Welcome to Fantasy Island

Following my chat with David Cameron I feel emboldened to go further with my panacea for Life the Universe and Everything.

I hate to concede anything to the Left because I think it’s a failed philosophy. It has failed in its most extreme forms in the USSR, China, Cuba, and everywhere else communism has been attempted. But it has also failed in more moderate incarnations, notably in India where the release of free enterprise has turned a sclerotic failing state into another Asian tiger.

I will go further. All social enterprises reduce growth, impact living standards and waste money. That includes cherished institutions such as the NHS, public education and welfare. But sane people will accept a degree of social spending because it is the price we pay to live in a civilised society. The only question is: where do you draw the line? I believe the fundamental difference between Right and Left is, the Left believe government is a force for good, and we need more of it. The Right believe government is a necessary evil and we need as little as possible. Of course ‘more’ means higher government spending and higher taxation and ‘less’ means lower spending and less taxation.

I am pretty convinced people spend their own money a lot more effectively than the government will spend it for them.   

But, oh dear, I have to admit the Left are right to call the Banking Crisis a failure of Capitalism. However there is a key difference, Capitalism will recover. It always does. It is a fluid as water. It will automatically take the shape of any environment it finds itself in.

But, even as a rabid right winger, I find myself very uneasy about modern capitalism. I am a passionate believer in Free Enterprise and Free Enterprise and Capitalism are often used as synonyms. But I am starting to believe that Capitalism as practised now, is very damaging to Free Enterprise. Big Capitalism is the enemy. It always seems to result in monopolies, duopolies or triopolies (yes, I know there is no such word, but you know what I mean).  That destroys competition and without competition Enterprise is not Free. 

Governments are not unaware of this, but they seem to accept industry explanations that these massive corporations are in fierce competition - with each other. Now, there is actually a lot of truth in that. But the chance of an enterprising new business succeeding in these industries is close to zero.  But any government of the Right or Left must be pragmatic, and many of these massive companies are delivering what their customers want – which is how they got massive.

Once you step onto the Global stage, massive is too small a word for it. As we all now know, The Banks became so huge they could (and did) threaten the survival of the state itself.

Governments tried to use regulation as a substitute for the real market constraints of competition. They failed miserably. Partly because Banking is byzantinely complicated and they did not understand it and partly because the cleverest and most skilful people were in the banks making fortunes and not in government trying to wade through tiers of leaden bureaucracy to make a career. But mainly because governments are incompetent financial managers and they need the banking system to fund their profligate spending.

I heard an interview with a Greek Minister on the radio today. He was an intelligent and articulate man, especially considering he was speaking a foreign language (i.e.English).  He was explaining how wrong it was for the EU to be sending in financial mangers to oversee Greek spending ministries. He also explained how the Greek economy was in thrall to the hedge fund managers. He was understandably distressed that the Greek government and therefore the Greek people were not masters of their destiny, but at the bidding of foreign powers. The only thing he forgot to mention is the Greeks are entirely responsible for the situation. They were the ones who borrowed like a teenager with her first credit card. They were the ones who faked their accounts to gain entry to the Euro, which gave them the ability to borrow way beyond their ability to repay the debt – ever. They were very happy with the hedge funds and big banks then. But when the time came to pay the Piper . . .

Globalisation has enabled us in the First World to improve our standard of living without improving our productivity. We have bought cheap manufactured goods from poorer countries at very low prices. As a result our standard of living has improved but because productivity has stagnated, we have borrowed to pay for it.

So, how do we get back to Free Enterprise in a world of mega corporations and the Super Rich?

Well, I have a solution. We limit the size of a company by law. We make it illegal to own or operate a business with a turnover greater than (say) one billion dollars or making an operating profit of more than two hundred million dollars. Needless to say, this would need to be an international agreement otherwise companies would simply relocate to parts of the world were the law did not apply. But the whole world does not have to sign up. Just all those countries that represent serious wealth. It would also be illegal for subsidiaries of any company over the threshold to trade in signatory countries.

A lot of fairly obvious loopholes would have to be closed; no individual could own a group of companies that exceeded the limits. No person could have shareholdings in a group of companies that exceeded the limit (tricky to enforce). Proxy ownership and shareholding would be illegal. Breaches in the various laws and regulations would be punished very harshly. Other schemes and wheezes to avoid the law would no doubt be legion, and would need to severely suppressed and punished.

Companies at the limit, would no doubt stagnate with no growth possibilities, that’s OK it makes room for enterprising new comers.  Huge global entities would have to be broken up. All to the good. Some maverick countries would certainly use this as an opportunity to attract big business, but with no access to lucrative advanced markets those big businesses would probably soon become smaller anyway. And if small less advanced countries want the benefits of mega corporations trading in (and virtually owning) their territories – they are welcome to them. We have been there. It’s not nice.

I did title this piece Fantasy Island. None of this will ever happen. Trying to get international agreement on preventing some clearly potty people in Iran getting nuclear weapons has failed. And that is the most obvious, common sense, aim I can imagine. Similarly, we have failed to get serious agreement on global warming, Syria murdering its citizens, population control (a particular favourite of mine) and a dozen other good causes that, with goodwill could be fixed fairly easily.

Chances of a radical new proposal limiting the size of businesses?

Somewhat less than zero.       


              

My Chat with Dave

As you will probably know, the British economy is not in great shape. The only thing that prevent us being in exactly the same mess as the rest of Europe, is our government has a very tough plan to reduce debt.

Unfortunately although that plan has implemented big cuts in public spending and big tax rises it is not working very well. These austerity measures are well known to affect domestic economic growth. But the hope is, that will be offset by a large increase in exports. But in this particular situation, our main export markets (the EU) are in even worse shape than us. So while the markets are happy with the UK's efforts for now, lack of growth is a very serious problem. It causes many problems, not least a fall in government tax revenues at a time when they need more money to pay down debt.  The social consequences are pretty dire too. Unemployment is rising and with it both poverty and yet more spending on welfare benefits.

So how do we escape from this impasse? Well I am convinced our salvation lies with small companies (often referred to as SMEs - small and medium enterprises). It's well established that most new employment comes from SMEs and their reaction time is a tiny fraction of the time it takes a big corporation to react to market and regulatory changes. Most of their business is done domestically, so the troubles of our traditional trading partners have little impact here. 

But, and it's a rather large but - government regulation and tax policies actively discourage anybody starting a small business or anybody already running one from expanding their operation. Restrictive employment laws governing who you can hire, how you can fire, and everything else from taxing you for every person you employ to paying them when they are not at work, seem specially designed to choke off your business before you have even started.
     
There are lots of examples of developing economies where removing regulation and punitive taxes has created explosive growth driven by SMEs. India is a prime example. I was so exercised by this I decided to write to my local MP, Who happens to be a Mr David Cameron. This is my letter, his response and my follow up. 

Oxfordshire

15 November 2011

Mr David Cameron

10 Downing Street
London
SW1A 2AA

Dear Mr Cameron

As a constituent of yours I realize you are an incredibly busy man, and slightly mad people pestering you with their crazy ideas must be an occupational hazard.  But, I have some thoughts on the economy which I’m afraid, I feel compelled to share with you.

As you will know the traditional method of alleviating a recession is to increase government spending or cut taxes, and neither option is open to you. May I suggest a third route.  It is well established that SMEs generate most new employment and are a key driver in economic growth.

My suggestion is to completely deregulate SMEs.

In practice, some regulation will have to stay. But it should be pared down to an absolute minimum.  In particular they should be excluded from all Employment legislation including minimum wage regulations. This would cost the exchequer nothing.

I would also strongly advocate reducing taxation, in particular employers National Insurance contributions. But in general, any tax possible.  I would even like a lower rate of VAT on SMEs, although that might prove to be irredeemably complicated.   

All these tax reductions would cost the exchequer money, and that would need more careful analysis than I am capable of. But the stimulus effect and the fact that very low levels of taxation are not worth avoiding, might well increase tax revenues (e.g. the introduction of the 40% top rate of income tax by Margaret Thatcher).

The removal of regulations and reduction of taxes should be progressive. So that as a company grows the burden of regulation and taxes increases slowly. And I would define growth as the number of employees.  (The definition of self employed and agency workers would need to be significantly tightened).

In addition, the changes do not have to be permanent. They could be phased out as the economy returns to growth.

A very appealing side effect of this policy would be its presentational drama. It would be a very clear and unmistakable signal that ‘something is being done’.

The most compelling evidence for the success of these policies is Hong Kong. By a policy of Positive non-interventionism, Cowperthwaite turned it from an unimportant offshore island into one of the world’s most dynamic economies. Obviously in a modern developed social market economy, that cannot be applied universally. But it could be applied to small enterprises at very modest cost to the exchequer.

If you have taken time to read this, many thanks.

Sincerely

His reply

 So, it turned out the government was doing more than I thought. But still I thought, not enough, not part of a coherent strategy, and not very well presented to the electorate at large. So I wrote again:

 

Oxfordshire

17 December 2011

Your ref DC/na/Y

 Mr David Cameron

10 Downing Street
London
SW1A 2AA

Dear David

Thank you very much for your response dated 12^th Dec to my letter about stimulating small businesses.

I’m afraid I feel moved to reply. I know it’s traditional for constituents to use green ink for these slightly unhinged moments, but I only have a mono laser printer. Sorry about that.

I think I may have placed too much emphasis on tactics in my original letter. What I was really trying to talk about was a strategic approach to growth.

I think everyone understands the Conservative fiscal policy. The objective is clear: reduce the deficit by the end of this parliament. The strategy is clear: reduce UK indebtedness by public spending cuts and tax increases.  The tactics are painful and contentious, but clearly support the strategy.

I believe most people understand all this and know it has to be done, despite the pain.  And I think most people accept the blame lies with the profligacy of the last government.

My first point was meant to be, if it is true that we like Europe are facing our ‘Biggest threat since the Second World War’ we need a dramatic solution.  My second point was meant to be, we need clear and important objectives for economic growth, and releasing the potential of SMEs should be the strategy to achieve it.

You may have clear objectives, strategy and tactics for growth. But I’m afraid your letter looks a like a list of tactics. The measures might look breathtaking to a Whitehall mandarin, but to me they look like a long list of rather small things

I have no doubt all the points you mention are good news for small businesses. But these measures do not seem to be coming across as a clear and coherent government strategy for growth. Before I retired my business was marketing and it is a marketing truism that ‘perception is everything’

I think I am more interested in politics than the average citizen and I was barely aware of the tactics let alone any strategy. And I have friends who own or are involved with SMEs and government support for their companies is not something they eulogize over.

I think very few people understand the Conservative strategy for growth. That maybe because the communication is poor, but I suspect it doesn’t really exist in a single coherent form. A bit of extra spending here, tinkering with a regulation there, it’s hardly a ‘bonfire of red tape’. You may well dispute that, but as I said ‘perception is everything’

Any Prime Minister must get very bored indeed with references to Margaret Thatcher. Sorry, but I’m going to do it again.

When Lady Thatcher introduced the Right to buy Campaign, it was a clear statement of Conservative values and how they affect the ordinary citizen. It stood for a property owning democracy versus the paternalistic state. I’m sure that nobody in the whole country was unaware of the campaign and that most people understood the underlying message. It changed the demographic profile of the UK.

The ‘Tell Sid’ campaign when British Gas was privatized was similar. Although the lasting effect was less obvious, the message was clear and dramatic and it did change attitudes to owning shares.

I believe you need to be much, much bolder. You need to package everything up as a single, dramatic, strategic policy – a short list of very big things. Then spend some money communicating the programme to the general public – not just to the direct beneficiaries of the programmes. Consider the time and treasure we spend on attracting inward investment – we need to spend far more time and treasure on creating and encouraging our own domestic entrepreneurs.

Sorry about the harangue. I am on your side. I want Conservative free market values to win and our nation to prosper. Honest.

And I promise to leave the subject alone now. But I can’t promise not to find some other bone to worry! 

Yours sincerely

P.S. I think Tony Blair understood perception is everything, but he failed to understand that discontinuity between the promise and the product is fatal.

This time I got a standard "Your letter has been received and the contents noted" post card. Ah well, he is a busy man!