One of the assertions made by free market fundamentalists is the “trickle-down effect”: making rich people richer by cutting their taxes benefits everyone, as their extra wealth trickles down to the rest of us. I have long doubted this; a recent IMF report provides further evidence that this is not so.

To quote from the report:

“If the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years, suggesting that the benefits do not trickle down. Instead, a similar increase in the income share of the bottom 20 percent (the poor) is associated with 0.38 percentage point higher growth.”

The report goes on to say that the positive effect on growth holds true also for increasing the share of income for the middle classes – it’s only when the richest get more that we’re all worse off overall. This is hardly surprising. The poor tend to spend more of their income, not least on the basic necessities of life. The rich are more likely to save theirs – and, for the richest, often tuck it away in some offshore tax haven!

Spirit Level

In their 2009 book The Spirit Level, Richard Wilkinson and Kate Pickett demonstrated that more unequal societies had worse performance over a range of social outcomes:

• Community life and social outcomes
• Mental health and drug use
• Physical health and life expectancy
• Obesity
• Educational performance
• Teenage births
• Violence
• Imprisonment and punishment
• Social mobility

The book goes on to state a plausible mechanism to explain why inequality has an adverse effect on each of these outcomes. If growing inequality does indeed cause all these societal problems, it’s not hard to imagine that the overall growth in the economy is reduced as well.

Concentrating Wealth

Britain does worse than most comparable countries when it comes to wealth inequality – and we’re getting more unequal faster than them. The graphs from the IMF report illustrate this, showing the proportion of all wealth owned by the top 1% and the bottom 90% of the population, for 1980 and 2010.

In the UK, the top 1% own almost as much wealth as the bottom 90% of the population. Only the USA has greater inequality and the gap between the blue (1980) and green (2010) bars is biggest for the UK. Sweden, by comparison, although getting worse, shows that it doesn’t have to be this unequal.

I don’t want to live in a society where I have to shop around every few months for my energy supply to stop me being ripped off by my current supplier.

Since our former public monopoly gas and electricity suppliers were privatised by the Thatcher government in the 1980s, the private companies that replaced them have been playing a game of cat and mouse on two fronts:

• with the regulator, Ofgem;
• with their customers.

With Ofgem, this has mainly taken the form of a bewildering mix of different tariffs, designed to make it as difficult as possible to compare prices.

The game with customers mainly focussed on winning market share in an oligopolistic market. The consequence is to offer discounts and/or more attractive tariff packages to new customers, whilst pushing up prices to existing ones. In other words, customer loyalty is penalised and everyone has to play the game of shopping around.

The energy companies didn’t invent this practice: the insurance industry led the way, as they institutionalised greed and treating their customers as a cash cow. The phone companies have also jumped onto this bandwagon.

Natural Monopolies

Even at the time the companies were privatised, I felt the idea was wrong. Gas and electricity retailing is a natural monopoly: it’s the same gas and electricity coming down the pipes and wires regardless of whom your contract is with. These industries do not form a natural market: such competition as exists is on the periphery of the service – billing and customer service – and not on the core offer.

Matters were made worse when the wholesale supply and distribution business was privatised a few years later. These industries require long-term investment, for example, in new power stations. Also, there are major externalities, such as climate change and air pollution, which should be factored in at a strategic level. Similarly, security of supply is paramount, given how much of modern life is dependent on these supplies always being there. Short-term focussed, profit-maximizing competing companies don’t match these needs.

Consumer Benefits?

Have consumers benefited from cheaper prices or better services? I doubt it, at least in the longer term. There may have been some price cutting to benefit consumers in the early days, but prices have risen faster in recent years and I am convinced we’re paying more now than we would have done under public ownership. Like the petrol retailers, gas and electricity companies are quick to raise the retail price when the wholesale price rises, and very slow to lower it when the wholesale price falls. Furthermore, the various comparison websites will quickly tell you how patchy customer service is.

Dogma Rules

What got us into this sorry mess is the mindless application of the dogma I described as “free market fundamentalism” in my earlier post Some Are More Equal. If you have a basic universal need for energy like gas and electricity, what’s wrong with it being met by an organisation driven from top to bottom by a commitment to public service principles?

With news of the cancellation, only 6 weeks after the election, of major rail improvements to support the creation of a “Northern Powerhouse”, here’s a tale of when the last one was killed off by the first wave of free market fundamentalism.

In the summer of 1980, my boss thought it would be a good idea for me to attend the Oxford University Business Summer School. This was a course aimed at aspiring managers and was essentially the economics part of the first year PPE (politics, philosophy and economics) undergraduate course, crammed into three weeks of study. My fellow students came from medium to large employers across the country, in a variety of different sectors of the economy.

1980 saw the first of the home-grown and entirely unnecessary economic slumps, this one brought on by Thatcher’s great experiment called monetarism, at that time part of the new religion of Free Market Fundamentalism. (See my earlier post, Jam tomorrow on the M3, for more on my views of monetarism.) The recession was hitting manufacturing and the north of England particularly hard. Some of my co-learners worked in such industries.

We had many after-dinner speakers from the upper echelons of politics, academia, business and trade unions (yes, they were still listened to then). One speaker I particularly remember was one of the first of the new breed of City traders. His talk started by gently ridiculing the Old City Gentleman (seen on the left below), with his old-school tie code of ethics: “my word is my bond”, etc. He compared this unfavourably with the shiny, thrusting new City type (such as himself), who would sweep away the old ways. (The City “Big Bang” of deregulation was still a couple of years away.)

In the picture he painted, the new City was one enormous game of monopoly (playing with other people’s money), huge fun and with lots of money to be made. He all but invited his audience to abandon their own careers and follow the path he’d chosen.

During the question and answer session which followed, the discussion got quite heated. I distinctly remember two fellow students from northern industries: they were solid, respectable and, in all probability, “natural” Conservative voters. In the debate, they got very angry indeed, forcefully pointing out the enormous problems government policies were causing their industries, especially for exports.

There was absolutely no meeting of minds: they were living in different worlds.

I don’t know to this day whether my fellow students prospered or even if their companies survived. Nor, indeed, how many millions our city friend went on to make. But I did see at first hand the very personal pressures that were only just beginning as a result of the irresistible rise of the City and the destruction of our former northern industries.

Osborne was, until yesterday, speaking of a great revival of a northern powerhouse. It would have been a great deal simpler if his predecessors hadn’t destroyed the one we had in the first place.

Before the Tories finally get away with their version of history, let’s look at a few facts….

Debt

In 2010, the UK government debt stood at £1,100 billion pounds, no small sum! But when expressed as a percentage of Gross Domestic Product (GDP) – roughly national “turnover” – this comparison with other countries in 2010 gives some perspective:
Greece:                       170%
USA:                               90%
France:                       110%
Germany:                    95%
UK:                                 60%
So, in comparison with other countries, our debt was relatively small.

Yes, but how does this compare with past years? This graph gives some perspective:

Over a 300 year perspective, debt rose slowly and then more rapidly to its all-time peak, just after the battle of Waterloo in 1815, of over 2½ years’ GDP. The next 100 years were spent slowly paying off this debt. The years from 1914 to 1945 show a sharp rise, reaching almost the same peak level at 238% of GDP in 1945. It then fell to a low of 29% and has continued to rise after 2010 to around 80% today, the steep rise following the global economic crash in 2008. (It’s worth noting, in passing, that the near-record levels of debt in 1945 did not prevent the Labour government creating the NHS three years later – and that wars are very expensive!!)

So, debt in 2010 was not exceptionally high by historical standards.

Deficit

So, what about the deficit: the ability of the government to live within its means in any one year? This graph shows the position since the start of the Thatcher government in 1979:

The solid blue and red bars above show the actual deficit for each year of Conservative (or Conservative-led) and Labour governments respectively. The pale pink shows a hypothetical scenario for the years 2002-3 to 2007-8, which is when the Tories said Labour should have had a budget surplus. I’ve used a fairly arbitrary figure of 1.3%, which, by historical standards, would have been quite an achievement.

So what can we tell from the figures?

• Their track record shows the Tories are in no position to lecture Labour about budget surpluses!
• At March 2002, the final year of Labour surpluses, national debt stood at 29.3%, close to the record low.
• Six years later, after Labour “profligacy” and at the start of the global crash, it had risen to 36.7%, a rise of just over one percentage point a year.
• In the next two years, deficits rose sharply causing the debt to shoot up another 25 percentage points, to 62%. This resulted from the “nationalisation” of record private debts by rescuing the banks and pumping money into the economy.
• Deficits then slowly decline to around half the 2010 level, in contrast to Osborne’s prediction, at the 2010 “emergency” budget, of eliminating the deficit by 2015.

What conclusions can we draw? On some simplifying assumptions (which work very much in the Tories’ favour), if Brown and Darling had followed Osborne’s retrospective advice, national debt would have fallen to a 300-year low of 25% of GDP at the start of the crash, rather than the actual 37%. This certainly would have helped a bit, but is enormously overshadowed by the effects of the recklessness of the financial sector.

Who’s to Blame?

No one saw the crash coming in 2007-8. Mervyn King, Governor of the Bank of England said it wasn’t Labour’s fault, but rather “a shared intellectual view right across the entire political spectrum”. Even using my simplifying calculations (heavily biased in the Tories’ favour), blame would be apportioned:

• 80% financial sector
• 20% Labour Government.

And that’s before we even consider the benefits (Sure Start centres, increased NHS spending, etc.) that the extra money was used for.

One final thought about numbers – just a coincidence, I’m sure:

• 37%: National debt at the start of the crash
• 37%: Proportion of the vote to secure a Tory Government in 2015.

It’s a funny old world, isn’t it?

* economically speaking

Two events from recent history:

1. The Berlin Wall fell in 1989 – the symbolic end to communism as a way of organising society and the economy.
2. With the collapse of Lehman Brothers and government rescue of failing banks, Free Market Fundamentalism – my term for neoliberalism or neoconservatism – collapsed in 2008.

No serious commentator in the west or in the former Soviet bloc doubts event one, but many are still in denial about event two. Gideon George Osborne is one such person.

The “EffEmEffs”

Now, to back-track a bit. (This is not meant to be a lecture on the history of economics. Much, perhaps too much, has already been written on the clash of the ideas of Keynes and those of Hayek and Friedman. Suffice it to stay, the latter got the upper hand nearly forty years ago and won’t let go.)

As is well known, the core message of free market fundamentalism is that market forces are the best and most efficient way of organising society and the economy. Each individual pursuing his or her own interests leads to the best possible outcomes. Governments should “keep out” from interfering in the workings of markets.

I was instinctively against such ideas when they first emerged into public debate in the early 1980s, but could not articulate a full, coherent argument against the FMF movement.

Markets Increase Inequality

It was clear even then that free markets, left to themselves, would, over time, lead to ever increasing levels of inequality. The “invisible hand” of millions of individual decisions about which products and services would be bought and sold, and at what price, inevitably leads to an economy at odds with people’s preferred wishes overall. There would be more luxury goods in the world and fewer doctors, nurses and teachers than people would choose if asked to express their priorities directly. The reason is simple: in free markets, choices are made by the “votes” of each transaction: the more money someone has, the more “votes”. Markets thus respond in a way that makes poor people poorer and the rich richer. Even the smallest initial levels of inequality, processed through the amplifying effect of repeated transactions with the rich getting most say, lead to an ever-widening gap between rich and poor. This is an immutable law of free markets.

The Psychopathic Economy

Imagine for a moment, if you will, that the economy is a person. We would say that that person, exhibiting the behaviour required by the FMFs, has a severe personality disorder. Such a person would have a high risk of antisocial, predatory or even criminal behaviour. In lay terms, we’d call them a psychopath.

Now, using the Four Cs framework from my earlier post Being Human II: The Four Cs, it is easy to see why this should be so. Free market rules (i.e. pursuing self-interest) do not represent human thinking. The twin attributes “curiosity” and “competition” are modelled fully in the workings of markets. But the balancing attributes of “conscience” and “compassion” are missing completely.

George Osborne is our national cheerleader for the “EffEmEffs”. And it’s in that way that he is only half human.

Do you remember M3? Or M1? Or M0? No, I’m not talking motorways here, I’m referring to monetarism.

Ah…! Monetarism: the new religion of the early 1980s.

In the late 1970s, the standard methods of managing the economy seemed no longer to work. Major shocks, such as the five-fold increase in the oil price, had wreaked havoc. Enter the Chicago school of economics under their leader Milton Friedman. Much has been written about his ideas and I don’t plan to repeat them here. But these ideas had a profound effect on government thinking which continue to this day. Even Dennis Healy, Chancellor in Jim Callaghan’s government, seemed to think there was something worth considering. But it was Margaret Thatcher and Chancellor Geoffrey Howe who were the true believers.

There was much talk about the definition of what was money – hence the various M’s – and its “velocity of circulation”, which was asserted to be stable, at least in the long term. Followers of Keynes hit back with their hero’s famous “In the long run, we’re all dead” quote from 1923. But, at the start of the 1980s, Howe pressed ahead with great vigour to implement policies based upon Chicago school thinking.

And what happened?

As can be seen from the graph, the great monetarist experiment plunged Britain into a wholly unnecessary recession, which lasted about three years. The main consequence was the permanent destruction of much of our manufacturing industry, from which we have never recovered. The very lop-sided state of our economy towards services, and in particular financial services, starts here – we never did get the “jam tomorrow” promised by the theorists.