Saturday, 4 April 2015

Business and Labour

Deborah Mabbett

In the run-up to the election, senior business leaders have launched an attack on Labour’s policies. No-one should be surprised at this criticism. Labour presumably hopes to get its votes primarily from people who are not exceedingly wealthy. If Labour offers policies to attract the votes of the non-wealthy, the wealthy are not likely to be favourably impressed. That’s just how partisan politics works.

Nonetheless, criticisms from business might reasonably make voters uncomfortable if they associate the standard descriptor ‘business leader’ with entrepreneurship and job creation. Then the criticisms would suggest that people with deep knowledge of economic affairs have reservations about Labour’s policies, and those who feel that they lack that deep knowledge could pick up the cue. The difficulty for voters is that meaningful messages from business about the impact of policies are overlaid with self-interested babble. There may be important things to say about the effect of policies on economic activity: inadequate plans for infrastructure projects and housebuilding, for example, would be legitimate targets for business criticism. But the babble component is high: much of the critical comment has been about Labour’s tax plans. Claims that these will be a dampener on ‘business’ are the self-interested objections of wealthy people.

The difficult reality for Labour is that the era in which it could comfortably bridge class divides and occupy a middle ground that combined business-friendliness and redistributive ambitions has ended. In its New Labour variant, business-friendliness meant at least a partial embrace of ‘trickle-down’ economics: what was good for business was good for the country. It was a comfortable position for its proponents, who could engage in great deal of glad-handing and prawn cocktail consumption, and save themselves from some of the more vitriolic attacks that might otherwise come from the right-wing media. But now that we live in the era of ‘trickle up’, where the wealth of the few grows at the expense of the many, this stance is no longer tenable.

Nothing has happened since the financial crisis to reverse the well-documented picture of rising inequality in the UK. Each year since 2009, growth in average weekly earnings has not kept pace with inflation; only in 2015 is this expected to change. The median hourly wage in 2014, a princely £11.85, was 12% below its 2009 peak in real terms. While incomes have stagnated, wealth has soared, thanks in no small part to monetary policy. Bank of England estimates in 2012 suggested that quantitative easing (QE) had boosted UK households’ net financial wealth by £600b. Since the the top 5% of households have 40% of the financial assets of the household sector, the effect was highly unequal. An update by Ben Chu of the Independent estimated that the top 10% of households benefited from QE by an average of nearly £350,000 each. (Aficionados of data on the super-rich will recognise that within the top 10% there is still more inequality: the top 1% have probably benefitted by another order of magnitude again.)

The political implications of the rise in inequality are distressing. In the US, the political power of wealth has been evident in innumerable policy changes, often too small to be noticed by the general public, but adding up to substantial gains, particularly in reducing the tax paid by the most well-off. Mercifully, many of the strategies that have proved so successful in the US Congress are not available in the UK: there is less wheeling and dealing in ‘omnibus’ measures and fewer opportunities to insert obscure clauses in committees. At least the wealthy in the UK do pay taxes, although this creates its own paradoxical pressures. Stuart Adam and Barra Roantree at the Institute for Fiscal Studies have drawn attention to the very high concentration of income tax receipts: half of revenue comes from just 3% of adults. As they remark, ‘[i]ncreasing reliance on a very small number of taxpayers for revenue.. leaves the public finances more vulnerable to changes in their behaviour.’ The ominous subtext is that governments have to handle the wealthy with kid gloves, or they will exit for Monaco. The less reactionary implication is that governments have to tackle these concentrations of income and wealth at their source if they are not to be held hostage by the top 1%.

In any case, the primary difficulty for Labour in formulating policies that reflect strong public preferences for combatting inequality is not the threatened mobility of the tax base. It is the belief that the party must demonstrate ‘economic competence’ to win elections. Since the court for judging economic competence is rigged by powerful economic actors, policies that challenge their interests are quickly condemned for failing to accept economic realities.

There is a lot of slippage between the idea of the ‘business leader’ who might be engaged in innovation and entrepreneurship, and the person who is merely rich. The distinction emerges rather strongly in recent research on the United States by Martin Gilens and Ben Page. They found that the preferences of the wealthy are not well-correlated with those of business interest groups. The wealthy tend to have stronger ideological objections to state intervention, and ‘prefer lower levels of government spending on practically everything’ while business groups often lobby for regulation or spending in specific sectors. These differences, while rarely identified so clearly, are not surprising. Businesses need public goods to function; the wealthy can exit to their private domains.

This suggests that the outcry from ‘business’ could be muted by a strategy of division. Ed Miliband took a step in this direction by proposing a distinction between ‘predators’ and ‘producers’. This got a cool response in the media, perhaps because the country’s newspaper barons tend to fall on the wrong side of the line. It is a hard line to draw. There is an illuminating discussion in Thomas Piketty’s Capital in the 21st Century about the ‘moral hierarchy of wealth’ which locates the entrepreneur above the heir and the oligarch. Piketty argues that these distinctions, vital as they are to our willingness to listen to business, are futile. ‘Every fortune is partially justified yet potentially excessive. Outright theft is rare, as is absolute merit.’ Piketty exemplifies the point with a comparison of Bill Gates, ‘a model of a meritorious entrepreneur’, and Carlos Slim, a Mexican tycoon widely believed to have gained his wealth from monopoly rents obtained through government favours. Gates, he points out, has also profited from monopoly rents, as well as drawing on the unpatented basic research of engineers and scientists, much of it funded from the public purse. To develop policies towards wealth and income inequality with a clear head, we have to refrain from trying to assess the merits of individuals, and instead recognise that fortunes grow regardless of merit. Moral hierarchy in the tax code has brought about such absurdities as ‘entrepreneur’s relief’, a product of New Labour moralizing (introduced in 2008) and much loved by tax avoidance planners.


Nonetheless, Labour has succeeded in identifying some policies that divide productive from exploitative business. Wages and working conditions are a good target. While wealth can accumulate without merit, it is possible for business to demonstrate some merit by sharing the gains with the workforce. The minimum wage has enjoyed a reasonable level of business acquiescence because it protects better employers from undercutting by rogues. However instinctively business may bridle against interference, it needs the government in such situations to impose common standards and regulate competition. There are other examples where business interests are divided. While the utility companies have the resources to complain loudly when tougher rules threaten, the lives of many business people are made miserable by poor utility services. Ditto the banks, highly unpopular with small business as well as the general public. Adding to ‘business’ numbers, there has been a huge rise in the number of people who are self-employed since the financial crisis. Many struggle on relatively low incomes and are vulnerable to exploitation by big business suppliers and customers.

There is no denying that it is difficult to hold out against criticism from those who self-identify as business leaders. The influence of the wealthy extends a long way down the income scale: middle class people often share their preferences. This could be because the middle class believe that policies to tax the wealthy heavily are liable to creep down the scale, as Helen Thompson noted in her discussion of the mansion tax in the previous issue of PQ. It also reflects the cultural dominance of the rich. They are admired for their lifestyles and their power. Admiration shades into identification: many hope to be like them, and resist having their hopes dashed. But while some voters found New Labour’s ease with big business reassuring, there were others who found it alienating. New Labour gained a friendlier press at a high cost in its relationship to its core electorate.


If Labour is serious about tackling inequality, it is in for an uncomfortable time. It has to destroy the pleasant illusion cultivated by New Labour, that there are no fundamental conflicts of interest in a successful capitalist economy. Not only will this bring political opprobium from the rich down on the heads of the party’s leadership, but also it is a message resisted by many people who will never be rich. Nonetheless, it is the message that has to be conveyed, especially now that Labour can be undermined by voices from further left, at least in Scotland. Weathering the storms that can be whipped up by the rich and powerful is tough. Even the Financial Times, loved on the centre-left for its acerbic criticisms of the City, has shown its family loyalties by criticising Miliband. But there is no way of avoiding a bad press from business if Labour is to offer an alternative to the Tories. The easy times of the prawn cocktail circuit have gone for good.