Thatcher’s mortal enemy, by regulating the private sector, as opposed to throwing money at it, would be immeasurably cheaper.

Let me count the ways.

Energy

The enormity of Liz Truss’s energy price guarantee  a huge “state handout” of between £100 billion and £170 billion may have been scaled back by Jeremy Hunt but the principle remains: using taxpayer money to subsidise the profits of energy retail and supply companies because the prospect of public ownership – ‘socialism!!’ – is so horrifying it can never be countenanced.

And the huge cost of heating their homes to the public – the price cap is now at an annual level of £4,279 – has only been exacerbated by the Conservatives’ attempts to head off the idea of public ownership by introducing phony competition into a plainly monopolistic market. The £6.5 billion state bailout of the energy retail company Bulb – one of nearly a hundred new suppliers introduced to give the appearance of competition to the electricity supply system – will cost each household £230.

Despite the fact that, due to sharp falls in the price of wholesale energy, gas and electricity are cheaper than they have been since 2010, the market price will not be reflected in bills for a long time. “The cost of rescuing failed energy firms,” says Rupert Hargreaves of Money Week magazine, “will add hundreds to each bill, offsetting some of the declines in wholesale energy prices.” And of course the shaky finances of the still existing energy firms need to be secured.

It is reassuring to know that the opposition ‘Labour’ party, now safely back in Blairite hands, will continue this prudent use of taxpayer funds. Its stated approach of a six month price cap freeze, now judiciously mirroring Hunt’s policy, will give £29 billion to the energy firms, the mad Corbynite relish to “nationalise everything” at exorbitant cost having been thrown in the dustbin of history where it belongs.

It’s not surprising therefore that there is a singular lack of curiosity in Westminster as to why wholesale energy prices have been on such a rollercoaster in the first place, spiralling skywards and then crashing. It can’t have been solely down to Vladimir Putin , or the gods of supply and demand, because the falls continued, even sped up, after the Nord Stream pipeline, which syphoned gas to Europe, stopped operating and was then sabotaged.

All that Rishi Sunak will say is that it’s impossible to artificially hold energy prices down. But there is nothing natural about the ‘wall of money’ that drives speculation in commodities such as oil and natural gas. “Prices for food, oil and gas are determined independently of both wholesalers and costs,” noted economist Ann Pettifor in the Financial Times last September. “Wall Street and Chicago Mercantile Exchange investors deploy vast sums in speculation on movements in the price of both food and energy prices. It’s a profitable game.”

But rather than cracking down on speculation, the government, unfailingly loyal to a bastardised market fundamentalist ideology,  wants to encourage it. The Financial Services and Markets bill, currently being scrutinized by the House of Lords, will give the Prudential Regulation Authority and the Financial Conduct Authority additional objectives of encouraging “economic growth and competitiveness.”

The idea that you should limit speculation in commodities, which drives up wholesale prices thus inflating everyone’s heating bills by thousands of pounds, is beyond the bounds of the thinkable. This is despite the fact that it has been done in the past by an American President who would have bristled with indignation at being called a ‘socialist’.

In 1934, Franklin Roosevelt passed a law that limited speculation in commodities to 20% of the market. Stability reigned until ‘New Democrat’ Bill Clinton – channelling the deregulatory spirit of Reagan and Thatcher – legalised credit default swaps in housing (paving the way for the 2008 financial crisis) and in the same law gave the green light to unlimited speculation in other commodities, such as oil and gas – the root of our current troubles.

But the notion that we might shun this 21^st century liberation and return to the benighted ‘socialist’ practices of the past – which kept energy bills low thus obviating the need for huge public subsidies – is clearly just puerile. Like King Canute ordering the tide to stop coming in.

Public Services in general

You might think that no-one in their right mind would want to copy our dog’s breakfast of an energy supply system in other public services. But then again you (probably) don’t live in the mind of a Thatcher-besotted British Conservative.

The roll out of broadband installation in the UK is (prepare for a shock) heavily subsidised by the public purse. Under the £5 billion “Project Gigabit” programme, the government is gifting most of this money to BT and BT Openreach, its broadband division. However, stung by the lack of progress, it has augmented this with the fake competition model pioneered in the energy distribution system, encouraging other suppliers, so-called “altnets”, to start laying fibre-optic cable. Unfortunately, reports the Times, these paragons of efficiency are – much like private medical firms cherry-picking the simplest procedures – concentrating on the easiest areas. So “we’ve ended up with hundreds of fibre companies all building in the same areas.”

There is also the clear and present danger in the current climate that some of these “altnets” could go bust. So, as with the energy supply ‘market’, the government is setting up a Supplier of Last Resort system, naturally at the public’s expense. Unavoidable bail-outs, in the manner of Bulb, are on the cards. According to investigative journalist Solomon Hughes:

Customers of failed broadband firms will be shunted back to the old monopolistic firm, BT. The cost of these bailouts will be borne by the customer or the government. Just as in energy, trying to break [up] monopolistic firms by encouraging new entrants might end in costly failure.

The ‘socialist’ alternative, outlined by Corbyn at the 2019 General Election, would have been far more effective and cheaper. He wanted to entrust broadband rollout to a new public firm, called British Broadband, created partly by nationalising BT Openreach, and funded by taxing trillion dollar tech monsters like Facebook and Google. But this “crazed communist scheme”, to quote Boris Johnson, was too much for freedom-loving Brits so we’re back to gifting private firms public money to dig up the same stretch of road.

It has dawned on some right-wingers that the privatisation pioneered by Margaret Thatcher at the start of the 1980s has morphed into something else without many people noticing. Initially the Conservatives did simply divest themselves of state-owned companies (that had often been nationalised in the 1970s because they were at risk of bankruptcy). Firms like Cable & Wireless, British Steel, Rolls-Royce, British Airways, Jaguar and even Thomas Cook, were sold and had to make their own way in the private sector. Sometimes they survived and often, as in the case of Jaguar, British Steel and Thomas Cook for example, they didn’t.

But from the Tell Sid era of the break-up of British Gas in the mid-1980s, so-called ‘privatisation’ changed its nature. It became synonymous with contracting out monopoly services from the state to the private sector on the dubious grounds that this would be more efficient. This process is now so ubiquitous, encompassing services like water, gas and electricity, the railways, academy schools, NHS services, air traffic control, and care homes, that its uniqueness, and crucial difference with authentic privatisation, is often overlooked. These services were funded – and continued to be funded – by the government and, most importantly, could not be allowed to cease to exist.

After British Rail ‘privatisation’ in 1996, for example, the operation of lines was subject to a franchise system companies could bid to run. At the same time, the public subsidy awarded to this allegedly privatised system has increased by over 200%. And when the train operating companies are faced with a strike by their employees, they are reimbursed by the government for lost revenue.

In the words of a journalist for the right-wing Spectator magazine:

The rail industry hasn’t really been privatised at all. It remains underwritten by the taxpayer. Nor is there much in the way of competition: local monopolies are guaranteed by the franchising system.  The only difference is that the system is rigged so as to allow the private companies owning the franchises to make a profit, even if their underlying operation is making a thumping loss.

Predictably, faced with this “rigged” system, the writer wants to return to the original spirit of Thatcherism and genuinely privatise the railways, abolishing state subsidies and forcing “the industry” to stand on its own two feet. But this solution would simply result in a system of free market anarchy that laid the ground for Thatcher’s bête noire of ‘socialism’ in the first place. Fares would be hiked into the stratosphere and ‘uneconomic’ lines shut down. What is socially necessary is not always profitable – in fact the two are often in conflict – and the fear of this realisation is why this country lives under the sway of bastardized Thatcherism.

Where did it all go wrong?

In part two, I will continue to list the myriad ways that 21^st century conservatism props up the ‘free market’ system with public funds, in addition to asking why.

The answer, in my opinion, lies in both a putatively realistic but flawed vision of human nature and the unacknowledged economic failure of Thatcherism. She told herself, and everyone else, that releasing the forces of enterprise and beating back trade unions and socialism would result in a future of unending prosperity for all.

However, it hasn’t turned out that way and all they can do, to tweak a well-known phrase, is ‘throw [other people’s] money at the problem”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Economy the Rich Won

The two-part BBC documentary, The Decade the Rich Won, which concluded last week, made for interesting viewing. It told “the little understood story of our times” – how through the policy of Quantitative Easing (QE), the fabulously wealthy became even more fabulously wealthy and the rest of us had to make do with austerity and falling wages. But it did beg certain questions:

Why didn’t anyone say so at the time? “Full disclosure” said hedge fund manager Paul Marshall. Since the 2008 crash the world’s largest central banks (US Federal Reserve, Bank of England, European Central Bank and Bank of Japan) have created around $20 trillion which has basically gone into the already cavernous pockets of banks and wealthy individuals (like Paul Marshall’s).

In the words of Andrew Huszar, who was QE Program Manager at the Federal Reserve (and thus in charge of the entire process): “over the last 12 years, we’re talking about unprecedented amounts of money being printed and funnelled into the markets, banks being showered with trillions upon trillions upon trillions of dollars, ultimately benefiting the most privileged in our societies.” Only a fraction of the ‘stimulus’ he admits, “was actually getting out and making a difference in the lives of everyday people”.

But these mea culpas are strictly retroactive. When QE was first happening, not only politicians and central bankers – who you might expect to parrot the official line – but also media organisations like the BBC uncritically rehearsed the story that QE was providing  a lifeline to the ‘real economy’.  In 2009, the BBC likened QE to putting “imaginary petrol” in your car. 

And this isn’t of purely historical interest. The Covid shut down saw governments quickly turn to the “unconventional” (now used so much it must be thoroughly conventional) technique of QE. In Britain, the Bank of England increased QE from £495 billion to £895 billion. And the BBC was on hand to explain how this pumping of money into the economy would “help it to recover”.

So much like a war, when the controversy in question has to be implemented unscathed, critical voices are sidelined. But in the aftermath, when it doesn’t much matter anymore, they are allowed airtime and what actually went on can be safely revealed. That’s how much freedom we’re allowed.

If the economy wasn’t saved, what was? All the old familiar faces protested that they had no choice but to implement QE. It was a no brainer. “We kept the economy going,” said Alastair Darling (Chancellor in 2008). “People who’d otherwise have lost their jobs didn’t”. Former Bank of England Governor Mervyn King attested that the first tranche of QE prevented a re-run of the Great Depression. Transient Tory PM Theresa May called QE “emergency medicine”.

But if only a small amount of the QE trillions actually escaped into the ‘real economy’ – in the US mortgage lending actually went down after QE was introduced – it can’t have been the actual economy, the economy of people exchanging goods and services, that was saved. The “emergency medicine” has to have been for the conduit through which QE was implemented, the financial system. And only by QE preventing the implosion of the financial system, was the real economy rescued from oblivion.

The real question is therefore how did QE save the financial system? This is something the documentary didn’t try to explain but is actually the crux of the whole story. One means was simply by pumping huge amounts of money into the system. Thus hugely indebted banks and other companies escaped their natural free market fate.

But QE did more than supplying, in Huszar’s words, “the greatest Wall Street bailout of all time”. It also works by ensuring an ultra-low interest rate and by increasing the price and reducing the yield on government bonds, incentivising investors to shift into other assets, such as shares.

In this way, zombie companies – firms that do nothing more than survive by meeting the interest payments on their debt and paying wages – are permitted to live on. And the stock market as a whole receives a purely artificial boost. Under ‘normal’ market conditions, shares prices reflect investors’ expectations that profits will be high or low in the future. But not under QE. Thus a company such as car rental firm Hertz can file for bankruptcy and see its share price soar at the same time.

This is nothing like a free market system. More accurately it should be called a state capitalist system.

You can’t artificially hold down energy prices but you can, apparently, artificially raise share prices. Ex-banker and hedge fund manager Rishi Sunak lectured us last week on the futility of the state trying to hold down the natural, market prices of gas and electricity. But strangely this King Canute style impotence does not apply to share prices – or house prices – which through QE can be synthetically raised for years.

But what happens, you might wonder, when this outside ‘stimulus’ is taken away? When “the shot of adrenalin”– in Alastair Darling’s phrase – has done its work and we can get back to normal.  Will there be a massive market correction towards ‘natural’ share prices, precipitating widespread company bankruptcies? In 2018, US Federal Reserve started selling the bonds it had acquired under QE – a practice called Quantitative Tightening – but it had to abandon the policy after a few months owing to a negative reaction from markets.

In Britain, authorities have reached for the “unconventional” policy of QE on three separate occasions in the last decade. Currently central banks around the world are reducing the amount of QE but not stopping it altogether or reversing it which should happen under a free market system.

The documentary only nibbled at this question. “In a way markets are addicted”, said hedge funder Marshall, “and central banks have become very nervous indeed about removing the drug.”

But if QE has become a near permanent part of the economic landscape what are the consequences? Does its very existence – and the huge amount of money involved – mean that it is always accompanied by the shadow of austerity?

Or can QE be redirected to pay for essential public services like the NHS? If you can save the financial system by injecting huge amounts of money why can’t you do the same for public services millions of people depend on? This is essentially the argument of Modern Monetary Theory – that public services can be fully funded through nothing more elaborate than hitting keys on a computer. The need to amass taxpayer funds to pay for everything is a myth. Austerity is a political choice, not an economic necessity. The only constraint – MMTers argue – is inflation.

However, lack of inflation is the one sure sign that QE didn’t diffuse through the real economy, rather staying within the financial system. The classic explanation of inflation is that it is caused by too much money chasing too few goods. And the simple fact that inflation didn’t rise exponentially is a pretty strong indication that the QE trillions didn’t filter through the financial system. Inflation is rising now unquestionably, probably caused by supply chain disruptions and Covid relief spending. The Bank of England predicts it will hit 7.25% in the spring. But this is not the level of inflation that QE, if the theory is right, should generate.

However, if QE is redirected to pay for public services, all the ingredients for spiralling inflation are there. This is because the money in its entirety will enter the real economy – through spending by consumers and suppliers. And the mere existence of more money, if accompanied by rising prices, does not translate into greater value or purchasing power.

It’s also the case that QE, notwithstanding the public pronouncements, is intended to have financial effects. Through buying bonds from banks and other companies, these institutions are suddenly awash with cash which they will inevitably use to buy assets, such as shares, thus inflating their price. It is also meant to reduce interest rates on debt for vastly overleveraged companies. QE “for the people” cannot, I would suggest, use the same conduits without having similar effects which pointedly don’t benefit the people.

But the establishment’s faith in QE is unshaken. The BBC doc did reveal a certain buyer’s remorse on the part of some. Ex-Bank of England governor Mervyn King admitted, “if you’ve had the biggest monetary policy stimulus the world has ever seen and you still haven’t had adequate economic growth, maybe the answer is not yet more monetary policy stimulus.”

But there no indication that those at the helm would, in retrospect, have done anything different or, indeed, would do anything different today. Even in conditions resembling 1970s’ “stagflation” – negligible economic growth and rising inflation – alternative means of stimulus are not seriously entertained. “Helicopter Money”, for example, the crediting of ordinary people’s bank accounts with cash in the expectation they will spend it, contravenes a core principle of our political settlement, that only the financial system deserves bailing out and everyone else – especially the bottom 30% — must be kept on a firm leash.

The QE/Austerity duopoly thus reigns supreme and is, if anything, more entrenched than ever given that it is longer a leap in the dark but tried and tested policy. The Chancellor of the Exchequer, for example, hails from the finance system and has faithfully imbued its self-interested mores. The personally very wealthy Rishi Sunak used to work for Goldman Sachs and a hedge fund – the precise ‘sector’ of the economy that Paul Marshall says has “made out like bandits” because of QE.

And if that isn’t guarantee enough, Sunak’s opposite number – Shadow Chancellor Rachel Reeves – used to work for the Bank of England and is an expert – mercifully! – on QE.

So despite the enormous pile of evidence that QE just makes the rich richer and has no impact on economic growth, the establishment faith in the practice remains undimmed. The bandits have taken over the asylum.

QE’s impact on inequality is astonishing. A statistic flashed on the screen at the end of the documentary revealed just how well the bandits have done. UK billionaires (individuals who own assets of more than a thousand million pounds) are worth 310% more than in 2010. But the effect is not limited to this blessed island. According to rich peoples’ magazine Forbes, in 2021 there were 2,755 billionaires in the world, an increase of 660 from just a year earlier. “Altogether these billionaires are worth $13.1 trillion, up from $8 trillion in 2020,” says Forbes. In 2006 – just two years before the QE era began in Euro-America – there were less than 1,000 billionaires globally with a collective net worth of under $3 trillion. What explains the huge increase in a period of insipid economic growth?

Objecting to this is not just a case of the “politics of envy” as it used to be derided. Beside the fact that these individuals do not deserve their loot under any objective free market criteria, such mammoth inequality fundamentally distorts society. As I have argued in a previous post, these billions are not all spent on buying luxury yachts or even blasting into space. They are also used as capital – money invested to make more money. In areas such as housing, privatisation, fossil fuel extraction, the media and democracy the invested funds of the ultra-rich are perverting society in ways that are directly at odds with the interests and desires of the vast majority. And through QE we have, through government action, turbocharged this process.

But then that is not all that surprising as the ultra-rich basically own the government as well.

It's only Marxist if the Labour Party does it

Reports that Chancellor Rishi Sunak is ‘considering’ raising corporation tax from 19 to 24% are fascinating not least because of what they say about our mainstream media.

Because no-one in the MSM seems to have noticed that even mooting such an idea completely contradicts the foundations of Tory economics.

Sunak, it is alleged, is mulling increasing corporation tax by 5 percentage points in order to boost revenue by £12 billion. But the crux of Conservative economic thinking going back decades is that the way to increase the tax yield is actually to cut rates on the wealthy and big business.

This conviction underlay George Osborne’s decision to reduce the top rate of tax from 50 to 45p in 2013. And it undergirded Tory minister David Lidington’s 2017 assertion that corporate tax yield has been ‘shooting up’ since tax levels started plummeting precipitously after the coalition took office.

The theory, as most things seem to in British politics, comes from America. In 1974 – so the story goes – economist Arthur Laffer met Dick Chaney in a Washington bar and drew a diagram on a napkin showing that increasing tax rates beyond a certain levels causes tax revenues to decline, not increase. Apparently, high tax rates compel the wealthy to work less or evade taxes (which obviously the government is absolutely powerless to prevent).

Though the napkin itself did not survive, in the next decade when Ronald Reagan was president, the ‘Laffer Curve’ justified swingeing cuts in personal taxes for the rich and seemingly endless reductions in corporate tax rates.

And the ethereal napkin, despite its empirical emptiness, has continued to guide the policy of western (in fact most) governments. Just four years ago, Theresa May was proposing a corporate tax rate of 17% and was prepared to go even lower to attain the most ‘competitive’ rate in the G20.

Up to now, however. If the theory is correct Sunak should be advocating further tax reductions precisely in order to increase revenue. But instead he’s arguing for a tax rise, in the process damning the entire theory as completely wrong-headed.

Before this latest leak, cracks were already showing. In the last election campaign, Boris Johnson committed to delaying May’s corporation tax cuts in order to fund the NHS, which is utterly nonsensical is you believe, as Johnson did, that cutting corporate tax increases the tax yield. But Sunak’s musings, even if they are not acted upon, drive the proverbial coach and horses through Conservative economics.

But it won’t be just the Conservative party that will be affected. At the last election, as we know, Marxist Anti-Christ Jeremy Corbyn – who proposed raising corporate tax to 26% (2 points is all the difference between sensible economics and wealth devouring Stalinist madness) – was banished to the outer darkness by all that is holy. The new model Labour party has bought into the idea that he lost because he was ‘too left-wing’. Indeed, Blairism and Brownism were conspicuous by their unquestioning acceptance of the precepts of the Conservative economics and the private good/public bad dogma.

But now the Conservative party itself seems to be rejecting some of those very precepts. So what is the Labour party to do?  Shadow Chancellor Annaliese Dodds, who recently mooted a wealth tax only to find herself out on a limb, is surrounded by convinced Blairites in the shadow Treasury team. Bridget Phillipson, Pat Mcfadden and Wes Streeting would have great difficulty – probably more difficulty than Conservatives who have a pragmatic side – in backing corporate tax rises. Indeed Phillipson can’t even commit to abolishing hospital parking charges for NHS workers.

   
It may be that the Sunak story is all wind and no substance. Some of us still remember Theresa May’s ‘burning injustices’, her call for responsible capitalism and proposal for workers on company boards, the sum total of which, in the fullness of time, was the banning of toilet charges at mainline train stations. But even if Conservative corporate tax rises turn out to be oxymoronic, the mere fact that they were put ‘out there’ and not denied is incredibly significant.