Should government reward 'good' businesses?

By Robert Peston on the BBC
A happier, more cohesive society would be filled with businesses that offer rich and fulfilling employment, don't pollute, don't impose big risks on taxpayers, pay taxes that more than cover their net drain on social resources, train the younger generation for life in an uncertain economic world, and so on.



It's a lovely ideal that the market hasn't delivered, because the market doesn't always reward those businesses that do good things, or penalise businesses that do bad things.



To put it in highfalutin' economic terms, there are plenty of externalities generated by companies: these are the various impacts that companies have on society and the economy that aren't captured by the pricing mechanism.



That is one reason why we have government, to deal with those externalities. Right now, for example, the current government is amending the tax system to impose bigger penalties on large emitters of carbon dioxide. And it has already imposed a special levy on banks, because of its view that the financial risks taken by banks impose a potential cost on taxpayers, for which the banks have not been paying.



These judgements about the good and bad that companies do are never simple to make or uncontroversial. Think about the threats that heavy energy users and banks have been making about jobs going abroad if the special tax burdens they face aren't lifted.



In recent times, governments have tended to penalise negative externalities - like pollution - while ignoring positive externalities. And the reason is largely to do with history: providing state rewards for businesses that are deemed to be good is felt to be uncomfortably close to the failed industrial policies of the 1960s and 1970s of picking so-called winners.



So should government play a more active role in rewarding the good that companies do, while also imposing new penalties on a wider number of bad effects?



The Labour leader appears to think so. Here is an extract from the official briefing notes for the speech he is to make later today at his party's annual conference:



"Ed Miliband will call for radical changes in the way businesses are rewarded to create a something for something deal in our economy.



"He will challenge the idea that all businesses are the same and will call for rewards and incentives linked to the long-term value they create and the wealth they build.



"He will say businesses which secure governments contracts will be required to offer young people apprenticeships. And he will open up the prospect of major reforms to the tax and regulation system to create incentives for companies that make a wider contribution to the economy, e.g. through long-term investment or building skills."



In concrete terms, what he means is "Rolls-Royce good, Southern Cross bad".



He wants to support companies that win large export orders, collaborate with universities to develop valuable intellectual property and provide highly skilled manufacturing jobs in Britain (like Rolls). And he wants to penalise those that place big financial bets, where the winnings (if any) are restricted to a few well-heeled owners, and losses fall on innocent bystanders.



Which is all very well, except that it is hard to create general rules that define all the good businesses and all the bad businesses in a fair and accurate way.



For example, even if a Labour government wished to discriminate against businesses owned by private equity, on the basis that it believed they were more likely to invest too little in training and R&D, that would not necessarily have spared the residents of Southern Cross's care homes from heartache and anxiety - because it was listed on the stock market at the time that it collapsed.



What is more, not all private equity businesses take the kind of extreme financial risks that Southern Cross took when it was owned by private equity. And if your bugbear happens to be another species of debt-financed institution, the hedge funds, don't forget that some of them have been more effective than regulators at spotting dangerous bubbles in markets.



Also, judgements about the merits of businesses and business leaders are subject to change. So for example I understand that in an early version of his speech, Ed Miliband was going to say that it was wrong of the last Labour government to reward Sir Fred Goodwin - widely seen as responsible for the calamitous near-failure of Royal Bank of Scotland - with a knighthood (he may yet say this).



But this is to forget that until Royal Bank of Scotland became obsessed with growing bigger and bigger from 2005 or so and onwards, Goodwin was widely seen as one of the more talented British business leaders - who had overseen a highly effective and long overdue modernisation of NatWest's systems and network.



Which is why Mr Miliband will - I am sure - resist the temptation to argue that ministers should reward or punish companies, with special grants or exceptional taxes, on a case by case basis.



That would almost certainly be the road to industrial desertification and corruption.



Does that mean there is nothing government can do to encourage sustainable long term wealth creation?



Well, there is evidence that the tax rewards accruing to debt finance have encouraged banks, property companies, hedge funds and private-equity businesses to take dangerous risks, while discouraging long-term investment as opposed to short-term asset trading, and also shrinking tax revenues paid by the corporate and financial sectors.



This was an argument that George Osborne, the chancellor, took seriously in opposition, but seems to have subsequently discarded - although the Independent Commission on Banking recently flagged up the tax advantages of so-called leverage or borrowing as a contributor to the lethal explosion in the growth of banks' balance sheets relative to their capital resources.



So finding a way to enhance the rewards of equity-financed investment, and reduce the rewards of debt-financed investment, could go some way to reducing the most toxic of externalities afflicting our economy - namely an urge to borrow that has foisted record debts on the British economy and hobbled its ability to grow.

Cost Benefit Analysis

An Answer To The Meaning of Life

Love, economists have discovered, is depreciating rapidly. On current trends, it is expected to fall by £1.78 per passion-hour between now and 2030...

George Monbiot


Love, economists have discovered, is depreciating rapidly. On current trends, it is expected to fall by £1.78 per passion-hour between now and 2030. The opportunity cost of a kiss foregone has declined by £0.36 since 1988. By 2050 the net present value of a night under the stars could be as little as £56.13. This reduction in the true value of love, they warn, could inflict serious economic damage.

None of that is true, but it’s not far off. Love is one of the few natural blessings which has yet to be fully costed and commodified. They’re probably working on it now.

Under the last government, the Department for Transport announced that it had discovered “the real value of time”. Here’s the surreal sentence in which this bombshell was dropped:

“Forecast growth in the real value of time is shown in Table 3.”(1)

Last week the Department for Environment announced the results of its National Ecosystem Assessment, a massive exercise involving 500 experts. The assessment, it tells us, establishes “the true value of nature … for the very first time.”(2) If you thought the true value of nature was the wonder and delight it invoked, you’re wrong. It turns out that it’s a figure with a pound sign on the front. All that remains is for the Cabinet Office to tell us the true value of love and the price of society, and we’ll have a single figure for the meaning of life.

The government has not yet produced one number for “the true value of nature”, but its scientists have costed some of the assets that will one day enable this magical synthesis to be achieved. The assessment has produced figures, for example, for the value of green spaces to human well-being. If we look after them well, our parks and greens will enhance our well-being to the tune of £290 per household per year in 2060(3).

How do they calculate these values? The report tells us that the “ecosystem services” it assesses include “recreation, health and solace”, and natural spaces “in which our culture finds its roots and sense of place” (4). These must be taken into account when costing “shared social value”. Shared social value arises from developing “a sense of purpose”, and being “able to achieve important personal goals and participate in society.” It is enhanced by “supportive personal relationships” and “strong and inclusive communities.”(5) These are among the benefits which the experts claim to be costing.

The exercise is well-intentioned. The environment department rightly points out that businesses and politicians ignore the uncosted damage their decisions might inflict on the natural world and human welfare. It seeks to address this oversight by showing that “there are real economic reasons for looking after nature.”(6) But there are two big problems.

The first is that this assessment is total nonsense, pure reductionist gobbledegook, dressed up in the language of objectivity and reason, but ascribing prices to emotional responses: prices, which, for all the high-falutin’ language it uses, can only be arbitrary. It has been constructed by people who feel safe only with numbers, who must drag the whole world into their comfort zone in order to feel that they have it under control. The graphics used by the assessment are telling: they portray the connections between people and nature as interlocking cogs(7). It’s as clear a warning as we could take that this is an almost-comical attempt to force both nature and human emotion into a linear, mechanistic vision.

The second problem is that it delivers the natural world into the hands of those who would destroy it. Picture, for example, a planning enquiry for an opencast coal mine. The public benefits arising from the forests and meadows it will destroy have been costed at £1m per year. The income from opening the mine will be £10m per year. No further argument needs to be made. The coal mine’s barrister, presenting these figures to the enquiry, has an indefeasible case: public objections have already been addressed by the pricing exercise; there is nothing more to be discussed. When you turn nature into an accounting exercise, its destruction can be justified as soon as the business case comes out right. It almost always comes out right.

Cost-benefit analysis is systematically rigged in favour of business. Take, for example, the decision-making process for transport infrastructure. The last government developed an appraisal method which almost guaranteed that new roads, railways and runways would be built, regardless of the damage they might do or the paltry benefits they might deliver(8). The method costs people’s time according to how much they earn, and uses this cost to create a value for the development. So, for example, it says the market price of an hour spent travelling in a taxi is £45, but the price of an hour spent travelling by bicycle is just £17, because cyclists tend to be poorer than taxi passengers(9).

Its assumptions are utterly illogical. For example, commuters are deemed to use all the time saved by a new high speed rail link to get to work earlier, rather than to live further away. Rich rail passengers are expected to do no useful work on trains, but to twiddle their thumbs and stare vacantly out of the window throughout the journey. This costing system explains why successive governments want to invest in high-speed rail rather than cycle lanes, and why multi-billon pound road schemes which cut two minutes off your journey are deemed to offer value for money(10). None of this is accidental: the cost-benefit models governments use excite intense interest from business lobbyists. Civil servants with an eye on lucrative directorships in their retirement ensure that the decision-making process is rigged in favour of over-development.

This is the machine into which nature must now be fed. The National Ecosystem Assessment hands the biosphere on a plate to the construction industry.

It’s the definitive neoliberal triumph: the monetisation and marketisation of nature, its reduction to a tradeable asset. Once you have surrendered it to the realm of Pareto optimisation and Kaldor-Hicks compensation, everything is up for grabs. These well-intentioned dolts, the fellows of the Grand Academy of Lagado who produced the government’s assessment, have crushed the natural world into a column of figures. Now it can be swapped for money.