The free market in danger

Young people say capitalism has failed them. They’re right. We must change the system to save it

Ross Clark, 10/22/11

It would be easy to attack the London spin-off of the Occupy Wall Street protests, which manifested itself in the form of a 300-tent encampment outside St Paul’s last weekend. Their political agenda? The same, meaningless, Dave Spartesque gobbledegook which has been a feature of anti-capitalist demos for the past decade and a half, such as the demand for ‘Structural change towards authentic global equality’ and ‘an end to the activities of those causing oppression’. Look for leadership and what do you see? The usual old suspects: Billy Bragg, Julian Assange and assorted vegans, unilateral disarmers and other hangers-on.

We know where this sort of protest leads: to the shattering of windows in one or two branches of McDonald’s, a police van rocked from side to side, kettling, accusations of police overreaction caught on camera-phones, before the exhausted Dave and Deidres are finally dekettled and allowed to slope off back to their squats -- and not a few Rupert and Lucindas back to their trust-fund flats.
Yet there is a very big difference between the ‘Occupy’ movement and the regular eruptions of left-wing anger over the past 50 years. The previous ones all occurred against a backdrop of rising wealth and increasing home-ownership. Anyone plotting revolution under those conditions was doomed from the start, because they had to sell their idea of socialist revolution against a more attractive alternative: the opportunity to sign up to capitalism -- to get a job, a car, a house and all the rest.

Occupy London Stock Exchange, on the other hand, takes place against a background of declining wealth. According to the Institute for Fiscal Studies, the median British family will have lost 7 per cent -- £2,080 of its income in real terms between 2009/10 and 2012/13.

This is unprecedented in modern history. The unemployment rate, which rose to 8 per cent last week, is modest compared with the early 1980s recession or even that of the early 1990s. But there is a crucial difference: in this downturn, unemployment is hugely skewed towards the young: 21 per cent of under-25s are currently unemployed, up 6 per cent in just six months.

On top of this, property-ownership is in sharp decline. Having peaked in 2002 when 70 per cent of homes were owner-occupied, by 2010 it had slumped to 65.1 per cent, back to the levels of the mid-1980s. Not only is a sustained fall in home-ownership unprecedented in over a century, but the housing situation is far worse than those figures suggest. In the 1980s it was at least possible for ordinary people on ordinary salaries to afford to get on the housing ladder -- something now impossible for many people in the London and the southeast, even those with good jobs, unless they have wealthy parents. There are many who say declining home-ownership does not matter; it makes more sense for young, footloose people to rent. But conditions for tenants have rarely been so bad. Until reform of the rented property laws in 1989,the non-propertied at least enjoyed secure tenancies and controlled rents. Nowadays, living in privately rented property means living under the threat of having to move on at two months notice even if pregnant.

Neither has the great share-owning democracy quite materialised.
During the last of the boom years, corporate wealth seemed to acquire a habit of finding its way into the pockets of senior executives and of scheming hedge-fund managers rather than shareholders. The FTSE 100 index stood last week 24 per cent lower in actual terms, and 45 per cent lower in real terms, than it did at the end of 1999. The chief executives of FTSE 100 companies have managed to do very nicely, however: their average pay over the same period has risen from £900,000 to £2.3 million a year. As for savings, they are being fast eroded by inflation.

Capitalism is running into a fundamental problem: for various reasons a declining proportion of the population feels able to gain any meaningful stake in it. And if you cannot see how you can gain a stake in capitalism, why should you support it? There is a growing constituency of people who, if the economy progresses in the same direction as it is doing now, will inevitably come round to wondering whether they would not be better off under a more centrally planned, more redistributive system of government in which housing, in particular, is a resource provided by the state. For those of us who lived through the Cold War and the stagnation of British nationalised industries during the 1970s, socialism may seem an unappealing relic of history. But I am not sure that I would feel that way if I were 25 and felt frozen out of the market economy.

Unfortunately, there is not much to suggest that the government understands the problem. The coalition tells us about the need for economic growth, but fails to explain how the masses can hope to gain a share in that growth when and if it comes. In stark contrast to the 1980s, the government emits an air of patrician Toryism more concerned with defending the privileges of the very rich than with improving wealth-amassing opportunities for ordinary people.

It is still astonishing to think that the Conservatives went into the last election promising just one tax cut: that of inheritance tax.
While that was dropped under Liberal Democrat pressure, the Chancellor now appears to have made the abolition of the 50 pence tax rate his overriding priority; he has paved the way to abolition by commissioning a study into how much money it raises. True, the 50 pence rate feels too high and should eventually go, but shouldn’t George Osborne also be studying the effects of his recent rises in national insurance and VAT, both of which have a disproportionate impact on the poor?

The government seems unable to understand how deep runs the anger at the behaviour of the banks and their ability seemingly to carry on with huge salaries and bonuses regardless of their bailout by the taxpayer (bizarrely it has been left to Goldman Sachs rather than the zombie, nationalised RBS to call time on bumper pay rises).

You don’t have to be a closet socialist to feel the anger; on the contrary, the bailout was proof that our free market system tends to become rather less free when powerful people are in danger of losing money. Our economic system would be better described as fairweather laissez-faireism which turns highly interventionist for the wealthy and powerful when the weather turns bad.
If we are going to have intervention and state-ownership in the bad times it becomes difficult not to ask why we should not also have them during the good times. It isn’t going to come from the encampment outside St Paul’s, but conditions may soon be right so as to enable a coherent voice on the left to sell the British public at least as collectivist a programme as the one they voted for in 1945.

There is an alternative: to tweak the rules openly and deliberately so as to promote wealth-accumulation among the masses. How about a law demanding that all salaries above £100,000 in public companies must be payable in company stock which cannot be sold for at least five years after an individual’s involvement with the company has ended? Then, the interests of the directors would be aligned with that of small shareholders: the former would have to build long-term value in their companies. In the short term they would have to earn cash through paying dividends to everyone, not just bonuses to themselves.
The most obvious way of offering the masses a stake in capitalism, however, is through housing. Cameron has promised to relaunch the right to buy through increased discounts, but this isn’t going to do the trick. All it will achieve is to create a lucky few and relieve the taxpayer of some very valuable assets at a knock-down price. It will do nothing whatsoever for the millions who are too well off to qualify for council housing but who cannot afford to buy on the open market either.

The coalition says it has large tracts of surplus public land which it plans to sell to large house builders, who will only have to hand over the money when the houses are sold. But why not cut out the big house builders and sell the land directly to aspiring homeowners to develop themselves? What’s more, how about selling it at its current, undeveloped value, which in the case of agricultural land could be as little as £300 for a one-sixteenth-of-an-acre building plot? There should be one proviso: that the land should be sold with a restrictive covenant allowing houses built on the land to be occupied only by their owners and only as main residences -- not as second homes or buy-to-let investments. This would ensure that large tracts of new housing were reserved in perpetuity solely for owner-occupation, suppressing prices and helping to maximise home-ownership. What would be the attraction of a tent encampment outside St Paul’s if there were the chance to own your sixteenth of an acre?
There are plenty of interests who would squeal at the idea of a popular land sale: existing property investors, land-bankers and house builders. But ultimately if you want to save capitalism there is a rather bigger vested interest which is going to need to be satisfied: the voters.

http://www.spectator.co.uk/essays/all/7326043/the-free-market-in-danger.thtml