Abby Innes offers the second in a short series of articles on the political economy of the manifesto. Here she considers how the party’s economic strategy is made up of incompatible ideas and paradoxes.
“A strong economy built on sound public finances, low taxes, better regulation and free trade deals with markets around the world…a new deal for ordinary, working people giving them a decent living wage and new rights and protections in the workplace…fairer corporate governance, built on new rules for takeovers, executive pay and worker representation on company boards… modern industrial strategy and major investment in infrastructure, skills, research and development” (p. 12)
These ideas promise a marriage of political economic models not known for their institutional compatibility. They draw, on neo-liberal, supply side economics that seeks to leave businesses unencumbered by tax or regulation; the unprecedented state interventionism of the American New Deal; the stakeholder coordination and the flattened corporate hierarchies of Germany and the Nordic economies, and finally; second-generation ‘endogenous growth’ and investment theories which argue that economic growth increases from strong investment in human capital development, R&D and infrastructure, and that the private sector will under-invest in all three.
So, has the Conservative Party moved to the economic centre-left as much of the media commentary claims? If you put these strategies together do you get the best of all ‘varieties of capitalism’? Or is John Kay right when he calls this the ‘topical treatment of symptoms’? How are voters meant to decide?
What the manifesto lacks is any analysis of why these are the policies we need now. As with its evocations of ‘the state’ this is a text that discusses archetypes – the ‘modern joint stock company’ and ‘small businesses’ – not structural dynamics. The manifesto is as Panglossian as incumbents’ manifestos tend to be: we will be the most innovative country in the world, though recently ranked below Belgium.
But not entirely: it acknowledges “the UK’s slow productivity” growth, the lack of worker protection in the ‘gig’ economy, and that “senior corporate pay has risen far faster than corporate performance”. Nevertheless, without any diagnosis of how we got here economically – of who gained and who paid – how are voters meant to know the values by which a Conservative government would act?
This might matter less in stable times: in a growing economy with rising living standards. But the UK has seen a decade of economic slowdown, poor productivity and declining real wages that look set to fall further with Brexit. At the root of this is ‘financialisation’. As Natascha Van de Zwan has set out, in the UK, as in the US, financial markets and institutions have increasingly displaced other sectors of the economy as the source of profitable activity. In large corporations – 53 per cent of UK turnover in 2016 – we see the ascendency of shareholder value and a shift from the value-creating ‘retain and reinvest’ model of the post-war era to an extractive system of ‘downsize and divest’.
This dynamic has penetrated corporate life so that even non-financial corporations emphasize their financial activity and set high dividend payments as the highest priority, i.e. over investment. Finally, finance has spread into every aspect of life and across classes so that low to high earners alike are incorporated into financial markets through pension plans, home mortgages and other mass-marketed financial products. These trends increase the systemic risk from financial markets and sit at the core of our growth without prosperity. This manifesto speaks of excessive executive pay but it considers this a matter for shareholders. On financialisation writ large it has nothing to say.
The manifesto is shot through with internal economic paradoxes that indicate less a concerted shift to the centre-left than a lack of underlying analytical strategy altogether. In an era of unprecedented corporate profits and cash holdings, from what analytical basis is it coherent to cut corporation tax further to encourage investment but to pull the UK out of the Single European Market? Discuss!
The steady, ‘competitive’ reduction of corporate tax rates over the last thirty years has failed to fulfil its promise of increased productive investment or wage growth (see above). This shouldn’t be surprising: the arguments for tax competition derive from value-loaded deductive mathematical models from the libertarian Chicago School. Robust empirical economic scholarship, in the meantime, has demonstrated how negligible corporate tax rates are compared to market size, real income, skills and infrastructure levels etc. as the host factors that actually determine foreign direct investment. 2016 research estimates that EU membership increases foreign direct investment into the UK by around 28 per cent.
Likewise, what drives the manifesto commitment to ‘a modern technical education’ and workers consultation in public limited companies? These are constructive ideas which evoke the coordinated market economies of Germany and Scandinavia and their higher productivity. But the latter are stakeholder systems characterized by patient banking finance. They have encompassing trades unions and business associations which coordinate across entire sectors on training, investment, R&D, wage bargaining, and employment and unemployment protection. Cooperation is institutionalised across strategic dimensions.
It is unlikely, then, that the outcomes of these models can be achieved through their faint suggestion in fragments: that the manifesto’s call for UK PLC boards to appoint one solitary director from the workforce will do much to re-establish a long-term investment and employment horizon. As Tom Clarke shows, Section 172(1) of the UK Companies Act 2006 imposed a director’s duty to act with regard not just to the interests of shareholders but also employees, suppliers, customers, the community and the environment. And this proved a singularly ineffective piece of corporate law because it operates in a political economy of institutional relationships geared to the short term. Directors’ duties have in no sense amounted to stakeholders’ rights. The manifesto commitment to renew technical education looks strong but un-costed – so will the funding come from the existing university and education budget, with schools already facing a real terms spending cut? And if the spending is new, why should large corporations contribute less for the investments from which they will gain?
Finally, the manifesto makes much of ‘sound public finances’, but, to take just one example of fiscal perversity, in which strategic framework is smuggling the number one issue for the reinforcement of capacity in Her Majesty’s Revenue and Customs? Revenue losses from smuggling run to billions per year but HMRC estimates the tax gap – between taxes owed and taxes paid – at £36 billion: an estimate that underplays tax evasion by multinationals according to many tax scholars. Under the supply-side policies of recent years, HMRC has been actively redirected to take a ‘partnership’ (lax) approach to multinational ‘tax planning’ (legal avoidance) as part of tax competition. But HMRC employees see tax planning as the source of most of the tax gap for large businesses. Given the abject redundancy of corporate tax competition, why not tackle that?
Philip Hammond has suggested the UK might have to become a full-fledged tax-haven as our growth strategy if Brexit goes badly. That’s Plan B. But what is plan A? Emerging markets put all their developmental effort into trading with economies higher up the chain of value-added. Hard Brexiteers are unique in thinking that it’s wise, once you’re situated at the top, to do the opposite.
Their manifesto has cherry-picked Labour policies such as a cap on energy prices and increases in the living wage. But on the brink of the most perilous economic step in the UK’s modern history it remains unclear on what analytical grounds the Conservatives decide their economic priorities. Even so, a deeper problem is apparent: between the Imperial nostalgia, business as usual on climate change and the conception of the joint stock company as the responsible home of innovation and investment, the Conservative economic imagination operates in a time warp.
About the Author
Abby Innes is Assistant Professor of Political Economy in the European Institute, LSE.
p.s. apologies: that should read James S. Henry! (not James O). Also of note: OUP published ‘Global Tax Fairness’ recently – an excellent book of expert chapters on issues around tax competition and tax havens. For the UK evolving role in that story see also Nicholas Shaxson’s Treasure Islands and Richard Brooks’ The Great Tax Robbery (Shaxson is an experienced investigative economic journalist, Brooks an ex HMRC tax inspector…). See also Gabriel Zucman’s The Hidden Wealth of Nations (with a forward from Thomas Piketty). In scholarship terms it’s an interesting subject: there is a pretty severe separation between a highly technical corporate tax law field, an equally technical public finance field that operates overwhelmingly through deductive mathematical modelling, a highly technical tax accountancy field and these more popular but nevertheless empirically heavily researched and well-documented texts. The technicalities around the subject have made it relatively easy to ascribe to corporate tax cuts and the deliberate regulatory laxity that has accompanied them a naturalistic fallacy wherein this ‘has to be done’ as a law of economic nature. But the promises and the outcomes have in no sense cohered, and the spillover effects – the massive increase in offshoring, the proliferation of tax havens, the shifting of the tax burden onto other less mobile factors and businesses, the redundancy of the cuts in terms of investment and the encouragement of the culture that firms carry no social obligations – all these are surely highly negative outcomes (for value-creating markets as well as democracy).
p.p.s. The p.s. is attached to the reply to ‘Dipper’. Also, please note that by calling the more accessible texts about tax havens and tax competition ‘popular’ I mean ‘readable’: in evidential terms they’re extremely compelling. What’s surely remarkable in research terms is that there is a missing ‘academic’ political economy scholarship around the wider story of tax competition, i.e. that tracks the story all the way through theory (and its strengths and weaknesses) through to the translation of that theory into policy, and on to the downstream consequences of policy in terms of the building of some constituencies and the weakening of others, i.e. in terms of accounting for ‘who gained and who paid’.
Shaxson, Brooks and Zucman actually do that work and have accumulated overwhelming evidence, but there is a risk that because they’re writing in a language that is also activist and committed – a language surely justified by their evidence and the analysis that follows – they’re somehow in danger of being brushed aside by policy-makers who may wish to dismiss them as, exactly, ‘activist’, as if that activism isn’t merited. In the meantime the technical texts are remarkable – and problematic – for remaining fixated on particular policy details without scaling up to the bigger institutional picture, or in the case of the public finance literature, for just remaining within exceptional mathematical abstraction – a condition which means the downstream political-economic consequences of this story remain untold in suitably ‘technical’ texts. These particular ‘popular’ texts show the wider institutional picture and consequences in a way that is always reached via notably strong evidence and as such they surely fulfil a core criteria for ‘academic research’ – they are evidence-based and the evidence is too strong to be ignored as ‘selective’ – though they lack the supposedly agnostic tones of social science. The OUP text on Global Tax Fairness is consequently a great bridge….
Gabriel Zucman is, of course, an economics professor at Berkeley. The Hidden Wealth of Nations is built on a unique comparative data set of tax revenues lost to tax avoidance through tax havens, and he has fascinating new research on who, by income level, has the greatest propensity to avoid tax. But the point is that there Is still a centrifugal tendency in mainstream economic debate that continues to spin these explicitly critical expert texts – whether they’re written by academic experts specialising in inequality – like Piketty or Zucman – or from expert former practitioners and journalists – away from what is a remarkably resilient orthodoxy. The inertia around tax competition policy is remarkable given that the more realistic the public finance model assumptions have become the more they have tended to find against benefits from tax competition, and given that the notably more empiricist economics on foreign direct investment and on growth theory always strongly contradicted the claims made by the original (and highly political!) Chicago-School theory. And that inertia has to be explained, and the interest group politics around the policy are surely key, as is the institutional reductionism in hyper-mathematical economics… . (Ok! That’s enough afterthought! Ed.)
Apparently I read its meaning in a different way in that it means we can trade with 164 non eu nations without the interference or permission from Brussels unelected committee of failed politicians, This gives us an opportunity for bilateral agreement s that don’t have take into account whatever might be good for Luxembourg etc.
Welcome to the back of the queue.
Thanks for taking the time to comment. I suspect that to offer you a decent reply to this it would help if I knew where you interpret the failures of the EU as residing (beyond its democratic deficit, no small matter of course). On the political failure front, isn’t it the case that the EU has simply always been a mirror of the condition of European politics more generally? It is, after all, just a political arena to which we elect MEPs, send civil servants, and to which our elected governments send Commissioners, when our own ministers aren’t directly making decisions in the Council. So if it has suffered from being excessively neoliberal and technocratic in the last twenty years then isn’t that because that politics has prevailed in the member states, and because the UK, in particular, has driven that agenda? If it hasn’t been neoliberal enough, in your view, then we get into a much deeper debate about the political economy and the role of the state as an essential element in enabling functioning markets and democratic, as opposed to crony capitalism. The UK’s Conservative hard Brexiteers are, of course, the most neoliberal politicians of all in the UK…. One of the ironies of our exit is that the UK has punched above its weight in the EU since it joined. Our friends and colleagues in the other member states who do not sit on the neoliberal right could be forgiven for thinking: ‘well thank you for playing UK’… now that we are rejecting the overall agenda that we did so very much to help establish. No?
But more specifically on trade, isn’t the difficulty this: that there isn’t a steady, neutral condition in which we move seamlessly from the Single Market to bilateral agreements? I fear that in the process – quite apart from the huge losses in cooperation on every dimension – we are going to lose investment and jobs, as potential investors look at the overwhelmingly likelihood of increased transaction costs/worse terms of trade and invest somewhere else (particularly since our own low skills/infrastructure/R&D investment has made the UK a poorer prospect than it should be, except for the kind of footloose capital a government (as opposed to the City) shouldn’t seek. But my colleague, Nick Barr, wrote this before the referendum
and this afterwards
and I think both are unusually clear in the reasoning as to why leaving has huge costs and limited gains. But of course the ‘who gains?’ question comes back to where you’re standing in your criticism of it. The EU has flaws, no doubt, but do we do better to walk away? My own sense is that we’re going to put ourselves in a much more intense version of the polarised politics that we were already suffering from, but now with fewer resources to resolve that polarisation. And that’s before you hit the ethical point that the younger generation, who will pay the price, were outvoted by a generation who will suffer none of the consequences. Best wishes, Abby
Thanks for the article pulling the disparate competing concepts from the Tory manifesto. It makes clear that there is a total failure to think about state matters on a long term basis. The manifesto ideas were clearly partly born of expediency to take advantage of Labour divisions ,which may explain the lack of realisation of the consequences of the “bold and stable” ideas put forward. What we need is a recognition of the difficult times ahead because of the relatively poor state of the nation in terms of productivity, falling investment and the salient fact that our asset base has been sold off to support current expenditure.
One can only suspect that the PM’s idea is to retain power for 5 years and to then do a “Cameron” ,having fulfilled a lifelong ambition. Can we see a prospect of anyone able to tell the nation how serious the situation is and persuade it to support the “blood .sweat and tears needed for our survival?
Thank you for commenting! I don’t know if you would agree with this, and I’m probably wandering way off course from your question at the end….but I’m struck by how the tone of great certainty in the rhetoric of the Conservative campaign is in inverse proportion to both the strategic clarity and the confidence in any of the actual policy proposals. But I suspect this is a consequence of a much a deeper problem that afflicts all the mainstream parties. I think we are coming to the end of the dominant economic paradigm of the last thirty years – neoliberalism – as a credible orthodoxy in terms of either social or environmental functionality. Its failures are now turning critical in terms of democratic stability and our deeper long term survival. To continue with neoliberalism now is to walk, eyes wide open, into political instability, social crisis and a catastrophic degree of climate change. But Conservative, Liberal and Labour parties in the UK have to a greater or lesser extent all bought into neoliberalism over the last thirty years and so there is going to be a serious grinding of the political gears in revising this position. Labour is taking a newly critical stance, but look at the difficulty it faces in convincing us that ‘this is about the future’ without our hearing ‘go backwards with us…’ But Blairites and Corbynites should be able to have a productive conversation about where policy went wrong in the 1970s, but also under Blair and Brown in regard to regulatory and tax competition and in quasi markets in welfare: to take stock and think of policies for where we are now…but both need to admit that that conversation needs to be had. Ditto within the Conservatives and the Liberals. There are a lot of unsafe certainties flying around.
When you combine what would anyway be the socially disruptive consequences of rapid technological change with a political economic orthodoxy that rather actively seeks to disable the state as a balancing mechanism for social integration and environmental protection (and neo-liberal economics specifically rejects the pluralist understanding of the state), then we’re really maximising the pressures on a democratic (inclusive) and sustainable system. In the 1970s neoliberalism had been on the fringes of economics for years but it found a constituency in business and politics that was powerful enough to bring it to the fore as the new solution. There are new ideas now in mainstream and green economics but so far they lack such a powerful constituency to bring them forward and, of course, they are likely to be actively opposed by those who benefit most from the status quo.
It is becoming increasingly difficult to support neoliberal politics without having to just ignore or deny their failures, and the Conservative manifesto acknowledges the failure of the orthodoxy but without yet translating this into a clear rejection of the policies that follow: it takes the narrative but not the substantive step. And the substantive change is going to be hard because that means confronting powerful constituencies and admitting error – it means re-engaging with what we have long known about the system limits of both states and markets as distinct regimes that are mutually dependent. But it also means talking about the systemic limits of the environment, and the Conservative manifesto is a paean to the fracking industry.
The trouble is, in narrative terms this is the language of limits, responsibility and cooperation… it sounds incredibly… parental…It is so much less heroic than the language of radical individualism and the dynamism of markets. The Czech neoliberal Prime Minister Vaclav Klaus once ran on an election slogan that said ‘if you believe in yourself, vote Klaus’ which was as brilliant psychologically as it was anti-social. Rambling thoughts…Best, Abby
“Their manifesto has cherry-picked Labour policies such as a cap on energy prices and increases in the living wage.”
I disagree. The “Thatcher model” of free competition with a regulated market is surely pretty much part of the current standard approach to capitalism. Left to their own devices, cartels of large organisations will use their power to suck above-average returns out of a value chain suppressing productive activity elsewhere along that chain. So government, through regulators, controls activity in these areas to allow other parts of the value chain to thrive. Another example is price-making in banking where regulation is forcing transparency to avoid conflicts of interest. Labour’s approach was much more crude, an attempt to showboat their championing of ordinary people by bashing large companies in a destructive way.
“But on the brink of the most perilous economic step in the UK’s modern history it remains unclear on what analytical grounds the Conservatives decide their economic priorities”.
Well yes. But so much depends on the nature of the treaty (or lack there-of) that emerges from our departure of the EU. We have for decades pretty much had no choice in significant parts of economic policy, it simply being mandated through EU policy. Some of that will be removed and the next government will take time to adjust to the new additional freedoms they negotiate. As a voter I’m looking for a party that shows an ability to learn from experience. I feel the Conservatives, despite their many faults, offer that much more than Labour who are controlled by a north-London clique that live in a fantasy world.
Sorry for the slow reply…
I completely agree with you about the shift to regulatory capitalism, but that leaves open a huge arena of debate around the appropriate forms and levels of that regulation (see for example Steven K. Vogel’s Freer Markets, More Rules), and it still leaves a very sizeable portion of GDP being directed through state provision. And of course, state provision can be more or less cost efficient and equitable, depending on how it’s organised (please see previous blog from a few days ago, on the Conservative understanding of the state…)
So as to that debate, I suspect this is where we differ in finding evidence for the current Conservative administration’s propensity to learn. To explain where I’m coming from a little more…corporate tax cuts are a core example of a refusal to admit that a policy has failed in the terms by which it was justified, which begs the question of why it’s being continued…. The justificatory models for tax competition from public finance are at the extreme end of what Paul Romer calls ‘mathiness’ in economics: i.e. that use mathematical stylisations of real world factors so abstract they cannot, in fact, be linked back to the real economy in an empirically robust way. The economic debate around tax competition is essentially normative political philosophy being played out in maths: change the mathematical stylisation of the key factors and you change the outcomes. The ‘firm’ in these models is typically modelled as a neo-classical firm, depicted as an efficient bundle of contracts that operates, if ‘the economy’ is modelled at all, in a single sector. Such a depiction is institutionally empty and in no way has it tracked the actual development of large firms in the real world away from the retain and reinvest practices of the post-war period to the downsize and divest tendencies of today (and of course, there are counter-examples, but we’re talking predominant trends…). Nor do these models include tax havens or tax planning.
The tendency in the UK in recent years, as in the US, has been for large firms to operate dividend and repurchase ratios that are unsustainably high – they are extracting more than they are likely to sustainably earn – and I promise you that this is not some fringe interpretation but the view of investment funds looking at longer term market stability and respected business economists alike (see John Kay’s reviews of corporate governance in recent years).
The UK’s investment, productivity and employment record in no way vindicates the promised rising tide of productive investment and long term wage growth that was meant to follow as a consequence of our repeated bids to have the lowest corporate tax rates of all our competitors. Given the uniquely high cash holdings and payout ratios the evidence is rather that corporate tax cuts have hardly ‘touched the sides’ of large firms in a productive sense. And yet the Conservative Party wishes to see the headline rate cut further. Why? If you look at the mono-culture composition of the advisory panels established around deciding corporate tax rates in recent years it’s fair to say that the government has not been taking the kind of pluralistic advice that might encourage a change of heart: large corporations and accountancy firms, whose tax planning earnings come second only to their audit fees, are not going to encourage a return to higher rates or a stabilisation of rates – why would they? So why is it that only they have been consulted since regulatory laxity became part of tax competition. Again, this is really not a fringe view but the repeated published opinion of the cross-party Public Accounts Committee, the Treasury Select Committee and the House of Lords committees reviewing HMRC and corporate tax development. It has to be said that parliamentary select committees continue to do a fantastic, serious job of policy-scrutiny…what is remarkable is the extent to which their advice is repeatedly ignored.
Would it be destructive of large firms to encourage them, via regulation an taxation, to return to their pre-neoliberal self-understanding as value creators: value creating in a more complex sense than shareholder dividends. What would it destroy? I think that this is a genuinely difficult task for the Conservative party to fulfil in political terms, particularly given internal party politics, but I still think they could and should do it, as part of rebalancing the economy. This rebalancing includes rebuilding the fiscal contract whereby the rule of law applies to all players equally.
The work of the Tax Justice Network is interesting and most especially because it’s made up of and supported by people from inside the world of corporate taxation, including former tax inspectors like Richard Brooks. One of the leading critics of tax competition and tax havens is James O Henry, who was the Chief Economist at McKinsey, so not exactly an unworldly soul from the Tooting Popular Front… My sense is that the Conservatives have made a narrative shift – hence the statement that they do not believe in unfettered markets – but they have not yet made a substantive shift, which is why there is a completely redundant promise of a corporate tax cut that will no doubt, as in the previous years, have to be compensated for by increases in PIT, VAT and, most perversely of all in employment terms, NIC rates. Moreover, there was absolutely nothing substantive on offer for small businesses, who make up the vast majority of UK businesses.
But at the core we agree; parties that learn – that is surely the ideal! Best wishes, Abby