Economists Against Austerity present: Mariana Mazzucato

The next meeting of Economists Against Austerity is pleased to have Prof. Mariana Mazzucato as the key speaker on what really happens in the process of innovation. Andrew Simms (Global Witness) will respond.

This promises to be a different take on the relationship between innovation and inequality: it’s not about skills but value extraction.

The talk will focus on the relationship between the State and the Market. I will argue that the State not only ‘fixes’ different problem/failures in the market (of which there are many) but also actively shapes and creates markets. It does so in the face of extreme risk and uncertainty. The different implications of this will be considered (theoretical, empirical, and ‘political’) of the blindness of economics (as a discipline) to understanding the State as market maker and lead risk-taker in capitalist economies - beyond the traditional ‘market failure’ framework.

The talk will build on her recent book The Entrepreneurial State: debunking private vs. public sector myths as well as recent work with Bill Lazonick on the relationship between innovation and inequality.

The Entrepreneurial State and the Risk-Reward Relationship

April 1,

Portcullis House, Thatcher Room 6.30-8.30pm

NB: Security at Parliament has been very slow recently. Please aim to arrive at 6pm for 6.30pm. Meetings are open to the public, no invitation required.

Find out more at Economists Against Austerity

Tony Benn - a tribute

Tony Benn: "Democracy transferred power from the wallet to the ballot"



For all British socialists - and many around the world - Tony Benn was an iconic and inspirational figure. He perhaps developed the political philosophy of 'democratic socialism' more than any other Labour politician. In the video clip above, from the 2008 LEAP conference, Tony explained how democracy challenged capitalism - and how capitalism fought back against democracy.

LEAP Chair John McDonnell MP tweeted: "Tony Benn was the articulate advocate for socialism who inspired my generation and gave people hope of a fair and equal society."

LEAP Co-ordinator Andrew Fisher posted: "Tony Benn - inspired generations of socialists (including me) with his warmth, integrity and ideas"

John Hilary of War on Want tweeted, "RIP Tony Benn: a true internationalist, comrade in the fight for global justice and long-term friend of @WarOnWant"

Tax justice campaigner Richard Murphy, said: "Tony Benn: simply a hero. RIP"

Katy Clark MP posted on Twitter: "Very sad news about Tony Benn. A great socialist thinker who made a massive impact. A huge loss. My thoughts are with all who loved him."

Paul Mason, former Newsnight economicscorrespondent, tweeted, "At Labour conf in 1980 & heard #Benn riveting call for 1) abolish the Lords 2) industrial democracy act 3) repeal EU powers - like detonator"

The Banking Reform Act is rearranging the deck chairs on the neoliberal Titanic

 
Prem Sikka

A new report from the Centre for Labour and Social Studies highlights the failure of the Banking Reform Act to deal with any of the problems at the core of the 2007/8 collapse. Here, its author explains what's really going on.

Some six years after the banking crash, the UK has wheeled out its answer – the Banking Reform Act. Some deckchairs have been rearranged, but little attention has been paid to the key drivers of the crisis.

The biggest financial crisis has coincided with the rise of neoliberalism, which emphasised faith in free markets and light-touch regulation. The notion of competition is a key concept and is applied to every sector of society, including corporations, regions, government departments, hospitals, and universities because this somehow secures efficient allocation of resources and opens the door to wealth and riches. Neoliberalism provides everyday understandings of what it means to be successful. It reconstructs individuals as competitive beings engaged in the endless pursuit of private wealth and consumption. In common with other sectors of society, individuals are expected to have strategies for meeting performance targets and be rewarded accordingly. Thus, performance related pay for executives has become endemic. A necessary condition for the operation of markets and pursuit of self-interest is that all individuals, including business enterprises, need to be constrained by social norms and regulatory structures. But this has not been high on the neoliberal agenda because the state is bad and inefficient and has to be rolled-back, and the self-correcting markets would restore some mythical equilibrium. Well, it has not turned out that way.

The fault lines of neoliberalism have long been evident. The mid-1970s secondary banking crash highlighted empires built on fraud. The state dutifully bailed out banks, property and insurance companies. In 1984, Johnson Matthey Bank collapsed under the weight of fraud and the Bank of England organised a rescue. In 1995, Barings Bank collapsed due to fraud. The twentieth century’s biggest banking frauds took place at the Bank of Credit and Commerce International (BCCI). In July 1991, the Bank of England closed BCCI. Some 1.4 million depositors lost some part of their savings. In an environment of weak regulation, banks continued to pick customers’ pockets by selling useless, pensions, mortgages and saving schemes.

Neoliberalism, remained the key philosophy for governments. The 2008 banking crash showed that banks made vast amount of money from running illegal cartels, money laundering, insider trading, tax dodges, manipulation of interest rates, selling abusive products, misleading investors and consumers. Markets celebrated higher corporate profits and did not ask any questions about the quality of profits, or the social consequences of banking practices. Bank executives collected vast sums of money from performance related contracts.

Markets did not come forward to rescue banks. It was the state, which has been restructured rather than rolled-back, which bailed out banks. Under the weight of neoliberal ideologies it is now less concerned about the redistribution of income and wealth, labour rights, or the provision of decent healthcare, education, pensions and social infrastructure. It has shunned any attempt to democratise corporations or enhance their public accountability. Its major purpose is now to guarantee corporate profits and socialise losses, a kind of reverse socialism has been institutionalised.

The UK state has committed some £976 billion of loans and guarantees support distressed banks and also handed over another £375 billion under its quantitative easing programme. During the boom years of 2002 to 2007, the financial sector paid £203 billion in UK corporation tax, national insurance, VAT, payroll taxes, stamp duty and insurance taxes. Between 1991 and 2007, it created around 35,000 additional jobs. But it received vast stacks of money in return. Confidence in the banking sector is maintained through the provision of a taxpayer funded depositor protection scheme which safeguards savings of individuals of up to £85,000. Since March 2009, the state has maintained interest rates at 0.5%, considerably below the rate of inflation. This has robbed pensioners and savers of income and also eroded the real value of savings. The policy has enabled banks to borrow at ultra-cheap rates, lend at high rates, make profits and replenish their balance sheets. The customer base for banks has swelled as the government has persuaded pensioners and social security claimants to receive their payments through bank accounts rather than through the Post Office. The Private Finance Initiative has been a bonanza for banks and other corporations. In 2012, there were over 700 contracts with a capital value of £54.7 billion. The government is committed to repaying£301 billion over the next 25-30 years, a profit of nearly £247 billion.

The Banking Reform Act does not check fat-cattery or speculative practices. The sunlight of democracy and public accountability is an effective antidote to shady practices, but is missing from the Act as it does not connect with neoliberal values. The Act should have separated speculative banking from the rest. To prevent speculators from contaminating the economy, the privilege of limited liability should have been withdrawn from all gambling. Instead of banking elites regulating the banks for the benefit of the industry a Board of Stakeholders, representing a plurality of interests, should have been created to guide the regulator. This Board should not be dominated by the finance industry. In fact, only a minority should come from the industry, thus ensuring that other voices are heard and policies are made by consensus. Its meetings would be held in the open and its minutes and working papers would be publicly available.

Employees, savers and borrowers have long-term interests and should elect directors and vote on their remuneration. Instead, the government is obsessed with shareholders who are often the source of problems. The Parliamentary Commission on Banking Standardsconcluded that “shareholders failed to control risk-taking in banks, and indeed were criticising some for excessive conservatism”. The typical shareholdingperiod in banks is about three months. Shareholders provide only a small amount of risk capital at banks. For example, at Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered, shareholders provide about 5%, 7%, 5%, 5.5% and 7.25% respectively of total capital. Shareholders are akin to traders and speculators and cannot invigilate bank directors.

In time, the missed opportunities for opening a new chapter in banking regulation will haunt the UK.

• This article first appeared on Open Democracy.

Barclays and the sack race 2

Last year Barclays bank made a large profit and celebrated by sacking thousands of staff (see Barclays and the sack race).

This year Barclays made even more profit - and so to celebrate will sack even more staff. Barclays adjusted pre-tax profits were £5.2 billion for 2013, that's £165 every second in profit. In a month that's £430 million.

The sack race

Barclays also announced that it will be sacking up to 12,000 people (including 7,000 in the UK). So assuming every employee to be sacked is on the average UK full-time wage of £26,500, Barclays could afford to keep every single one of them on for a year (including NI and pension contributions) from less than one month's profits.

As we said last year, no company should be able to make redundancies as long as it was profitable. After all, why should a company making profits be allowed to sack the workforce that produced those profits - simply to try to make higher profits for shareholders and to give ever larger bonuses to casino bankers?

Bonuses

But take a look at where the money is going. Before profits are calculated, Barclays will £2.38 billion in bonuses to its investment bankers - the socially useless parasites of late capitalism - a 10% increase on last year.

Instead of paying those bonuses (on top of above average wages) that £2.38 billion could pay for a golden goodbye of £200,000 to each of the 12,000 staff being sacked.

The Barclays model

But it won't. Barclays' the epitome of a nihilistic cannibal capitalism, that strips jobs, pay and dignity away from the many to give riches to the few. This is the gratuitous redistribution of wealth from poor to rich.

It also means customers will get worse service - those sacked staff will translate into few cashiers, fewer staff in call centres and possibly the closing of some high street branches.

• See also Ripped-Off UK looks for radical solutions

Review: The Poverty of Capitalism ... but a wealth of insight

Andrew Fisher, LEAP Co-ordinator, reviews John Hilary's 'The Poverty of Capitalism: Economic Meltdown and the Struggle for What Comes Next'. Published by Pluto Press.

War on Want's Executive Director John Hilary has been an outspoken and radical advocate of the global movement for social justice. Unafraid to speak plainly, to step outside and even condemn the cosy coalitions and tame agendas of some other NGOs. As such, it was with much anticipation that I started to read The Poverty of Capitalism.

The book not only draws upon Hilary's encyclopaedic knowledge of the global players and the struggles they provoke around the world for social justice, but also develops new theoretical underpinnings and useful concepts to better understand the global struggle against the power of almighty capital.

Hilary's fearless analysis not only takes on the known evils of globalisation - including the big corporations, the far from objective global economic institutions and the bought and paid for politicians. But it also takes aim at the wolves in sheep's clothing: the philanthropists, aid agencies and NGOs providing a humanitarian facade for a corporate agenda (reminiscent of the role of missionaries for the British Empire).

Like any well-researched book, it contains a number of great tidbits to develop the main thesis, including the quotes from Pentagon's 2012 paper on the 'Joint Operational Access Concept' which make it clear the US will go to war for resources - as it did in Afghanistan and Iraq - stating:

"the United States must maintain the credible capability to project military force into any region of the world in support of those interests. Thus includes the ability to force both into the global commons to ensure their use and into foreign territory as required."

Another also relates to the US, as we learn that 60% of personal bankruptcies in that country are caused by medical bills.

But the most important point in the book is to detail the corrupt power structures that keep the poor poor and the rich rich. In doing so, concepts like 'popular sovereignty', 'common ownership' and 'social production' are introduced and explained in developing the case for a democratic and ecologically sustainable transition in the global economy.

This is not an abstract vision, but rooted in social movements from across many of the most developed and successful of which are from Latin America, Africa and Asia. And it is this that perhaps gives the book its power - as the reader is transported along a compelling narrative from technical analysis of the realities of global realpolitik and economic institutaions, to an conceptual outlining of alternatives to the discontented struggling and often succeeding to make those alternatives a reality.

Those realities could take us, as Hilary labels the final chapter, 'Beyond Capitalism'. I'm in.

Andrew Fisher edited 'Building the new common sense: social ownership for the 21st century'.

Hamstrung SFO not capable of holding bankers to account

Prem Sikka

Iceland has sent four former directors of its bank Kaupthing to prison for fraud. But the chances of similar legal action happening in the UK are low, where fraud investigators have a poor record.

The Serious Fraud Office (SFO) is the main agency for investigating and prosecuting major fraud. It was formed in 1988 after a spate of high-profile cases. A government-sponsored inquiry into share price rigging at Guinness in the 1980s concluded that too many executives at major corporations had a “cynical disregard of laws and regulations … cavalier misuse of company monies … contempt for truth and common honesty. All these in a part of the City which was thought respectable”.

But rather than changing corporate laws, amending personal liability of directors, or creating an effective enforcement agency, the government created the SFO.

Last week, the SFO’s case against businessman Victor Dahdaleh collapsed because at the last minute it could not provide evidence of alleged graft. This is not the only case the SFO has botched. It spent between £25-40m investigating price-fixing by pharmaceutical companies supplying the UK’s National Health Service (NHS), but the case collapsed because of errors in the interpretation of law.

Previously, the SFO was very slow in taking action against BAE Systems over allegations of corrupt practice. The SFO mislaid 32,000 documents relating to the case. It is currently facing a lawsuit for damages from the Tchenguiz brothers after dropping a three-year investigation into the collapse of Icelandic bank Kaupthing.

Bigger beasts

In 2012-13, the SFO brought 12 cases covering 20 individuals, eventually securing 14 convictions and recovering £11.4m from fraudsters. But it rarely went after the bigger beasts. Money laundering and sanctions busting by British banks did not appear on its radar. The SFO has hardly been visible in investigating and prosecuting the misdemeanours of bankers who brought the UK economy close to collapse.

In mitigation, it might be argued that the SFO’s failures are the outcome of the politics of government cuts. In 2008-09, the SFO had an investigations and prosecutions budget of £52m. Despite the banking crash, LIBOR rigging and other scandals, the UK government has drastically reduced SFO’s resources.

For 2013-14 its budget is £30m and will decline to £28.8 million for 2014-15. That is a cut of over 44% since the start of the global financial crisis.

Faced with a reduced budget and pay freezes, the SFO has been losing experienced staff and outsourcing a lot of its legal work, often paying very high fees. Such practices make it difficult to build in-house expertise and an institutional memory.

Other countries seem to assign higher priority to fraud investigation. The US equivalent, the Securities and Exchange Commission (SEC), has an annual budget of US$1.674 billion (about £1.1 billion). It is therefore in a far stronger position to take on the bigger beasts. The SEC has its shortcomings, but it is more likely to get a result than the SFO.

Ineffective patchwork

The SFO’s failures are indicative of Britain’s failure to build durable and effective institutional structures to fight financial crime. Rather than a single powerful and well resourced agency, there is an ineffective patchwork of institutions.

These include the Financial Conduct Authority (FCA), the Office of Fair Trading (OFT), The National Crime Agency (NCA) Her Majesty’s Revenue and Customs (HMRC), the Crown Prosecution Service, the London Stock Exchange and the Financial Reporting Council, to name just a few. The overlapping and often unclear boundaries result in duplication, waste, obfuscation, delays, poor accountability and outright failures.

Any effective fight against globalised financial crime needs to streamline its institutional structures. In the age of globalisation the UK cannot fight financial crime on a shoestring, with puny organisations. Large parts of the patchwork should be replaced by a UK equivalent of the SEC.

But a new organisation would not be able to combat wealthy elites or giant corporations without significant resources. This might be expensive, but it is an investment that would pay off.

• This article originally appeared on The Conversation website

Ripped-off UK looks for radical solutions

At the 2011 Budget, LEAP called for "a Windfall Tax on recession profiteers": UK banks, energy companies and supermarkets - to fund job creation and capital expenditure programmes (full report here).

John McDonnell MP, said in the 2011 Budget debate, "I think that a windfall tax on energy is appropriate. The current profits of British Gas average 24%, and Ofgem has reported an average profit margin of 38% per customer since last November. That is profiteering during a recession."

There are indications the British public agree - and may want to go further. A YouGov opinion poll commissioned by the Class thinktank found that 68% want the energy companies renationalised, while 35% believe the government should have the power to regulate grocery prices (rising to 44% among Labour voters - and 40% of UKIP voters!).

The poll coincided with Russell Brand's thought-provoking essay in which he wrote, "Profit is the most profane word we have". Indeed it is.

In the last few days Sainsbury's results showed like-for-like sales were up 1.4%, yet their profits were up 9.1% - which shows profit margins keep increasing.

And the energy companies are ripping off UK consumers with further price hikes - adding to inflationary pressures. The claim that this is a reflection of wholesale prices is refuted by this graph comparing causes of inflation between the UK and the Eurozone. The gross disparity between the Eurozone (where energy prices have fallen sharply) and the UK where prices have risen (and are bout to rise more sharply) clearly tells the story of the UK energy cartel ripping off consumers. No wonder 68% want energy renationalised.

Even John Major (the Prime Minister who privatised the railways, which 66% want renationalised) now supports a windfall tax on the energy companies.

And it's little better with the banks - as our European neighbours again show us up. The chart below shows the difference between the interest banks give to savers and the rates they charge borrowers. While UK banks have lower margins than US banks, they are far wider than Eurozone banks.

It would be interesting to work out the economic stimulus to consumers if UK banks reduced their margins to Eurozone levels (nearly half that of UK banks) ...

It is clear that rampant profiteering has, if anything, got worse since our March 2011 report - and it's no surprise that the public supports more radical solutions to address it. The vacuum remains the political movement to reflect those radical solutions ...

The race is on, but the field is limited in the auditing business

Prem Sikka

Isn’t it interesting how governments go through the rituals of promoting competition, but little actually changes? The latest example is the UK Competition Commission’s report on the UK auditing industry.
The report is supposedly concerned with enhancing competition in the UK auditing market. The current position is dire. Thanks to the close alignment between corporate interests, policymakers and politicians, successive governments permitted restrained mergers.

Today the auditing market is dominated by just four accounting firms. These are PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche and KPMG (known as the Big Four firms), and between them they audit 99 of the UK’s biggest listed companies (FTSE100) and around 240 of the next 250. On average, a FTSE100 auditor remains in office for about 48 years; for the FTSE250 the average is 36 years. The Big Four firms are dominant in most western countries. Their global income from auditing and consultancy services is about £77 billion (US$115 billion) and some £7.9 billion ($11.9bn) of it comes from the UK. This provides plenty of financial and political resources to thwart any unwelcome policies.

The probability of another accounting firm breaking into this magic circle is extremely low as the entry costs are high. The challengers need help but there is little on the table from the Competition Commission. The Commission does not want to break-up the Big Four firms or place any limits on the proportion of market they can dominate. It does not want to place any time limits on the audit firm’s tenure either.

This monopoly of company audits has been the springboard for the growth of the Big Four accounting firms. Audits give accounting firms easy access to company boards and lets the accountants sell all kind of additional services, ranging from tax avoidance, advice on mergers and takeovers to printing T-shirts, badges and laying golf courses. All this increases fee dependency on clients and must lessen the probability of speaking out against unsavoury practices. At the dawn of the banking crash, concerned savers were forming queues outside distressed banks and governments were bailing out banks, but auditors gave their customary clean bill of health to all distressed banks. This silence was not followed by any investigation by the UK government. There is no action by any regulator either. Even if they act, it takes years. The matters relating to the audit of automaker MG Rover by Deloitte were referred to the Financial Reporting Council, the UK regulator, in 2005. It finally reported on 29 July 2013.

The regulatory inertia neither encourages competition nor improves the quality of audits. Last year, a tax tribunal heard a case relating to a tax avoidance scheme designed by Ernst & Young for Iliffe News and Media. The company was very profitable, but was concerned that healthy profits would encourage employees to demand higher wages. So Ernst & Young, who were also the company’s auditors, designed a scheme that would artificially depress profits and avoid tax too. The company’s board minutes stated that Ernst & Young confirmed that the use of the scheme would also “significantly lessen the transparency of reported results”. Despite such episodes, the Competition Commission does not want to ban the sale of consultancy by auditors to their audit clients. The best that it can come-up with is that companies might put audits out of tender every five years.

The Competition Commission could have increased the market pressures on auditors to improve quality of audits by empowering consumers of audit opinions, but it does not do that. Auditors only owe a “duty of care” to the company rather than to any individual shareholder, creditor or any other stakeholder. So individuals can do little to bring negligent auditors to book. Court cases such as MAN Nutzfahrzeuge AG & Anor v Freightliner Ltd & Anor [2007] show that there is little recourse against auditors even when they are found to be negligent.

At annual general meetings (AGMs) shareholders are asked to vote on auditor appointment and remuneration, but this resolution is not supported by any information about quality of audit work, lawsuits or regulatory action against auditors. Shareholders are not given any sight of auditor working papers. Shareholders have no idea of the work done by auditors. Auditing firms are commercial concerns and their success is measured by profits. In pursuit of profits, the firms reduce the time allocated to each audit even though audits are labour intensive and need a higher time budget. The hope is that aspiring accountants will work evenings and week-ends for free. Academic research shows that a large number of audit staff do not go along with such strategies and resort to falsification of audit work or ignore awkward transactions because they require more time than is allocated. Audit failures are manufactured by the business model and organisation culture of accountancy firms, but this does not even appear on the radar of the Competition Commission.

There is little meaningful public information about auditors. There is no public availability of audit contract, information composition of the audit team, time spent on the job, details of meetings with company directors, or anything else that might enable the consumers of audit opinions to assess audit quality.

The Competition Commission has capitulated to the lobbying power of the Big Four and failed to introduce any meaningful reforms. Maybe such issues will be considered after the next banking crash.


This article first appeared on The Conversation website

We are light years away from the days of Cadbury capitalism

Prem Sikka

The tax debate offers insight into the possible trajectories of capitalism.

Organised tax avoidance does not create anything of social value, but encourages concentration of wealth in relatively few hands. It is part of the unsustainable technique for increasing short-term profits. Companies have become adept at increasing profits through imposition of wage freezes of workers and dilution of their pension rights. This has been supplemented through management of how and where taxes are paid.

Public attention is now focused not only on the tax practices of multinational corporations, such as Google and Amazon, but also on traditional retailers such as Marks and Spencer. And then there is the tax industry. This is dominated by accountants, lawyers and finance experts. The role of the Big Four accountancy firms – KPMG, PricewaterhouseCoopers (PwC), Deloitte and Ernst & Young – in designing, marketing and implementing complex tax operations has been scrutinised by the House of Commons Public Accounts Committee (PAC).

Anyone looking at the websites of accountancy firms will see claims of ethics, integrity, and a burning desire to serve the public interest and uphold the law. Yet, following a briefing from a former PwC insider the PAC chairperson said (see page Ev4) that the firm “will approve a tax product if there is a 25% chance – a one-in-four chance – of it being upheld. That means that you are offering schemes to your clients where you have judged there is a 75% risk of it then being deemed unlawful”.

The PwC partner at the committee’s hearing denied this. Partners from other firms claimed their thresholds were 50%. By their own admission the firms are selling tax avoidance schemes with the knowledge that there is a 50% chance that their practices will be found to be unlawful. The firms know that in the age of austerity the tax authorities will never have sufficient resources to challenge them. So they continue, with the sole aim of producing private profits.

We are light years away from the capitalism of Cadbury and Quaker, which had some social conscience. Highly organised tax avoidance is the outcome of the relentless promotion of enterprise culture and deregulation over the last 35 years. It has persuaded many to believe that ‘bending the rules’ for personal gain is a sign of business acumen. Any ‘deal’, regardless of the social consequences is considered to be acceptable as long as it produces private profits, especially where competitive pressures link promotion, prestige, status and reward, markets, niches with meeting business targets. Those able to sail close to the wind are seen as financial wizards, media stars and are much in demand. The shame no longer resides in participation in activities that undermine social fabric, or even in being caught. Fines and sentences have just become another business cost.

In March 2013, Ernst & Young paid a fine of $123 million to the US tax authorities to resolve allegations of tax fraud. The firm admitted wrongful conduct by certain partners and employees. A number of its former personnel have received prison sentences. Previously, KPMG paid a fine of $456 million after admitting “criminal wrongdoing” over the sale of avoidance schemes and a number of its former personnel also received prison sentences. Despite massive reductions in the rate of corporation tax and top rates of personal income tax, the tax avoidance industry shows no sign of abating.

A large number of tax avoidance schemes have been declared illegal by the UK courts. The UK Ministers have referred to the schemes marketed by the big accountancy firms as “blatantly abusive avoidance scams”, but this has not been followed up with any investigation, inquiry, prosecutions or fines. No accountancy firm has ever been fined or disciplined by its professional body for selling unlawful tax avoidance schemes. In fact, there are no negative consequences for the designers of such schemes.

The big firms, HMRC, the Treasury and senior civil servants and politicians (see chapter five for evidence) maintain a close relationship. The firms provide jobs for some former and potential ministers. They donate money and services to political parties/former partners now hold senior positions at HMRC and the Treasury.

Democracy is a major casualty of a rampant tax avoidance industry. We can all be persuaded to vote for a political party that promises investment in education, healthcare, pensions, security and transport, but the ultimate veto rests with the tax avoidance industry and its clients. They can scupper any chances of public investment by designing schemes that erode tax revenues. The result? The loss of hard won social rights and inability of governments to deliver on their promises.

• This article first appeared on The Conversation website

The Dash for Cash - the Great British Energy Rip-Off

British Gas announced a 6% increase on gas and electricity on 12 October, which will add an average £80 per year to bills (Npower will increase the gas by 8.8% and electricity by 9.1%).

Energy companies blame the rises on declining North Sea gas supplies, rising global prices, and costs of maintaining the UK distribution network. The reality is somewhat different.

Last year British Gas announced profits of £1.5 billion. It supplies to around 9.5 million households so is making £160 a year profit per household.

So even if we take British Gas at face value about their rising costs, they could have absorbed them and still made £750m profit.

But it's not just British Gas ... 

On 15 October, Scottish Power announced gas and electricity bills would go up by 7% in December. Scottish Power has 2.3 million customers – average fuel bill will rise by £100 per year.

Scottish Power made £1 billion in profits last year – this price rise will raise £230m – so just one-quarter of their profits!

This is the grotesque profiteering that has happened since our gas and electricity was sold off in the 1980s.

Last year British Gas put up gas bills by 18% and electricity bills by 16% - that’s how they made £1.5bn in profits.

We are being told we have to pay more so that the energy companies can invest in renewable energy, but this year, last year and every year for the last 25 years billions from our energy bills have been going to private shareholders’ dividends instead of into investing in the energy network.

We urgently need to invest in renewable energy. Sweden gets nearly half its energy needs from renewables, France is 12% and Germany around 10%. In Britain it’s less than 3%. 

A large reason for us lagging behind the rest of Europe is that energy companies have been siphoning every penny they can - and successive governments have done nothing to stop them.

So what can you do? Support Fuel Poverty Action's day of action on Saturday

‘Empowering’ shareholders won’t revolutionise corporate culture

Prem Sikka
Executive remuneration is out of control in the United Kingdom. The final report by the High Pay Commission concluded that “there is rarely a link between directors’ incentives and the way a company performs. In the past 10 years, the average annual bonus for FTSE 350 directors went up by 187% and the average year-end share price declined by 71%”. The average pay levels of workers rose only by 10% during the same period.

The Cameron Government is now promising to clamp down on executive pay. Details will be announced later in the year, but the key idea is to empower shareholders. The British government could follow the Australian two-strikes law, which ensures that a 25% vote against executives' remuneration packages at two consecutive annual general meetings triggers a compulsory re-election of the board. However, laws developed in particular social and economic contexts can rarely be exported.

The UK government assumes shareholders are the owners and main risk-bearers of companies. This is not the case. Most shareholders are traders and speculators and have little long-term interest in invigilating companies.

The average duration of share holding in UK-listed companies has fallen from about five years in the mid-1960s and about two years in the 1980s to about 7.5 months at the end of 2007. The average shareholding periods for banks has fallen from about three years in 1998 to about three months in 2008. This does not suggest any long-term commitment to companies or corporate issues.

Since the 1980s, governments have privatised state-owned industries and given shares to UK citizens at knockdown prices. Governments have given tax incentives to individuals to buy shares in companies. None of this has expanded share ownership.

The table below shows the structure of shareholding in the UK listed companies.

The biggest change is the massive reduction is share ownership by individuals and the increase in foreign ownership by rich oligarchs, sheikhs, sovereign funds, hedge funds, offshore funds and private equity investors. Even 100 years ago, foreign companies were listed on the London Stock Exchange and UK and foreign individuals could hold shares in them. But with the increased mobility of money, their numbers have expanded.

There is little evidence to show they are interested in corporate governance issues. If foreign investors choose not to vote on executive remuneration packages, the UK government is hardly in a position to impose sanctions.

Individuals also indirectly hold shares through insurance companies, pensions funds and banks, but in these cases they do not have the right to appoint directors or mandate managers of these organisations to vote on AGM resolutions. Besides, corporate pay levels elsewhere form the benchmark for remuneration of mangers of financial institutions. Their incentives for curbing executive pay are low.

At the moment, the outcome of AGM resolutions is advisory rather than binding on directors. Even if that was changed and shareholders mustered some courage to shackle directors, they can easily be defeated because directors and their representatives are permitted to cast thousands of delegated proxy votes.

Voting rights should be given to other risk-bearers too and to those with a long-term interest in companies. Banks provide an interesting example. The leverage ratio of many banks shows that shareholders do not bear the main risks or provide most of the risk capital.

A bank with 10 billion pounds of equity and 100 billion pounds of assets in its balance sheet is said to have a leverage ratio of 10:1. In other words, for every 10 pounds of investment by shareholders, it borrowed 90 pounds.

In 2007, Barclays Bank had a leverage of around 39:1; Royal Bank of Scotland 31.2:1; HSBC 21.3:1; Lloyd’s TSB 31:1, Lehman Brothers 31:1 and Bear Stearns 33:1. Most of the long-term finance to banks is provided by savers and lenders.

Therefore, they should have the right to vote on executive remuneration, as well as for appointing directors. Employees have a long-term interest in the wellbeing of companies as their jobs and pensions depend on them. They are in a strong position to know whether the bosses deserve high rewards and should the right to vote too.

As UK politics is drifting to the right, democratisation of corporations is unlikely. Shareholder empowerment is unlikely to solve the problem of excessive executive pay.

This article first appeared on The Conversation website

Greece - the people vs global capitalism

Events in Greece over the last 24 hours have resembled the plot from a political thriller – A Very British Coup perhaps. Under fire Greek Prime Minister Papendreou announced a referendum on whether to accept the bailout terms agreed at the recent EU summit. He apparently did so without consulting his Cabinet, and by lunchtime his finance minister was in hospital with a suspected heart attack, and a backbench MP resigned.

He also took the surprising step of replacing all of the military top brass – the heads of the defence staff, army, navy, and air force – all replaced and apparently without any warning to Cabinet or military. Obviously the Greek military has history – a CIA-backed junta ruled Greece from 1967-74 – but did Papendreou believe a coup was on the cards?

Certainly there are the siren calls for a government of national unity from opposition MPs (and the PASOK MP who resigned yesterday). The major opposition party is right wing, and the security establishment will have been rocked by the massive and occasionally violent protests and strikes in Greece which have intensified and grown in recent weeks.

Plus by calling for a referendum, he will have infuriated the EU and IMF – and therefore NATO (of which Greece is a member) – and so the Greek military and political right (supportive of the bailout terms) would have potentially had international support.

Twenty four hours after issuing the referendum call, the Cabinet has unanimously backed it, and it will take place in December according to rumours. With no further resignations, Papendreou seems likely to survive a confidence vote on Friday too.

While all this clandestine backroom activity may have been necessary to get the referendum (and avert a coup?) it was the very public protests that have won it. The marches, rallies, strikes, direct action and street-fighting against the government, banks and police have been a demonstration of the commitment of the Greek people to resist austerity.

Now the people have the final say in a referendum, which as Papendreou has said will effectively be on membership of the euro.

So what would a yes or no vote mean?

A yes vote would mean misery heaped upon misery for the Greek people. With a stagnant and contracting economy, high and rising unemployment (16% nationally, but 40% for young people – double the respective UK rates), jobs and services already slashed, taxes increased and wages cut or frozen.

The bailout demands an intensification of austerity to satisfy creditor nations and banks.

A no vote is more complex. It would mean defaulting on debts, an exit from the euro (so as not to further weaken the currency). It would mean reinstating a national currency (drachma mk2).

As Greece would still be an economic mess, this is no silver bullet. The Greek economy is heavily flawed and needs urgent investment. Tax evasion is rife and needs to be immediately addressed, but so does investment – in order to create jobs and bring unemployment down.

Greece would need a friendly nation to support it – to lend to it on a comparatively favourable long-term basis. Which nation could do this? That would depend on the nature of the government in place at the time. A possibility would be one of the BRICs least affected by Greek default, or by going to the Latin America via Mercosur or even ALBA for an extraordinary loan.

To avoid the money markets playing havoc with the new currency, and a descent into Weimar hyperinflation, there would have to be firm capital and export controls – which would in turn necessitate breach EU rules, and presumably necessitate exit from the union entirely. Bilateral arrangements, such as those achieved by other non-EU states should be possible but will take time.

Much of the above is necessarily speculative – we are entering unchartered waters – but one thing is clear the people of Greece have forced this referendum through considerable struggle. They now need to realise their power and create a vision that can unite what they are for too.

Their victory (albeit partial)* should also inspire anti-austerity struggles across Europe, particularly in Spain, Italy and Portugal.

*It is a victory to have forced their right to have a say, when the EU and IMF though they had done a deal to salvage banks and creditor nations at the Greek people’s expense. But the victory is partial because – without winning a no vote in the referendum and then, crucially, having a unifying vision that their movement can force into the political arena – it may only be kicking the can down the road. But for now, it is the Greek people doing the kicking.

End the rule of the 1% as economy implodes

The force of the global economic implosion, which has seen unemployment skyrocket to a 17-year high in the UK, overwhelmed its first eurozone government last night. It is unlikely to be the last.

The Slovakian parliament voted to reject a stronger European Financial Stability Fund (EFSF) and hence a second rescue package for Greece. This was despite immense political pressure from the European Central Bank, the European Commission and the International Monetary Fund, as well as the US administration.

They all warned of the systemic nature of the worsening crisis and the direst of consequences for the world capitalist economy should Greece be allowed to fail. As a result of the vote, the coalition government of Slovak Prime Minister Iveta Radicova fell after a small party in her ruling coalition refused to back the plans.

The EFSF is the capitalist powers’ main weapon in dealing with the debt crisis that threatens the European common currency, the region's banks and the global financial system. But eurozone rules require all of the 17 member states to ratify the new plan and Slovakia was the last to vote after all the others had given their agreement.

Now the international lending agencies, responsible for holding the crumbling system together, have to stitch together a new interpretation of the rules allowing the package to be put into operation, whilst they wait to see if a more compliant government will emerge in Slovakia.

Just a few short weeks remain before the Greek government will run out of money and cease to be able to pay wages or pensions for the public sector employees who make up one fifth of the country’s workforce. But the price of the new, wholly inadequate deal would see further tax rises, jobs destroyed, wages cut and – to the banks’ horror – a write-down of the money they are owed by the Greek government by as much as 50%.

As those in the race to contain or deflect the impact of the deepening crisis struggle with its European expression, insolvency practitioners in the United States and elsewhere are gearing up for a busy time ahead.
Bankrupt book chain Borders, for instance, recently closed its doors after failing to find a buyer. Moody's credit rating agency says the number of troubled companies rose for the third month in a row in September, an ominous sign similar to the third quarter of 2007 when the economy slid into recession and the ensuing crash engulfed the world.

And in another blow for the New Green Dealers who are promoting an eco- friendly growth-oriented capitalist solution to climate change, recent failures included renewable energy companies Evergreen Solar and Solyndra. The latter collapsed in a politically-charged bankruptcy after taking a $535 million loan from the US federal government.

This time around China cannot come to the aid of the ailing system. As is now becoming clear, its huge injection of spending on infrastructure developments to ward off the impact of the global crisis on its domestic economy, has taken its toll internally.

A Reuters special report on China noted:

Local governments had amassed 10.7 trillion yuan in debt at the end of 2010. The government expects 2.5 to 3 trillion yuan of that will turn sour, while Standard and Chartered reckons as much as 8 to 9 trillion yuan will not be repaid – or about $1.2 trillion to $1.4 trillion. In other words, the potential debt defaults could be even larger than the $700 billion U.S. bail-out programme during the 2008 crisis.

Be warned. Any and every attempt at shoring up the defences of the capitalist system will involve an unimaginable, intolerable assault on the lives of billions of people. Almost a million young people are on the dole in Britain already, according to today’s figures.l

Saturday’s global occupation of city and town squares should become the focus for shaping a new social, economic and democratic political system founded upon the satisfaction of human needs. The 1% cannot be allowed to continue their rule over the 99%.

Gerry Gold
Economics editor
12 October 2011
reposted from
www.aworldtowin.net 

Will capitalism eat itself?

The liberal economic commentariat may have choked on its cornflakes this morning, when Professor Nouriel Roubini said "Karl Marx said it right, at some point capitalism can destroy itself because you cannot keep on shifting income from labour to capital" (see video below).



The shift from labour to capital has been a long term process, acute in the US and increasing in the UK too where, as PCS points out, the value of wages has declined from nearly 65% of GDP in the mid-1970s to 55% today. Over the same period, the rate of corporate profit has increased from 13% to 21%.







Roubini also seemingly dismissed the Keynesian solutions used in the 1930s as 'kicking the can down the road', the debt is now too great.



So is Roubini becoming a Marxist and was Marx right? Certainly there is the risk - as Roubini says - that capitalism might self-destruct. It does seem that there is no way out, because of the inherent contradictions of capitalism playing themselves out in this crisis:



1) Governments that impose austerity measures are reducing demand, squashing any chances of recovery. As Roubini says, "If you are not hiring workers there is not enough labour income, there is not enough consumer confidence, there is not enough consumption, there is not enough final demand. We had a massive reditribution of income from labour to capital from wages to profits, ineqaulity of income and wealth has increased."



2) Governments could invest in the economy to create jobs. But in the short term and on the necessary scale that would mean borrowing in the money markets, and the markets have shown their propensity to punish any government not slashing budgets - see Greece, Spain, and Italy - and perhaps even the US following the S&P downgrade. One could counterpose increasing taxes on the wealthiest and clamping down on tax avoidance and evasion - but that takes time, and no western government is even preparing for that eventuality.



So if governments can't save their way out of recession or spend their way out, could capitalism self-destruct?



Certainly some defaults are likely - Iceland effectively defaulted in 2010 and Argentina in 2001. There has been talk of Greece leaving the euro and effectively defaulting. But that would damage the euro - and bond markets would inevitably up the risk factors on any country with a large deficit (Spain, Italy, Portugal - and potentially the US and the UK). This would make it more expensive to borrow, and rule 2) out while requiring more cuts under 1).



Now you might argue that the Argentinian and Icelandic defaults did not cause contagion, but a eurozone country would be a very different proposition, as would a major global economy like the UK, let alone the world's largest economy, the US.



So the only way out seems to be to take on the markets (e.g. shutting down stock markets, nationalising the finance sector, and taking currencies out of international money markets. The only risk for any country trying this route might be US invasion - but can they afford it?



I'll write more on how this could be done soon.

Tesco to contest OFT fine

From the Morning Star



Tesco threatened to take legal action against a competition watchdog today that gave the supermarket giant a £10 million fine for its alleged role in a dairy price-fixing scandal.



Tesco was among nine firms that the Office of Fair Trading judged to have colluded to rig the price of cheese and milk in 2002 and 2003.



The penalties imposed by the OFT total nearly £50m but the scandal is thought to have hit their customers' pockets to the tune of £270m.



Originally the OFT had intended to fine guilty parties more than £116m but it scaled back the penalties after a period of consultation.



Supermarket chains Asda, Sainsbury's and Safeway and dairy processors Arla, Dairy Crest, McLelland, the Cheese Company and Wiseman all received lenient fines after admitting liability.



Left Economics Advisory Panel co-ordinator Andrew Fisher said that it was not hard to see where the real looters are.



He said: "It is very welcome that the OFT has decided to act on behalf of consumers who are being hit with outrageous price hikes by energy companies, supermarkets and banks.



"As LEAP highlighted in its March report, British supermarkets have hiked prices at a higher level than their European counterparts. They are looting people's wages to maintain their fat-cat profits. It's a rich irony that these fat cats are overcharging for cream."



But Tesco stands alone in denying it had anything to do with the price fixing of dairy products stating it will defend its position "vigorously" and "through the courts if necessary."



The supermarket's director of corporate and legal affairs Lucy Neville-Rolfe said: "We are disheartened and disturbed that the OFT continues to pursue this costly and time-consuming case at the expense of both the taxpayer and British business.



"We have always said we did not collude on prices on cheese and we stand firm in our rebuttal of these ongoing allegations."



But the OFT defended its decision and the watchdog's chief executive John Fingleton said the fines send "a strong signal" to supermarkets, suppliers and other businesses that adopt anti-competitive tactics.

Stock markets and nonsense

If someone walks into a pub and declares their jacket to be worth £300, but everyone else declares it to be worth a mere £50 - has £250 been wiped off the economy?

It's an interesting question, because today the Guardian website squeals that "World stock markets tumbled sharply again on Thursday, wiping nearly £50bn off the value of Britain's biggest listed companies". Further down the article we learn that in fact it's worse: £110bn has been wiped off in the past week!


Whoops, that is careless! Britain's biggest companies have lost £110bn! But it's nonsense. Going back to the someone in the pub with his '£300 jacket'. Let's say he's a scam artist this time. He walks in and says here's my £300 jacket, and has planted a couple of his mates in the pub to talk it up, say how lovely it is (reminiscent of the Emperor's New Clothes isn't it?) and fool some mark into paying £300 for a £50 coat. If the mark buys, then he has lost £250. That is because the asset has a clear value: £50.

Back in the stock market, this fluctuation between confidence and panic would not be a problem if it was only one rogue scam artist - the problem for the stock markets is, this is the system.

It is for this reason that seemingly sensible, educated, intelligent people panic when anyone points out the Emperor's flies are undone, let alone that his willy is hanging out. So when AAA rated CDOs (£300 jackets) are pointed out to be near junk (£50 jackets) the system seizes up in the same way that the mark in the pub won't buy from the scam artist again.

On such occasions these same great brains (who never predicted this could happen) start using infantile playground language: warning against 'scaring off the confidence fairy' or 'talking down the economy' - as if a sound economy would collapse because someone says something negative. In the same way that most of us aren't reduced to gibbering wrecks because someone tells us 'you're a git', sound economies don't collapse because of a few words.

Of course in 2008 economies started collapsing for the very real reason that they were based on the valuation of scam artists. Governments around the world stepped in and guaranteed much of the scam artists' nigh on worthless assets.

The question is will the government (a la the mark in the pub) be fooled twice and bail out or will it learn from its mistakes and nationalise, control and operate their assets in the public interest - maybe ven taking on the mafia behind the scam artists (the bond markets)?

For those of a left-wing disposition shouldn't we be asking,'do we need a stock market?', 'shouldn't we shut it down?', when it simply serves to create destabilising panics and to distort the economy.