An allergic reaction to ‘fat cats’
The super-rich of the private equity sector are a symptom, not the problem with capitalism today.
Anybody might be forgiven for thinking that there is a growing mood of anti-capitalism in British public life. Last month, in the normally staid and conservative House of Commons, MPs were warned by a top adviser to Gordon Brown that unless they reformed the taxation system, the widening gap between the new multi-millionaires of the private equity sector and the poor could lead to ‘Paris-style riots’. Just this week, the media headlined another warning from a leading figure about a possible popular backlash against the ‘New Capitalism’ of tax-privileged private equity.
But that’s just familiar rhetoric from trade union leaders, isn’t it, and nobody listens to them these days, right? Except that those echoing the union arguments were hardly labour movement firebrands. The warning about riots was delivered to the Treasury committee of MPs by Sir Ronald Cohen, not only a major Labour Party donor but himself a private equity ‘fat cat’ reportedly worth more than £250million. And the headlines about a backlash against the ‘New Capitalism’ were made by none other than the director general of the Bank of England.
So what’s behind the strange debate about the state of capitalism today?
In Europe and America, the rise of private equity (PE) has been the economic phenomenon of the past few years, as groups of financiers borrow huge sums to take over established companies. In recent months, a growing campaign against the excesses of private equity has been led by Europe’s big unions, accusing PE chiefs of acting as asset-strippers and ‘locusts’, cutting jobs and wages to maximise profits at the companies they take over. On the other side, the small band of PE defenders claims it is a great British success story.
The fact that, in a recent newspaper exchange, the case against PE was put by Labour crank and conspiracy theorist Michael Meacher, while the case in favour was entrusted to Tory crank John ‘Vulcan’ Redwood, suggests that we should be wary of taking either side in this false debate.
In one sense the campaign against PE is only the latest incarnation of the longstanding crusade to find the ‘unacceptable face of capitalism’ (a phrase first coined by a Tory prime minister). In the post-Enron age, when big business is falling over itself to show how socially responsible it is, the PE financiers have stood out by looking more like old-fashioned profit-hungry capitalists. The secretive way they operate, often using foreign capital, has made them an easy target for those in the rump of the old labour movement desperately looking to score some cheap and easy points.
Seen in their proper context, however, it becomes clear that these fat cats are only a symptom of the current state of economic affairs rather than the problem. PE is not some sort of a septic boil on an otherwise healthy economic body, but rather a natural development of the way that the market economy works today, especially somewhere like the UK. Nobody needs to defend multi-millionaires. But the current attacks on PE have more to do with moralistic grandstanding by its opponents (increasingly met by self-conscious defensiveness from its supporters), than with any considered critique of modern-day capitalism. Make them pay more tax if you want, but let’s not kid ourselves that it will make any difference to the rest of us.
Although it has been blown up into a big political issue, with the Brown government promising to review its tax breaks, private equity is really little more than another technical financial instrument. It has boomed as the latest way for financiers, consultants, accountants and lawyers in the City of London to make their millions. In 2006, global PE takeovers and deals were worth £380billion – five times more than in 2003. The USA and the UK are at the heart of this boom. In May, PE made its biggest-ever score in Europe with the buy-out of pharmacy chain Boots for more than £11billion.
PE has been fuelled by the flow of cheap credit, particularly from the East. As Asia, and especially China, has become the new productive motor of the world economy, these countries have been building up their foreign exchange reserves, mostly invested in Western financial assets. This has provided the basis for the latest expansion of easy credit: billions of dollars slosh about the world looking for a home while central banks keep interest rates low by historical standards. In turn, this easy credit has financed and supported the take-off in private equity deals.
These deals, however, do not represent productive investment in the creation of new wealth. Like much Western investment in recent times, they are speculative attempts to make short-term profit through taking over existing assets. PE groups take public companies private, load them with debt, and then use various financial instruments to maximise profits.
That might sound like outrageous financial skulduggery, but it is typical of how successful Western and especially UK capitalism operates today. The days when Britain could claim to be the industrial workshop of the world or the largest empire on Earth are long gone. What British capitalism relies upon today is the City of London (now spreading into Canary Wharf), where the financial institutions make billions by servicing the movements of somebody else’s capital produced elsewhere in the world. British economic ingenuity is not about inventing steam engines or engineering feats, but about coming up with new financial instruments and mechanisms through which the City’s financial services can maximise its dividends and fees.
Lately, critics of PE have tended to focus on the generous tax privileges it has been granted by the New Labour government. Much was made of the revelation at last month’s Commons committee hearings that some of the ‘fat cats’ pay lower tax rates then their cleaners. The key trick here is that PE millionaires are able to treat their income as capital gains on their investments and thus, through something called taper tax relief, end up paying only 10 per cent tax rather than the 40 per cent top UK rate. Those registered as non-domiciles for tax purposes – who include most of the biggest PE players in the UK – pay even less.
A glance at this obvious discrimination in favour of private equity would no doubt have many agreeing with Meacher that ‘never have the super-rich been showered with such lucrative partiality by any government’. But the real question is, why does the government do it? It surely cannot be because Brown – the chancellor responsible for the tax concessions – feels natural sympathy for City ‘slickers’. The real reason New Labour is ‘soft’ on PE has little to do with a love of the super-rich, but simply because it recognises the reality that the British economy now depends upon the activities of the City.
With the further withering away of British manufacturing and the massive expansion of international financial flows, the UK economy is more reliant than ever on financial services to support the state and society. Servicing and moving around other people’s money, rather than creating new wealth, is the British way of economic life in the twenty-first century. The UK is behind only the USA in the scale of its PE deals. In what other economic area can Britain claim to be second in the world today? Whether he likes it or not, Brown understands which side his bread is being buttered.
Some PE takeovers, such as the buy-out of the Automobile Association, have certainly led to the loss of a lot of jobs, at least in the short term. But the allegation that they are always worse than ‘ordinary’ corporate buy-outs does not really seem to stand up. What private equity does to the firms it buys is not that different from the sort of restructuring seen in many industries since the Thatcher government launched a wave of privatisations in the 1980s. Indeed, much of the present PE restructuring seems to be financial re-engineering, using easy liquidity to add debt (‘leverage’) to companies (which risk-averse banks are often more reluctant for publicly quoted companies to do) and does not impact much on the public activity of the company itself.
In short, PE is the latest soft target for those who, in the age of TINA (There Is No Alternative), have had to accept that they cannot challenge capitalism directly. Union and other objections tend to be about the shady, foreign character of PE, playing on general resentment of the ‘super-rich’ rather than focusing on what PE actually does. The growing influence of the unions in this debate reflects the defensiveness of the capitalists rather than any real resurgence of a labour movement that is now largely an empty shell.
Of course, if multi-millionaires have to pay a bit more tax, we need not shed any tears. But what difference would it make to the rest of us? Will it be distributed like charity, at the rate of a few pence each? If the unions are concerned about inequality, let them focus on demanding better pay and conditions for their members instead of PR stunts. The demand for more ‘fairness’ always seems to mean levelling people downwards rather than upwards – a miserabilist spirit that will benefit nobody.
A culture of restraint and regulation rather than a wild free market is the biggest barrier to society’s economic advance today. As the examples I gave at the start illustrate, we are not dealing with rapacious cartoon capitalists, but with a cautious and defensive business class. Even the ‘fat cats’ get nervous and start worrying about riots and setting up CR (corporate responsibility) bodies when they come under pressure. We can expect more voluntary codes of conduct as PE tries to stave off state regulation. Who exactly will benefit from that is another matter.
These ‘fat cat’ super-rich characters are hardly the solution to the troubles in the world economy, but they are not the big problem either. And inasmuch as the crusade against PE offers no alternative other than to re-enforce the culture of economic restraint, it will end up as part of the bigger problem. What we need are fewer cheap stunts and gestures, and more serious discussion of how society’s wealth is produced, used and distributed today. The public good is ill-served by singling out private equity or anything else as the unacceptable face of capitalism.
Mick Hume is editor-at-large of spiked.
James Woudhuysen asked if the Red Dragon is a green threat. Phil Mullan reviewed Daniel Ben-Ami’s Cowardly Capitalism: The Myth of the Global Financial Casino. Daniel Ben-Ami said that JK Galbraith is the forefather of contemporary anti-capitalism, that growth is good and that there is no ‘paradox of prosperity’. Or read more at spiked issue Economy.
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