Monday, 16 July 2007

An allergic reaction to 'fat cats' (Spiked Online)

The super-rich of the private equity sector are a symptom, not the problem with capitalism today. Anybody might be forgiven for thinking that there is a growing mood of anti-capitalism in British public life. Last month, in the normally staid and conservative House of Commons, MPs were warned by a top adviser to Gordon Brown that unless they reformed the taxation system, the widening gap between the new multi-millionaires of the private equity sector and the poor could lead to ‘Paris-style riots’. Just this week, the media headlined another warning from a leading figure about a possible popular backlash against the ‘New Capitalism’ of tax-privileged private equity. But that’s just familiar rhetoric from trade union leaders, isn’t it, and nobody listens to them these days, right? Except that those echoing the union arguments were hardly labour movement firebrands. The warning about riots was delivered to the Treasury committee of MPs by Sir Ronald Cohen, not only a major Labour Party donor but himself a private equity ‘fat cat’ reportedly worth more than £250million. And the headlines about a backlash against the ‘New Capitalism’ were made by none other than the director general of the Bank of England. So what’s behind the strange debate about the state of capitalism today? In Europe and America, the rise of private equity (PE) has been the economic phenomenon of the past few years, as groups of financiers borrow huge sums to take over established companies. In recent months, a growing campaign against the excesses of private equity has been led by Europe’s big unions, accusing PE chiefs of acting as asset-strippers and ‘locusts’, cutting jobs and wages to maximise profits at the companies they take over. On the other side, the small band of PE defenders claims it is a great British success story. The fact that, in a recent newspaper exchange, the case against PE was put by Labour crank and conspiracy theorist Michael Meacher, while the case in favour was entrusted to Tory crank John ‘Vulcan’ Redwood, suggests that we should be wary of taking either side in this false debate. In one sense the campaign against PE is only the latest incarnation of the longstanding crusade to find the ‘unacceptable face of capitalism’ (a phrase first coined by a Tory prime minister). In the post-Enron age, when big business is falling over itself to show how socially responsible it is, the PE financiers have stood out by looking more like old-fashioned profit-hungry capitalists. The secretive way they operate, often using foreign capital, has made them an easy target for those in the rump of the old labour movement desperately looking to score some cheap and easy points. Seen in their proper context, however, it becomes clear that these fat cats are only a symptom of the current state of economic affairs rather than the problem. PE is not some sort of a septic boil on an otherwise healthy economic body, but rather a natural development of the way that the market economy works today, especially somewhere like the UK. Nobody needs to defend multi-millionaires. But the current attacks on PE have more to do with moralistic grandstanding by its opponents (increasingly met by self-conscious defensiveness from its supporters), than with any considered critique of modern-day capitalism. Make them pay more tax if you want, but let’s not kid ourselves that it will make any difference to the rest of us. Although it has been blown up into a big political issue, with the Brown government promising to review its tax breaks, private equity is really little more than another technical financial instrument. It has boomed as the latest way for financiers, consultants, accountants and lawyers in the City of London to make their millions. In 2006, global PE takeovers and deals were worth £380billion - five times more than in 2003. The USA and the UK are at the heart of this boom. In May, PE made its biggest-ever score in Europe with the buy-out of pharmacy chain Boots for more than £11billion. PE has been fuelled by the flow of cheap credit, particularly from the East. As Asia, and especially China, has become the new productive motor of the world economy, these countries have been building up their foreign exchange reserves, mostly invested in Western financial assets. This has provided the basis for the latest expansion of easy credit: billions of dollars slosh about the world looking for a home while central banks keep interest rates low by historical standards. In turn, this easy credit has financed and supported the take-off in private equity deals. These deals, however, do not represent productive investment in the creation of new wealth. Like much Western investment in recent times, they are speculative attempts to make short-term profit through taking over existing assets. PE groups take public companies private, load them with debt, and then use various financial instruments to maximise profits. That might sound like outrageous financial skulduggery, but it is typical of how successful Western and especially UK capitalism operates today. The days when Britain could claim to be the industrial workshop of the world or the largest empire on Earth are long gone. What British capitalism relies upon today is the City of London (now spreading into Canary Wharf), where the financial institutions make billions by servicing the movements of somebody else’s capital produced elsewhere in the world. British economic ingenuity is not about inventing steam engines or engineering feats, but about coming up with new financial instruments and mechanisms through which the City’s financial services can maximise its dividends and fees. Lately, critics of PE have tended to focus on the generous tax privileges it has been granted by the New Labour government. Much was made of the revelation at last month’s Commons committee hearings that some of the ‘fat cats’ pay lower tax rates then their cleaners. The key trick here is that PE millionaires are able to treat their income as capital gains on their investments and thus, through something called taper tax relief, end up paying only 10 per cent tax rather than the 40 per cent top UK rate. Those registered as non-domiciles for tax purposes - who include most of the biggest PE players in the UK - pay even less. A glance at this obvious discrimination in favour of private equity would no doubt have many agreeing with Meacher that ‘never have the super-rich been showered with such lucrative partiality by any government’. But the real question is, why does the government do it? It surely cannot be because Brown - the chancellor responsible for the tax concessions - feels natural sympathy for City ‘slickers’. The real reason New Labour is ‘soft’ on PE has little to do with a love of the super-rich, but simply because it recognises the reality that the British economy now depends upon the activities of the City. With the further withering away of British manufacturing and the massive expansion of international financial flows, the UK economy is more reliant than ever on financial services to support the state and society. Servicing and moving around other people’s money, rather than creating new wealth, is the British way of economic life in the twenty-first century. The UK is behind only the USA in the scale of its PE deals. In what other economic area can Britain claim to be second in the world today? Whether he likes it or not, Brown understands which side his bread is being buttered. Some PE takeovers, such as the buy-out of the Automobile Association, have certainly led to the loss of a lot of jobs, at least in the short term. But the allegation that they are always worse than ‘ordinary’ corporate buy-outs does not really seem to stand up. What private equity does to the firms it buys is not that different from the sort of restructuring seen in many industries since the Thatcher government launched a wave of privatisations in the 1980s. Indeed, much of the present PE restructuring seems to be financial re-engineering, using easy liquidity to add debt (’leverage’) to companies (which risk-averse banks are often more reluctant for publicly quoted companies to do) and does not impact much on the public activity of the company itself. In short, PE is the latest soft target for those who, in the age of TINA (There Is No Alternative), have had to accept that they cannot challenge capitalism directly. Union and other objections tend to be about the shady, foreign character of PE, playing on general resentment of the ‘super-rich’ rather than focusing on what PE actually does. The growing influence of the unions in this debate reflects the defensiveness of the capitalists rather than any real resurgence of a labour movement that is now largely an empty shell. Of course, if multi-millionaires have to pay a bit more tax, we need not shed any tears. But what difference would it make to the rest of us? Will it be distributed like charity, at the rate of a few pence each? If the unions are concerned about inequality, let them focus on demanding better pay and conditions for their members instead of PR stunts. The demand for more ‘fairness’ always seems to mean levelling people downwards rather than upwards - a miserabilist spirit that will benefit nobody. A culture of restraint and regulation rather than a wild free market is the biggest barrier to society’s economic advance today. As the examples I gave at the start illustrate, we are not dealing with rapacious cartoon capitalists, but with a cautious and defensive business class. Even the ‘fat cats’ get nervous and start worrying about riots and setting up CR (corporate responsibility) bodies when they come under pressure. We can expect more voluntary codes of conduct as PE tries to stave off state regulation. Who exactly will benefit from that is another matter. These ‘fat cat’ super-rich characters are hardly the solution to the troubles in the world economy, but they are not the big problem either. And inasmuch as the crusade against PE offers no alternative other than to re-enforce the culture of economic restraint, it will end up as part of the bigger problem. What we need are fewer cheap stunts and gestures, and more serious discussion of how society’s wealth is produced, used and distributed today. The public good is ill-served by singling out private equity or anything else as the unacceptable face of capitalism. Mick Hume is editor-at-large of spiked. Previously on spiked James Woudhuysen asked if the Red Dragon is a green threat. Phil Mullan reviewed Daniel Ben-Ami’s Cowardly Capitalism: The Myth of the Global Financial Casino. Daniel Ben-Ami said that JK Galbraith is the forefather of contemporary anti-capitalism, that growth is good and that there is no ‘paradox of prosperity’. Or read more at spiked issue Economy.Neil Davenport Bash the rich-bashers Why is everyone from Tatler to Toynbee (as in Polly) attacking the super-wealthy for their greed and spending habits?Printer-friendly version Email-a-friend RespondAttacking rich people for having tons of cash was once the domain of those pantomime anarchists, Class War. advertisementadvertise on spikedBack in the Eighties they would organise ‘Bash the Rich’ festivals and campaign against what they saw as the gentrification of old working-class communities, particularly in east London. In recent months, these whinging, anti-success sentiments have made a notable comeback. Only this time, it isn’t Special Brew-drinking, dogs-on-strings anarcho-types who are attacking the wealthy – it is rather more respectable opinion-makers and columnists. Slating London’s City traders, the Guardian’s Polly Toynbee says ‘it’s time to face them down, call their bluff and regulate their unjust advantage before their pernicious buccaneering destroys the culture of corporate social responsibility’ (1). What next? Will Toynbee be sporting a t-shirt showing a graveyard under the slogan: ‘We’ve found new homes for the rich’? Even more surprisingly, the defiantly right-wing Daily Mail, the London Evening Standard and even Tory magazine Tatler have indulged in the new anti-rich grandstanding. Tatler editor Geordie Greig ranted recently against the impact the super-rich have on dear old Blighty: ‘That old sense of living in a country where fair play and an honest day’s work led people to feel they could get what they strove for has been destroyed by dizzying extremes in wealth.’ (2) Blimey. Is all this rich-bashing, as one commentator claims, a healthy sign of a desire for a fairer, more equal society? Is it a belated questioning of Thatcherite money-grabbing, and therefore A Good Thing? No, it isn’t. On every level, today’s complaints about the ‘super-rich’ are spectacularly ill-informed and wrongheaded. For a start, complaining that millions in the bank is an ‘obscene amount of money’ is akin to looking through a telescope at the wrong end. Wouldn’t a £180 weekly wage packet, earned by some in the poorer sections of society, better be described as an ‘obscene amount of money?’ It’s coming to something when having little money is seen as being somehow more desirable than having a mountain of moolah. What kind of message does this popularise? That aspiring for higher living standards is the equivalent of dining with the devil? Attacking ‘rich bastards’ might sound righteous and radical, but it conveys the idea that all of us should settle for less. Indeed, five years ago, when London Underground workers went on strike, commentators complained that the RMT union’s pay demand was a sign of wanton ‘greed’. Incredibly, there were even complaints that the Tube drivers’ £32K salary was already ‘too high’! (3) In truth, that paltry sum would barely buy a broom cupboard in London these days, let alone a semi-detached house. Those stinging criticisms of ‘greedy’ Tube workers should have served as a warning of what happens when anti-materialist sentiments are allowed to flourish. The real consequence of anti-rich ideas, which have little impact on the rich themselves, is to constrain those of us who want more from life. Notice how the anti-wealthy opinion-makers berate the rich for what they do with their cash rather than for how they make it. There is rarely any mention of the fact that rich businesspeople make their fortunes on the backs of the badly-paid labour of the working classes. Instead, critics aim their fire at the rich for buying luxury goods and big houses, rather than for any exploitation they may preside over. One columnist reckons that the entrepreneurs on BBC 2’s Dragon’s Den probably drive tacky sports cars and therefore are a bunch of cocks (4). These are cheap moralistic shots rather than anything like a serious critique. It seems the workplace origins of wealth are of no real moment for these tax-the-rich complainers; they’re more interested in attacking the garish spending of the wealthy than in demanding a restructuring of wealth creation more broadly. As a result, the discussions about the rich tend to mystify social relations in society. Having millions of pounds in the bank is not an automatic source of social power. Rich entertainers, pop musicians and actors might have accumulated enormous amounts of money, but it doesn’t mean they have the ability to shape society and make decisions that impact on people’s lives (bar the misery inflicted on people whenever U2 release an album or their frontman Bono opens his sphincter-like mouth to pronounce on African poverty). Social power only comes about when the owners of society’s resources enter into an economic relationship with those who survive by selling their labour power to them. This monopoly of the means of survival endows such businessmen with the power to influence debates, set agendas and make decisions that have real consequences for people’s livelihoods. It follows, therefore, that calls for wealth redistribution don’t get to the heart of the problem of social inequality. Increasing taxes on the super-rich to give to the low-paid and the poor wouldn’t improve people’s living standards in any meaningful way, as previous welfare redistribution policies have shown. Perhaps our time would be better spent interrogating, and changing, the issue of who owns society’s resources. None of the rich-bashers (certainly not Tatler!) is suggesting that there should be collective ownership of society’s productive resources – that would mean allowing millions of people to have a genuine say in how society is organised. Instead, today’s attacks on the rich are driven by a rather patronising view of the masses as inert, passive dolts in need of a bit of altruistic charidee. The likes of Toynbee and Tatler are not in favour of creating a more democratic method of wealth-creation. Rather they seem to believe that the rest of us should be happy with a few crumbs that fall from the rich man’s table – though heaven forbid any of us should spend these handouts on foreign holidays, a decent car or on a trolley-dash around Tesco. How did moralising about money and materialism become mainstream? It strikes me that the origins of these sentiments lie in the Labour Party left during the 1980s. As their Alternative Economic Programme and welfare policies in the 1970s had proven an economic disaster, the Labour left quietly shelved their commitment to improving living standards altogether. Instead, they recast being left-wing as being all about moral-mindedness and a commitment to community, values and ethics. The then prime minister Margaret Thatcher seized the initiative by colonising social aspiration as being somehow the property of the New Right rather than the left, as it previously had been. So successful was Thatcher’s use of social aspiration as an ideological tool with which to defeat the left that, to this day, anyone who claims to be left wing will express his or her loathing for the politics of social aspiration. For them, anyone who wants more from life – a big house, cars, holidays, etc – has clearly capitulated to Thatcherism. Today, anti-materialist ideas are so mainstream that even the rich attack the rich. Right now, there is no bigger or louder anti-consumerist and anti-materialist than the very wealthy green proselytiser, Al Gore. When even the super-rich berate the, er, super-rich, it seems clear that there is nothing to be gained from joining in with the attacks on wealth and success. To do that would be to attack the very basis for changing society for the better. So long as people aspired to greater living standards, there was an audience for politics that aimed to revolutionise the way society is organised. Attacking those at the top of society is simply an indirect way of keeping everyone else in their place below. Neil Davenport is a writer and lecturer in London. Previously on spiked Daniel Ben-Ami reviewed Oliver James’ book Affluenza and interviewed Indur Goklany, author of The Improving State of the World: Why We’re Living Longer, Healthier, More Comfortable Lives on a Cleaner Planet. Rob Lyons looked at poverty and politics. And Daniel Ben-Ami summed up why, if prosperity doesn’t make us happy, it’s still a good thing. Or read more at spiked-issue Economy.(1) ‘Stick it to these City Caesars - for the sake of the nation’, Polly Toynbee, Guardian, 19 June 2007 (2) Tatler, June 2007 (3) See Underground Fat Cats, by Neil Davenport (4) Last Night’s TV, Guardian, 4 August 2006 Digging up the roots of the IPCC by Tony Gilland

1 comment:

Anonymous said...

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