Has market fundamentalism had its day?

Johann Hari

Thursday, 20 March 2008

The sound of scenery collapsing and actors staggering off the stage on Wall Street and in the City of London is echoing all over the world. The reporting of these events is mostly couched here in the anodyne language of economic cycles – there is "market turbulence" and "a down-turn on the way". This makes us think of it all as the economic equivalent of the tsunami – one of those horrible things that erupts every now and then, beyond our control. But this is a lie.

The financial crises of the past year, culminating in the de-clawing of the Bear Stearns bear-pit over the past week, are the direct result of pursuing an ideology to its logical end-point. This financial bubble could only take place because we have been living in an ideological bubble – one of market fundamentalism.

From the trauma of the Great Depression to 1973, there was a broad consensus across the democratic world that markets were absolutely essential to generate wealth, but they will also cause all sorts of problems if they are left unregulated. Economists like JM Keynes and JK Galbraith taught us that if you abolish markets, you get starvation; but if you abolish all the democratic checks and balances on markets, you get a system that eats itself. Unregulated businesses will cause unsustainable levels of pollution and inequality, and ultimately start pursuing unhinged business models that cause the whole system to collapse.

But since the 1970s, we have been lectured that these ideas are stale left-overs. Markets work best when all the fetters on them – a democratic state, and democratic trade unions – shrivel like fruit in the sun. Whatever the problem, the solution is to release businesses from all checks and balances.

So we tried it. We now have a global business system that is virtually unregulated, with trade unions crippled and politicians largely bought by the super-rich to serve their interests. And what is the result? Inequality has returned to 1920s levels, and movement between the classes has collapsed. We have bank runs unseen in a century. And now even senior Wall Street figures mutter – with only a hint of hyperbole – about a looming Depression and "the worst crisis since 1929". All we need now is rising unemployment and Zelda and F Scott Fitzgerald boozily waltzing through Wall Street, and we are back where this story began.

The sub-prime mortgage collapse that started the stock market tremors was entirely and exclusively the child of the deregulation mania. Until the Bush era, banks were forbidden by the state from offering unpayably vast mortgages to the poorest people in America. It was plain that such a system would be unfair to consumers, and introduced a wild instability into the financial system. But – hey! – state regulation is always a problem, and market freedom is always the solution – right? Now that the deregulated market has begun to collapse in on itself, the state has had to step back in with a far heavier hand than before, throwing tens of billions at failed banks.

So as we enter a recession – or worse – caused by market fundamentalism, how will our politics change? The world economy now needs an era of re-regulation akin to Franklin Roosevelt's, which regulated the banks, legalised trade unions and made taxation progressive. This will be harder to do because the economy is now globalised. But with political will, it can be done.

Yet this is not necessarily what will happen. The super-rich speak louder than the rest of us – politicians are dependent on their party donations, for one – and are determined to defend their privileges. As an economy contracts, stress-lines open up in a society – and by looking at British politics today, we can see the conflicting directions these fractures could run in.

When the funds for public services dry up, the right instinctively looks downward for places to save cash. The Tories are pledging a crackdown on dis-ability-benefit recipients, and the abolition of services for the poor like SureStart centres and Educational Maintenance Allowances. Refugees are rarely far behind: remember, David Cameron wrote the last Tory manifesto, which committed to end the 1951 UN Convention on Refugees founded in the wake of the Holocaust.

But there is another place for our anger to be directed. Buried in the many dense footnotes to the Budget last week, there was an extraordinary figure. The Treasury has calculated that the super-rich are using avoidance and evasion techniques to wriggle out of paying £41bn in taxes to the British Exchequer every year. To put this in context: if every single disability benefit claimant and every single refugee was a fraud, they would still be ripping us off for less than the super-rich.

If the super-rich paid their taxes as the rest of us are required to, we could increase every pension by nearly 50 percent, or treble spending on primary schools. (I will post some of my suggestions for how to make them do this on our OpenHouse blog.) We are always hearing about the tiny number of dishonest disability and refugee claimants, but hardly anything about this far larger scandal.

As funds for public services dry up in a recession, our politicians can go after the weak people at the bottom, or they can require the strong people at the top – who caused this crisis with their demands for deregulation – to start paying their fair share. Imagine an election poster bearing the faces of the 10 richest men in Britain, asking: you pay your taxes, why shouldn't they? Some European governments are already making this choice: Germany and Italy are engaged in huge programmes of loop-hole closing and prosecutions.

Of course, the cheerleaders for deregulation who unrepentantly led us into this mess announce that requiring the rich to pay their fair share will only drive away investment and send productivity plummeting. An intelligent writer once answered this point, writing: "The Chancellor has been generous in the deployment of new and lucrative tax shelters for the very rich. The theory is that capital will flourish, that industry and innovation will thereby profit and enterprise will be justly rewarded. The realities are more mundane and more squalid. The rewards are for ingenuity in tax avoidance only. The only beneficiaries are the very rich, who show no sign of becoming more productive – only richer."

The writer was Gordon Brown in 1987. Perhaps somebody could show it to him now – a prime minister who had to be jostled into charging the likes of Mohamed Al Fayed a pittance of £30,000 a year. (Cameron would be even worse: his political career has been bankrolled by a man based in the tax haven of Belize, and his "competitiveness" spokesman, John Redwood, has suggested copying the US deregulation of mortgages here.) In the US, both Clinton and Obama are similarly cautious, looking nervously over their shoulders to their big-money donors.

The 1920s nostalgia of the market fundamentalists has brought us to this crisis, where we could be facing our own 1930s. This should shift global politics dramatically to the left – but not if our politicians' responses are as sub-prime as our mortgages.

How to stop the super-rich scam
By Johann Hari

So what do we do about the fact the super-rich are scamming the British tax system for £41bn a year? In my column today, I point out the super-rich are dishonestly wriggling out of paying tax billions that are enough to treble spending on primary schools, or increase every single pension by nearly 50 per cent. This is being repeated across the Anglo-economies, from the US to Australia.

There is a kind of pessimism about our ability to stop the rich unilaterally exempting themselves from the tax system. They live in our societies - dependent on the same police and army and emergency rooms – but they increasingly refuse to pay the membership fees. Indeed, they demand we show “gratitude” just for them gracing us with their presence.

A superb recent report by the tax specialist Richard Murphy for the British TUC – ‘The Missing Billions’ – details a rich range of options to make it much harder for these people to scam us.

The most simple is to introduce into British law something called a general anti-avoidance principle.
It is simply stated that if any step is added into a commercial arrangement for the sole or main purpose of avoiding tax, then this step will be ignored by HM Revenue and Customs. They will tax it anyway. So if you transfer you earnings into your wife or child’s name just to scam us; if you relocate your business on paper just to scam us; we’ll ignore it.

This is not a magic bullet – but it changes the terms of the debate. Instead of the Inland Revenue chasing retrospectively to close loopholes, accountants have to justify them as being more than mere tax avoidance every time.

The next move is to stop the perverse staff cuts at HM Revenue and Customs. By 2011, three hundred tax offices will have been shuttered, and 25,000 staff laid off. This is a totally false economy: each staff member brings in £2,636,588 a year – more than 96.5 times their wages. But if there’s nobody to track down the tax avoiders, we can’t net the cash.

And we can crack down on tax havens. The German government is now using its equivalent of MI5 to track people dodgily shifting their cash to Liechtenstein. Britain needs to be as proactive. We were constantly being told that it was impossible to restrain tax havens, because the money would simply leech to another haven, then another; there would always be somebody prepared to snub the world and reap the rewards. But after September 11th the US demanded every al Qaeda-related bank account be closed – and it happened overnight. If money stashed away to kill people can be tracked, why not money that could save lives too? An international campaign to end this system is in the interests of the 99.9 percent of humanity who will never use a tax haven.

This isn’t about persecuting the super-rich; it’s about requiring them to pay their fair share for the privilege of living and working in a stable democratic society. I pay my taxes; you pay yours. It is time for the people who can most afford it to do the same.