The Miliband Muddle

Ed Miliband gave an interesting speech at the 2011 Labour Party Conference: http://bit.ly/qCzUlb. Well, actually, he gave a rather dull speech largely filled with the usual platitudes that any such speech needs to have, delivered with his characteristic lack of panache and charisma: a sign of how badly it went down even with Labour supporters can be seen in this article http://t.co/0Wc4YKMO. But, it is too easy to focus on Mr Miliband’s presentational skills even if it is a good bit of knockabout fun to tease him for his blocked-nose voice – I’m not a particularly polished orator myself which is one of the reasons why I never stuck it out at the Bar.

The aspect of his speech I want to look at is the highly contentious way in which he sought to differentiate between productive and predatory business, between good and bad personal and corporate values and how this should form the basis of policy. This is interesting and bold (and not just in the way meant by Sir Humphrey in Yes Minister), particularly with its (probably unintended) echo of John Major’s ill-fated “Back to Basics” campaign ( http://bit.ly/rv1fno ). Businesses which made or did good things, engaged in good employment and training practices contrasted with ones which “simply” fed off such businesses in a parasitic or predatory way, stripping them of their assets, undoing all their good work in the name of profit and short term gains. First up against the wall when the Miliband revolution comes would be the private equity firms.

Introducing such an obvious morality test into decisions about taxation and regulation is fraught with difficulty. That does not mean that it is the wrong thing to do. To some extent the fact that senior Labour politicians, including members of Miliband’s shadow ministerial team, held their hands up in despair at the idea is worrying in itself. Why shouldn’t the leader of the Opposition call it when he sees something rotten about the way the world works at the moment? The idea that the economy has favoured predatory businesses over productive ones would have chimed with many ordinary people who have seen bankers continuing to get large bonuses while blameless people in all walks of life lost their jobs or had pay freezes. It would be a poor and thin sort of opposition which didn’t do this.

The historical precedents

However, the auspices for putting Miliband’s rhetoric into practice are not particularly favourable even if you accept that he had a point. The last large scale attempt to base taxation policy on an assessment of whether businesses were productive or predatory was the Selective Employment Tax introduced by Harold Wilson’s government in 1966 http://ti.me/naehKA . The Selective Employment Tax required employers in service industries to pay a levy on each employee which was then partly recycled in the form of a per employee subsidy to employers in manufacturing. Businesses which were in a grey area where it was not immediately obvious whether they were engaged in manufacturing or the provision of services would have to pay the levy and then apply to have it refunded following a formal declaration as to whether they were services or manufacturing businesses according to the Ministry of Social Security. Some businesses were deemed to be neither and so got a refund on their contributions but no subsidy. Others would win, be classified as manufacturers and get a refund and a subsidy.

The Selective Employment Tax was not so dissimilar to what it looks like Mr Miliband was suggesting, albeit that the precise form of taxation might not be on employees (for fear of it being labelled, correctly, as a “jobs tax”) but perhaps on corporation tax or capital gains tax. It did not last long and was abolished in 1970 when Wilson lost the General Election. Its attempt to “nudge” businesses into focusing on manufacturing and exporting rather than “unproductive” services was too crude and arbitrary with too many unintended and undesirable consequences; http://bit.ly/nDKR6I . Given that the basis for the Selective Employment Tax was economic theory and an intention to raise additional revenue while pushing the economy to more economically beneficial activities rather than some higher moral purpose, it is clear that the task Miliband has created for himself if he were to follow through on his promise is a huge one.

I am not sure that this is quite what he meant or has the stomach to push through. So, what other options are there for implementing changes in favour of the productive over the predatory?

Competition Law

There already exists an established set of laws and enforcement mechanisms across industry which was designed to do at least some of the things that Miliband seeks. The rationale for Competition Law is to deliver a better functioning economy in the interests of consumers. One of the big legislative achievements of the Labour governments from 1997 is the body of Competition Laws built up – the Competition Act 1998 prohibiting cartels and other anticompetitive agreements, and abuses of dominant market positions, the Enterprise Act 2002 bringing in a new system of investigations of markets which operated to the detriment of consumers, criminalising individuals’ involvement in cartels and updating the control of mergers and the updating of the sectoral regulation of the privatised utilities in the Utilities Act 2000 and the Communications Act 2003 amongst others.

The approach of these statutes has mainly been to turn the analysis of problems caused by businesses into an economic one with reducing levels of political interference. However, there is scope for changes in policy which would reintroduce greater political control were the government of the day to wish it (eg the creation of a new head of public interest in merger control cases by the previous government to enable the merger between Lloyds and HBOS). In principle there is no reason why many of the “abusive” practices Miliband complained about in his speech could not be remedied by the more aggressive use of existing competition laws.

The issue of pricing by energy companies is already subject to detailed scrutiny and has been investigated a number of times. However, on the basis of all the evidence the regulator has not found there to be a sufficiently strong case made out that there is a cartel in operation. It might be that Ofgem has not looked hard enough, but I’m skeptical about this. The regulators, in my experience, fall over themselves to find big headline grabbing cases to help make their case for existence. Ofgem’s last investigation into the possible existence of a cartel in energy pricing came around the same time that it was being heavily criticised by the Audit Office and parliamentary select committees for being ineffective. Delivering a landmark case to bring down consumer gas and electricity prices would have been like winning the lottery for Ofgem. In reality, there may be no cartel in terms of the energy companies agreeing with one another on the timing and extent of price rises and falls but that the rational response to each others’ changes is usually to follow suit giving the impression of concerted action. However, raising Ofgem’s investigation budget so that it could afford to defend even a borderline case would be all that is needed to get to the bottom of the issue.

Asset stripping by private equity firms could equally well be investigated, for example in a market study by the OFT and market investigation reference to the Competition Commission under the Enterprise Act. These investigations have the potential to look at markets in very great detail and to lead to significant structural and behavioural remedies being imposed. In either case, without ripping up the textbook of liberal economics of the past 35 years, introducing arbitrary powers to determine whether a business was “desirable” as under the Selective Employment Tax, or otherwise creating new legislation and administrative structures of an undefined sort, it would be possible to achieve the ends outlined by Miliband in his speech.

There are, however, two problems with this approach for Miliband.

Problem 1 – He might not like the answer

There’s no guarantee that the application of the existing laws would inevitably lead to the “right” answer. Economics is something of a dark art at times and one which can lead to counter-intuitive results (eg how the John Lewis “Never Knowingly Undersold” promise actually leads to local pricing across the market staying higher than it might otherwise have been). Miliband’s approach in his speech is something of a “it stands to reason” argument (or, as lawyers would, when legal Latin was still encouraged, res ipsa loquitur). He has identified something which most would agree is obviously wrong and bad, something must be done about it and so you can only use a method that would also see what’s wrong and remedy it. Being told that actually it isn’t the problem you thought it was or that the solution is small and unexpected isn’t the stuff of dreams. This could be mitigated to an extent by providing the competition authorities with substantially increased resources so that they never have to drop cases on the basis of budgetary limitations and the risk of losing appeals and challenges. Doing this would mean that the truth would have to come out and it would not be possible for wealthy businesses simply to be able to outspend the investigators (to the extent that this is actually a real issue in big cases).

Problem 2 – he doesn’t trust the approach to answering the question in the first place

This is the bigger philosophical issue raised by Miliband’s speech. He seems to have a distrust in any of the mechanisms of the market to deliver acceptable outcomes. This can be seen at least as far back as his interventions at Prime Minister’s Questions on the Health and Social Care Bill where one of his criticisms of the Bill was that it introduced EU Competition Law into health care: http://wp.me/p1kusD-l . It appears to be building on a growing trend in the liberal left of, possibly unconsciously, looking backwards to how the country was prior to Mrs Thatcher’s government: http://wp.me/p1kusD-23 and a refocusing on non-economic bases for determining the public interest http://wp.me/p1kusD-2M .

This can be seen in the way that Miliband consistently refers to values in his speech. The implication is that the market, as a concept or a mechanism for controlling what happens in an economy or society is redundant. This is very bold.

Unfortunately, the only realistic conclusion, if the speech was intended to be more than mere mood music, is that Miliband’s vision for the future is to take us back to the time of Wilson’s governments of the 1960s. An important part of this would be to change back Labour’s approach to the EU – whatever Miliband says about regulating and taxing business on the basis of “values” this will be defeated by the strong opposite trend of doing so on the basis of liberal market economics that is at the heart of EU law. That this seems so utterly implausible to most at the moment perhaps tells us something about how seriously Miliband is looking to actually making the changes he is talking about.

The world has changed out of all recognition since the the 1960s. The white heat of the technological revolution that Wilson talked about, and which in part drove policies like the Selective Employment Tax, is no longer (if it ever was) driven by improvements to the manufacturing industries. There is a brain drain from sciences and engineering to services and the City, but it would not be reversed by making the City less productive when it is so much easier to move abroad to work. Today’s technological advances are much more driven by the ready availability of private equity and venture capital in Silicon Valley in the 1990s. Facebook, Google, Twitter, Amazon, Apple, Microsoft and so on are not manufacturers. It is hard to work out whether they and their financial backers would be described as productive or predatory. To an extent they are both. Betting your house on any clear concept of “productive” industry in this context is pitching a course where the UK looks to compete with China on manufacturing rather than the US on innovation. Just at a time when China is using its manufacturing base to move up the value in chain in creative and innovative business.

Is Ed Ted?

Miliband appears to be asking us again, as Ted Heath did infamously in 1974, “Who’s in charge?”. As Heath found to his cost, the answer can come back overwhelmingly as “not you, mate”. Changing the answer that Heath got took many years and a huge change in attitudes across the political mainstream. I believe that Miliband knows this – hence his repeated anguished claim during his post-speech interviews, that his view was the centre ground. Pehaps he was right, but can he transform himself in the next 4 years to be a realistic champion for the start of such a new consensus? Mrs Thatcher achieved a similar feat in a similar period so it is possible. But whether it is desirable is a different question entirely.