1 March 2017

Why Britain needs to share the wealth

By Andrew McNally

In making the case for public ownership, James Keir Hardie repeated a point made by the Greek historian Diodorus Siculus: “It is absurd to entrust the defence of a country to men who own nothing in it”.

Both the founder of the Labour Party and the man he was quoting understood a truth that’s as old as civilisation itself: it is impossible for societies to keep developing, economically and socially, unless they bring everyone along.

As the UK heads for a clean break from the European Union, the redesign of our economic model will no doubt focus on our trading relationship with the rest of the world. But if Brexit happened because most people did not share the rewards of globalisation, or were hit by it, then a new model for trade – even if successful – won’t on its own calm the discontented.

The more meaningful debate will be on domestic economic policy. It is how we share success that will render us viable – or not. Yet the political narrative on this front is more muddled than ever – and the current political battle lines are incompatible with the conundrum that declining economic inclusivity presents.

Jeremy Corbyn’s vision is closer to that of Keir Hardie than today’s Labour Party establishment might dare to embrace. But he’s also getting closer to the nub of our economic dilemma than the Conservative Party could dare to imagine.

For today’s debate is beyond the pros and cons of public or private ownership – it’s about ownership full stop.

Since Margaret Thatcher’s “Tell Sid” campaign, which invited everyone to take a stake in the newly privatised British Gas, ownership has been going backwards in all respects. Even that most sacred of British obsessions, home ownership, is in decline – and the dream of widespread share ownership is now just that.

The former is worrying – home ownership has been a mainstay of social content since World War II – but the concentrated control of productive wealth, business equity, in the hands of fewer and fewer ultra-wealthy individuals is much more troubling.

As I explained in my book Debtonator: How Debt Favours the Few, it is through business equity that the financial riches of economic progress are shared. So the fewer the people who reap the benefits, the wider income disparity will be in the future.

If we are, as one former prime minister liked to say, in this together, then without the goal of broader ownership at the heart of progressive economic and social reform, we will continue to sleepwalk into a familiar problem. Responsibility for the dispossessed will increasingly fall to the state and the compulsion for the government to respond will lead us back to statism.

This is an outcome Jeremy Corbyn might prefer. But it’s also one which will, in the end, lead to disaster. For whether that state response is in the form of growing transfers through welfare, support for unproductive jobs, or state-directed investment, it will set us on the road back to being the sick man of Europe.

The causes of declining ownership are manifold: they include structural flaws in our pensions system, the debt bias in corporate taxation (which has curtailed the need for equity finance), regulatory focus on risk aversion. Fuelling all of this, though, is our reliance on cheap money, and more specifically, on the Bank of England to keep the show on the road.

The forces at play are not just the obvious – although the Bank of England buying assets through quantitative easing did indeed increase the net worth of the wealthy. There is a more subtle and insidious dynamic at play.

Ultra-low interest rates have facilitated one of the biggest land grabs in history. Private equity firms making leveraged buyouts, corporations using debt to finance large-scale share buy-backs, landlords building vast buy-to-let portfolios – the land-grabbers come in many forms.

And so do the losers. From pension funds corralled out of equity and into low yielding bonds, to young people priced out of the housing market, cheap money harms just as many people as it helps. As the cost of ownership has collapsed for the few, the rest have been priced out. Ultra-low rates have created a winner-takes-all version of capitalism, rather than harnessing its true potential.

So what would an economic agenda with broader ownership as its goal look like?

First, it would need to upend the status quo when it comes to corporate taxation, pensions, investment and regulation.

The most useful change to corporate tax is straightforward. Removing the so-called debt shield,  by canning the tax deductibility of interest expenses, would dramatically increase the use of equity rather than debt to finance corporate activity (this is on the policy agenda for the new US administration).

A “re-equitisation” of our pensions system could be encouraged through the tax system and changes to pension fund accounting. And broader equity ownership could be inspired through much more ambitious tax incentives and a rebalancing of our regulatory culture away from pure risk aversion.

If the ownership problem is largely monetary, however, then the philosophers’ stone solution is too. On that front, the narrative is shifting quickly – experts and commentators alike are grappling to justify helicopter money. But if done badly, the outcome would be statism on steroids.

Under such circumstances, we would find ourselves well on the way to being a failed state: an elite political class in Whitehall would be allocating capital, most likely to white elephants, with little understanding of those projects’ real value to society.

Instead, we should go for monetary support (via zero-cost debt finance) for pools of more broadly owned equity capital, via a sovereign wealth fund or funded individual pension accounts. This would stabilise the financial system (rather than further destabilise it) and embed the virtues of ownership into our economy.

State support for broader ownership isn’t new. Arguably one of the greatest political achievements behind America’s economic success was Abraham Lincoln’s Homestead Act of 1862. By allowing ordinary Americans to earn ownership of agricultural land, through working it for five years, it created an ownership society.

Inflated house prices and bond markets will not make us more productive. But broader ownership of productive assets would – so the system should engender it for the benefit of everyone.

Corbyn and everyone else on the Left will despise this solution, because it values private ownership. But if Theresa May is truly driven to create “a country that works for everyone”, then nurturing a financial system that promotes broader ownership in all respects is the best way to relieve the burden on the state.

And unless we address these structural flaws in our financial system, any other attempts to build a truly inclusive economic democracy will be condemned to failure.

Andrew McNally is the CEO of Equitile and author of 'Debtonator: How Debt Favours the Few and Equity Can Work For All of Us' (Elliott & Thompson)