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Friday, 21 December 2012

Back Wealth Creators... Back!

David Cameron suggests, in fact he demands that the balance of our economy is changed so that the private sector is larger and the public sector smaller. His rationale for this is that only the private sector contains wealth creators, whereas the public sector only recycles taxes. To understate the point somewhat, this is both overly-simplistic and fatuous. In short, it is just plain wrong!
Speaking on the closing day of the Conservative Party Conference the PM said that Britain must get behind its wealth creators as he announced further cuts to the public sector. Let’s explore that, for example what do we mean by wealth creators? Is this a collection of people who generate money for its own sake or are we talking about real value added to the economy? These are very different things, the former includes investment banking traders who simply speculate on markets without producing anything, the latter are those that actually produce physical products and services that increase the quality of our lives.
John Fallon a recent appointment by Cameron as Vince Cable’s number two cites private equity bosses as an example of wealth creators. Therefore we can see that this government’s emphasis is purely on people looking to make a profit from their use of money rather than actually contributing something solid and worthwhile. This also explains the Government’s reluctance to interfere in a financial sector which caused the 2008 financial crash and ensuing recessions through irresponsible trading. This is certainly the kind of activity that this government favours, it is after all where the Cameron family fortune was earned – Cameron’s farther ran off-shore tax havens for the wealthy.
If we really did want to increase wealth by increasing the value that our economy adds then our politicians would perhaps have a closer look at how money actually travels around our economy. 
As you can see from the diagrams above both private and public sectors are simply ways in which we organise money flows around our economy. If we wish to increase that flow then we have to develop the efficiency of the areas we currently have and/or invent new areas. It is a common misconception that the private sector does this better than the public sector. Think about hospitals, schools, roads, trains, the postal system and many more. Only the public sector can generate the vast sums of money required to finance such ambitious projects, since the private sector relies on sales to survive and therefore cannot take such large scale decisions without the potential of immediate sales. Only the Public sector can make the initial outlay which is why we see these industries beginning as public sector entities before being privatised once they are stable enough to produce a profit for those lucky enough to be in a position to buy them on the cheap.
As was shown in my previous post "Does Privatisation Work?", neither is the private sector more efficient than the public sector. Indeed, any efficiency gains that are made benefit only the shareholders and senior managers of the organisation in question. There will be those who tell us that the public sector does not generate wealth and at the moment this may be true to some extent, but only because all of the wealth generating industries have been stripped from it and given to those who exploit assets purchased by the tax-payer to generate their own wealth. This means that the added value that is being generated from these divested industries is not reinvested to improve conditions in the UK.
Examples of this are easy to find, according to the Telegraph profits of the FTSE 100 companies doubled to £73Bn per year between 2003 and 2007, and again to £150Bn between 2007 and 2010 despite the economic conditions. The Guardian reports that the tax they pay as a percentage of profits had fallen to 26% from over 35% by 2011. The Telegraph goes on to develop this point explaining that 37% of FTSE companies paid no corporation tax whatsoever, while the others employed various means to significantly reduce their tax bills. Meanwhile UK unemployment was increasing, real wages were falling and the Government has used lack of money to justify an austerity push which has reduced all of our standards of living and decimated the public sector. Still being the socially responsible entities that they are the FTSE companies responded by setting up new ventures in tax havens so that they could avoid their tax obligations to an even greater extent – all but two of them have done this. And this money does not find its way back into our economy through spending as so many of the shareholders are based in other countries or are actually other organisations.
This pattern - the focus we have had on private sector wealth creators over the past thirty years - is the very reason why we have growing inequality in our country. The Private sector has one legally enshrined goal – to maximise value to shareholders. This means that they have no incentive to improve the quality of life for employees, no incentive to reduce pollution, no incentive maximise value to customers and no incentive to improve the outcomes for their local community.
There is little evidence to suggest that public sector organisations cannot provide the same added value as the private sector beyond the spin of politicians who have become blinded by their own dogma. In actual fact the public sector is better placed to maximise added value since less money is leaking from the system in the form of the exorbitant profits that large private businesses accrue. Imagine a situation where some of those profits had been reinvested into the UK economy. Not only would this have served to improve the services that we all share, but there would have been indirect effects such as reduced unemployment and the consequent increase in consumer spending which would actually have benefitted private businesses as well in the form of increased sales.
More than this though, public sector organisations have far less incentive to cheat in the way that we have seen the banks manipulate the Libor rate, or in the way that we see huge multinational companies avoiding tax – that is avoiding contributing to the society where they generate their vast profits. But if we try to explain this to a politician - or indeed try to explain this to anyone who has done well from the private sector – they point ruefully to the 1970’s and tell us that the public sector doesn’t work.
Let’s be honest, the public sector was not hugely efficient in the 1970’s. There, I said it! But this does not mean it can’t be. Let’s remember the fact that the post-war move toward a more collective society happened because the traditional private sector alternative was not able to produce the required outcomes for everyone. Instead of persevering and working to improve the functioning of the public sector, Margaret Thatcher and Keith Joseph decided instead to research how they could make free markets more palatable so that we could return to a system that was better for them. The result is what we have now: A divided, unequal and self obsessed society where people are treated as commodities to be used to maximise value to shareholders. A society where people are reduced to [human] resources whose only real purpose is to increase profits for an organisation, not to improve the society that they are a part of.
Cameron’s view builds on Thatcher’s ideas in that it asks us to sacrifice those in the public sector, and below the top of the private sector so that we can further the pursuit of riches for a few. For example he wants to relax employment rights to make it cheaper and quicker for businesses to sack you if they are not making a profit. He wants to reduce you to a serf who can be bought and sold on a whim. His vision will see more jobs lost with the consequence of ruined lives as he seeks to make what is already the most flexible labour market in Europe even more flexible for the benefit of the large multinational companies and rich captains of industry who sponsor his political career.  His vision will lead to an intensification of the process that has led to triple digit increases in wages for the top 1% while the rest of us have seen wages increase by an average of just 47% between 1986 and 2011 (Guardian). This is growing inequality in action with frightening results such as the fact that the richest 10% of Londoners are 273 times more wealthy than the poorest 10% (Guardian) - this is why the queues are so long at food banks.
Nonetheless, we must take a leaf from Thatcher’s memoirs and rethink our public sector as she re-branded the private. We must hold on to the ideals of equality of opportunity and collective endeavour but design ways for national organisations to be more efficient. The public sector is more difficult to manage than the private sector precisely because it seeks far more than the one-dimensional aspiration of increasing the wealth for a few. This does not mean however that it is impossible and anyone with even the most rudimentary conception of our society’s problems must conclude that change is not only desirable but that the need for it is urgent.
In response to the growing private sector assualt, we must develop an alternative that provides the best outcomes for the masses, for the 99%, for all of the people within our society and for those beyond it. An alternative that is more ambitious than the private sector aims of wealth creation. An alternative that not only provides better outcomes in terms of adding value, but which goes beyond it to improve the quality of life for everyone. This is not change for changes sake. We urgently need to stop “wealth creators” gorging themselves on our rights, our lives and the fabric of our society. We cannot continue to turn a blind eye to the destruction of lives, and we cannot continue to accept growing poverty and inequality as the collateral damage of an inefficient, immoral and unfair system.