The Labour government still has ‘economic growth’ as its cure-all remedy in the lead up to the Budget. However, without any systematic, coherent approach, expectations are low. What should the UK actually do ?
In Part 1, I argued that it was necessary to start from key principles; defining growth and where it comes from, and scoping out the landscape (and boundaries) for beneficial economic growth; at least to help all the relevant people know what is to be achieved. Part 1 also touched upon the ‘headline’ economic problems to be tackled, and institutional obstacles to be overcome.
In Parts 2 and 3 the aim is to comment on a few of the ‘levers for achieving growth’, starting with the two main inhibitors to growth, concentrated finance and its link to monopoly, and a sclerotic state.
CONCENTRATED FINANCE – ‘Make financial services, services again’
In the UK expressions like ‘capital markets’ and ‘institutional investors’ mask the extent to which control of the finance sector is concentrated in a few hands (eg Index Funds). Share prices rise due to manipulations such share buybacks rather than performance, creating vulnerabilities and systemic risks. De jure monopoly, and private cartelisation amongst supposedly arms-length investors are designed to keep share prices rising at all costs. Such institutions have become the masters not servants of productive businesses. A range of complex measures are required to address cartelisation, and shift power back to ‘real businesses with long term plans’. That is, if these towering financial institutions do not collapse first.
SCLEROTIC STATE – ‘Parkinson’s Laws are Euphemisms’
In the UK over recent decades the path to riches is no longer seen as providing innovative goods or services that people want to buy. It is getting an extendable profitable government contract, or a favourable regulatory change, where the ‘client’ is none too bothered about the detail, or even concerned about value for (someone else’s) money. The ‘reach’ of the state has gone beyond critical mass, fuelled by conflicts-of-interest. Culturally, in the UK, on the political right and left, it has become unfashionable to demand accountability and transparency, especially in procurement, regulatory and civil servant integrity matters.
Contracting out anything that moves, started by the free market right, has been embraced by the left,. This factor is made worse by a cadre of ‘generalist’ governmental employees with scant business or proper procurement experience, ever ‘managing up’ and ever shifting jobs … and now believing they don’t need expertise since everything is now contracted out. The remedy for the sclerotic state is a set of quasi-constitutional changes, giving elected bodies more power over the errors of the bureaucracy, enforcing accountability and transparency in detail, abolishing ‘commercial confidentiality’ overuse and replacing the recently-abolished ACOBA, inter alia.
LAND AVAILABILITY – ‘The land on which they stand’
There is no general shortage of economically useful land in Britain. There is just a shortage of land available within reasonable timeframes for commercial activities. The same goes for housing. The first problem is open information. There is no obligation to register publicly the ultimate beneficial owner of land. It is often difficult and expensive just to find out who ultimately owns a piece of land. In addition there is the problem of ownership concentration, with a small number of owners controlling vast land holdings across the nations. More importantly for economic growth, the state controls incalculable swathes of land. Literally, since many governmental institutions don’t even know how much land they own/control. The Mistry of Defence and the Ministry of Transport (and their agencies) are top of the list for unused facilities suitable for commercial and housing use, some concreted over but are plots the size of small towns. A departmental register of land & buildings, and making it a criminal offence to conceal governmental landholdings, are sorely needed.
In Part 3 (before the budget) I shall comment more briefly on the banking sector, infrastructure and planning, skills, economic regulation, and fiscal decentralisation.
* Paul Reynolds works with multilateral organisations as an independent adviser on international relations, economics, and senior governance.
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14 Comments
The biggest manipulator of share prices are not share buybacks but the practice of shorting. Share buybacks are just companies announcing that they intend to buy shares in the company’s shares on the open market which adds to demand and tends to move the price up in the short term. Shorting, however, is when share speculators pay to borrow large numbers of shares, which they then sell to force the price to fall – and then, when the price has fallen sufficiently, the buy them back at the lower price and help push the price up again, pocketing the difference between the price they sold at and the price they paid to repurchase.
People invest in companies to get a return on that investment, otherwise why bother? Share buy-backs, along with paying dividends, is how a company gives it’s owners (the shareholders) a return on their investment. Buy-backs are no more of a manipulation than paying dividends. They have different tax implications, but that’s not the companies fault.
If you view giving investors a return as a problem, you need to explain how else you expect companies to get funded?
As Jenny and Nick have pointed out, share buybacks are not a manipulation. If shares are “retired”, those shares remaining are worth more, but the value of the company remains unaltered. In the long run there is a clear link between the net asset value of a company and its share price.
Listed companies make up less and less of the company and perceived regulatory burden incentivises companies to go public. More high profile companies on the LSE might encourage retail investors to contribute funds.
Sorry, obvious typo in para 2, “less and less of the economy “.
Paul, thanks for this series. It is worth pointing out what faces people asking for ‘radical’ changes to politics to promote social democracy. This includes arguing that the NHS is not “too expensive”. Setting out to make such changes means that we would face the ‘wealth defence’ industry and their playbook of tactics.
A news story yesterday (Fri 14 Nov) about Liberal Democrat MP Charlie Maynard and Thames Water is a good example. As in football, it is a professional foul to play the man not the ball.
I am still not sure what policies are being proposed.
When it comes to economic growth policy, it is necessary to be systematic; defining growth (good and bad), setting out the ‘sources’ of economic growth (the ‘policy levers’), and scoping out the extent and boundaries of policy. It is also necessary to define the ‘real world’ economic problems & inhibitors that economic growth policy is there to address. That all means getting away from tokenism and PR-related policies. These three short articles attemp that. Of course a book could be written on each policy point, but the start point is to be systematic and start with the fundamentals.
Share buybacks … it is especially important for political parties to understand this controversial phenomenon. Corporations purchasing their own shares in the open market or privately has, since the 2008 crash, become a common practice in the USA, and it has increased especially over the last 5 years. It has risen in the UK too. This practice was unlawful before 1982 in the USA, but today whilst permitted (but still controversial), there are restrictions on its use and there is a new tax on the transactions. There are pros and cons.
The conventional ‘pro-buybacks’ case is that when companies have surplus cash, they should be free to choose between issuing dividends, investing internally in development, investing externally (M&A), or buying back shares at above market prices, whilst increasing future dividends for remaining shareholders. The ‘anti’ case is that management, as insiders, can profit risk-free personally (eg via share options) creating perverse incentives, it can inflate share prices without improving profitability, and it is ‘unproductive’ compared to other options for surplus cash. What’s more, corporations with declining profitability can borrow to buy back shares, shoring up share prices, giving temporary benefit to some, but putting the longer term at risk.
The more complex criticism of buybacks points to the dynamics involvd; eg. that large US tech giants sitting on cash piles, still borrow to buy back shares, due to low interest rates, which may not stay low. More importantly, the rise of buybacks since 2008 has paralleled the rise of investment funds indexed to market capitalisation, which now control up to half (!) the world’s traded equity. These funds require ‘permanent’ rising share prices, pressing for buybacks and share price hikes regardless of profitability, (and seeking de jure cartelisation). These factors seem to be key parts of their strategy. Today, many analysts say this overall system represents substantial systemic risk (ie ‘a dangerous bubble’). Political parties rightly wonder why stock markets keep rising despite squeezed profitability, and worry about a ‘major adjustment’ (ie crash). Buybacks, whilst sometimes beneficial, are a key factor in creating the current bubble.
Maybe I’ve missed it but I haven’t seen any reference to the management of ‘aggregate demand’ in either of these articles on growth.
The trick to getting growth is to ensure that the level is going to be consistently high enough to justify investment spending but not too high that it will cause inflation. So, easier said than done, I do admit, but then most things are.
For anyone who is thinking of setting up a business this is lesson 101. The first question to be asked is “will I have enough paying customers to justify the investment?”
The three articles (one to come) are specifically about the sources of beneficial economic growth, and defining and addressing problems related to the main sources, as a path to fiscally, environmentally and socially sustainable growth. They specifically exlude macro-fiscal policy, since that represents another swathe of polemics, especially given the current cost of debt service. I am of course, aware of the set of economic approaches which do not accept limitations on state borrowing and/or, QE, and they are rational and well argued … but for another day.
@ Paul,
It doesn’t have to be macro-fiscal policy. The present day mainstream approach is to control aggregate demand using monetary policy which effectively means the adjustment of interest rates. This is sometimes known as New Keynesianism although I always tend to read this as Not Keynesianism.
It may not be the optimal method but, as we do rely on it, it is something that you might want to bring into the discussion.
Economic growth requires a mind set that understands that some actions are necessary for that aim that do not always fit with the public’s perception of what government is for. Certain countries such as South Korea and Taiwan have a better educated electorate in this regard and so make actions by government to create an entrepreneurial culture easier.