Forget high pay - the filthy rich don't get paid at all

Fascinating piece by Jenni Russell in tonight’s Evening Standard, on the back of an extraordinary statement by the International Monetary Fund. After 60 years as the guardian of Un-compassionate Capitalism, the IMF has decided that inequality matters – not because it’s unfair, but because it actually damages the world economy. According to the IMF, inequality was a factor in causing the financial crash. Because most people haven’t got much better off over the last 30 years, they borrowed excessively to raise their living standards, while the filthy rich got filthier and much richer. The logic is remarkably appealing – the burgeoning wealth of a minority causes things like house prices to inflate beyond all realism, and everyone else borrows money (partly against their overvalued houses) to keep up.

Russell pulls out some terrifying stats about how economic growth has primarily benefited the rich since the 1970s. In America, 58% of all growth in income since 1976 has fallen to the top 1% of people – and the UK isn’t too far behind. That might sound a bit dry, but the implication is real: most people haven’t got very much better off for 35 years.

The reaction in the media, and among the public, has focused disproportionately on pay. Not just on bankers’ bonuses and chief executive salaries, but even on headmasters and council staff. In fact, most of the rise in inequality is down to markets and control of resources – it is about the distribution of wealth, not salaries. The fact that Fernando Torres now earns more each week than the average person might make in 10 years might seem grotesque, but there are millions of football fans (and at least one dodgy Russian billionaire) who’d pay a small fortune to see him play for their team.

Pay has played its part in the growth in inequality, but the serious stuff is about finance and the control of resources. It is no coincidence that the rise of inequality coincides relatively closely with the deregulation of financial markets. In today’s world, a man (and sadly it is still mostly men) can make a fortune without doing an honest day’s work in their lives. Financial services, international bond markets, foreign exchange markets and mergers and acquisitions all have their place in the economy (as the fundamentalists at the IEA will attest), but when people start doing this just to enrich themselves, they end up stifling innovation, destabilising the economy and making ordinary people pick up the pieces.

But if you think the solution to this lies in higher taxes, or tough action by the UK government, you’d be sadly mistaken. Today’s financial elites are incredibly mobile – and if they feel victimised in one country, they’ll move on. That’s a big part of the reason that successive governments have been so soft on the demonised bankers – hit them too hard and they’ll take their spending and taxes elsewhere. If you want to solve a big, global problem like inequality, you need to get the whole world signed up, to overhaul the rules of global capitalism. That is a colossal task – but if the IMF is on board, then anything must be possible.

Memo to the Chancellor: Businesses need support, not bribes

It’s not often I find myself violently agreeing with a trade unionist, but these are strange times. According to the BBC, Sally Hunt of the University and College Union will “accuse ministers of prioritising billions of pounds in tax breaks for business as they triple the cost of university and axe funding for college students and help for the unemployed” at an anti-cuts protest today.

My instinct is that she’s right – but my reason for thinking that is quite different to hers. I’m not too interested in whether this is fair or just, because at the end of the day we will only create jobs for the young and the unemployed if we have strong businesses. It’s one of those perverse laws of the economy: the fate of business and worker, of rich and poor, are inextricably bound up with one another.

My problem is that giving tax breaks to businesses just isn’t a very effective way to create jobs. To see what I mean, you need to put yourself in the place of a business owner. The corporate tax rate only applies to a firm’s profits (assuming your business makes a profit). That’s all very well, but there are a lot of obstacles to actually making a profit: Can I afford the rent on my office? Will the VAT rise make my products too expensive? Where can I find the skilled workers I need? All of these problems – problems which the government can do something about instead of cutting tax – come with a huge risk. Now ask yourself: if you are thinking of starting a business, are you more likely to worry about a marginal amount of tax on your profit, or the myriad of risks and obstacles you need to overcome to make a profit in the first place? Would you want the government to be helping create an environment for you to make a profit, or giving you a marginal tax break on whatever profit you do make?

One of the lesser known features of this recession is that UK businesses are, in fact, sitting on vast piles of cash – and it’s not just me saying that, it’s the Chancellor, no less. Why should they be hoarding cash rather than investing it, and creating jobs? The answer is complicated – it involves many things, including risk, uncertainty, structural problems with the UK economy – but I find it hard to believe that corporate tax rates are an important consideration. Of course, the government deficit does play a role in creating an uncertain environment, but remember: cutting taxes makes the deficit worse. Surely Osborne needs some better ideas than cutting taxes for business and cutting spending on everything else?

The London Evening Standard revealed yesterday that Osborne and Vince Cable were also planning to bring back Enterprise Zones to help stimulate deprived areas by offering temporary tax breaks to businesses. This policy from the 1980s looks like a great idea on the surface, but it was generally seen as a failure (with the exception of Canary Wharf). That’s because there is one very big problem with Enterprise Zones – the tax break is temporary. Businesses might come into the area to take advantage of the tax breaks and new office space while they’re available, but there’s nothing to stop them moving away again once the offer expires. The logic is the same as that used by Ireland, which cut its corporation tax to attract foreign companies. It worked brilliantly while things were going well, but as soon as the economy took a turn for the worse, many of the companies fled. It looks as if Osborne hasn’t learnt this lesson.

But what of Canary Wharf? It was an Enterprise Zone in the 1980s, and today is still a thriving economic hub, long after the tax breaks expired. The main reason that Canary Wharf took off is that it is a great place to do business: affordable, swanky offices, close to the centre of London, with access to world class skills. What it needed was new buildings and infrastructure to replace the decay of the docklands – not so much a tax break. When the tax break ended, Canary Wharf was still a great place to do business, unlike all the other Enterprise Zones. The FT tells us that office space costs more in Birmingham than in San Francisco, a problem that a temporary tax break will do little to solve. It would be much better to spend the money on new infrastructure, to provide a lasting legacy for businesses.

That is the fundamental problem: the government is offering short term bribes to businesses, while ignoring the underlying weaknesses in the UK economy. If you don’t tackle the real problems – skill shortages, bad infrastructure, deep uncertainty – you won’t get any growth at all, let alone balanced, sustainable and equitable growth.

The changing face of Cleggmania

Cleggmania used to be like Henmania – everyone loves a plucky underdog with a fresh face and floppy hair. He even carried through the comparison by proving to be a bit of a let down at the crucial moment. But these days, Clegg’s mania seems more like the type that a psychiatrist would treat.

In some ways, I feel sorry for the guy. After all, once the Lib Dems had suffered a disappointing (and deeply unfair) setback at the election, he didn’t really have much room for manoeuvre. The decision to enter the coalition was never going to be popular, but the alternatives were unthinkable.

Since then, he has made some pretty spectacular blunders. Even if you are prepared to put aside the tuition fee debacle (some pundits would insist his only mistake was making the pledge in the first place!), his list of blunders since May is incredible. It got so bad this week that Ed Miliband started quoting the Lib Dems’ own statements against the rise in VAT – talk about writing your own death warrant!

But one thing really caps it all – Nick Clegg is unbelievably, inexcusably patronising. He seems to preach interminably about building a fair society, about creating an open political process – and then does the exact opposite. And most infuriatingly of all, everything he does is “liberal”. It’s as if he has an exclusive right to the word liberal, just because it’s in the name of his party.

That might sound pretty trivial if you’re a prospective student, or a public sector worker facing unemployment, but there’s a point in here. The Lib Dems have had to make difficult choices on big issues, and as a junior coalition partner they have to pick their battles – as Vince Cable knows all too well. The battles they’ve picked have too often been driven by their obsession with a narrow strand of liberalism – an issue that doesn’t tend to interest very many people. Electoral reform, civil liberties for terror suspects, freedom of information and the like are worthy issues, but they are not ones that matter much to the electorate. (Indeed, electoral reform was my number one issue at the election, but that says a lot more about me as a person than about the voting system as a political issue).

Meanwhile, on the issues that matter most to ordinary people – the deficit, healthcare, education and so on – Nick Clegg and his party have surrendered meekly. Many people, myself included, hoped the Lib Dems could moderate Conservative radicalism in these areas, but they haven’t. They’ve sacrificed this role to push through a few pet Liberal policies. As a result, we’ve seen VAT rise, eye-watering cuts to some public services, and a retrenchment of state support for higher education, and we await the impact of sudden, drastic reforms of how schools and healthcare are run, with the Lib Dems forced to defend each and everyone. It’s no wonder Mr. Clegg is so unpopular.

Free press, so where's the free debate?

The media is having a pretty stultifying effect on Britain at the moment. And it’s not just the usual candidates – the Daily Mail, the Murdoch press and so on – even some of our more reputable media outlets seem to be letting us down badly. We are used to the jarring experience of Paxman or Humphrys turning supposed “interviews” into egotistical games of cat and mouse, pinning their guests down on the narrowest of issues. Of course, they would tell you that it’s about providing proper scrutiny of public figures – but while there may be some truth there, the overwhelming effect is to stifle any kind of honest, constructive debate. As George Monbiot put it in his provocative article before the election, the notion of the press as a democratising force is a “pernicious lie”.

The media has extraordinary scope to present the same issue in different ways. Take the example of NICE, the body that was meant to decide which drugs the NHS could afford. It withdrew funding for some very expensive cancer drugs to focus resources on more cost effective treatments, an excruciating but ultimately sensible decision. Of course, the press has only to pick up the case of one unfortunate victim of this decision, and sensationalise it without any regard for the context around the issue. With public opinion whipped up, ministers then have no choice but to overrule NICE’s professional decisions. Ultimately, this ends up costing lives.

And this type of thing isn’t confined to the NHS. The media can make VAT progressive or regressive as it pleases, can manufacture or cover up a debt crisis as it pleases. Given the right figures, it can even make unemployment go up as well as down.

Of course, people will argue that the media just reflects what the public wants to hear. But surely the media plays just as decisive role in shaping people’s opinions as people do in shaping the headlines. It is easy to stir up anger about bankers bonuses, or abject poverty, but much harder to get people interested in the bigger picture behind their lives. In as much as this, the media plays a decisive, and often damaging role, in our national life.

But what is the alternative? For that, we have to look to characters like Vladimir Putin, Robert Mugabe and Laurent Gbagbo – not to mention Charles de Gaulle. Sepp Blatter’s warning about the “evil of the media” probably wasn’t motivated by fears about them stifling intelligent debate. Russian journalists are not normally bumped off for failing to be objective enough. A free media is an essential foundation of a free state, and not without good reason. A series of biased and simplistic debates is better than no debate at all.

My guess is that there are two ways around this. First, journalists could take it upon themselves to become more balanced and objective. But while there are many excellent people in the media doing this already, they are unlikely to have the loudest voice in a world where sensationalism sells.

Second, we, the readers, could become more educated, and better able to pick out the real issues from the hype. But we don’t choose that ourselves – it can only really happen on a large scale through effective education. We all learn a wide range of things at school – from how the weather works to the instruments in an orchestra – but we learn virtually nothing about how our society or economy functions. Under such circumstances, you can hardly expect us to be prepared for sophisticated debates about our future. My suggestion – instead of patronising young people with community service, introduce a compulsory post-school programme dedicated to understanding how politics, the economy and society works.