Friday, 2 May 2014

Let Them Eat Cake

The key to good economics is timing, Adam Smith was banging on about pins when pins where the last word in precision technology, Keynes was lucky to be at the height of his powers when the world needed him most and Milton Friedman took his bow when everyone had gotten bored of trying to make Keynes ‘General Theory' work.  Enter stage right Thomas Piketty, who is also lucky to be making his pronouncements on inequality as a new gilded age dawns bright.  Incidentally, one of the last gilded ages led to Equality, Fraternity and Liberty by way of the Guillotine so M. Piketty, a Frenchman, should be careful what he wishes for.
Exécution de Marie Antoinette 16 octobre 1793


Inequality is a malady that affects us all, miserable for those who have nothing, painful for those who have everything (the sense of unworthiness is soul destroying) and even worse for those who want everything but have very little.  It reinforces the propensity to sin in a deadly way – greed (I want it), sloth (what do I do now that I’ve got so much) and envy (I want what you’ve got).  This makes sensible debate all but impossible and it is likely to end in a bad way.   There is some history here  - Charles I followed by Cromwell, the age enlightenment followed by the French revolution, the roaring twenties by the depression and so on.  

In contrast to these periods of excessive wealth concentration we have enjoyed a period where the middle classes have enjoyed a great improvement in living standards – from 1930 to 2000 we in the West lived through period when great wealth accumulation was based on meritocracy.  Professionals all over the world increased their share of wealth substantially; well-off accountants and lawyers and doctors were able to climb the greasy pole to become really rich and the same was true for hard working artisans and successful managers.  This progress of the middle classes was just rewards for their hard work and the acquisition of important skills, it seemed for a time that “the war for talent” would cement this progress and then three things happened.  The Internet followed by leverage followed by recession!

The Internet is proving to be a major threat of the professional classes, who needs a consultant physician when you can look up your aches and pains on the web, who needs an accountant when you can file your tax return on line, who needs lawyer… well quite!  We’re all professionals now and we have access to so much advise (much of it poor) that we don’t need any one to tell us what to do.  In the same way small business owners have been crippled by this explosion in information access – who needs a travel agent, bookshop or insurance broker – and so it goes on.  This loss a value that the middle classes have endured is likely to get worse before the younger generations figure out how to milk the system, as they surely will.

Secondly the middle classes have been ruined by leverage.  It’s not controversial to say that the working classes have always been suppressed by leverage.  Capital has been able to keep them in their place without too much effort since the dawn of time as most working class jobs are in capital intensive industries that thrive on job insecurity (manufacturing, mining, agriculture, etc).   The middle classes were able to piggy back on this suppression, providing services to the capitalist and making good money in return.  But today leverage is used not to build railways or ships and dig coal, no leverage is used as a means to asset strip the old fashioned economy. 

Take a business like Boots the Chemist (we could pick a 1,000 others)  that was the heart and soul of Nottingham, bought by an Italian Financier in 2007 the businesses head quarters was moved to Switzerland (with a number of off-shore entities in Luxembourg, Cayman and Gibraltar which “save”  $1bn in tax a year), the old Head office in Nottingham has been devastated, the innovation of its pharmacy business has been destroyed, It pays little no corporation tax (On sales of over $22bn) and one man (who has no obvious talent) has basically stolen a great business because a couple of Private Equity firms (KKR for one) were keen to line their own pocket and put up the leveraged finance.

The business hasn’t got any better, the tax take has plummeted, the social good it provided to the good city of Nottingham has evaporated and one man has made off with £bns!  The flow money from the real economy peopled by honest hard working to business owners who have no obvious talent is a cause of great injustice.  No one minds the innovators like Dyson, Gates and Jobs making hay from brilliant ideas and designs but the manipulation of wealth through access to leverage is a commercial obscenity that needs to be atoned.  The scar on humanity is made more livid by the fact that this enormous wealth is then handed down from generation to generation.  It rude to say it but this activity is a form of larceny but its true.

If the advent of wild leverage wasn't bad enough the middle class have since been further penalised by the recession as governments have chosen to bail out their public spending deficits by collecting from those in work on middle incomes.  The poor have no spare money to tax and the very rich sort their money away well out of reach so governments have squeezed the middle - and how they have squeezed.

Piketty (our timely French economist) suggests a concerted action by the largest economies to implement a global tax on accumulated wealth so this money can be recirculated into the real economy a kind of beefed-u inheritance tax.  Five years ago this kind of idea would have been heralded as a communist mumbo jumbo, but how things have change and how well Piketty has timed his run!  In fact, dealing with the excesses of private equity, the huge pools of “dead money”  would be the best possible thing for capitalism – releasing £bns into the real economy where it can drive demand and grow real businesses owned by deserving entrepreneurs and hard working shareholders.  It will be difficult for the squeezed middle to bounce back, but with a bit of help they will bounce back and then heads will roll!




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