David Green: Wealth extraction, not wealth creation. The Morrisons takeoever – and why government should be prepared to intervene.

11 Jul

David Green is Director of Civitas.

The Government is in a philosophical quandary. Its commitment to levelling up implies economic interventions in favour of left-behind regions. As a result, it has been attacked for abandoning the ideal of low taxes and small government. Simultaneously, it is pursuing some policies that imply continued commitment to the principle of non-interference in economic policy – not least in its approach to takeovers of British companies by private equity, brought to a head recently by offers to buy Morrisons.

The paradox was particularly striking when Kwasi Kwarteng announced new subsidy rules under the Subsidy Control Bill. He felt bound to say that the Government was not returning to the industrial strategy of the 1970s. There would be no ‘picking winners’ or bailing out of unsustainable companies. Producers will be backed only if they have good prospects of success and especially if they are supportive of decarbonisation. An innocent observer might conclude that a policy of avoiding lame ducks and backing promising ‘green’ technologies was picking winners.

The Government appears to have no clear criterion to help it distinguish between policies compatible with personal freedom and those that undermine it. Fortunately, one of the greatest defenders of liberty in the last 100 years grappled with this very problem.

Hayek argued that the main criterion was the rule of law, by which he meant that the Government should act through general laws that applied equally to all, including itself, and specifically that it should not grant preferential treatment to specific people. To do so would undermine the process of competitive discovery by which we reveal better ways of meeting human requirements.

What would this criterion imply for decarbonisation policy? It suggests not pre-judging which producers or technologies will be preferred. In vehicles, for example, there may be a role for hydrogen, hybrids, diesel, petrol, or all-electric. We should allow the competitive system to reveal the best approaches through trial and error.

But what should the Government do about private equity taking over British companies. Must it be accepted as an inevitable consequence of a free market and its ruling doctrine of non-interference?

Again, Hayek thought it through. It was the character of government activity that was important, he said, not the volume. Many measures were compatible with freedom. Moreover, he thought that a government that was ‘comparatively inactive but does the wrong things’ could do much more to ‘cripple the forces of  a market economy’ than one that is active, but confines itself to measures that assist ‘the spontaneous forces of the economy’.

How should this reasoning be applied today? The Morrisons takeover has come under strong fire from others in the financial sector. Legal and General, the City’s biggest fund manager, cautioned against loading Morrisons with debt and selling off its property assets on the cheap. Andrew Koch, a senior fund manager, feared that this strategy would lead to reduced tax paid to the Exchequer (because debt interest is deducted from profits).

Concerns in the City have been multiplied by the experience of Cobham, the defence group, which was sold to American private equity owners about two years ago. At the time, many warned that the new owners would break up the company, but the Johnson Government authorised the deal after getting some promises. Today, more than half of the business by value has been sold. James Anderson of Baillie Gifford, one of the world’s most successful investors, has recently described the underlying problem as a ‘deep sickness’ in UK capital markets.

The claims of these critics is consistent with the thinking of Adam Smith who warned against misplaced trust in manufacturers, speculators and merchants. They were ‘an order of men, whose interest is never exactly the same with that of the publick, who have generally an interest to deceive and even to oppress the publick, and who accordingly have, upon many occasions, both deceived and oppressed it’.

The Government should not fall into the trap of thinking that it should never intervene in corporate takeovers. There is a public interest in stopping the Morrisons takeover. The company’s model is to own the vast majority of its shops and run some its own manufacturers and farms. It is profitable. Private equity has been granted preferential advantages. Owners are allowed to pay tax as if they make capital gains and not profits subject to higher corporation tax. And owners are able to take advantage of the preferential treatment given to company debt compared with equity. A government that used its powers to encourage Hayek’s ‘spontaneous forces’ would equalise the treatment of debt and equity to preserve responsible private ownership.

If the Morrisons bid is allowed to proceed the owners will probably sell off the shops to another company they control and lease them back, giving them a capital gain and an income stream at the expense of Morrisons. This is wealth extraction not wealth creation. If the Government allows its squeamishness towards intervention to paralyse it into inaction, it will drop helplessly into the trap described by Hayek: that of crippling the spontaneous forces of a market economy by inaction.

Nick King: Luntz’s polling shows a crisis of confidence in capitalism. Here’s how we can change that.

8 Jul

Nick King is a Research Fellow at the Centre for Policy Studies.

The recent survey work conducted by Dr Frank Luntz on behalf of the Centre for Policy Studies think tank was some of the most extensive ever undertaken in the UK. It is no surprise, then, that it has been the subject of media attention and scrutiny for days, with an array of organisations poring over its findings and implications.

Their attention has mainly been focused on the publics disillusionment with the political class, our increasing polarisation as a country and the rising division between the woke and the anti-woke.

Equally concerning, though less commented on, have been Luntzs findings in relation to capitalism, enterprise and business all of which, I am sorry to say, the public seem to take a pretty dim view of.

ConservativeHome readers might point out – when asked their opinion of British business – that our firms create jobs and opportunities, provide salaries to their employees, pay billions in taxes, are innovative and socially responsible. But Luntzs poll found that the associations that spring to mind for most people are about profit over people, tax avoidance or excessive CEO pay.

This cynicism was all the clearer when voters were asked what business and economic leaders care most about. The British public chose making as much money as possible for themselvesand using loopholes to pay as little in tax as possibleas their second and third most popular answers. Only making a profit for their companies and shareholderswas more frequently pointed to. But before anyone takes too much comfort from the publics familiarity with s172 of the Companies Act, I should point out that I am not sure that those polled meant it in a good way.

To those of us who are supportive of free and open markets, this rings serious alarms bells. Not least because it’s the latest example in a worrying trend. Similar notes of caution were struck by a report published this week by the Institute of Economic Affairs entitled Left Turn Ahead? It points to widespread distrust of business and capitalism among the young almost three quarters of whom think our current economic system fuels racism, greed and exploitation. Crucially, the report argued that this sentiment no longer diminishes with age.

Luntzs findings suggest that the British public has fallen out out of love with business and that they are not convinced its a cause worth fighting for. A majority of voters even agreed with the statement: “When I look at the corporate leaders and how they treat us, I just think ‘f*** them all’.” Although at least business executives can console themselves that they fared slightly better than the politicians.

I wholeheartedly disagree with such attitudes. Britain has so many great businesses, and it needs more of them. Businesses create the jobs and wealth and innovation that keep this country going.

But it is clear that if we going to convince the public to change their minds, we need to carefully consider the terrain on which we are fighting and the battles which will win the war. Here are some ideas:

First, as Luntz has consistently pointed out over his long and distinguished career, language matters. Capitalism is unpopular. But to many of capitalism’s advocates, terms like free enterprise and open markets can be used interchangeably with it – and other polling suggests these concepts are more favourably received. If a phrase is more appealing than capitalism to those who reject it as a concept, then it makes sense for those who believe in the benefits of this system to adopt the language which people more readily accept.

Second, we need link the benefits of the economic system to individuals’ lives and livelihoods in the most direct way possible. Those surveyed by Luntz and the CPS were clear that they prefer the term “employers” to “companies” (and both, overwhelmingly, to “corporations”), as well as “employees” to “workers”. This suggests they want a sense of participation and reciprocity – something which comes out more generally in the polling. Again, it makes sense to adopt this language and point out the symbiotic relationship between employers and employees as far as possible.

Third – and this is not something brought out in the survey – we should talk more about the sorts of businesses people are typically more supportive of. As previous work I have undertaken at the CPS demonstrates, people are far more positively inclined towards the sorts of small and family businesses which make up the vast majority of companies within the UK. When trying to convince people of the value of businesses we should “think small” wherever possible.

Finally, we need to remind people of the role businesses play in society. This is not a plea for businesses to publish well-intentioned but often meaningless ESG strategies. Nor is it a suggestion that businesses should demonstrate their right-on credentials – the British people left Luntz in no doubt that they did not want business leaders weighing in on culture wars. But it is a suggestion that we draw out the link between business and the things the British people care about all the more clearly.

When asked the fundamental purpose of the economy and presented with a dozen options, more than a third of those asked responded “to pay for public services like the NHS”. It might not be the purpose I would pick, but the British public are absolutely right to draw a link between businesses and the revenue needed for the proper running of our public services. So lets remind them of the link whenever we can.

All is not lost. Luntzs polling data also showed that most voters (especially Conservative ones) put a value on hard work and that they think success in this country is typically earned and deserved. But the survey presented a fascinating and sobering insight into the crisis of confidence in capitalism which this country faces. If we do not heed its lessons, we will be faced with a crisis not just in confidence, but in capitalism itself.

Nick King: Levelling up. The challenge is less defining it than delivering it, for which Johnson will need the private sector.

25 May

Nick King is a Research Fellow at the Centre for Policy Studies.

To level up or not to level up? That is certainly not the question. If theres one thing the Government has been admirably clear about, it is its determination to do it. But that begs rather a lot of other legitimate questions, such as: what does levelling up really mean? How will we level up? What level are we levelling up to? How will levelling up be measured? And if answers to these questions are not forthcoming, how can we ever really know whether weve levelled up or not?

Some of these points were recently put to ministers from the Business and Housing departments by the Business Select Committee. The answers forthcoming were clearly not to the (Labour) Chair of the Committees satisfaction. He suggested there was no clarity in terms of understanding what levelling up means or the policy which sits behind it.

But there’s actually a strong argument – although you wouldn’t expect the ministers themselves to make it – that the lack of specificity around levelling up, and the catch-all nature of the term, have added to its value as a concept.

The Conservative Partys last general election manifesto talked about levelling up every part of the UK, levelling up skills and levelling up through investment in infrastructure. Prior to that manifesto, I produced a report for the Centre for Policy Studies, which called for greater devolution, enhanced skills, increased infrastructure investment and new Opportunity Zones as the principal means of levelling up.

Since the election, various other think tanks have put their own spin on levelling up, with Onwards taskforce looking at levelling up the tax system and innovation, the Centre for Progressive Policy developing its own Levelling Up Outlook, the Institute for Public and Policy Research suggesting we level up health, and Bright Blue looking at levelling up in the context of deprivation.

This all-encompassing nature of the phrase, not yet defined by any mainstream dictionary, is surely more of a strength than a weakness. We saw this during the election. Then, across the former ‘Red Wall’ seats of the Midlands and the North, people voted in their millions for levelling up, without needing a detailed policy prospectus outlining which departments would take the lead and what metrics they would apply. Yes, they wanted to ‘get Brexit done’ – but getting Brexit done was just one half of the equation to making their lives better: levelling up was the improvement that would come afterwards.

For all of its lack of explicit definition, those of us who are who committed to the levelling up cause – and I include myself in that number – feel we know what it’s aiming at. We know that at its heart it is about addressing the long-standing inequalities which exist in the United Kingdom.

Levelling up is about the life chances of people, the prospects of places and about making sure our country is the United Kingdom it should be, not the divided realm it risks becoming. In that spirit, it can be seen as a continuation of One Nation Toryism, of efforts to extend social mobility and even of various Governments rebalancing efforts.

Perhaps that is why, when Boris Johnson returned to Downing Street, having won his crushing majority in the election, he stood on the steps of Number 10 and promised to unite and level up’ our country. There followed measures such as substantial increases in infrastructure investment, the creation of the Towns Fund and, more recently, the creation of the Levelling Up Fund and the Community Renewal Fund. These all suggested a centrally-driven, targeted approach, relying on the funding of specific projects to level up specific places.

But the ambition to level up goes much wider and deeper than that. Ever since the election, every Government department has been tasked with thinking about levelling up and how to deliver it. In education, that means better schools and improved skills outside London and the South-East. For the Transport and Culture departments, that means greater national transport and digital connectivity respectively. For the Department of International Trade, it means getting more investment into the regions and more companies around the country exporting.

Now, to bring coherence and strategic intent to the levelling up agenda, the Government has promised a Levelling Up White Paper. This White Paper is to be produced by ConHome columnist, Harborough MP and the Prime Minister’s Levelling Up adviser, Neil OBrien. He is, in many respects, the perfect man for the job, with a first class brain and a long history of considering these issues, raised in the North but representing a Midlands constituency, and someone who knows his way around Whitehall.

This last point is critical given the clear intention to make this a ‘whole of government’ exercise. Virtually every department has been instructed to play its part in levelling up; the Prime Minister and the Chancellor recently put it at the heart of their Plan for Growth, and OBriens White Paper is being run out of Cabinet Office, suggesting an ambition to reach into various Whitehall departments.

He will, no doubt, have received direct orders from the Prime Minister as to what he wants in the White Paper and perhaps the slight shift in language within the Queen’s Speech gives us a clue as to what to expect. That speech promised to level up opportunities’ and the accompanying Briefing Note – prepared by the Treasury – tied the levelling up agenda much more closely to public services, such as health, education and policing. 

This suggests the Government will be looking as much at the opportunities presented to people, and within places, as the outcomes which those opportunities might lead to.For my part, the most important factor I would urge the Government to remember, is that whether we want to improve opportunities, or outcomes, levelling up needs to be centred on the potential of the private sector. As I argued in my recent Centre for Policy Studies paper with Jake Berry on rejuvenating the North, only the private sector can offer the scale of investment, the jobs and the opportunities which can lead to long-term sustainable change.

Government, of course, has a pivotal role to play. It needs to think about where it invests, about the implications of the gravitational pull of London and the South East and how it can best break the trend of self-perpetuating economic failure in the least successful parts of our country. But, most importantly, it can help create the conditions in which private enterprise can thrive.

After all, to business-loving, capitalism-supporting types like me, levelling up can only really be delivered through the dynamism of the private sector. It is its agility, investment and innovation through which life-changing opportunities will be created. Absent of that, levelling up will mean very little at all.  

Greed can have good consequences, generosity bad ones. What counts isn’t the motive. It’s the result.

24 Mar

At the risk of invoking Godwin’s law, we will risk the following.  Hitler believed his persecution of the Jewish people was right – morally justified.  That he believed he was doing good does nothing to make the Holocaust less evil.  Ditto Stalin and the Kulaks, Mao and the Rightists.

Now imagine a vaccine producer – to take a topical example – who is driven entirely by greed.  His motive does nothing to lessen his product’s effectiveness.  It doesn’t lop even a single life off the list of those saved.

By the way, it’s unlikely that he would be driven entirely by anything.  Most of us aren’t.  We’re powered by a mass of motives, the mix of which we can’t identify: greed, altruism, fear, compassion, anger, lust, shame, love – and perhaps, above all, by the elemental urge to “keep going”, as the sergeant yells at the shell-shocked First World War soldier in Ted Hughes’ radio play The Wound.

To be clear: greed isn’t good in itself, but its by-products can be.  Generosity, by contrast, is good in itself, but it’s by-products may not be.  What good comes of generously giving the addict money for the fix that will kill him?

Whatever you may say about Boris Johnson, he never fails to give us all something new to talk about – in this case, his half-remark about those vaccine firms yesterday, quickly made and just as quickly withdrawn.  As he sometimes does, he was offending the spirit of the age.

Which crowns virtue signalling as the ultimate virtue.  What matters isn’t what you do, but what you say – the signal you send.  It shows that you have the right motive, and everything else follows.  Except, as we’ve seen, that it doesn’t.

If you want societies that seek to impose virtue by force, leave the rest of us to muddled old Britain, and try Jim Jones’ Jonestown, with its murders and mass suicides, or Mao, Stalin, Hitler – and so on.  Compared to the lot of them, a greedy capitalist is a study of morality.

Ryan Bourne: “Levelling the playing field” is no argument for an online sales tax

5 Aug

Ryan Bourne holds the R Evan Scharf Chair in Public Understanding of Economics at the Cato Institute. 

Some time soon, we’ll see more automation in the fast food sector. Burger-making machines are real. Franchises such as McDonald’s have rolled out self-ordering touchscreens. It’s not difficult to imagine a world in which fast-food worker numbers collapse. In the longer-term, when the technologies become widely affordable to businesses, cost reductions from these sorts of labour-saving investments will benefit consumers through lower prices.

Not every competitor chippie, kebab shop, or burger outlet will make the transition, of course. Some will struggle under what will then become the higher cost, labour-intensive model, finding their niche in the market. Others may simply go out of business – unable to compete on price and without the ability to invest in the machinery.

Would this be a problem? Or is it simply an example of capitalism’s creative destruction? 

Imagine if the struggling companies and their employees demanded Parliament pass a “burger automation tax” under the premise of “levelling the playing field” with those companies that took the plunge. Think how dangerous supporters of consumer-led capitalism would consider it for popular price-reducing innovations to be held up as a problem. Consider how bemused we’d be if the savings in labour costs were dubbed “unfair competition,” simply because not every company realised them.

Well, we are seeing an analogous argument capture policymaking today. And, bizarrely, free-marketeers within the Conservative party are not really speaking out against the muddled thinking.

The UK government is kite-flying about an online sales tax of two per cent, or taxing online deliveries to consumers. One of the many justifications given for even considering these Luddite measures is to “level the playing field” between online retailers and the High Street, given the latter face business rates.

Here’s the problem: there already is a level playing field. Just as all businesses face the same minimum wage laws, they also face the same overall tax regime. This includes business rates – which is a tax on the rental value of commercial property, not sales.

Faced with those policy realities, businesses are free to decide how to operate and structure. Innovative online sellers such as Amazon have simply adopted business models that repudiate the need for a high fixed‐cost physical presence in expensive inner‐city areas.

Operating from out-of-town warehouses is a cost-saving business decision akin to the potential automation in fast food. To then suggest that online retailers not needing to rent high-value property is some distortion of competition that requires a corrective tax, as the Treasury reportedly believes, is just bizarre.

It’s this business decision that partially explains why online sellers can provide low prices for consumers, enhancing their welfare. The idea that adopting this model is some underhand advantage is as daft as saying that Amazon’s packaging costs are a disadvantage for it, requiring a “packaging-equivalent tax” on High Street stores’ sales.

To echo the 19th century classical liberal economist Frédéric Bastiat, the bricks-and-mortar retailers using this level playing field argument are akin to candlemakers petitioning the Government about the sun flooding the market with cheap light.

Now if the Government thinks that the current business rates regime is an inappropriate tax on rental values or has distortionary impacts on commercial property use (I agree, but think the impact overblown) then, by all means, they should change the law faced by all. If councils are worried about car parking charges’ impact on high street retailers, then they are within their rights to adjust them.

But let’s not talk as if it’s unfair competition when firms, faced with a tax regime, innovate to reduce costs to provide a service in a way that consumers prefer. For make no mistake, it is customers that will ultimately bear the costs of any new sales or delivery tax in the form of higher prices, especially those whose use of delivery is less responsive to price, such as in rural areas.

Of course, increasingly traditional retailers are themselves re-orienting to online, especially during Covid-19. Any cuts to business rates (to the extent they are passed through by landlords) might allow for some consumer price reductions to “compete” better with online firms for sales. But if these same traditional retailers then face a new tax on their growing online sales anyway, the Government will have given with one hand and taken with another. 

And which companies will suffer disproportionately from the new administrative burden of having to deal with an online sales tax, do you think? Will it be Amazon? Or is it more likely to be smaller companies navigating the online market for the first time?

This whole debate highlights a broader gripe I’ve had with Conservative policy thinking for some time. Conservatives used to understand the case for consumer-led markets, as extolled by Jeff Bezos in a US Congressional hearing last week. They trusted customers to make choices in their own best interests. Our revealed preferences were thought to represent us trying to maximise our wellbeing under the circumstances we face.

But increasingly MPs seem to think they know better. Sure, customers might be flocking to online retail, especially during a deadly pandemic. But what they really want, we are told, is a thriving High Street. Who you gonna believe: MPs or your lying eyes?

The idea that any business providing the same product must face the same tax and regulatory cost base to truly compete on a “level playing field” is easily dismissed. Wind and nuclear power both produce electricity. But if someone told you we needed a tax on wind power to make up for the safety costs of nuclear, you’d think they were utterly mad. So what do we think is different about retail, after we’ve decided that it’s appropriate to tax commercial property consumption?

Now perhaps the Government’s real aim is not to “levelling the playing field.” Some say a tax on online deliveries would reduce congestion – a daft argument given a van delivering to 30-40 places would cause far less traffic congestion than everyone going to stores. Some say that the Government simply needs the revenue – in which case £2 billion is a relative drop in the ocean. Our communitarian friends, with their stale 1950s vision of High Street’s somehow engendering “community,” want to pull any lever to try to preserve the town centres of yesteryear.

Yet those arguments are self-evidently absurd or futile in the face of ongoing trends. The “level playing field” line is more dangerous precisely because it sounds as if it’s pro-competition. If Conservatives really believe, however, that the role of Government is to correct for businesses finding ways to reduce their fixed costs, as if this were some unfair advantage, then they are further through the economic looking glass than I’d realised.

Damian Green: Here are our One Nation ideas for reviving post-Covid, post-Brexit Britain

27 Jul

Damian Green is Chair of the One Nation Caucus, a former First Secretary of State and is MP for Ashford.

There has been a flurry of comments about One Nation Conservatism, and what it means in the 2020s, over recent weeks. This is very timely, as for many years the One Nation tradition was linked with pro-European views, to the point where views on Europe seemed to become its defining characteristic.

Those times are clearly past, and one of the aims of the One Nation Caucus of Conservative MPs is to set out a new set of policy priorities, both in domestic and international policy, which we want the Government to adopt. We hope that we are pushing at a reasonably open door, as the Prime Minister has always described himself as a One Nation politician, and certainly his levelling up agenda is absolutely in that tradition. His description of himself as a “Brexity Hezza” may have been rejected by, well…..Hezza, but nothing is easy these days.

Getting the country back on the track it voted for last December is the task for the next four years, and One Nation ideas will play a central role in the successful pursuit of that project. The last thing the Conservative Party or the country needs is a continuation of the Brexit divisions. If the only thing that matters is how you voted in 2016, we will never move on. So through the summer and autumn the One Nation Caucus will be publishing a series of policy papers designed to set out a full agenda for government in the post-Covid period.

The first of these papers is Restarting the Economy, which brings together six MPs from various intakes to address the central issue of our times. Stephen Hammond is the lead author, and he emphasises the importance of a relentless focus on levelling up to extend growth beyond London.

Key proposals in the paper include the development of new local economic bodies to drive growth, expanding the number of planned freeports, and creating technology adoption funds to support the Fourth Industrial Revolution. The report also suggests a number of policies to protect people on low incomes, including suggestions for ending consumer rip-offs, and proposals for managing repayments of Covid business loans, recommending an approach similar to the Student Loan scheme.

Each of these is a meaty idea in its own right, and the full paper is available on the One Nation website. But this array of economic ideas is only the start of the wider project to position Conservative ideas at the heart of the national political debate post-Covid.

Labour may be under new management but one of the features of the Starmer era so far has been the avoidance of any policy discussions. This is clearly a conscious tactic, but while Labour pursues it there is a space to fill in shaping the public mind. It is often observed that intellectual regeneration is more difficult inside a governing party, but it is not impossible, and is absolutely necessary if conservatism is to have another successful decade.

The financial crisis, Brexit, and Covid-19 have been three black swans that have swept aside the original plans developed the last time the Conservative Party was in opposition. They have incidentally also swept aside Tony Blair’s fond idea of making the twenty-first century “the progressive century”, by which he meant the New Labour century. How does that look in 2020?

So now is exactly the right time for One Nation Conservatives to think hard and set up debates. After the economic paper our next publication will be on social mobility, how we can bring it back, and why we must not think about it in traditional terms. Following that we will be publishing a paper on the environment, showing how capitalism is not the enemy of achieving carbon New Zero, but the only way of reaching it.

Future papers will look at Britain’s place in the world, covering trade and aid, and specifically what the new configuration of the Foreign Office and DfId offers in the realm of making our aid spending (which One Nation Conservatives strongly support) more effective in the future. We will also be taking a hard look at schools and what they can do better to spread opportunity, and at the new world of work.

It is very pleasing that all cohorts of the Parliamentary party have contributed to these papers. Former Ministers have worked with many members of the 2019 intake on the individual ideas, proving that there is no shortage of new thinking on the back benches, and that One Nation ideas are alive and well in the rising generations within the party.

Whether or not you think of yourself as a One Nation Conservative, I hope you will welcome the fact that those of us who are in that tradition want to contribute publicly to the key debates that will dominate the coming decade. The public will of course judge the Government mainly on its actions. But every political party needs to demonstrate that it can apply its principles to new circumstances. In a world that changes as fast as this one constant intellectual regeneration should be our goal. The One Nation recovery papers are a contribution to that.