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.

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Back to the Eighties? No, more like the Seventies

The normally arcane world of Competition Law and merger control has been brought to centre stage by the public and political reaction to the allegations of illegality in the journalistic methods of News International newspapers. This has happened in parallel with the regulatory process for competition clearance of NI’s proposed acquisition of the 61% of shares in BSkyB that it does not already own.

Many people have been drawing facile parallels between the current economic and political conditions and those of the nasty old 80s under Thatcher. However, in the context of the NI/BSkyB merger, the clamour for Ministers to step in and stop it is more like the 70s. What we are seeing is a falling out of favour of the idea of looking at economic transactions on the basis of an economic test and a desire to look at transactions on the basis of a more political idea of what is in the public interest. This turns the clock back to a very different approach to government and the economy which culminated in the 1970s.

Merger control in the UK has, over the past 25 years or so developed to be almost exclusively about economics and competition but it started out as being much broader than that. The merger control regime in the UK started with the Monopolies and Mergers Act 1965, a piece of legislation brought in by Harold Wilson’s government but based upon a White Paper presented by Edward Heath as President of the Board of Trade in 1964. The system that this introduced placed the responsibility for deciding whether mergers of a particular scale (based on turnover of the target – the “turnover test”) or impact on a market (based on whether it resulted in market share in excess of 25% – “the market share test”) should be allowed upon Ministers. There was also a special test for newspaper mergers.

This was then updated by the Fair Trading Act 1973 (when Heath was Prime Minister). The broad process followed was that if a merger qualified under any of the tests, the relevant Minister (usually a Minister or the Secretary of State in what is now BIS) would, on the basis of his opinion whether it might be contrary to the public interest decide to refer it to the Monopolies and Mergers Commission (“the MMC”). Newspapers had a separate test and a mandatory requirement to be referred if they fulfilled the terms of the test so that all cases where 2 or more newspapers with a combined circulation of over 500,000 had to be referred to the MMC. The MMC would then have a period of time to investigate and report on whether the merger would be contrary to the public interest and if there were any remedies which would enable it to go through without harming the public interest in that manner. The Minister would then make a decision on whether to allow the merger based on the MMC’s report but with the ultimate discretion as to whether to follow or disagree with the MMC. The conception of public interest was very broad and could include such matters as the impact on employment, the “fit and properness” of the acquirer, impact on national security and so on.

Overall this can be seen as part of the corporatist view of the State and Government, with Ministers having the power to be very interventionist in determining whether mergers ought to be allowed with a great deal of political discretion. Newspapers mergers were seen as needing even more regulation and automatic scrutiny other than in cases where the target was likely to go bust or was small (under 50,000 circulation). Around the same time legislation was also in place to look not only at monopolies and restrictive practices but also to control prices of products as well as to enable strategic businesses to be nationalised and to prevent foreign takeovers generally. The Secretary of State for Trade and Industry had a lot of levers to pull if he wanted to direct how industry operated and what decisions business owners could make about acquiring competitors.

Unsurprisingly this approach drastically lost favour in the 1980s with much of this legislation being repealed. Mergers remained subject to the Fair Trading Act regime but the decision-making process became more and more depoliticised over time as a matter of policy. It was semi-formalised as the “Ridley Doctrine” (under Nicholas Ridley as Secretary of State in the late 80s – this formalised the approach of Norman Tebbit earlier in the decade) which took the policy approach that the only public interest criterion that Ministers would refer mergers on other than the protection of national security was that of the impact on competition. This was a self-denying ordinance as Ministers still retained statutory powers to revert to the broader conception of the public interest test. This was consistently applied by both the Major and Blair governments and culminated in the Enterprise Act 2002’s merger control provisions. The Enterprise Act took the decision-making power away from Ministers entirely other than for reasons of national security or other (then undefined) public interest considerations, such considerations needing new secondary legislation to be brought in. Media merger provisions remained in place, but again, with defined criteria upon which mergers could be blocked. The aim was to depoliticise the process almost entirely, retaining just a residual power for emergency use (eg the SI introducing a public interest in the stability of the banking system which was used to enable the Lloyds/HBOS merger to be approved without a reference to the Competition Commission “the CC” – the successor to the MMC).

Although media mergers have always been considered to be deserving of more detailed scrutiny than “ordinary” corporate M&A this has also always been constrained by the particular, detailed processes put in place under the legislation from 1965 onwards. The debate and vote to be held later today in Parliament to urge News International to withdraw its bid for BSkyB go some way beyond this. Particularly as the the clear expectation is that the Secretary of State (Jeremy Hunt, who took Vince Cable’s place after the latter, ironically in a sting by The Daily Telegraph, disqualified himself from doing the role impartially) should block the merger and reject the CC’s approach if it comes to the “wrong” conclusion when inconveniently applying the law correctly.

It is right that MPs debate major issues such as those raised by the allegations into hacking and other illegal or unethical practices. It is also right that, as said by the Prime Minister in today’s PMQs,  the NI/BSkyB deal cannot be looked at in isolation from the investigation into those allegations. As representatives of the general public, MPs should surely be able to express the public’s concerns about whether NI should be allowed to acquire BSkyB and this pressure may work on NI to drop its bid – businesses will change their strategies if they are likely to cause them reputational harm, just as eg HSBC did in divesting its sub-prime business in the US prior to the banking crash, following public and investor disquiet at them being involved in that end of their market.

However, this should not be seen as a green light to move back towards having more general political control over decisions on corporate transactions. It would be a seriously retrograde step to see the extreme case of NI/BSkyB as a justification for returning to a corporatist view of government’s role in business. Allowing the Lloyds/HBOS merger on public interest grounds in the face of competition concerns did not achieve its intended aim of securing the banking system. Ministers and their advisers are not good at making commercial decisions and should not be encouraged to do so. The broad agreement on this built up over the last three decades should not be lost – it was one of the good lessons from the 70s. The public interest criteria available for looking at media mergers, the fitness of proprietors and media plurality are sufficient in themselves and do not need a further political override, however tempting that may be in the individual case.

Update

Pretty much on publishing this NI has decided to pull out of its bid for BSkyB as a result of the public pressure against it. It will be interesting to see if it is revived. Ironically, the outcome of Lord Justice Leveson’s inquiry could make a future bid by NI more likely to succeed. For example, if the illegal methods are found to be rife across the media it will be less easy to single NI out. Even if they are focused on NI, the introduction of any new newspaper content regulation and other remedies will allow NI to draw a line between previous conduct and its position at the time of a future bid. There is also a serious risk of the public suffering outrage fatigue – after a year or more of the papers writing about the thing they are most interested other than celebrity tittle-tattle, themselves, the story might have played itself out. Much like the rightful anger over MPs fiddling their expenses didn’t result in lynchmobs or headlines for those who have gone to prison for doing so.