Can it possibly make sense that at this moment, as I speak to you, the share of public investment in GDP, adjusting for depreciation, so that’s net share, is zero. Zero. We’re not net investing at all, nor is Western Europe.
Lawrence Summers
Business interests have been very successful in employing all the levers we’ve described in earlier chapters to alter the rules of the economic game in their favour. Nowhere has this been more marked than in the domain of taxation, with catastrophic consequences for public services. In a globalised world with free movement of capital, nation states have lost control of the source of their strength: the ability to raise revenue. Large multinational companies have become the new unit of power, employing hundreds of thousands of employees across the world and able to shift resources and capital to maximise profits. President Trump’s December 2017 tax cut mostly benefited corporations, which were already earning record profits and stashing colossal sums outside the US in low-tax jurisdictions rather than repatriating them and paying tax to Uncle Sam. All over the world governments have been competing in a race to cut corporate taxation, leapfrogging each other in desperate attempts to prevent their tax base jumping ship.
Figure 9.1: US corporate tax rate 1909–2018
Figure 9.1 shows how corporate taxes have varied in the US since their inception in 1894. Notice that the effective tax rate has invariably been below the official rate, as companies have arranged their affairs to minimise their actual tax liabilities through deductions and exemptions, as well as carefully choosing where their profits are booked. It is probably no coincidence that the great period of infrastructure spending by the USA in the 1940s to 1960s coincided with government coffers swelled by substantial tax revenues. Since then, the story has been one of steady erosion as companies have repeatedly nudged the political system in their favour. US taxes on corporations are now the lowest since before the Second World War.
Figure 9.2 (overleaf) shows how American corporate profits have rocketed since 1990 and the beginning of the dominance of free-market ideology. The absolute increase in tax revenue to the US government has been modest over the whole period and virtually non-existent since before the GFC. The government’s take from corporate taxes in the US has fallen steeply from around 30 per cent of its total in the 1950s.1
Figure 9.2: Declining tax on profits
After the Trump tax cuts, the Office of Management and Budget forecast that in the 2019 financial year, while income tax revenue would rise to $1.688 trillion, corporations would see their taxes decrease to $225 billion – only 7 per cent of the total, compared to about 15 per cent in 1978.2 Meanwhile the budget deficit would increase by nearly half to $985 billion. All this assumes real growth of 3.2 per cent, a rate not achieved this side of the GFC and highly unlikely in a recovery now getting long in the tooth. Any shortfall in growth would make these figures look worse. Interest to be paid on the debt generated by cumulative deficits, including during the GFC, is estimated at $263 billion.
In the UK the main corporation tax rate has fallen from 52 per cent between 1973 and 1981 to 30 per cent in 2008 and 19 per cent in 2017. It is planned to decline to 17 per cent by 2020. According to the UK’s Institute for Fiscal Studies,
Cuts to corporation tax rates announced between 2010 and 2016 are estimated to reduce revenues by at least £16.5 billion a year in the short to medium run … In 2017–18 we were forecast to raise £53.2 billion from corporation tax. This represents 7.8 per cent of total tax receipts and 2.6 per cent of national income. This has fallen from the pre-recession high of 3.2 per cent of national income and is forecast to fall to 2.3 per cent by 2021–22 … Her Majesty’s Revenue and Custom (HMRC)’s most recent estimates suggest that a 1 percentage point increase in corporation tax for all companies would raise £3.2 billion in 2020–21.
Putting this in perspective, this means a 3 per cent increase in corporation tax back to 22 per cent would generate revenue that would cover the net contribution of the UK to the EU of slightly under £10 billion per annum. An 11 per cent increase back to 2008 levels would pay for this plus the extra £20–£23 billion per annum pledged for the NHS by the government by 2023.
In contrast, income tax receipts increased from £151 billion in the fiscal year 2011/12 to £177 million in 2016/17. It is true that corporation tax revenue also rose during this period in spite of the rate cuts, but more modestly, from around £43 billion to around £49 billion, as profits rose rapidly, partly boosted by falls in the value of the pound after the Brexit referendum.
Data in the OECD annual Revenue Statistics shows that tax revenues as a percentage of GDP have continued to increase since the low point experienced in almost all countries in 2008 and 2009 as a result of the financial and economic crisis. The average tax-to-GDP ratio in OECD countries was 34.2 per cent in 2017 compared with 34.0 per cent in 2015 and 33.9 per cent in 2014. The 2017 figure is the highest recorded OECD average tax-to-GDP ratio since records began in 1965.3 That year was the peak of the post-war economic golden era which lasted almost thirty years until the first oil crisis.
But the picture has not been uniform across developed countries. The UK has maintained a remarkably steady tax take of around 35 per cent of GDP, plus or minus a few percentage points, since 1965 (though it was only 10 per cent in 1900). In the late 1960s income tax rose, reaching 13.75 per cent of GDP by 1970 and then bobbing along for four decades between 12 and 14 per cent of GDP, peaking at 14.9 per cent in 2008.4
This stability is surprising in the face of the basic rate of income tax being cut from 35 per cent in 1976 to 20 per cent by 2007. At the same time the top rate of income tax was cut from 83 per cent in 1974 to 40 per cent in 1988 – it is currently 45 per cent. Was Laffer right after all, and cutting taxes actually pays for itself by stimulating growth? In fact, the figures are even better than Laffer predicted, since the tax take not only went up in absolute terms, but did not fall relative to GDP. However, the tax take has more likely held up due to a combination of reduced evasion and rising inequalities in income, which skews the take towards high earners who pay higher rates and whose share of total tax paid has shot up with their gross incomes.
Britain’s richest 1 per cent now pay nearly three times as much, relatively, as they did in the high-tax 1970s, and over twice what the bottom 50 per cent of taxpayers hand over collectively. Similarly, the top 10 per cent of taxpayers pay 59 per cent of total income tax, compared to 35 per cent in 1976. This is remarkable given the falls in tax rates over the period, including for top earners. However, the fall in income tax rates for high earners since 1975 was partly offset by rises in their National Insurance contributions (a tax to fund benefits) from 5.5 to 12 per cent on earnings up to £50,000 (2019 tax year), whereas NI is zero for the income band below £8,632.5 Complications also arise due to varying definitions of what counts as tax.
The Office of National Statistics (ONS) has reported that the average proportion of UK household income taken in direct taxation has generally fallen since 1977, declining from 21.4 per cent of gross income in 2007/8 to 18.8 per cent in 2014/15.6 This measure includes National Insurance contributions and Council Tax, a local tax on domestic property.
The rising share of tax paid by high earners implies either that the rich’s relative tax rates have fallen less than the poor’s, which clearly is not the case, or that their pre-tax incomes have risen more, which we know to be true. According to the ONS paper, the Gini coefficient of gross income inequality in the UK was 50 in 2014/15, up from 42.9 in 1977 (the higher the number, the more unequal, 100 representing a state where one person has all the income and 0 is perfect equality). And after taxes and transfers, disposable income inequality increased over the period with the Gini coefficient rising from 27.2 to 32.6. In other words, even though the rich now contribute a higher share of the total income tax take than they did the 1970s, this increased redistribution has not closed the growing inequality gap by much at all. That’s not surprising given what we know about the rich taking the lion’s share of the rise in incomes (see Chapter 4).
What has also changed over the last four decades is the composition of the government’s total tax take, as indirect taxes such as VAT and so-called stealth income taxes such as social security contributions have made up a larger proportion of revenue. Sales-related taxes such as VAT are clearly regressive, since they hit rich and poor equally, so the relative lightening of the income tax burden on lower earners has been partly countered by higher taxes elsewhere. Corporations have been the only clear winners.
In the US the skew is even sharper. In 2017 the share of reported income earned from the top 1 per cent of taxpayers fell slightly to 19.7 per cent in 2016, while their share of federal individual income taxes fell slightly to 37.3 per cent. In 2016 the top 50 per cent of taxpayers paid 97 per cent of all individual income taxes, while the bottom 50 per cent paid the remaining 3 per cent. The top 1 per cent paid a greater share of individual income taxes (37.3 per cent) than the bottom 90 per cent combined (30.5 per cent). The top 1 per cent of taxpayers paid an individual income tax rate of 26.9 per cent, which is more than seven times higher than the 3.7 per cent rate for taxpayers in the bottom 50 per cent.7
This suggests that the American tax system was, until the changes enacted by President Trump, more redistributive than the UK’s, with the rich paying proportionately more. In fact the figures reflect the outsize gains in income share by the rich. Frank Samartino of the Tax Policy Center has reported, ‘Much of the gain [between 1979 and 2013] in the top income share went to the top 1 per cent of the population. In 1979, they received 9 per cent of all income. By 2013, their share grew to 15 per cent, more than all the income received by the bottom 40 per cent’.8
In the US the tax system had become more progressive since the 1970s, with tax rates decreasing for lower-income groups. For high earners however, in contrast to the UK, tax rates remained steady at around 35 per cent. Nevertheless, the increasing progressivity of the tax system has not been enough to offset large pre-tax inequality. Samartino again: ‘Because high-income people pay higher average tax rates than others, federal taxes reduce inequality. But the mitigating effect of taxes is about the same today as before 1980. Thus, after-tax income inequality has increased about as much as before-tax inequality. Taxes have not exacerbated increasing income inequality, but have not done much to offset it.’
This conclusion is important because it means that, in spite of a progressive tax system, the after-tax slice of the income pie taken home by lower earners went down. That is why they had to borrow. The rich also borrowed more, but had less need to do so and used the money to turbocharge their returns on investments, not for consumption.
The OECD has reported that the share of total pre-tax income of the richest 1 per cent has increased in most OECD countries in the past three decades, particularly in some English-speaking countries, but also in some Nordic (from low levels) and southern European countries. This share ranges between 7 per cent in Denmark and the Netherlands up to almost 20 per cent in the US, and the increase is the result of the top 1 per cent capturing a disproportionate share of overall income growth over the past three decades. This explains why the majority of the population cannot reconcile aggregate income growth figures with the performance of their own incomes.9
In the US, Canada and the UK the bottom 90 per cent of the population captured only around 18 per cent, 34 per cent and 45 per cent respectively of the growth in total income from 1975 to 2007, compared to 90 per cent in Denmark. The top 1 per cent meanwhile, secured 47 per cent, 37 per cent and 25 per cent of the total income growth in those three English-speaking countries. Looking at it more broadly and more recently, the top 1 per cent in the US, Canada and western Europe captured 28 per cent of the total growth in incomes from 1980 to 2016, equal to the total growth in incomes of the bottom 81 per cent. Globally, the top 0.1 per cent of the population has captured as much income growth as the bottom 50 per cent over the period.10
Interestingly, countries such as France, Spain, Denmark, New Zealand and the Netherlands saw very little increase in income inequality as a result of rising shares taken by the top 1 per cent, with their top earners remaining well below 10 per cent of total incomes. This did not save Spain from suffering one of the worst crises from private individuals over-borrowing for property purchases in the run-up to the GFC. So the debt blow-outs were not exclusively an Anglo-Saxon phenomenon powered by the less well-off being forced to supplement their stagnant incomes through credit. The common denominator for all the disasters was the deregulation and encouragement of limitless finance. Spaniards went on a borrowing binge not because the middle class had been left behind, but simply because they could. Liberation from decades of repression under General Franco and the sudden drop in the cost of credit after joining the euro were simply too much to resist. The French, on the other hand, culturally closer to their conservative agrarian roots, never indulged in death by debt or a market free-for-all, and did not have much of a crisis.
If the tax take from direct income taxes as a proportion of GDP has been under modest pressure over the last four decades, the fall in corporation tax take has been huge. Business has been so successful at gaming the system that the contribution to state coffers from the big economic winners of globalisation and the technology revolution – multinational corporations – has become derisory. This tightens the screws on state finances, which are at the same time under structural pressure from ageing populations and high debt levels.
At another level, the globalised economy has undermined the nation state as a political unit that can decide and control its destiny. In the UK, the Brexiters’ brilliant slogan ‘Take back control’ touched a raw nerve in a population that senses how impotent their elected leaders have become in dealing with their primary concerns, one of which (for some) is the belief that the EU is a corrupt conspiracy to benefit big business.
The Brexit vote in the UK and the rise of populist anti-EU establishment parties in Austria, Hungary, Italy and even Germany has finally galvanised European attempts to roll back elaborate tax avoidance schemes constructed by corporations. Not only has the minimal tax paid by corporations making billions of euros of profits in the EU contributed to the budgetary problems of many countries, but the issue has also highlighted egregiously greedy pay rises financed by profits turbocharged by falling tax bills awarded to top company executives.
Take the case of McDonald’s. Leaked documents from auditor PwC showed how this multinational corporation was able to reduce its tax bill by channelling revenue through Luxembourg. McDonald’s set up an intellectual property company in Luxembourg in 2009 and moved its corporate headquarters for Europe from London to Geneva. This was just a year after Luxembourg introduced a generous corporate tax rate of 5.8 per cent on income generated from intellectual property. According to a report by the charity War on Want, between 2009 and 2013 McDonald’s paid tax of €16 million on ‘royalties’ (sales) of €3.7 billion from its close-to-8,000 European outlets, but in 2013 it paid tax of only €3.3 million.11
The revelations forced the European Commission to investigate whether Luxembourg had engaged in a form of illegal state aid to McDonald’s – and others such as Amazon – and to question similar set-ups in Ireland involving Apple, and Starbucks in the Netherlands. As a result, the French government was rumoured to have sent a tax bill plus fines for unpaid taxes totalling €300 million to McDonald’s France in a crackdown on aggressive tax structuring and avoidance.
This was not a one-off. Amazon benefited from a deal negotiated with Luxembourg in 2003, enabling it to transfer a large part of its European profits to a Luxembourg holding company that was not taxable. In October 2017 the European Commission ruled that Luxembourg had given Amazon €250 million in undue tax benefits. ‘Luxembourg gave illegal tax benefits to Amazon. As a result, almost three quarters of Amazon’s profits were not taxed,’ Competition Commissioner Margrethe Vestager said, and ordered Amazon to pay the back taxes due.12
Google’s arrangements have also come under pressure. Its total UK sales in 2016/17 amounted to £5.7 billion, but according to Google’s accounts it earned revenue in the UK of only £1.27 billion between June 2016 and June 2017 and will pay £49.3 million in tax on £202 million of declared profits.13 How does this work? Simple. First, it only ‘makes a profit’ on a small proportion of its sales outside the US because the software engineering is created in America. Second, it has set up its European headquarters in Ireland, where tax rates are much lower than in the UK. Google UK operates as a marketing and sales arm of the operation in Dublin, paying a substantial ‘administration fee’ to its European parent to operate across Britain. After that, there isn’t much left to tax in the UK even though that’s where a lot of the actual turnover is. News Corporation chief Rupert Murdoch once acidly tweeted, ‘Tech tax breaks facilitated by politicians awed by [Silicon] Valley ambassadors like Google chairman Schmidt e.g., posh boys in Downing Street.’
US tech companies benefit from a tax structure and regime that was devised for another era. Taxing physical products as they crossed borders was easy and straightforward, even if the design and technology came from elsewhere, but governments have essentially allowed the Internet to become a tax-free zone. The big Internet tech companies either claim their ‘production’ takes place in a lowtax country such as Ireland or Luxembourg, or else is completely absent from any jurisdiction, as in the case of Apple, probably the most aggressive tax avoider of them all. That said, Mondelez International, owner of Cadbury, was revealed a few years ago to be paying no UK corporate tax at all. It is hard to claim that chocolate bars are immaterial goods whose value added is created in some offshore tax paradise.
Apple has a manufacturing and services plant in Cork, Ireland, employing around 6,000 people. It claims that ‘substantially all’ of its non-US international earnings are generated by its Irish subsidiaries. These amounted to $54.4 billion for the tax year to September 2013. While Ireland’s low corporate tax rate of 12.5 per cent has attracted a lot of foreign direct investment, Apple has managed to pay even less than this. More recently, the company indicates the sales recorded by its operations in Hollyhill Industrial Estate, Cork, are in the region of $137.9 billion (€119.2 billion) per year.14
In 2017 the Irish Times reported that Apple had ‘paid Irish corporation tax of $1.5 billion in the three years 2014 to 2016. This equates to approximately $500 million per year.’15 How was this magic achieved? US Congressional investigators revealed a few years earlier that Apple had created offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere. This included the creation of non-tax-resident subsidiaries in Ireland, through which the bulk of its profits were funnelled. The investigators found that Apple cut a deal with Ireland to apply a tax rate of less than 2 per cent, well below the 12.5 per cent Irish corporate tax rate.16
This is the most extreme example of a race to the bottom by Western governments competing for globalised business where the multinationals can play one jurisdiction off against another. Not only are Western countries desperate to generate or hang on to jobs, they are also conscious that they are playing a negative sum game at best, where one’s capture of a company’s HQ for tax purposes is another’s loss, even if success depends on further reducing a country’s tax take. Despite winning the race for Apple, Ireland was forced to go cap in hand to the International Monetary Fund and its EU partners (taxpayers) for a bail-out when its banking system imploded during the GFC. It received €67.5 billion to plug the hole in its finances that, partly because of its low-tax regime, it could not take care of itself.
In 2014 Minister for Finance Michael Noonan changed Ireland’s tax rules so that all of a corporation’s annual profits could be written off using capital allowances. Up to then, only 80 per cent of each year’s profits could be sheltered from tax in this way. Despite being invited to do so, Apple did not respond to speculation that Apple Operations Europe, tax-resident in Ireland, may have spent tens of billions of euros, and possibly well in excess of €100 billion, on intellectual property which it brought from Apple subsidiaries now based in zero-taxed Jersey. Because the 80 per cent cap had been removed, that expenditure could be used to completely write off the liability to pay tax on profits booked by Apple Operations Europe.
The European Commission then said Apple should pay €13 billion, plus interest, to Ireland on the untaxed income earned by the Irish-incorporated Apple subsidiaries that were, for a period of years, stateless for tax purposes. In 2016 Apple was ordered to pay Ireland the record-breaking sum after a ruling by the European Commission concluded that the country granted undue tax benefits to Apple.17 This was finally handed over in 2018. The European Commission’s decision sets EU law and establishes that any tax ruling allocating profits to a non-existent entity is a form of illegal state aid. Secret tax rulings by the Irish are clearly not consistent with a level playing field under EU law.
John Plender draws a parallel between the aristocrats of pre-revolutionary France, who were exempt from direct taxation, and today’s large multinationals, perhaps implying a coming revolution unless privilege is reined back.
In the early 1950s the US corporate income tax take reached 5.9 per cent of gross domestic product … By 2013 the corporate tax take was down to 1.6 per cent of GDP. Despite a high headline tax rate, a multiplicity of tax breaks born of corporate lobbying, together with offshore avoidance schemes, wrong-footed the supposedly predatory state.
In the EU the decline has been less striking. Corporate income tax revenues went from more than 3 per cent in 2000 to about 2.5 per cent in 2012, with a notably steeper decline in the UK than in Germany, France and Italy.18
In the UK corporate tax raised around 8 per cent of total tax take, less than the OECD average of 9 per cent.19
According to Plender, this decline is ‘clearly unhelpful’ at a time when public-sector debt in much of the developed world has risen to unsustainable levels.
Smaller companies, which innovate and create jobs, carry an unfair share of the tax burden as they are less global and may lack the pricing power to pass on the cost of corporate tax to their customers … to create a more robust economic recovery it would make sense in many countries to shift income from companies to households to encourage consumption … The conclusion must be that the global corporate aristocracy will be promoting under consumption around the world for quite a while yet – without having to fear the fiscal equivalent of the guillotine.20
Unfortunately prescient words given Trump’s December 2017 tax changes in the US, which cut the headline top corporate tax rate from 35 to 21 per cent, to which we will return below. And although there is some discussion in Europe about reforming the corporate tax system to one based on where the revenues are generated, progress is very hesitant given the lack of consensus between countries and the need for global implementation.
The favourable tax treatment of corporations is perverse. Pascal Saint-Amans, a top OECD tax official, has remarked, ‘the great majority of all tax rises seen since the crisis have fallen on individuals. This underlies the urgency to ensure that corporations pay their fair share.’ Even if aggressive tax planning by companies is legal, it is hard to defend when times are hard lower down the food chain. No wonder disenchantment with the system is palpable, with the concomitant rise of populism as a political force.
On corporate tax, even the FT used a March 2018 leader column to remark that ‘governments are trapped in a race to the bottom’. The problem is exacerbated by technology transforming economic value into more mobile and intangible forms such as software and intellectual property: ‘there always seems to be another country ready to undercut whoever is offering companies the sweetest deal. The result is a steady erosion of tax rates on multinational companies at a time when revenue strapped governments are committed to austerity … or running historic deficits … or both.’21 Companies have partly broken free of the tax regimes of nation states, with perverse consequences: ‘In the ten years since the financial crisis, the reported effective tax rates at the ten biggest [UK] public companies in nine sectors fell 9 per cent (over the same period, tax rates for individuals have risen, on average). The situation is not sustainable in the long run.’
Perhaps things would be less serious if the increasing share of national income enjoyed by large corporations were put to good use, but regrettably much of it simply piles up as cash hoards. Governance is also a problem in the Anglosphere, with boardrooms, as we saw in Chapters 3 and 4, increasingly forgoing investment opportunities in favour of short-term earnings. Less investment leads to higher corporate savings in the form of retained profits.
Top executives have learned to game the system by creating financial reward formulae for themselves in the form of bonuses and long-term incentive plans (LTIPs) tied to growth in their companies’ earnings per share and share price. Both of these rise if less income from sales is recycled into investment such as capital expenditure in new factories or developing the skills of the workforce.
In Chapter 7 we considered one of the central problems ailing our democracies: the conflicts of interest inherent in a system of representative government. From the moment the people delegate power and authority to a body of representatives, there is a risk that the representatives will prioritise the pursuit of their careers and interests at the expense of the common good. In the UK the most flagrant example of this in recent times has been around the issue of Brexit, with politicians of both major parties attempting to safeguard their careers by refusing to take principled positions in line with their personal convictions for fear of losing their seats at the next election. Although over 60 per cent of parliamentary constituencies voted to leave the EU even though only 51.9 per cent of the popular vote was for Brexit, most members of parliament were in favour of remaining in the EU. However, a large majority of MPs voted to leave the EU after the referendum, under cover of honouring the (advisory) referendum result, despite many of them privately believing it is against the interests of the UK.
The second big conflict of interest eating away at Western society is between those who run and those who own public companies. Public limited liability companies are organised such that their owners (shareholders) elect boards of directors who have responsibility for the appointment of professional managers to run the companies.
Similar to the inherent conflict of interest which exists between elected political representatives and their electors, company executives have career interests that are by definition more short term than those of their shareholders; a company is supposed to outlast many generations of executives. However, executives whose remuneration is linked to profits and share price typically over three- to five-year horizons, also have the ability to boost these metrics in the short term, even if so doing weakens the competitive position of their company in the long run. Larry Fink, the head of Blackrock, the largest asset manager in the world, has accused America’s business leaders of eating their own seed corn. In a letter to S&P 500 CEOs he warned that their obsession with short termism would come at the expense of the future.
The classic method by which executives can massage up short-term profits, and so share prices, is by skimping on the reinvestment of profits and distributing more to shareholders to increase yield and short-term returns. They can use profits or issue new debt to buy back their company’s own shares, or leverage up the company to acquire other companies and cut combined costs, thus raising return (profits) on equity. Never mind that increasing company debt to boost share prices can place the business under stress if interest rates start to rise.
Journalist and commentator Edward Luce wrote back in 2015 that instead of companies raising money in the stock market to finance future growth, the exact reverse is happening:
Share buy-backs have been rising as a share of company profits for more than 30 years. Last year, the S&P 500 companies [the largest in America], spent 95 per cent of their operating margins on their own shares or in dividend payouts … Between 2004 and 2013, IBM spent $116 billion in buy-backs, which accounted for 92 per cent of its profits, according to a Brookings paper … Doubtless General Electric, which recently announced it would sell off its non-industrial businesses, will also be able to buy some goodwill … its disposals will in the first instance help fund a $50 billion share buy-back.
Luce continued: ‘With actions that can deliver immediate returns to shareholders … while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long term growth, why invest in your employees’ skills when you can boost your earnings now?’22
What has happened to these companies since then? From April 2015 to 30 July 2019, IBM’s share price fell from $173.62 to $150.88, during which time the S&P 500 index, representing the market, rose from 2108 to 3020. Meanwhile GE is in deep trouble, shocking the market with the rapid collapse of its profits. The share price has more than halved from around $27 at the time of Luce’s 2015 article to around $10 in July 2019. This did not prevent CEO Jeff Immelt from earning $18 million in 2016, and although his pay for the last seven months of 2017 was only $5 million according to the narrow definition used by GE, he actually amassed $29.3 million, including payouts on long-term incentive plans in the form of shares, in a case study of out-of-control and undeserved executive compensation and reward for failure.23 Among the more egregious excesses that Mr Immelt indulged in was the use of two business jets. GE subsequently conducted an internal review to ascertain why a spare jet accompanied its former CEO on his travels, and why no one on the board knew anything about it.24
As if all this wasn’t enough, executives have learned to game the system by stuffing their own companies’ remuneration committees with friendly executives from other companies, following the dictum ‘You scratch my back and I’ll scratch yours.’ Companies often employ ‘independent’ remuneration consultants to advise them of the going rate, but this simply adds another layer to the agency problem. Rather like estate agents, who tend to outbid rivals’ estimates of a property’s value in order to secure the seller’s mandate, consultants have an incentive to suggest overgenerous remuneration packages when they pitch for the business. Even more outrageously, consultants tend to guide their clients towards paying better than ‘the average’ in order to attract top talent to the company. So there ensues a game of leapfrog as each company ratchets up its top executives’ pay at regular intervals in order to remain competitive, adding further impetus to the upward spiral of top executive rewards.
A few years ago, Barclays chief executive Antony Jenkins decided to boost bonuses 10 per cent in spite of falling profits and 12,000 job cuts. Even the normally pro-business Institute of Directors questioned how he could justify an executive bonus pool ‘nearly three times bigger than the total dividend payout to the company’s owners’. In response, Mr Jenkins said, ‘We employ people from Singapore to San Francisco and need the best people in the bank to drive sustained returns to shareholders.’ Over the next four years, Barclays’ share price tumbled 20 per cent from around £2.50 to around £2, while the FTSE 100 index rose 15 per cent.
Measures taken by UK Business Secretary Vince Cable in 2012 gave shareholders binding votes on top executive pay, but these have thus far had little effect because of a third agency problem: most shares are owned by institutions such as pension funds and asset managers on behalf of thousands of individuals. This bumps up against the same problem found in representative government: how to know what thousands of disparate individuals want or is in their best interests. Furthermore, an institution has little incentive to rock the corporate boat, especially if another part of the institution is doing business with the company on whose pay structure it is being asked to vote on behalf of shareholders.
According to a 2015 report by the UK’s High Pay Centre, long-term incentive plans for executives should be scrapped and performance bonuses paid in cash, not shares – diminishing the incentive to manipulate share prices higher through short-term policies. According to the report, performance pay has been behind the rise in executive bonus payments between 2000 and 2013 at twice the rate of the increase of company earnings per share (returns to shareholders) and company profits. Executives have done far better than the shareholders they supposedly serve in another example of the incentivised few exploiting the passivity of the unmotivated many.25 More recently, in a report responding to an inquiry into executive pay, the High Pay Centre wrote,
there are still very few companies who align their bonuses with broader corporate responsibilities (relating to their social or environmental impact, for example), as opposed to financial or operational metrics. Vast Long-Term Incentive Payments (LTIPs) are still the prevailing method for paying executives, despite the growing evidence that performance-related executive pay is not particularly effective and that much smaller ‘restricted share’ awards would be a better form of reward.26
The HPC also argued that remuneration committees and institutional investors are failing to hold companies to account over their pay practices, and recommended a greater say for workers in the pay-setting process.
With company shareholders largely passive, having delegated their rights to professional money managers and savings institutions, managers are free to run companies primarily for their own benefit on a time horizon coinciding with their career at the top, at the cost of employee remuneration and skills and the impoverishment of the public domain through the relentless pursuit of lower taxes. But companies will fail if their customers are subject to poverty, violence, job insecurity, hopelessness and wage stagnation. Unless the small band of corporate titans that have skimmed off the cream realise this very soon, it is increasingly likely that they will end up living behind high-security fences.
Everyone over the age of fifty in the West, with perhaps the exception of those living in countries that recently joined the EU, has witnessed the degradation in education and health services, transport infrastructure and policing over the last thirty years, as governments have lost corporate tax revenue. However, the capture of the political system by the wealthy and corporate interests may turn out to be a pyrrhic victory, as the impoverishment of workers and the state threaten its overthrow.
How can we explain the perceived degradation in our public services and transport infrastructure? Answers include an ageing population demanding more expensive healthcare, large-scale net immigration not matched by a concomitant expansion in schools and hospitals, and the continuing effects of the GFC catastrophe, which holed public finances for over a decade. Japan has been an unfortunate leader in this area; it is still struggling to cope with its public debt a generation after the implosions of the 1980s.
As we saw in Chapter 6, many governments were guilty of gross negligence in letting financial bubbles inflate to the extent that their inevitable bursting destroyed the ability of states to maintain public goods and the social cohesion on which liberal democracy is built. This was due to the conflict of interest between the governed (long term) and governments happy to take in tax revenues in the short term from hot asset markets (property and finance profits), new immigrants and economic activity turbocharged by credit, but reluctant to reinvest them in new schools, hospitals, teachers, doctors and policemen or on maintaining roads and bridges.
Once the bubbles burst, government deficits ballooned as revenue fell, expenditure rose and financial companies had to be bailed out. Public debt levels soared to levels not seen since the Second World War. With growth weak, budgets had to be tightened and expenditure that could be postponed was cut.
In the UK the axe fell nearly everywhere, including on local government. Parliamentary watchdog the National Audit Office (NAO) has blamed years of cuts for putting local council finances in a perilous position, estimating that, as part of its efforts to balance the books since the financial crisis, Whitehall slashed funding for local authorities by 49 per cent in real terms between 2010/11 and 2017/18. This coincided with growing demand for public services: the number of households assessed as homeless and entitled to temporary accommodation rose by 60 per cent in the same period.27 Spending on care for older people in England declined in real terms from £8.45 billion in 2005/06 to £8.34 billion in 2015/16, while the over-65 population grew from 8.03 million to 9.71 million.28
Cuts to the level of public services have been made everywhere, from less road maintenance, with a network that is now decidedly no longer worthy of a first world country, to the closure of libraries.
Perhaps surprisingly, the UK scored relatively well in terms of education expenditure until recently, with an increase in government spending per full-time primary and secondary student of 36 per cent from 2005 to 2014. This is better than Germany (+33 per cent) and France (+17 per cent) and far better than the US, Italy and Spain, which registered zero real growth in spending over the period.29 However, while schools were prioritised, universities were sacrificed as the government opted to make students pay for their tuition, which had been free up until 1998.
The picture has deteriorated since 2015. In the UK, while real spending per pupil rose for several decades, David Cameron froze budgets in 2015. The Institute for Fiscal Studies (IFS) warned that this would result in a real-terms cut in school spending per pupil due to inflation and the rising cost of wages, pensions and National Insurance contributions, and the National Audit Office estimated that schools would have to make cuts of £3 billion.30 In its updated 2018 report on education in England, the IFS confirmed that total school spending per pupil fell by 8 per cent in real terms between 2009/10 and 2017/18.31
What does this mean in practical terms? A report by the Education Policy Institute think tank calculates that the cuts from 2017 to 2020 will result in ‘the loss of almost two teachers in an average primary school and six in an average secondary school’.32 Anecdotal evidence of schools unable to make ends meet is surfacing, with cases of parents being asked to pay for books or help out with lunch supervision because of staff shortages.
At the university level, the state can no longer afford to pay guaranteed pension benefits to staff. A 2018 proposal to replace this regime with a less favourable scheme under which the amount of pension received is dependent on how much an employee saves (guaranteed contribution), understandably sparked strike action. The proposal was dropped. The latest plans by the state were presented after the Universities’ Superannuation Scheme (retirement fund) asked for an extra £500 million a year in contributions from both universities and employees because of a multi-billion-pound funding hole.
On the global level, the OECD, in a 2017 report, noted that the real salaries of teachers had fallen in one third of the countries for which it had data between 2005 and 2015, and by 10 per cent in the UK, and remain low compared to those of similarly educated employees in other professions.33 Consequently, teaching is becoming increasingly unattractive to the educated young, and the average age of the teaching profession is moving up.
In a brutally competitive globalised world, the last thing countries should be doing is skimping on their investment in education, which will arm future generations with the ability to compete. In contrast to countries like China, who have understood that education is the path to self-improvement, the West’s short termism is again undermining its future.
Under pressure from general lack of funds and the diversion of resources in order to contain a constant terrorist threat (itself due to dysfunctional international politics), policing has retreated in the UK. Criminals have been quick to spot this. As police numbers have been cut, so crime has gone up; the police are swamped with cases and have had to manage their shrunken resources by abandoning the investigation of many crimes: Scotland Yard has said that crimes like shoplifting and criminal damage may not be investigated in London because it is ‘not practical’ to do so. In the four years from 2013 to 2017 London’s Metropolitan Police, the largest force in the UK, has had to make £600 million of savings and is due to lose an extra £400 million by 2020. Meanwhile, the number of recorded offences has increased, with violent crime rising by 63 per cent since May 2013 and gun crime increasing by 54 per cent in the past two years.34
Figures obtained by the Labour Party from the House of Commons library show that over the past six years the percentage of homicides that led to charges fell from 92 to 56 per cent. During that period, firearm offences that went to court halved to 36 per cent while robberies resulting in charges fell from 935 to 135. Soon after, in an open invitation to people to help themselves from retailers’ shelves, the BBC reported that shoplifters taking under £200 worth of goods would not be pursued.35 The Metropolitan Police commissioner has said she is ‘sure’ cuts to her force’s budget have contributed to a rise in violent crime in the capital, a rise that is particularly marked among young people.36
Nequela Whittaker used to be a gang leader in south London; now she’s a youth worker.
Young people don’t feel like they fit in with society and there doesn’t seem to be a voice for young people so at the moment there’s a bit of carnage … Due to spending cuts there has been less policing, community centres are closing. There’s been no money directed at the third sector for a while and with all these cuts and reductions we’ve got more young people falling out on to the streets. Young males are coming from homes with no fathers, no male role models. Many are lacking love.37
Rising violent crime is not peculiar to the UK. In France a January 2018 report by the Interior Ministry recorded four years of growth in violent crime up to 2017, representing a ten-year high. Unsurprisingly, such reports translate into huge insecurity. One in five people between the ages of eighteen and seventy-five reported feeling insecure in their home, their neighbourhood or their village. Three out of ten people said they had been victims or witnesses to crime in their vicinity every year.38
England and France share a huge demographic problem on top of the more general Western issues of the impact on employment of globalisation and technology. Both countries have a large underclass with low skills, no culture of valuing education, whose future appears hopeless, who feel alienated and rejected by mainstream society. This problem will only get worse as job prospects shrink and the sheer number of dispossessed rises. Short of erecting high-security border fences, nothing (including Brexit) will staunch the flow of desperate people from the increasingly dysfunctional regions of Africa and the Middle East. Britain and France, both ex-colonial powers, have been too busy firefighting their internal problems to summon the vision and energy to deal with the root cause of the unrelenting conveyor belt of migrants desperate to escape poverty and death in their home countries.
As for the USA, its crime rate, especially its violent crime rate, is in a different league, partly due to American demographics, inequality and racial issues, and partly due to the successful lobbying of politicians of the National Rifle Association against gun control.
Meanwhile our current crop of political leaders has shown itself unequal to these challenges. The state is in danger of surrendering, opening the ultimate prospect of citizens taking the law and their security into their own hands by organising local militias. It is then a short step to society disintegrating into tribes with their associated territories.
We need to pull the emergency cord. Politicians need to acknowledge that the descent into anarchy cannot continue. A deep structural change in how our economies work is needed to restore some sort of balance between the wealthy globalised elite and those desperately treading water to stay alive under a system that ignores their plight. That means taxing the wealthy and diverting huge resources to education and social services, and establishing a guaranteed and decent living wage for the bottom half of society. Recent promises of big spending boosts to public services in the heat of electoral battles may, if realised, act as a necessary short-term palliative but are not sufficient to address the underlying causes of our plight
A few of the winners recognise this. Richard Branson, successful British entrepreneur and founder of the Virgin Group, weighed in on this at the Michael Milken Summit in Abu Dhabi in February 2019: ‘I don’t think we should throw out capitalism. But for those of us who are fortunate to have made wealth, we have a responsibility to throw that out there and tackle some of the great problems. If we don’t do that, then we deserve to have very heavy taxes levelled on us.’ Billionaire hedge fund veteran Ray Dalio told a panel at Davos in January 2019, ‘Capitalism is basically not working for the majority of people. That’s just the reality.’ He said that if he were president, ‘I think that you have to call that a national emergency.’
In spite of attempts by UK government to ring-fence the National Health Service from public spending cuts since the GFC, the experience of users has deteriorated for years with the average wait to obtain an in-hours GP appointment climbing to around two weeks.39 Siva Anandaciva of the King’s Fund charity is clear that the annual NHS budget increase of 1.1 per cent per year in real terms from 2009/10 to 2020/21 is too small to cope with the increasing demands of a larger population that is also ageing.40
The number of full-time-equivalent GPs (excluding locums) has been falling since 2015. After growing by 6.2 per cent between September 2010 and September 2014, the number subsequently declined by 4.9 per cent between September 2015 and June 2018 to 32,370. This is despite the government’s commitment to a net increase of 5,000 GPs by 2020 (compared with 2015 figures). However, Pulse, a magazine on primary care, found in its annual vacancy survey in 2019 that 15.3 per cent of GP posts were vacant, compared with 11.7 per cent in 2016.41
Meanwhile, the morale of existing staff is low. Between 2010 and 2017 the GP Worklife Survey reported a rise in all the stress factors it surveyed and a 13 per cent drop in overall job satisfaction. The factors cited as causing the most stress were increasing workloads, insufficient time to perform work and paperwork. ‘Hours of work’ had the lowest mean satisfaction rating: 3.57 on a scale of 1 (lowest) to 7 (highest) – down from 4.39 in 2010.42
Of course, the UK health system is peculiar in being absolutely free to all, but inadequate resources results in the rationing of services, queues and long waiting times to obtain appointments or treatment. The reluctance of British politicians to tell the electorate that to fund the NHS adequately and deliver the high level of service it expects requires higher taxes is short-sighted as dissatisfaction only grows with the deterioration in service.
In the US, health spending is far higher, partly due to drug prices and partly due to the fact that healthcare is largely run as a profit-making industry.43 Individuals need to insure themselves and then pay for treatment, making claims on their insurers. Obamacare was an attempt to cover those sections of the population that could not or would not afford the insurance needed for their health needs. So far it has resisted attacks by the Trump administration. In spite of the USA having some of the most advanced medical facilities in the world, American life expectancy, at 78.9 years, trails its peers such as France (82.6 years), the UK and Germany, both on 81.3 years, and longevity champion Japan (84.6 years). Whether the US system is value for money is open to debate.44
With very few exceptions, real growth in health spending per person across OECD countries has dropped since the financial crisis.45 With the rising cost of drugs, treatment and equipment, and ageing populations, the level of service to large sections of the less well off in many developed countries, who do not have access to private medical treatment, is perceived to have fallen. While the US drop in healthcare growth has been less than for its peers, this is probably due to the one-off introduction of greater insurance coverage from Obamacare.
In France, a country that was proud of its high-quality public hospitals, times are also tough.46 France has introduced the market to its hospitals but cut the rates at which it reimburses them for medical procedures such as operations, pushing them to increase the number of procedures they carry out, more quickly, with the same staff, to meet their revenue targets and break even. In spite of such measures, French public hospitals ran a deficit of €1 billion in 2017 in another example of the misguided substitution of the market for what should be a public service not subject to the pressures of profit and loss accounts and their consequences.
Perhaps one of presidential candidate Trump’s more accurate diagnoses of what ails America was the decades of neglect of its physical infrastructure: crumbling roads, airports, sewers, tunnels and bridges. In 2017 real government infrastructure spending as a percentage of US GDP hit its lowest level since 1956.47 This is a consequence of the dominance of free market ideology, which equates all government spending with harmful interference in the workings of that perfect economic mechanism, the market.
Even the richest countries less directly affected by the GFC have cut corners when it comes to public infrastructure maintenance. In Germany many roads and bridges are in disrepair. The authorities were obliged to close several bridges across the Rhine in 2017, such as those at Leverkusen and Neuenkamp, due to the appearance of cracks. For Henrik Enderlein of the Hertie School of Governance in Berlin, Germany has focused too much on balancing its budget and reducing its deficit and not enough on investment. Statistics show that public investment as a percentage of GDP fell from nearly 5 per cent in 1970 to an all-time low of 1.9 per cent in 2005.48 Today the government insists public investment is rising but admits that the extra funds made available to local authorities have not triggered much new investment; rather they have been used to ‘reduce budgetary deficits and build up surpluses’.49
Marcel Fratzscher, head of the in Berlin think tank DIW, says, ‘when times are tough and unemployment and social spending go up, regional governments have found that investment is the easiest thing to cut. When the economy does better, Germans prefer to give ourselves a treat rather than invest.’ Public attitudes also need to change. ‘Politicians are unlikely to get elected by promising to invest in a bridge that might collapse in 30 years if left unattended, says Mr Hover, [a director of a transport lobby group]. For most people, such time horizons are like science fiction.’
This brings us back to one of the root causes of the West’s present dysfunctional politics. In the competition for power between professional politicians, there is no reason to suppose that the electorate will vote for socially optimal outcomes, even leaving aside the problems of defining what that is. This is because politicians seeking their own interest will succumb to pressure to offer a more attractive and painless menu of policies to an electorate that does not have the time to research the issues and trade-offs.
Putting it the other way round, maybe there is not such a big conflict of interest between voters and elected representatives after all. If voters have become more selfish, impatient, demanding instant gratification even if it means more pain later, politicians have simply adapted to the new mindset of their electorate and sought to deliver policy accordingly. Our representatives have become as short term in their policy horizons as we are. As the depressing saying goes, people get the governments they deserve, although in Germany this means governments which maintain a structural budget surplus. Stressing bipartisan resistance to increasing public expenditure, then German economics minister Sigmar Gabriel quipped, ‘In Germany there is the well-known saying that for the Germans the desire to save on taxes is stronger than the desire to have sex.’50 However, there are signs that this consensus is collapsing. In 2016
an opinion poll by the broadcaster ARD showed that a clear majority of the German public wanted the surplus spent on infrastructure rather than used to fund tax cuts or reduce debt … Physical infrastructure in much of the country … is ageing … Germany is also well behind in digital infrastructure, including broadband coverage, hampering the economy’s ability to diversify from its traditional manufacturing base into services.51
Germany’s fiscal hawks only oppose more government spending when the economy is growing, of course. This is in stark contrast to America, where the normally fiscally conservative Republican Party, in a reprise of the Reagan era, was happy to put aside its qualms to pass Trump’s massive tax cut programme just when unemployment and slack in the economy was at its lowest for years.
In a hard-hitting article just before the passage of Trump’s $1.5 trillion tax cuts for corporations and the wealthy, financier Michael Moritz of Sequoia Capital quoted evidence that suggests that such cuts do not encourage higher investment in America.52 For example, the top twenty American technology companies spent almost $52 billion on stock buy-backs and $39 billion on dividends to shareholders, compared to $55 billion on investment in the first nine months of 2017. It’s not as if there’s a cash shortage preventing investment. As Moritz remarked,
The technology companies would be more likely to increase their long-term investments if consumers had a lot more to spend on pick-up trucks, smartphones, fridges, washing machines and streaming video services – the sorts of items that these days include lots of semiconductor chips and software – than through receiving a tax cut from the Republican administration in Washington …The guaranteed beneficiaries of the corporate tax cuts will be people like me, the shareholders in many of these companies …
This is a tax plan conjured up by people who have spent their lives lining their wallets at the expense of the ‘hard working Americans’ they so piously claim to protect … Instead of stiffing the banks – as was his past practice – [Trump] is now stiffing the generations who will be left to deal with the consequences of this tax plan.
Given he’s a successful financier, it’s hard to dismiss Moritz’s diatribe against Trump; he’s hardly an anti-capitalist, anti-American leftie. Neither is he alone among his mega-wealthy peers. Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, wrote in a December 2017 blog that the Trump tax cuts, ‘By and large [don’t] deal with the impediments that are holding back investment and productivity in the US economy.’
While some large corporations were quick to trumpet pay awards to employees following the passage of the tax cuts, these appeared to be more symbolic than significant. Wells Fargo boosted its minimum wage from $13.50 to $15.00 an hour, while Fifth Third Bank did the same and added a $1,000 bonus for each of its 13,500 employees. Meanwhile, Boeing announced an extra $300 million of investment.53 However, this came after it had announced a record programme to buy back $18 billion of its own shares.
It seems likely that many of those who voted Trump into power are benefiting the least from his tax policy. By 2022, the bottom 80 per cent of US earners will receive tax cuts of between 0.9 and 1.7 per cent of income, while the top 1 per cent will enjoy a 2.9 per cent reduction.54 Moreover, the income tax cuts are due to expire in 2025, but the cuts for corporations (and their shareholders) are permanent.
This is obviously storing up trouble for the future, both economically and socially. Trump’s decision to ramp up the budget deficit and so public debt after nine years of economic expansion means there will be nothing left in the tank when the next downturn occurs. Unlike the massive government expenditure and bail-outs of 2009 that helped avert a depression, the public accounts will already be stretched, having not recovered from the previous crisis and the consequences of the tax cuts. That means the only source of emergency funds to prop up the economy during the next recession will be the Fed. The US central bank may have to print even larger amounts of money than last time to finance emergency government expenditure.
Western states are caught in a downward spiral of tax structures that favour corporations over cash-strapped individuals and declining funds for education, security and infrastructure due to a weakening revenue base arising from globalisation. This is degrading their ability to compete and mortgages their future. Populations are waking up to the decline, even if their politicians are mostly still in denial. Like him or loathe him, President Trump is the exception on the trade front. His long-overdue attack on a world trading system that serves the short-term interests of the financial and corporate elite by boosting profits from shifting production to low-cost countries to the detriment of their employees is the first attempt by a Western leader to stop the rot. Whether he is serious enough to succeed remains to be seen. What Trump is not addressing, however (as we have seen, quite the reverse), is the cancer of record inequality in his country.
His popular base elected him in the belief that, as a Washington outsider, Trump would ‘drain the swamp’, and they would finally recover some of the lost ground of the past decades. The omens do not look promising. Disillusionment is likely to set in as unsustainable policies benefiting the wealthy and the temporary high in the stock market from the tax cuts fail to tackle the root causes of rising popular discontent with the political system. A CNN poll in the week of 21 December 2017 showed that two thirds of Americans thought the tax cuts did more to help the rich than the middle class, evidence that you can’t fool all of the people all of the time. In a summer 2018 Gallup poll 51 per cent of Americans between eighteen and twenty-nine said they believed in socialism, while 45 per cent said they supported capitalism. This is unheard of in capitalist America.
Academics Leon Grunberg and Sarah Moore interviewed Boeing employees anonymously over twenty years and in 2010 published their findings, tracking how an engineering-led family business with a strong tradition of employee welfare has morphed into an aggressive, cost-cutting, finance-driven corporation chasing shareholder value and ramping up executive remuneration. Boeing has relocated parts of its production to cheaper countries and treated its workers like disposable commodities. Grunberg and Moore show how the changes at Boeing have contributed to the hollowing-out of the US middle class and a distrust of authority that has prompted a rise in anti-establishment sentiment. The study ‘provides a view over two decades of the unwinding of the post-war social contract – where workers felt they could rely on decent pay and benefits in exchange for hard work … Workers feel more exposed, more vulnerable and anxious, and increasingly abandoned by the establishment.’55
The change in corporate behaviour has been partly inspired by the writings of the late economist Milton Friedman. Instead of companies balancing the interests of the various stakeholders in their decision-making, their sole objective should be profit maximisation. ‘There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.’56 Shareholder value is the ultimate test for all corporate decisions; employees, the local community, even the environment, should not come into it. This principle is clearly unsustainable today, although so far most top executives have only explicitly acknowledged its limitations with respect to the environment.
Clive Cowdery, a British insurance entrepreneur who donated £50 million to stimulate a debate on how to distribute money and power more fairly, was clear about his motivations: ‘It’s not a short term thing, it’s a 10-, 20-, 30-year erosion in the ability of our economic model to deliver an improved living standard … And therefore we need a new model.’ This is because ‘In 1945 you didn’t have globalised trade. In 1945 you didn’t have machines doing the skilled jobs of skilled workers, and in 1945 you could afford to offer people a pension that paid out at age 65 … the economic model worked … because it gave them routine and confidence … I don’t see that confidence today to the same degree among working people.’57
Clearly something fundamental has changed in the system we have grown up with, to the point where it appears to be edging towards complete breakdown. As we saw in Chapter 7, this system marries democracy with capitalism. Historians have argued that the rise of capitalism pressured the political system to democratise in order to guarantee property rights to entrepreneurs, the rule of law rather than the whim of the ruler, and incentives to take risks. But if democracy and capitalism evolved in a symbiotic relationship, each needing the other, that is not to say that they were not also subject to contradiction and conflict.
A true democracy – one citizen one vote – is egalitarian by definition. It can also empower political units, such as the nation state or a local authority, using elected representatives to make laws and regulations according to what the majority is thought to have voted for. Capitalism on the other hand, is inherently not egalitarian in outcome or theory, especially in its pure free market form. It aims to maximise the wealth of the owners of capital, who are a minority and who, unrestricted and unregulated, will seek to secure their position by buying out or driving their competitors out of business. Once an unassailable market position is achieved, they will enjoy their protected income as rentiers.
The inherent tension between capitalism and democracy did not prevent this two-headed beast from working well enough to be accepted as legitimate and the best system on offer, as long it could provide security and rising living standard for the majority. It was OK for the rich to get filthy rich, so long as there was enough left over for everyone else to be comfortable too, if somewhat more modestly. Widely shared rising real incomes legitimised both capitalism and democracy. Although there were always winners and losers, the system compensated the latter through transfer payments and by providing good-quality job opportunities.
But the system has now morphed from one organised and controlled at the national level to one dominated by global companies playing one country off against another. Nation states are losing the power to control their economies, a trend exacerbated by tax policies driven by the fear of losing even more capital and jobs to other jurisdictions. The EU could have resisted this trend, the size of its market enabling some aggregate political sovereignty to survive, but this has only happened in some areas such as competition policy, mobile phone roaming charges and minimum standards. In terms of preserving jobs and the real incomes of the vulnerable, it has manifestly failed, hence the rise of so-called populists across the continent and in the UK.
Logically, a globalised economy needs to be run and regulated by a global government. Multinational businesses can now play one government off against another in a way that was impossible prior to the digital age. As their power has shrunk, national governments have become toothless in defending the interests of the common man or woman, and corporations have ensured that their interests take precedence over those of voters.