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Posts tagged Economic policy
How many economists does it take to sign a letter?
Mar 14th
Confusion over recent round robins that economists have sent to newspapers has revived all the old jokes, but it’s no laughing matter
There has been a spate of round-robin letters from economists to the newspapers recently, superficially suggesting there are huge divides between practitioners of the dismal science, and giving non-economists a field day. Thus we have had a revival of the old joke about economists being laid end to end; and any day now we shall be asked once again how many economists it takes to change a light bulb.
The old jokes are the best, but they come in various guises. One version is that if all economists were laid end to end, they would still not reach a conclusion; another is that if all economists were laid end to end they would reach a conclusion. I prefer the latter, which I think is subtler, and (I believe) was coined by none other than George Bernard Shaw. As for the lightbulb joke, anyone who has recently had a house rewired will tell you that changing lightbulbs these days requires a PhD in electrical engineering, and is therefore not a laughing matter.
But now for the real joke. It turns out that the letter from 20 economists to another Sunday newspaper that started the furore was originally intended as a demonstration of how united the economics profession was on the question of deficits and cuts – ie a return to budgetary discipline was required in due course, but not yet; not until it was safe to act without risking turning what even the prime minister calls a “fragile recovery” into a full-blown depression.
Unfortunately the letter was dressed up as backing for “savage cuts soon”, and presented as endorsing the Tory position – or, at least, one of the Tory positions, because Messrs Cameron and Osborne have been going around the mulberry bush on this issue , blowing hot and cold, sometimes, it seems, depending on the outside temperature.
The result was that a letter intended to demonstrate “consensus” provoked a furious reaction from Keynes’s biographer Robert Skidelsky and others, who highlighted the danger of “instant cuts” when the economy is so fragile.
The episode has revived memories of the occasion on 13 March 1981 when 364 economists wrote to the Times attacking the monetarist policies of the time, and in particular Sir Geoffrey Howe’s apparently deflationary budgetary stance. Since then the 364 economists have been the butt of endless jokes from the Conservative Party (although not its Wet Wing) for “having got it wrong” because eventually there was a recovery. But what the economists did not know at the time of writing was that the government had secretly changed its policy, and decided on a strategy to get the exchange rate down, thereby encouraging an economic recovery. Even so, it was not much of a recovery, because unemployment went on rising until 1986.
In an article entitled “Economists and Policy Letters”, the veteran economist Max Steuer of the London School of Economics takes his colleagues to task for writing such letters, and for causing confusion by signing up to letters using wording with which they are not always happy, but which help them to make a point or “stand up and be counted.”
Given that the recent letters have been concerned with the budget deficit, what especially irks Max Steuer is that “it is apparent that very few of those signing any of the letters have done work on the issues of United Kingdom public debt. What we really want from economists is careful work on this matter. It has to be pretty rapid work to offer useful guidance on current policy. And really good work will not only do that, it will help in improving the general body of knowledge on national debt, work which will be applicable in other situations.”
Well, I am all in favour of good work on the national debt, but, with due respect to Steuer, I think those familiar with their Keynes can be allowed to attack the idea of savage and instant cuts in the deficit when the recovery is far from secure. And this is not, pace a senior BBC political commentator, a “micro” issue of timing or detail. It is a very important macro issue. One of the worst macro economic policy mistakes made since the second world war was when the Japanese introduced a sharp increase in consumption taxes in 1997, when their recovery was still fragile, and knocked that fragile recovery for six, thereby consolidating the deflationary situation which became known as the “lost decade”.
An example of an economist who signed the letter that was presented as favouring instant cuts, but who does not favour them himself, is Roger Bootle of Capital Economics. In his new book, The Trouble With Markets, Bootle notes: “Bearing in mind the fact that the public debt is owed to ourselves, I believe that the greatest threats to economic wellbeing arising from the size of the public debt are posed not by the debt itself, but rather by how we might react to it; that is, by excessive early tax rises, which could have the effect of prolonging the depression.”
Bootle also has soothing words for those who, despite the way the financial sector brought the economy to its knees (and caused the deficit “crisis”), are worried that the British economy will somehow “lose out” from a contraction of that financial sector.
“A good deal of what has gone on in financial markets has been positively harmful,” he writes (and he has observed those markets at very close quarters over the years). “The release of resources from the financial sector and their re-employment elsewhere will bring no net loss and may even bring a net gain.”
This, as he says, requires an end to the recession and the re-employment of those resources. Meanwhile, I should add, if what we are witnessing now is a “recovery”, then we need a recovery from that recovery.
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Lib Dems refuse to support Tory spending cuts
Mar 14th
Nick Clegg describes George Osborne’s plans to slash budgets as ‘economic masochism’
The Liberal Democrats have distanced themselves from the Conservatives by warning they would not support plans to cut public spending too early in the next parliament.
The party’s leader, Nick Clegg, said early deep cuts would be “economic masochism”. It came as the Lib Dem treasury spokesman, Vince Cable, hit out at the Tories’ economic plans. In his speech at the party’s spring conference in Birmingham, Cable accused the Conservatives of engaging in a “phoney war over cuts” that would affect millions of lives. He also hit out at George Osborne, the shadow chancellor.
Cable said the Tories were trying to present their economic team as “‘Slasher’ Osborne and the Hard Men”. But, he added, they appeared to have taken cuts straight after the election off the table – at least for now. “Or at least that’s what I think they said. I’d love to attempt a critique of the Tories’ budget plans, but I have no idea what they are. I think the present line on the budget is: ‘Trust us and we’ll tell you after the election’,” he told cheering delegates.
He added: “People are desperate to see the back of this Labour government. But they don’t want the same old Tories. And make no mistake they are exactly the same.”
He also claimed that David Cameron’s party and its “cronies” were trying to create financial panic to frighten people into voting for them. “Playing fast and loose with the financial stability of this country for political gain – destabilising the markets – is dangerous, irresponsible and wrong,” said Cable.
He did not limit his criticism to the Conservatives. Cable, having famously compared Gordon Brown to Mr Bean, this time made delegates laugh when he said the prime minister sounded like the Chelsea footballer Ashley Cole, pleading: “Give me another chance.”
The Lib Dems had identified £15bn worth of reductions in public spending that would cut the deficit, he said. The party has come under an increasing level of scrutiny as the polls narrow. Observers are watching for any signs to suggest whether the Lib Dems would be prepared to make a pact with Labour or the Conservatives in the event of a hung parliament. That is the scenario suggested by two polls released today.
YouGov research for the Sunday Times finds that the Tories’ lead has narrowed from five points to four over the past week. An ICM poll for the Sunday Telegraph places Cameron’s party seven points ahead – not enough for a majority. The same research suggests that the Lib Dems have strengthened their position and are now on 21 points.
Clegg will discuss a hung parliament when he addresses MPs today. “People often ask me what the Liberal Democrats will do after the general election. Some days I read we’re planning a deal with Labour, some days that we’re planning a deal with the Conservatives, other days that we’ll refuse to talk to anyone at all,” he is reported as planning to say.
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The wisdom of recycling trade surpluses | George Irvin
Mar 13th
Look to Keynes for a way to rebalance the world economy – force surplus countries to spend money in deficit countries
How is the global economy to be rebalanced? Is there a distinction worth making between Chinese and German mercantilism? One can argue that China’s astonishing growth has sucked in other countries’ imports while lifting millions out of poverty. But growth continues to be export-led, and the Central Bank of China has accumulated the world’s largest stash of dollar-denominated assets. Germany runs an even larger current account surplus, but much of it is recycled into buying companies in the US and elsewhere.
Is exchange rate adjustment the answer? While the US Congress seems to believe so, a large revaluation would in practice serve nobody’s interests. Chinese export-driven growth rate would slow, and Americans would find themselves poorer in real terms having to buy dearer goods at Wal-Mart.
In the EU, things are slightly different because the euro has appreciated strongly against the dollar. But appreciation has had only had a marginal effect on Germany’s surplus; Germans have accepted slower wage growth as a price worth paying for the prize of being the world’s leading exporter. By any measure, exchange rate adjustment – even allowing for lags – seems to have done little to rebalance the world economy.
The financial crisis has complicated matters, with fiscal deficits growing alarmingly. The German response to resulting downward pressure on the euro has been to insist that all countries should balance the books like Germany. But as Martin Wolf correctly observes: “Germany is in a trap of its own devising. It wants its neighbours to be as like itself as possible. They cannot be, because its deficient domestic demand cannot be universalised”.
In macroeconomics, the basic savings identity says that the sum of the private sector surplus (of savings over spending) and of government’s fiscal deficit must equal the current account (or external) balance. Thus, if a country is in approximate external balance, but an external shock like the credit crisis leads to a sudden increase in the private sector surplus, this must be mirrored by a similar increase in the fiscal deficit. In plain English, as the private sector pays off its debts by spending less, this is reflected by an increase in public sector spending.
There are only two ways out: the first is getting the private sector to start spending again and the second is for net exports to expand rapidly. The problem with the first solution is that, by definition, private consumption falls in a credit crunch; in consequence, business confidence falls dragging down private investment.
The problem with the second solution is slightly more complex and involves what philosophers call the “fallacy of composition“. While one country may be able to boost its exports, all countries taken together cannot. Because my exports are your imports, everyone trying to boost their exports simultaneously by means of, say, currency devaluation leads to a 1930s style “beggar my neighbour” result. This is broadly the logical flaw of those who argue that Britain was fortunate in not joining the euro and retaining its own currency.
What of the weaker members of a currency union, eg Greece and the “Club Med” countries? The German solution, currently dressed up as a debate about the merits of a European Monetary Fund (EMF), is for all countries to adhere to strict fiscal discipline and slash the public deficit. The EMF in its present guise is simply another version of the EU stability and growth pact. This “solution” only works through cutting the real wage and driving down national income to such a degree that the private sector surplus falls and imports contract drastically – ie though expenditure cutting rather than expenditure switching. The rub is of course that were a number of eurozone countries forced to adjust in this way, Germany’s current account surplus would contract.
Is there another answer? John Maynard Keynes proposed a perfectly sensible solution at Bretton Woods in 1944, namely, forcing surplus countries to spend their extra money in deficit countries, thus both their private spending and export capacity. The “Keynes solution” as is has been dubbed by the US economist Paul Davidson, was unfortunately vetoed by the Americans. In fairness, one must add that America rechannelled part of its surplus at the time into the Marshall Plan, thus enabling Europe to grow and to overcome its deficit.
Under such a scheme applied to the eurozone, the EMF would use the German euro surplus to create new sources of income and jobs in the Club Med countries, thus raising their ability to buy future German exports. In the absence of an EMF, a new eurozone economic structure which provided it with a Federal Treasury could capture such surpluses and direct them towards an ‘extended’ solidarity fund.
Too idealistic? Not at all. Just as Keynes and Marshall recognised that the failure to reflate Europe after the war might be catastrophic for the west as a whole, so Germany should draw the same lesson today – just as China now seems to be recognising that the new mercantilism leads nowhere. Recycling trade surpluses is a win-win game. Alternatively, insisting on budgetary balance will almost certainly lead to prolonged recession with high social costs.
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Unthinkable? Hiring more tax inspectors | Editorial
Mar 13th
Improve the public finances in a fairer and more imaginative manner than slashing spending. What’s not to like?
Bingo! A particularly unpopular notion at an especially unlikely time. For the popular image of tax inspectors, one could do worse than turn to Lennon and McCartney’s song-cum-professional assassination, Taxman: “If you get too cold, I’ll tax the heat / If you take a walk, I’ll tax your feet.” And it is true that eye-watering cuts in public services lie ahead. Yet hiring more inspectors would be a smart move in these straitened times – the kind of spending that could pay for itself. Most companies see the men and women who bring in revenue as being vital to their business. But at Her Majesty’s Revenue and Customs there is a chronic shortage of staff, which has got far worse in the cuts. The Guardian’s Tax Gap investigation last year quoted an HMRC source’s estimate that there were “less than 100 inspectors actually tackling avoidance, against thousands of professionals advising companies on how to do it”. Which is precisely the point: the government is outnumbered and under-resourced compared to the City accountancy firms that help businesses and wealthy individuals to reduce their tax bills. Inspectors still in public service know that they could almost double their salaries by turning private-sector poacher. Hiring more tax inspectors is about improving the public finances in a fairer and more imaginative manner than merely slashing spending. Governments often talk about getting more cash by tightening up on tax collection; but they can’t do that without the people.
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Nick Clegg calls for 10% bank tax to rescue recession victims
Mar 12th
Lib Dem leader condemns bankers as ‘Scargills in pinstripes’ and says electorate, not him, will decide who is next PM
Nick Clegg is to call for a 10% tax on bank profits to fund a £2bn job creation programme to rescue victims of the recession.
In a Guardian interview, the Liberal Democrat leader condemned bankers for behaving like ”Arthur Scargill in pinstripes”, and vowed his party would be “a radicalising, rather than moderating force” in the event of a hung parliament so long as the majority party was committed to bring the deficit under control.
On the eve of his party’s pre-election spring conference, he insisted he will consult his party fully before joining a coalition or supporting a Queen’s speech tabled by a minority government.
Clegg insisted it is not for him, but for the electorate to decide whether David Cameron or Gordon Brown becomes prime minister. However, he also attacked Brown in contemptuous terms: “It’s very difficult to invest much hope or faith in a man who could not even maintain relations with his own colleagues”.
He said Brown was not a credible figure to rebuild the economy. “This is the man who wrought the damage, he should not be the person to do the repair work”.
Brown’s late conversion to electoral reform was “hardly a hallelujah moment”. He added: “There is no point anyone clinging to power when it’s obvious the British people don’t want you … they’d prefer someone else.
“That’s where constitutional nicety bumps up against political reality. It’s not for me to decide. We give the electorate the cards, they deal them”.
Clegg said he remained, on balance, “a huge critic” of Margaret Thatcher, but admitted Britain needs to rediscover the zeal she showed when she tackled the unions.
The banks, he said, have now become Britain’s great contemporary vested interest. He said: “Bankers are Scargill in pin stripes. Scargill’s stated aim was to challenge who runs the country. The bankers have behaved in the same arrogant way … to benefit only themselves …
“The banks have basically been given untrammelled support by both Labour and Conservative governments to do exactly what they like, and take massive risks with our livelihoods and savings.
“They have been holding a gun to the economy. A progressive liberal like myself is not going to be squeamish about blowing the whistle on a vested interest.”
In the only tax rise proposed by his party, he now backs a 10% tax on bank profits, a break up of the banks’ investment and retail arms, and finally a requirement on banks owned by the taxpayers – RBS and Lloyds – to be required to behave in the public interest on issues such as take-overs of UK firms.
He also proposes tighter requirements on banks to lend. “What I hear from the Conservatives is … ‘we’ve got to wait for the rest of the world’. I really don’t think the Tories get how much we’re skating on thin ice as an economy.
“If we don’t take on this vested interest ourselves, now, unilaterally, immediately, we’re asking for trouble. The liabilities of British banks are now four and a half times the size of the British economy. We are like a large version of Iceland. We are not sheltered in any way”.
In his interview Clegg also:
• dismisses Tory plans to open new schools and rejects profit-making firms opening new schools. “I keep reading that we and the Tories have identical policies on schools but it’s complete rubbish.”
• insists he will not ringfence the NHS from cuts. He said: “We need to make significant savings to safeguard the GP surgery or A&E or the maternity ward”.
• promises “to slash the headcount of the Department of Children”.
He tried to defuse the issue of whether he would back Cameron or Brown in a hung parliament saying: “I think these constitutional niceties will be swept aside if it’s obvious that there’s one party that enjoys a mandate, if not an actual majority. I don’t think there will be a photo finish.”
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Nick Clegg calls for 10% bank tax to rescue recession victims
Mar 12th
Lib Dem leader condemns bankers as ‘Scargills in pinstripes’ and says electorate, not him, will decide who is next PM
Nick Clegg is to call for a 10% tax on bank profits to fund a £2bn job creation programme to rescue victims of the recession.
In a Guardian interview, the Liberal Democrat leader condemned bankers for behaving like ”Arthur Scargill in pinstripes”, and vowed his party would be “a radicalising, rather than moderating force” in the event of a hung parliament so long as the majority party was committed to bring the deficit under control.
On the eve of his party’s pre-election spring conference, he insisted he will consult his party fully before joining a coalition or supporting a Queen’s speech tabled by a minority government.
Clegg insisted it is not for him, but for the electorate to decide whether David Cameron or Gordon Brown becomes prime minister. However, he also attacked Brown in contemptuous terms: “It’s very difficult to invest much hope or faith in a man who could not even maintain relations with his own colleagues”.
He said Brown was not a credible figure to rebuild the economy. “This is the man who wrought the damage, he should not be the person to do the repair work”.
Brown’s late conversion to electoral reform was “hardly a hallelujah moment”. He added: “There is no point anyone clinging to power when it’s obvious the British people don’t want you … they’d prefer someone else.
“That’s where constitutional nicety bumps up against political reality. It’s not for me to decide. We give the electorate the cards, they deal them”.
Clegg said he remained, on balance, “a huge critic” of Margaret Thatcher, but admitted Britain needs to rediscover the zeal she showed when she tackled the unions.
The banks, he said, have now become Britain’s great contemporary vested interest. He said: “Bankers are Scargill in pin stripes. Scargill’s stated aim was to challenge who runs the country. The bankers have behaved in the same arrogant way … to benefit only themselves …
“The banks have basically been given untrammelled support by both Labour and Conservative governments to do exactly what they like, and take massive risks with our livelihoods and savings.
“They have been holding a gun to the economy. A progressive liberal like myself is not going to be squeamish about blowing the whistle on a vested interest.”
In the only tax rise proposed by his party, he now backs a 10% tax on bank profits, a break up of the banks’ investment and retail arms, and finally a requirement on banks owned by the taxpayers – RBS and Lloyds – to be required to behave in the public interest on issues such as take-overs of UK firms.
He also proposes tighter requirements on banks to lend. “What I hear from the Conservatives is … ‘we’ve got to wait for the rest of the world’. I really don’t think the Tories get how much we’re skating on thin ice as an economy.
“If we don’t take on this vested interest ourselves, now, unilaterally, immediately, we’re asking for trouble. The liabilities of British banks are now four and a half times the size of the British economy. We are like a large version of Iceland. We are not sheltered in any way”.
In his interview Clegg also:
• dismisses Tory plans to open new schools and rejects profit-making firms opening new schools. “I keep reading that we and the Tories have identical policies on schools but it’s complete rubbish.”
• insists he will not ringfence the NHS from cuts. He said: “We need to make significant savings to safeguard the GP surgery or A&E or the maternity ward”.
• promises “to slash the headcount of the Department of Children”.
He tried to defuse the issue of whether he would back Cameron or Brown in a hung parliament saying: “I think these constitutional niceties will be swept aside if it’s obvious that there’s one party that enjoys a mandate, if not an actual majority. I don’t think there will be a photo finish.”
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Nicolas Sarkozy and Gordon Brown hail ‘entente formidable’
Mar 12th
Two leaders stress need for close co-operation to stay ‘bang in the middle’ of Europe
Gordon Brown today described Britain’s alliance with France as an “entente formidable” as he and Nicolas Sarkozy stressed the need for close co-operation and to stay “bang in the middle” of Europe.
Speaking at a press conference after a working lunch at Downing Street today, the two leaders highlighted close political alignment on a number of policy fronts as the prime minister described relations between the two countries as “greater now than at any time since the second world war”.
Brown said he and Sarkozy were in “harmony” over the need to introduce a tax on banking transactions as he revealed that a report on the levy is due “in the next few weeks”.
As well as on the economy, the two countries were working “more closely than ever” on environmental, energy and security matters, he said.
This included putting nuclear power at the heart of tackling climate change.
In his first visit to Downing Street since 2008, Sarkozy echoed the view that it was essential Britain remain “bang in the middle” of Europe amid concerns that a Tory government may engage less enthusiastically with Europe under David Cameron.
Sarkozy insisted he was not in Britain to “play politics” ahead of the forthcoming general election but nevertheless made comments that appeared to be aimed squarely at the Tory leader, who he is meeting this afternoon.
“I remain convinced that the position of our British friends is bang in the middle of Europe. We need you,” the French president said.
Sarkozy said he “regretted” Cameron’s decision to pull the Tories out of the centre-right European People’s party grouping in the European parliament.
The two leaders used their press conference to reveal that work on a banking levy was progressing as Brown pointed to Japan’s recent decision to come out in favour of such a move.
“The banks are organised at a global level now,” said the prime minister. “Their global contribution to society has to be measured in some way. I cannot have one set of banks undercutting another set of banks by moving from one country to another as tax havens or regulatory regimes make it too easy to pay any taxes at all.
“The global financial levy is something that is not only on the agenda but will be subject to a report that will appear in the next few weeks and I believe that the French and British positions are entirely in harmony on this and we can move forward on this.”
He said Britain’s alliance with France was a partnership for the future.
Both were worried about the fragility of the economic recovery, he said, so had agreed to maintain the economic stimulus, “to stick to the course” in their determination to create high global growth.
But he stressed the need for “more global co-operation” in the G20. This should comprise “more determination, more consistency and more speed”.
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Letters: What about women?
Mar 12th
I’m heartened that Labour’s election strategy will target “middle-class mainstream mums”, although I hope they extend this to all women (Report, 11 March). Fawcett polling shows that 49% of women don’t think politicians are considering their view on key issues such as the economy, though they are more likely to vote for a party with a women’s equality plan. But tackling women’s equality is still too often seen as a fringe issue, even while the gender gap in voting intention is likely to be key to the election result. On the big issues like the economy and crime, policies can have a significantly different impact on women. If there are to be drastic cuts to the public sector, women are more likely to lose their jobs, as they make up 65% of the workforce and also make greater use of public services. This is why we’ve launched our What About Women? campaign, calling on politicians to explain what their policies would mean for women.
Ceri Goddard
Chief executive, Fawcett Society
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Darling urged to introduce second stimulus in budget
Mar 11th
Leftwing MPs, trade unionists, and economists call for further investment to nurse economy back to health
Alistair Darling was today urged to use his impending budget to introduce “a second fiscal stimulus” to help secure economic recovery.
A coalition of over 80 signatories including leftwing MPs, trade union leaders and economists seized on a speech delivered yesterday by Gordon Brown in which he signalled a resistance to spending cuts while the economy was still in “choppy waters”.
Brown said yesterday: “We are at a turning point, a crossroads, for our domestic economic recovery where we have to choose now to maintain the stimulus until recovery is assured or cut it and at a crossroads for the global economic governance that will shape the next decades for us and our children, and for families and children all across the world.”
A letter in today’s Guardian signed by MPs including Jon Cruddas and Colin Burgon, as well as the general secretaries of the heavyweight affiliated trade unions, called on the chancellor to introduce a “second fiscal stimulus” to nurse the economy back to full health.
The letter, designed to put pressure on Darling in the run-up to the budget on 24 March, noted that, despite leading economists pointing out that the fragile nature of the recovery means that investment is still required, “Britain is one of only two G20 countries not currently planning any such fiscal stimulus in 2010″.
They called for such a stimulus, particularly in areas where investment has fallen most, notably housing and transport.
The letter said: “A programme of government investment would not only stimulate the wider economy in the short term but would increase long-term growth, thereby lowering the debt levels through a higher tax take.”
Brown said yesterday that he would not rule out using money from the higher-than-expected bonus tax on banks, or a windfall from lower-than-expected unemployment claims, to spend on further recovery stimuli, as opposed to cutting the deficit faster than at present.
He said: “We’re not going to withdraw the stimulus until the recovery is assured. We’re sticking to our four-year deficit reduction plan.”
His speech came just a day after senior ministers discussed how to frame the debate on the economy at a cabinet meeting. One cabinet source said: “The debate is how we position ourselves when we have said we will cut the deficit within four years.”
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Don’t celebrate these billionaires, be horrified by their existence | Will Hutton
Mar 14th
Posted by Will Hutton in Business
No comments
It’s just accepted that more billionaires of any hue is a sign of economic vitality. Wrong
Last week offered a chance to collectively gawp at the super-wealthy. Mexico’s Carlos Slim and the US’s Bill Gates were in a run-off to be the world’s richest billionaire in the Forbes list of the 1,011 people with personal wealth in excess of a billion dollars. In the event Slim’s $53.5bn just pipped Gates’ $53bn. It was a moment of symbolism, opined the global commentariat. The economic baton was passing from the US to countries in Asia and Latin America. And we all could relax; the numbers of billionaires was growing again – proof positive that the global economic machine was picking up.
It is the ultimate degeneracy of the age. There is little critical appraisal of billionairedom. It is just accepted that loadsamoney, capitalism, jobs and economic progress are indissolubly linked. More billionaires of any hue is a sign of economic vitality. Lucky Mexico for coming up with the winner. But wealth is not connected to economic progress in a linear way. Wealth can come from productive or unproductive entrepreneurship. Society wants the former and deplores the latter. If you want to be seriously wealthy the message from the Forbes list is clear. One way or another you need to have played the system, played the financial markets, been born to the right class or manipulated government to have got rich. This is a list of expropriated wealth on a Midas-like scale. Marx will be grimly smiling in his grave.
Too few of the world’s billionaires can claim to be honest-to-God productive entrepreneurs who have enlarged the economic pie by dint of hard work, imagination, risk taking and innovation – although thankfully a useful proportion do populate the list. But a depressingly large number constitute a ragbag of monopolists, oligarchs gifted assets and profits by the state, mega-financial engineers or just family plutocrats. And once on the list you tend to stay there; there is little churn. The arteries of capitalism are hardening.
Sixty-two of the 1,011 are Russian oligarchs. Twenty eight are Turkish oligarchs. Even Carlos Slim made his fortune from being the monopolist who controls 90% of Mexico’s telephone landlines and 80% of its mobile phone subscribers. The OECD notes that he charges among the highest usage fees in the world. But hey! He is a billionaire and what matters today are his riches – not the manner in which the money is made. He may have started out as a productive entrepreneur. Today he is using his power to expropriate wealth on a mega scale.
The contrast with his rival Bill Gates could hardly be greater. Microsoft may have had its head-to-head confrontation with the EU Commission over anti-competitive practices, but Gates built his company by innovating around one of the great historic general purpose technologies. Information and communication technology is like the railway, internal combustion engine or air travel – a technology with massive spill-overs and implications for society. It is a classic example of productive entrepreneurship. Gates may not deserve $53bn, he was lucky to be in the right place at the right time with a great university system around him, but he undoubtedly deserves to be rich. Both Gates and Slim are exploiting their market position to get above average profits, but one is more overtly political than the other. Put another way, Gates has grown the economic pie. Slim represents a tax on it.
The good news for the US is that even if its share of global billionaires has fallen to 40%, a disproportionately high share are still productive entrepreneurs. There are figures on the list – like the Walton family riding high on Walmart – who have inherited their money, but most have made their fortunes from socially and economically useful activity and whose profits and market position are being actively challenged in the market place. A large proportion of the Indian entrepreneurs are in a similar position, although the relationship with the Indian state is sometimes more murky. Mukesh Ambani, complete with his 70-storey home in Mumbai, may be extravagantly wealthy at number 4 in the list, but like the number 5, Lakshmi Mittal (who has British residence) he has spawned an industrial empire that is generating jobs and wealth. The productive entrepreneurship spells long-term good news for the US and India – less so for the countries whose billionaires are politicised oligarchs and monopolists.
But strangely not even Forbes magazine makes much of an effort to distinguish how the billions are made. The great truth of capitalism is that it took off only once the European Enlightenment created the great institutions that kept it honest – the rule of law, a free press, accountability mechanisms, ways of forcing monopolists to give up their ill-gotten gains, creating competitive markets and elections. Before that there was tax-farming and the buying and selling of monopolies – rather as in China today. The Enlightenment offered the means, however imperfect, to challenge all that. The great mistake of the free-market revolution was to argue that all that was needed to make capitalism work was free, lightly regulated and flexible markets – and that institutions imposing ethics, transparency, accountability got in the way. We now know better.
Britain’s representation in the Forbes list is particularly depressing. Our members include a bunch of property developers, tax-avoiding retail magnates, the Duke of Westminster, a hedge fund manager and Richard Branson. Branson is probably the closest we have to a billionaire productive entrepreneur, but his companies are hardly at the forefront of technological innovation or employment generation. He glamorises – but does little to grow the economy. We do not have one genuinely productive entrepreneur on the list.
In many respects this forms the heart of the British crisis. Our political class bought the proposition that whatever the source of wealth economic progress would follow, celebrating the Mayfair hedge fund manager more than the genuine innovator. Watch the British government now fight on behalf of hedge funds against EU regulation. Only at the eleventh hour, with some of Lord Mandelson’s speeches and initiatives, together with David Cameron commissioning a useful report from the entrepreneur James Dyson, Ingenious Britain, is there any sign of change. But it is a deathbed conversion. The electorate, angry and bewildered, want a conversation about creating wealth and jobs, rewarding those that do rather than those that speculate and rig markets. Instead they are offered platitudes and bromides.