My recent foray into the dynamics of economic inequality in the 1980’s, which seems to left everyone feeling vindicated*, set me to thinking about the question of whether the Conservative government of the time, or indeed any government since, could have taken a different approach to the re-engineering of Britain’s economy that most would, with hindsight, agree was necessary and, more importantly, whether these alternatives have any relevance to today’s economic situation.

*Because both sides were right, but arguing about very different types of economic inequality; income and wealth.

To give a bit of a recap, what the Thatcher government did during the 1980s was…

a) allow much of Britain’s, by then, uncompetitive manufacturing iand resource extraction base to wither on the vine in the face of competition from a developing global market, give or take that an explicit political objective, that of crushing the trade unions, played a significant part in the decline of the coal mining industry.

b) transfer something of the order of £27 billion of state-owned assets (at their sale price) and 2 million or so domestic properties into private ownership in two distinct phases that, as is apparent from the time-series data on the size and distribution of marketable wealth in the UK economy, had very different beneficiaries.

Phase one, the sale of council houses, began in the early 1980’s and transferred wealth, in the main, to the lower middle classes and the skilled working classes – the C1s and C2s – which goes a long way to explaining why economic inequality, measure in terms of the distribution marketable wealth, declined during Thatcher’s first two terms of office, even though income inequalities increased at the bottom of the economy due to impact of mass unemployment and the government’s decision to break the link between increases in the state pension and wage inflation.

Phase two, which began in earnest with the privatisation of British Telecom, coincides with and helped to spawn Thatcher’s third-term economic boom, during which wealth inequalities rose, and appears to have afforded the greatest benefit to upper middle and professional classes, the As and Bs, for all that one of the key political objectives of privatisation was the creation of a ‘share-owning democracy’ to go with the ‘property-owning democracy’ created by the sale of council houses.

As to why privatisation appears to have benefitted the already wealthy, for all that government of the time spent millions promoting these share issues to the general public, my feeling is that a number of factors came into play to limit the extent to which the C1s and, especially, C2s gained from the sale of state-owned assets. The lack of pre-existing culture of share-ownership, particularly amongst the skilled working classes, would have been part of the story, as would risk aversion (C2s would have seen an investment in property – their council house – as a much safer bet than buying shares. An element of short-termism would also have been a factor – on most of public utility privatisations, share values rose sharply on floatation, and the C1s and C2s were much more likely to cash-in for an immediately windfall.

I also suspect that the recession of the early 90’s played its part in prompting some of those who resisted the temptation to go for the fast buck on flotation to cash-in their utility shares to offset the falling value of their income due to the high inflation and interest rates of the period and – and this is where the limitations of the data come into play. Its not at all clear whether the definition of marketable wealth used in generating these statistics includes or excludes assets held by pension funds and if these are excluded then its likely that wealth inequality may not have risen during this period quite as much as data suggests given that a greater proportion of the wealth held by C1s and C2s is likely to have been in pensions and long-term endowments which may not have been included in the figures.

The upshot of all this is that the transfer of state assets into private hands was the primary means by which the Conservatives stimulated both consumption and key markets, particularly the housing market, on the back of credit secured against these now privately-held assets and there you have the foundations of what has been, even with the recession of the early 90s, a pretty good period for the British economy relative to both to other periods in history and conditions elsewhere in the world.

But, given that all this had negative as well as positive consequences, not least in creating Britain’s modern social underclass, the question remains – could things have been done differently?

In political terms, I doubt it very much as any alternatives that could have come into play would have required the Thatcher government to play the long game at the risk of failing to revive the economy quickly enough ensure electoral success. Political imperatives, more so than economics ones, created both the boom of the late 80’s and the recession of the early 90s.

So what were the alternatives?

If we set aside any thoughts of privatising state-owned industries by means of turning them into worker’s cooperatives, which is whole debate in itself, then one possibility that the Thatcher government had was that of building up rather than getting out of the retail banking business.

In 1979 the state owned Girobank and exercised what amounted to de facto statutory control over the Trustee Savings Banks, of which nineteen operated under the TSB umbrella. Girobank’s retail business was sold off to the Alliance and Leicester in 1990, while the TSB was effectively nationalised and then sold-off immediately to Lloyds in 1984, allowing the government to profit from the sale even though, strictly speaking, it never actually owned the bank.

At the time the Conservatives came to power in 1979, neither of these banks were major players in the retail banking sector – between them they accounted for only around 3% of consumer lending – so, from a short-term perspective, selling them off would have looked like a pretty good deal even though this ignores the possibilities that could have presented themselves had they been harnessed to another strand of government policy, the sale of council houses.

The sale of council houses created an opportunity for innovation and the introduction of the kind of mortgage products that we now clearly recognised as being of significant value to first-time buyers, such as long-term fixed rate mortgages and shared equity schemes, the kind of products that the private sector rarely, if ever, contemplate seriously because they work to an economic perspective that, if anything, is even more constrained by short-term thinking than that of politicians; by this quarter’s results or this year’s results or the proximity of their next bonus payment.

The idea that the government might make a better mortgage lender than the private sector is one that Chris Dillow floats here in a more contemporary context, i.e. that of the government’s recently announced measures to stimulate the housing market and Northern Rock, albeit that he couchs his comments explicitly in terms of nationalisation, which for many would imply that the state-owned mortgage bank would subject to direct political control. This is certainly not what I have in mind nor, indeed, would I suspect that Chris is thinking in terms of 70s style state ownership either – outside of a requirement that such a bank offer its innovative mortgage products, it should operate as a commercial institution like any other with the same duty to generate profits for its shareholders, which means the government and, ultimately, us.

This is where Labour (and the Conservatives – it was Edward Heath who nationalised Rolls-Royce and the water industry in the early 70s) got it badly wrong when it came to the nationalisation of industries other than the key public utilities. The government’s of the time got into the business of propping up uncompetitive industries for explicitly political reasons; to protect what it saw as national prestige or, in the case of Rolls-Royce, strategic interests and/or to protect jobs and keep the unemployment figures down, rather than insisting that these industries operate on the same commercial terms as the private sector and turn a profit, and its the perception this created, that nationalisation was all about propping up failing industries at huge expense to the tax payer that ended up discrediting the whole concept of state-ownership even though this had nothing whatsoever to do with the reasons why the public utilities were brought under state control in the 1940s.

So where does all this take us – well, interestingly enough towards something that’s been very much in the news in recent years and that has been at the heart of one of the big stories of the week – the takeover of Manchester City FC.

You see, if you take the idea that where state-ownership becomes problematic is where it either works to preclude competition in industries where a free market is not only possible but also desirable or where political imperatives, and particular short-term ones, lead to unnecessary interference in purely commercial decisions, as was once the case with what used to be the public utilities, and you figure out that one way in which you can limit the scope for political interference is by vesting ownership of any state-owned businesses or natural monopolies in a state-owned but commercially managed investment vehicle whose purpose is defined explicitly in terms of generating profits from commercial investments for the benefit of the British taxpayer then what you’ve got is what is, today, called a Sovereign Wealth Fund and, believe it or not, this is hardly a new idea for all that its only been in very recent times that the term Sovereign Wealth Fund has been used to describe them.

The term itself, originated as recently as 2005, but the oldest such fund is the Kuwait Investment Authority, which dates to 1953 and – and this may surprise a few people – there is even an investment fund of this kind dating to the same period that was created by us Brits, or rather by the British administration of the Gilbert Islands, which set up the Kiribati Revenue Equalisation Reserve Fund in 1956 to receive a levy on the income generated by the export of phosphates (bird shit) used in fertilizers. At the last count, this fund had grown to $520 million and operates, today, as a trust fund that plays a significant role in propping up Kiribati’s economy, which ran into major trouble in 1979 when its phosphate deposits were exhausted.

The roots of Britain’s anticipated ‘pension crisis’ can be found in the decision, taken by the Churchill government of the 1950’s, to use the National Insurance Fund to finance its road-building programme, which meant that we never did manage to build-up the reserve fund envisaged by Beveridge, leaving us to meet the growing costs of the state pension from current tax receipts. Today, around 41% of the UK’s expenditure on social protection, equivalent to around 11% of GDP, goes to older people as pensions, pension credits and to cover the cost of non-medical care – that’s around five times more than we spend on social protection for families, twenty times more than we spend on unemployment and around 25% more than we spend on healthcare, where older people are also amongst the major ‘consumers’. National Insurance now covers less than 50% of the cost of social protection and the annual cost of social protection for older people, alone, amounts to more the UK’s entire annual income tax receipts.

In the 80’s, North Sea Oil, the sale of council houses and the privatisation of the public utilities could have been used to provide the nucleus for a British Sovereign Wealth Fund. Norway did it, and its Government Pension Fund, which invests the country’s oil revenue surpluses and the receipts from its national insurance scheme, is now the second largest in the world, with assets of around $390 billion.

And to be scrupulously fair when we talking about failures to invest for the future and the limited business acumen of governments, if you’ve ever looked at how the financial side of New Labour’s PFI schemes and its school academies programme are structured you’d quickly realise that no businessman in his (or her) right mind would ever dream of cutting the kind of deals that the government has been cutting over the last 10 years.

Let me leave you with one last thought to chew over…

The main reason why the rhetoric of right has come to dominate and define the public debate on tax and government expenditure is not because we pay too much tax – that’s a gross oversimplification.

The real reason for that change in the public narrative dates back, again, to the 1980s and to the point at which the Conservative government of the time began to withdraw from the social contract between the government and the British people created by the Attlee government of 1945. No ever really likes paying tax, but they can tolerate doing when they can see that somewhere down the line they’re going to benefit from it even if its not straight away.

That was the clever part about Labour’s programme in 1945, it offered people a deal – work hard and pay your taxes and we’ll make sure that you’ve got a job and a roof over your head, that you can see a doctor when you’re ill, that your kids get an education and that when you grow old or you become ill and you can’t work, then the taxes you’ve paid will ensure that you’ll be taken care of.

Its when the government started reneging on that contract that tax suddenly became a ‘burden’ and ordinary people really started to resent paying it over to the state – and that’s all because, in the 63 years since the end of World War, but for a very short period after the war under Attlee, no British government even tried to save for a rainy day, not Labour and not the Conservatives who held office for 35 of those 63 years.

So, anyway, George – what was that you were saying about thin cows and fats cows and why was one of them playing a trombone?*

*And before the questions start – if you don’t get that remark then ask a fan of Terry Pratchett’s Discworld novels – they’ll explain…

About the author
'Unity' is a regular contributor to Liberal Conspiracy. He also blogs at Ministry of Truth.
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