The Tory Answer to Everything: Make the Rich Richer
While Kwasi Kwarteng weighs up ditching the bankers' bonus cap, normal workers are told to show 'restraint' and quietly accept a decade of flatlining wages. It's all designed to keep wealth moving in its current direction: upward.
New Chancellor Kwasi Kwarteng leaves Downing Street on 6 September 2022 in London, England. (Rob Pinney / Getty Images)
As thousands from across the country flocked to The Queue in London to pay their respects to the Queen, thousands more up and down the country continue to stand in line for hours to access food banks. Wages adjusted for inflation have fallen by an annual 3% in the last quarter according to data released by the ONS last month, while private rents in the UK are up by as much as 20% in some cities, and average energy bills are set to rise to £2,500 per annum from October. Subsequently, as analysis from the Financial Times has shown, living standards for the median UK household are now well below the global average for developed countries.
Amid the spiralling cost of living crisis, newly appointed Chancellor of the Exchequer Kwasi Kwarteng has thought it an appropriate time to announce the roll back of the cap on banker bonuses. Kwarteng believes that scrapping the regulation, introduced after the 2008 financial crash, will improve the city of London’s ‘global competitiveness’—a sentiment echoed by one Tory MP claiming on a recent LBC interview that financial services are the UK’s ‘most successful export’. At present, bonuses are ‘limited’ to just double a banker’s annual salary.
Scrapping this limit, Kwarteng claims, will attract top global talent, which will supposedly bring in more tax revenue. Current levels of banker pay in London is apparently not sufficient to entice bank employees based in Hong Kong or New York. The policy is based on a flawed belief that the financial sector, if left uninhibited by government regulation, will be able to efficiently allocate resources throughout the economy—thus stimulating economic growth. But if that past three decades have shown us anything it is that a deregulated financial sector is the problem not the solution. Kwarteng’s self-proclaimed ‘Big Bang 2.0’ approach will only serve to worsen the UK’s domestic economic injustices.
The Mantra of Shareholder Value
On 13 September 1970, on the precipice of a looming global economic meltdown, economist and arch-neoliberal Milton Friedman published an essay in the New York Times claiming that if US businesses wanted to stay globally competitive, they must focus only on profits and share-price—forgoing any notion of greater social responsibility. This mantra of maximising shareholder value went on to form the cornerstone of the economic reforms brought in under Reagan in the US and Thatcher in the UK around a decade later.
Key to ensuring that share-price and profitability were prioritised above all else was overcoming the ‘principal agent problem’. It was believed that part of the reason for the lagging productivity of capitalism during the 1970s was that managers’ remuneration wasn’t tied to their performance. By tying CEO pay to company performance (as measured by share price), some economists believed, they would behave less like bureaucrats and more in the interest of shareholders. There are three ways a CEO can increase profitability: 1) increase revenues by increasing market share, 2) increase prices, or 3) cut variable costs.
By the 1980s, consumer markets in the UK had become saturated—for example, by the 1980s over 80% of households owned a colour TV. When markets are saturated, it is hard for companies to increase revenues by capturing a higher market share. As such, the profitability of firms can only be increased by reducing costs, which in practical terms means reducing labour costs—a strategy CEOs have ruthlessly pursued. According to a report by the London School of Economics, since 1981, there has been a 25% decoupling between wages and productivity as workers have been squeezed to increase profit margins. During the same period the value of the FTSE 100 index has increased by 560% and the ratio of CEO to average employee pay has risen from 20:1 to 63:1 (at a conservative estimate). Between 2020 and 2021 alone CEO pay has increased by 40%, while real wages have fallen by the most in nearly 100 years.
This is Thatcher’s legacy to Britain. Yet each consecutive Tory prime minister and chancellor continue to pay tribute to her disastrous economic model.
A Tribute to Thatcher
The Big Bang refers to a set of deregulatory policies introduced to the banking sector by Thatcher in the 1980s during the early years of her premiership. There were three key aspects to the policies: abolishing the minimum on fixed commission trades, ending the distinction and legal separation between stock traders and investment advisors, and allowing foreign firms to own UK brokers. Ostensibly, the policies, introduced alongside a wave of privatisation of public assets like British Gas, were designed to turn Britain into a nation of shareholders. We were told that the privatisation and financialisation of the UK economy would unlock competitive innovation by allowing more mergers and opening London’s market to international banks.
Since the measures were introduced the number of shareholders in the UK has markedly increased, as have mergers and acquisitions, which account for an increasingly large portion of UK GDP. The changes have had the desired effect of making huge transnational corporations globally competitive, much to the detriment of workers—who have since experienced a protracted period of stagnant wages and deteriorating infrastructure.
After a £32 million advertising campaign in the ’80s aimed at encouraging the public to invest in the privatised companies, millions of Brits, alongside a tsunami of foreign capital, signed up to buy shares. This influx was supposed lead to increased investment, therefore providing better, cheaper goods and more efficient services for all. However, as economist Grace Blakeley outlines in her book Stolen, by the time Thatcher left office economic output from the previously nationalised industries had fallen from 10% to 3%, and capital investment in those industries had fallen from 16% of the national total to just 5%.
By the end of Thatcher’s reign, the number of people who owned shares had increased fivefold from three million to fifteen million, and today around 33% of the population own shares. But share ownership is heavily concentrated at the top of society with ONS data showing that financial wealth owned by the top 1% is more than ten times greater than financial wealth owned by a median household. Additionally, in 2020, over 56% of UK quoted shares were owned by overseas investors, meaning that profits being extracted from UK workers and consumers are leaving the country to pay wealthy shareholders overseas, often ending up in offshore tax havens.
Dire Consequences
The consequences of the bank coordinated shareholder model of public utilities are plain to see from the current state of privatised water companies. Since 1991 water companies have paid out £57 billion in dividends, while taking on billions in debt—but have failed to invest in maintaining infrastructure. The result is a 2,553% increase in raw sewage being pumped into the sea over the past five years due to leaky pipes that are incapable of handling heavy rainfall.
Equally, the proliferation of mergers and acquisitions since the Big Bang has had far from the desired effect. The theory was that more M&As would lead to increased competition and innovation by allowing stronger firms to buy up ‘under-performing’ assets and turn them into profitable enterprises. The reality has been the creation of huge monopolies that engage in practices like asset stripping or share buy-backs that just provide short terms gains for shareholders to the detriment of long term productivity. It has also given these huge companies the ability to engage in price fixing—with corporate profiteering accountable for up to 50% of current inflation levels.
Banks have been pivotal in facilitating the takeover of the British economy by giant corporate monopolies. According to a report by UK Finance, lending for asset based advances, i.e., credit creation for the acquisition of already existing assets, increased from £13 billion in Q2 of 2020 to £19 billion in in Q1 of 2022. Gross lending to small and medium enterprises, meanwhile, has declined from £6.1 billion in Q1 of 2019 to £4.9 billion in Q1 2022.
It is clear that deregulating banks and allowing them to financialise the UK economy has had a wholly detrimental impact for the vast majority of people in this country. Rather than efficiently allocating capital towards production or infrastructure to increase the wealth of society as a whole, banks have spent the past four decades fuelling speculative asset bubbles. Ultimately, banks make their profits from interest on loans—and since the Big Bang, these loans have increasingly been directed towards mergers and acquisitions. For the interest on these loans to be repaid to banks, assets must be stripped, wages must be squeezed, and consumers must be overcharged for the worsening services they receive.
Kwarteng’s attempt to woo bankers with the promise of bigger bonuses is a clear indication of his intent to continue the Thatcherite project of transferring wealth from the public, workers, and consumers into the pockets of the creditors and shareholders of large corporations—continuing to prioritise shareholder value above public wellbeing.