6 October 2015

The “undeserving rich” should watch out – the Tories are coming for you


In Manchester on Sunday, Sajid Javid paid tribute to Labour’s leadership on increasing the international aid budget. Iain Duncan Smith saluted Tony Blair’s decision to introduce the minimum wage. Ruth Davidson travelled even further back in time when asked to identify a great achievement by a previous Labour administration. The leader of Scotland’s Tories praised the Attlee government’s 1948 National Assistance Act – which established a safety-net for those not covered by earlier national insurance laws. But it was probably Michael Gove, the Justice Secretary, who made the most audacious intervention.

Speaking at an event hosted by the Legatum Institute and TheGoodRight.com on the fringe of the Conservative Party Conference in Manchester Mr Gove called on Conservatives to draw a distinction between the deserving and the undeserving rich. He talked about a deserving rich who work hard, who are creative and who add value to society but his target was an undeserving rich who play the markets, rig rules and sit on each other’s remuneration committees. He called for today’s Conservatives to tackle the undeserving rich with the same determination as the monopoly-busting Teddy Roosevelt demonstrated when he tackled the anti-competitive practices of his time.  Mr Gove specifically singled out people at the World Economic Forum in Davos who lecture the rest of the world on the importance of competitive markets but still get handsome reward packages if and when they fail. (Mr Gove makes his remarks at 33 minutes into this video.)

Iain Duncan Smith, the Work and Pensions Secretary, was quick to agree with the Lord Chancellor’s analysis. No free market Conservative should begrudge people who have risked everything and built a business and created jobs from being handsomely rewarded. But, IDS continued, in recent years capitalism became associated with a financial system that was quick to punish small business people or private households who fell into financial distress. Someone who didn’t pay back their loans on time were blacklisted in credit checks for many years, for example. But when those same banks and financial institutions got into trouble themselves they were bailed out by government and a different set of rules seemed to apply. If the rich can’t get poorer because the system protects them, the system loses legitimacy.

When the former Labour leader Ed Miliband waded into this territory a few years ago – drawing a distinction between producer capitalism and predatory capitalism – many Conservatives and business groups were appalled. In part, they were appalled because the intervention came from a politician who demonstrated no real understanding of wealth creation. There were legitimate fears that Mr Miliband was an old-fashioned tax-and-spend politician who would use the misbehaviour of some businesses to create an economic environment in which all businesses would suffer. The party of Gove, Duncan Smith, Javid and Davidson is in a very different position. The cuts it has made to corporation tax, its deregulation agenda and its reforms of employment tribunals are a few examples of measures that have helped Britain to become more competitive. The party will be given more leeway by the nation’s wealth creators to do things like introduce the National Living Wage and, perhaps, make a distinction between the deserving and undeserving rich. It’s typical Nixon-in-China territory.

Michael Gove hinted at one practical implication of his deserving / undeserving rich distinction: monopoly-busting. We may need stronger competition policy to break up the big banks or other large companies that, because of their size, are too big to fail, are able to squash competitors by predatory pricing or are able to afford heavy regulatory regimes that start-up enterprises cannot.

Reform of remuneration committees is another possible policy application. Why do so many CEOs receive golden parachutes as well as golden hellos? For some top CEOs it’s heads they win, tails they win. It’s all ladders and no snakes in the salary game with no clear connection between what managers pay each other and how the companies they manage perform.

I would add reform of the property and planning system to the list of necessary reforms. So many people are growing rich in London because of over-regulation of the land market. People who are already rich are getting much richer simply because they own homes in a market where heavy regulation favours the already propertied over those without a foot on the property ladder. Releasing much more public sector land for housebuilding – including compulsory purchase of the uglier parts of Britain’s greenbelt – will create a proper housing market and end the rigged one we have at present.

Speaking in the main conference hall today Sajid Javid declared that he would “come after” “bad practice”:

“Whether you’re a bank rigging interest rates; a car manufacturer cheating on emissions; or a company not paying your fair share of tax be warned: we will come after you. Because free enterprise is not a free-for-all.”

In most cases it is the absence of free and fair competition – rather than its existence – that produces undeserving riches.  The politicisation, regulation and bureaucratisation of the economy may be the biggest factors blunting the system of profit and loss that keeps free markets honest. But, as the Business Secretary Sajid Javid stated, the Tories are the party of law and order rather than the law of the jungle. Unethical business has to be punished.

Tim Montgomerie is a columnist for the The Times, a Senior Fellow at Legatum Institute and co-founder of the new website The Good Right. His “reform of capitalism” report for the Legatum Institute is published on 4th November.