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.

Iain Dale: Let’s hear it for the private sector and hear less about a bigger state

4 Dec

Iain Dale presents the evening show on LBC Radio and the For the Many podcast with Jacqui Smith.

“Let’s hear it for the private sector”. Seven words you hear very rarely nowadays. The current narrative is that the state can and should provide us with everything – even to the extent of providing breakfast and lunch for Scottish schoolchildren.

It’s not just the state taking over the role of parenting. It is increasingly involving itself in aspects of our lives which only a few years ago we would have been horrified by.

I totally back many of the measures taken to halt the spread of Coronavirus, but in order for the rest of the population to buy into them, they have to seem reasonable.

Dare I say the Welsh government’s decision to ban alcohol from being served in pubs and restaurants at all times of the day is a measure that is completely unreasonable? Quite how having a glass of wine with your lunch in a restaurant makes you more likely to spread Coronavirous or contract it yourself only Mark Drakeford knows. I know Wales has a proud tradition of Calvinism, but even so…

Without the private sector, many of our most recent medical advances would have been made. John McDonnell wanted to have a state-run pharmaceutical industry. We will never know how it would have been able to do what private sector drug companies are doing in terms of inventing Covid vaccines.

It’s certainly true that the private sector is often the worst advert for itself, given some of its more vocal adherents are not exactly an example to the rest of society, but I guess that’s human nature for you. The greed exhibited by too many of our highly paid executives does little to restore people’s faith.

Yet this week there has been a move by Tesco which rather restores one’s faith in big conglomerates. It is to return more than half a billion pounds they received in business rates relief to the Treasury.

I just hope that this is redistributed to very hard-pressed local councils. Morrisons quickly followed suit, and I suspect the rest of the big supermarkets will, in the end, grudgingly do so too.

Saisnbury’s say they won’t (at the time of writing), but it’s difficult to justify huge payouts in dividends if a similar amount is being received in business support from the Government in one form or another.

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Talking of people who give the private sector a bad name, let’s have a word about Sir Philip Green. I was the Jeremy Vine TV show on Wednesday talking about the demise of his Arcadia group and Debenhams, along with another guest, Becca Hutson, who seriously suggested that it was up to the Government to bail them out, and it was all the Government’s fault anyway because of Covid.

Seriously. She clearly hasn’t been reading the business pages of the newspapers over the last three years. Had she done so, she’d have been aware that the demise of these businesses had been predicted for a long time. While Covid has no doubt hastened their fall, there’s little doubt they were doomed anyway. Neither business had embraced online shopping in the way that their competitors have, and have suffered the consequences.

If I’m honest, I have a teency bit of sympathy for them in, that ten years ago, would I have imagined that I too would be buying clothes, suits and shoes on the internet? No. But I do.

To think the Government should become the employer of last resort is the economics of the mad house. Yes, I feel incredibly sorry for anyone who loses their job, but if the state comes to the rescue of Top Shop or Debenhams, then why didn’t it for BHS or Woolworths? Or countless other businesses.

Ah, they say, but the banks were bailed out, so what’s different about shops? Well, everything. It doesn’t take a genius to work out the consequences for the economy if the banks had all been allowed to collapse like dominos. That is not true of the retail sector. Business is all about strategy and risk. Get the strategy wrong and take the wrong risk, and you become another corporate casualty.

That’s what Sir Philip Green has done, and it is sadly his staff and customers who are suffering the consequences. And, all the while, he sits on his £100 million Monaco-based yacht and gets through the remaining £900 million of his personal fortune.

While there is no legal way he can be forced to compensate any of his employees, surely anyone with even a small heart would make some sort of effort to alleviate the misery of those who are about to lose their employment? I’m not holding my breath, though. He’s not that sort of man, as was clear from the evidence he gave to a select committee not that long ago. A more repulsive human being I have rarely seen.

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Back in 1997, I did something mad and opened a specialist political bookshop in Westminster called Politico’s. It soon established itself as a meeting place and event venue, too.

Seven years later I closed it, and took it online, due to a combination of the advent of Amazon, a huge rent increase by our landlords, the Crown Prosecution Service and the congestion charge. But I sold the online business a couple of years later.

This week, I have resurrected the name and the online shop at http://www.politicos.co.uk. The intention is for it to become a one stop shop for all sorts of political items and ephemera, not just books. I hope that ConHome readers will be regular customers.