Heading for recovery
A strategic review
Like several other countries, Britain faces four significant problems in having to:
Britain's situation is particularly exposed because of BREXIT and the need to also negotiate or otherwise a new arrangement that minimizes yet further disruption to the economy.
- Manage the transition from the Covid-19 related lock down to a safe operational environment and economy
- Reverse the growing disparity in wealth and incomes
- Achieve sustained, long term growth in real incomes while reducing climatic impacts and negative carrying capacity trends
- Reduce the levels of private personal and corporate debt
On the points 2, and 3 the solutions relate to the development of appropriate corporate structures an increase in the rates of take up in the adoption of suitable technologies and techniques. This transition can be greatly enhanced through changes in legislation and regulations related to wages, taxation and accountancy and macroeconomic policies in order to maximize the rate of change. These last items can contribute to debt reduction.
This article reviews the nature of solutions in each case.
BSR was organized to analyse strategic issues facing the United Kingdom. A decade of increasing turmoil resulting from inappropriate economic policies, BREXIT and Covid-19 demands fresh in-depth analysis of the economic and constitutional challenges facing the nation, with a focus on recovery.
The Q4 2020 volume reviews the issues and presents a series of economic and constitutional proposals for a sustainable future.
Since January 2020 I have been helping prepare and edit the first edition of the British Strategic Review (BSR) to be published by Hambrook Publishing Company 4th Quarter 2020. This was designed to address the items 2 through 4 in the summary above. The Covid-19 crisis intervened but in reality made no difference to the proposed business and policy solutions to the issues facing the constituents of this country. Covid-19 served to focus attention on the extreme exposure the majority of the population finds itself, in terms of low real incomes and savings. At the same time the majority of constituents have become aware that a tiny factional group have become extremely wealthy at an accelerated pace as a result of quantitative easing (QE). This rapid rise in wealth has not been the result of "hard work" or even "risk taking", but has been a policy-induced outcome of a system that biases policy cost-benefit to a select and small number of beneficiaries. No matter what Parliamentary majorities might be, no one voted for this type of outcome for government policies. This has generated a general malaise and feeling that the performance of government, on the economic management front, has been unfair and as not being particularly concerned with the plight of the majority. This precarious economic dependency of the majority has become a pattern moulded by inappropriate macroeconomic policies, legal and regulatory frameworks as well as shortcomings in democratic provisions for constituents to participate in the moulding of decisions that impact their wellbeing.
This article covers some of the solutions considered to be advantageous and the more detailed treatment will be presented in the BSR.Reverse the growing disparity in wealth and incomes
For well over 30 years real incomes for the majority have been declining as a result of monetary policies that promote a target inflation and thereby eroding the purchasing power of the currency. Corporate taxation codes, accounting regulations and monetary policy have isolated wages while the processes of collective decision making on wages are almost non-existent. Monetary policy, more obviously during the last decade under quantitative easing (QE), has been biased towards the interests of a small faction within the constituency who work in the financial intermediation and banking sectors. In spite of this being a cause of a continuing rift between constituent levels of income and wealth, QE has continued to this day.
Tackling this problem requires three changes
Structures designed to reduce income disparity and raise real incomes
- Expansion in corporate structures designed to reduce income disparity but to raise real incomes
- Changes in the taxation, accounting and regulations perhaps as applied to all types of company
- Changes in macroeconomic policies
|Financial policy mistakes concerning mutualization|
Building Societies Act of 1986 permitted societies to 'demutualize' if more than 75% of members voted in favour, the building society would then become a limited company like any other. Members' mutual rights were exchanged for shares in this new company.
Many building societies that took advantage of this legislation, failed. The best known example was Northern Rock.
Several of these transitions were associated with predatory behaviour of organized groups becoming members of mutuals and then joining the pressure to demutualize to secure windfall gains. The 75% threshold was overcome by offering particularly generous terms to members.
Some larger mutuals protected themselves by introducing "poison pill" clauses which required any gains from share allocations, be paid to charities.
The lesson has been to protect mutuals against destruction, members be required to abide by immutable private undertakings to prevent de-mutualization.
The rising prominence of the target of shareholder value has resulted in a shift away from investors being concerned with "fundamentals" such as market prospects, investment, innovation and trends in productivity and share price earnings ratios towards share price. This has been driven by monetary policy, especially under QE, which has led to cheap money and loans being channeled into corporate dealing assets but also organizing buy back of their own shares. This has driven up share prices on a speculative basis. Since this is of benefit to shareholders, most of whom are external and have no operational role in a company, there has been a relaxation in the ways and means of compensating company executives who manage these operations. These have included generous bonus schemes including options on shares. In large companies this can result in bonuses attaining over £20 million. At the same time, the other employees within the company can be on minimum wages or slightly above that level. In this situation the ratio if top pay to least can be as high as 400:1 in some cases it reaches 1,000:1.
The only way to change this operational structure is for people to become involved in the formation of companies organized on a mutual basis where those working in the company are its owners and there are no external shareholders. The immediate impact of this type of structure is that the overhead of dividend payments to external shareholder can be equivalent to an operational costs reduction of between 5% to 15%. Because those within the mutual have a direct interest in employment and an adequate real income there is room for operational incomes to be higher than would be earned in a plc, for example. Changes in regulations
The most obvious change to help move income levels into ranges that represent improvements as well as likely sustained growth, a shift in the tax burden from company accounts to individual earnings could help as long as this was associated with necessary changes in macroeconomic policies.Changes in macroeconomic policies
Changes in macroeconmic policies need to be directed towards the satisfaction of item 3 in the items listed at the top of this article, "Achieve sustained, long term growth in real incomes while reducing climatic impacts and negative carrying capacity trends". This depends of the right choice of technologies and in operational terms on the choice of unit prices. Technology can help generate more for less, reduce operational unit costs and permit unit price reductions to gain market penetration and increased incomes. The role of macroeconomic policies in supporting this objective has been described in articles covering the Real Incomes Approach or Real Incomes Objective (RIO) policies. The leverage of RIO policies through mutuals can result in rising real incomes in the goods and services production sectors both in terms of moderated prices of capital items for business and purchasing power of consumers or company employees.
Although the beneficial deflationary benefits for the supply side can be intensified by mutuals, RIO policies can benefit the whole economy.
Under RIO policies it is possible for mutuals to become more competitive than companies who need to support external shareholders. Therefore in order to support transitions from plc type structures to mutual type structures incentives are required to facilitate this and minimize employment loss in the process.
Reduce the levels of private personal and corporate debt
Private, corporate and government debt is higher now than it was in 2007 at the time of the financial crisis and this has been a policy-induced outcome. As real incomes decline and inflationary leakage from asset markets exacerbates this situation, increasing number make use of short term credit or remortgages to fill in purchasing power gaps. However, without real income rises this downwards spiral has resulted in rising personal debt. Companies of all sizes have taken on debt to support operations where consumption of output has declined.
In this context, there needs to be a two pronged approach with the introduction of stricter due diligence procedures required to make loans available, linked to cash reserves of lenders and real income status of borrowers. As real incomes rise under RIO policies debt can be paid down and requirements for additional debt will be reduced. Real consumption will be increased as a result of unit price reductions and the purchasing power bonus of the currency can means higher real incomes for companies, thereby reducing their requirements for loans.Research and extension services
An important contribution to accelerating the dissemination and adoption of appropriate technologies is through Research and Extension Services. These provide practical guidance to companies on the most appropriate technologies to bolster productivity. There are some interesting models for these services based on an adaptation of the agricultural extension services used for a very long period to promote knowledge and demonstrations in new production techniques.The case of MuTecs-Mutual Technology Companies
Research at SEEL-Systems Engineering Economics Lab and development work at the George Boole Foundation has identified some exciting structures for the creation of Mutual Technology Companies (MuTecs) as a cross-between Open Source collaborative networks and competitive DotCom companies. The exciting aspect of this approach is the relatively low cost of entry and already existing operational infrastructures in the W3.
Hector McNeill is the Director of SEEL-Systems Engineering Economics Lab.
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