Ballatha Pahayan
Thursday 13 June 2019
Wednesday 12 June 2019
Anyone who wants to be prime minister should have a course of therapy first
Our toxic political system rewards all the wrong traits and produces the worst possible leaders writes George Monbiot in The Guardian
I believe that anyone who wants to stand in a national election should receive a course of psychotherapy. Completing the course should be a qualification for office. This wouldn’t change the behaviour of psychopaths, but it might prevent some people who exercise power from imposing their own deep wounds on others. I’ve had two courses: one influenced by Freud and Donald Winnicott, the other by Paul Gilbert’s compassion-focused approach. I found them both immensely helpful. I believe almost everyone would benefit from such treatment.
The underlying problem is the system through which such people jostle. Toxic personalities thrive in toxic environments. Those who should be least trusted with power are most likely to win it. A study in the Journal of Personality and Social Psychology suggests that the group of psychopathic traits known as “fearless dominance” is associated with behaviours that are widely valued in leaders, such as making bold decisions and bestriding the world stage. If so, we surely value the wrong characteristics. If success within the system requires psychopathic traits, there is something wrong with the system.
In designing an effective politics, it could be useful to work backwards: to decide what kind of people we would like to see representing us, then create a system that would bring them to the fore. I want to be represented by people who are thoughtful, self-aware and collaborative. What would a system that elevated such people look like?
It would not be a purely representative democracy. This works on the principle of presumed consent: “You elected me three years ago, therefore you are presumed to have consented to the policy I’m about to implement, whether or not I mentioned it at the time.” It rewards the “strong, decisive” leaders who so often lead their nations to catastrophe. A system that tempers representative democracy with participative democracy – citizens’ assemblies, participatory budgeting, the co-creation of public policy – is more likely to reward responsive and considerate politicians. Proportional representation, which prevents governments with minority support from dominating the nation, is another potential safeguard – though no guarantee.
In rethinking politics, let us develop systems that encourage kindness, empathy and emotional intelligence. Let us ditch systems that encourage people to hide their pain by dominating others.
‘Toxic personalities thrive in toxic environments.’ John Bercow (centre) mediates during a Commons debate on the EU withdrawal bill. Photograph: Mark Duffy/AFP/Getty Images
Who in their right mind would want the job? It is almost certain to end, as Theresa May found, in failure and public execration. To seek to be prime minister today suggests either reckless confidence or an insatiable hunger for power. Perhaps we need a reverse catch-22 in British politics: anyone crazy enough to apply for this post should be disqualified from running.
A few years ago, the psychologist Michelle Roya Rad listed the characteristics of good leadership. Among them were fairness and objectivity; a desire to serve society rather than just yourself; a lack of interest in fame and attention; and resistance to the temptation to hide the truth or make impossible promises. Conversely, a paper in the Journal of Public Management and Social Policy has listed the characteristics of leaders with psychopathic, narcissistic or Machiavellian personalities. These include: a tendency to manipulate others; a preparedness to lie and deceive to achieve your ends; a lack of remorse and sensitivity; and a desire for admiration, attention, prestige and status. Which of these lists, do you think, best describes the people vying to lead the Conservative party?
In politics, almost everywhere we see what looks like the externalisation of psychic wounds or deficits. Sigmund Freud claimed that “groups take on the personality of the leader”. I think it would be more accurate to say that the private tragedies of powerful people become the public tragedies of those they dominate. For some people, it is easier to command a nation, to send thousands to their deaths in unnecessary wars, to separate children from their families and inflict terrible suffering, than to process their own trauma and pain. What we appear to see in national politics around the world is a playing out in public of deep private distress.
This could be a particularly potent force in British politics. The psychotherapist Nick Duffell has written of “wounded leaders”, who were separated from their families in early childhood when they were sent to boarding school. They develop a “survival personality”, learning to cut off their feelings and project a false self, characterised by a public display of competence and self-reliance. Beneath this persona is a profound insecurity, which might generate an insatiable need for power, prestige and attention. The result is a system that “consistently turns out people who appear much more competent than they actually are”.
The problem is not confined to these shores. Donald Trump occupies the most powerful seat on Earth, yet still he appears to seethe with envy and resentment. “If President Obama made the deals that I have made,” he claimed this week, “the corrupt media would be hailing them as incredible … With me, despite our record-setting economy and all that I have done, no credit!” No amount of wealth or power seems able to satisfy his need for affirmation and assurance.
Those who should be least trusted with power are most likely to win it
Who in their right mind would want the job? It is almost certain to end, as Theresa May found, in failure and public execration. To seek to be prime minister today suggests either reckless confidence or an insatiable hunger for power. Perhaps we need a reverse catch-22 in British politics: anyone crazy enough to apply for this post should be disqualified from running.
A few years ago, the psychologist Michelle Roya Rad listed the characteristics of good leadership. Among them were fairness and objectivity; a desire to serve society rather than just yourself; a lack of interest in fame and attention; and resistance to the temptation to hide the truth or make impossible promises. Conversely, a paper in the Journal of Public Management and Social Policy has listed the characteristics of leaders with psychopathic, narcissistic or Machiavellian personalities. These include: a tendency to manipulate others; a preparedness to lie and deceive to achieve your ends; a lack of remorse and sensitivity; and a desire for admiration, attention, prestige and status. Which of these lists, do you think, best describes the people vying to lead the Conservative party?
In politics, almost everywhere we see what looks like the externalisation of psychic wounds or deficits. Sigmund Freud claimed that “groups take on the personality of the leader”. I think it would be more accurate to say that the private tragedies of powerful people become the public tragedies of those they dominate. For some people, it is easier to command a nation, to send thousands to their deaths in unnecessary wars, to separate children from their families and inflict terrible suffering, than to process their own trauma and pain. What we appear to see in national politics around the world is a playing out in public of deep private distress.
This could be a particularly potent force in British politics. The psychotherapist Nick Duffell has written of “wounded leaders”, who were separated from their families in early childhood when they were sent to boarding school. They develop a “survival personality”, learning to cut off their feelings and project a false self, characterised by a public display of competence and self-reliance. Beneath this persona is a profound insecurity, which might generate an insatiable need for power, prestige and attention. The result is a system that “consistently turns out people who appear much more competent than they actually are”.
The problem is not confined to these shores. Donald Trump occupies the most powerful seat on Earth, yet still he appears to seethe with envy and resentment. “If President Obama made the deals that I have made,” he claimed this week, “the corrupt media would be hailing them as incredible … With me, despite our record-setting economy and all that I have done, no credit!” No amount of wealth or power seems able to satisfy his need for affirmation and assurance.
Those who should be least trusted with power are most likely to win it
I believe that anyone who wants to stand in a national election should receive a course of psychotherapy. Completing the course should be a qualification for office. This wouldn’t change the behaviour of psychopaths, but it might prevent some people who exercise power from imposing their own deep wounds on others. I’ve had two courses: one influenced by Freud and Donald Winnicott, the other by Paul Gilbert’s compassion-focused approach. I found them both immensely helpful. I believe almost everyone would benefit from such treatment.
The underlying problem is the system through which such people jostle. Toxic personalities thrive in toxic environments. Those who should be least trusted with power are most likely to win it. A study in the Journal of Personality and Social Psychology suggests that the group of psychopathic traits known as “fearless dominance” is associated with behaviours that are widely valued in leaders, such as making bold decisions and bestriding the world stage. If so, we surely value the wrong characteristics. If success within the system requires psychopathic traits, there is something wrong with the system.
In designing an effective politics, it could be useful to work backwards: to decide what kind of people we would like to see representing us, then create a system that would bring them to the fore. I want to be represented by people who are thoughtful, self-aware and collaborative. What would a system that elevated such people look like?
It would not be a purely representative democracy. This works on the principle of presumed consent: “You elected me three years ago, therefore you are presumed to have consented to the policy I’m about to implement, whether or not I mentioned it at the time.” It rewards the “strong, decisive” leaders who so often lead their nations to catastrophe. A system that tempers representative democracy with participative democracy – citizens’ assemblies, participatory budgeting, the co-creation of public policy – is more likely to reward responsive and considerate politicians. Proportional representation, which prevents governments with minority support from dominating the nation, is another potential safeguard – though no guarantee.
In rethinking politics, let us develop systems that encourage kindness, empathy and emotional intelligence. Let us ditch systems that encourage people to hide their pain by dominating others.
Tuesday 11 June 2019
How India could sidestep the Middle Income Trap
Rathin Roy - Economic Adviser to the Indian Government
It’s a fight between Hindus
THE assault by the Rashtriya Swayamsevak Sangh (RSS) on West Bengal Chief Minister Mamata Banerjee has roots in India’s pre-Partition intra-Hindu battle lines. While the most cited example of this bitter rivalry is Mahatma Gandhi’s murder by Nathuram Godse, the pre-Independence standoff continues to stalk Indian society just as menacingly writes Jawed Naqvi in The Dawn
The murders of Gauri Lankesh and her rationalist colleagues — allegedly by members of a Brahminical group suspected in Gandhi’s assassination — confirms this narrative. Theatre icon Girish Karnad who died of a prolonged illness on Monday was on the hit list of the group.
Banerjee is a Bengali Brahmin of a secular hue and the RSS is a Brahmin-led body of the Hindu right with origins in the intense intra-Brahmin rivalry that goes back to pre-Independence Poona, now Pune. It was here that nationalist leader B.G. Tilak took a violently hostile stance against M.G. Ranade’s social reformist interventions at annual Congress sessions. Tilak’s men would raid Ranade’s camps with sticks and stones, not dissimilar to the hooligans unleashed by the Hindu right today.
Given the spurious but all-pervasive critique of Indian liberalism under way, blaming them for the opposition’s rout by Narendra Modi, this equation between Brahmins and Brahmins (or Hindus and Hindus) needs to be clearly borne in mind. In today’s context, Prime Minister Modi is vocal about a Congress-free India, which in the Hindutva echo chamber may sound like Muslim-free India.
It is difficult to understand the grudge against Indian liberalism, when that is all one has to save and fight for.
But the real targets are reformist and secular Hindus. Tilak wanted a Ranade-free India. W.C. Bonnerjee, the socially regressive president of the Indian National Congress, would have preferred a Brahmo Samaj-free India. The Samaj was the progenitor of reformist Ishwarchand Vidyasagar, whose bust was razed by Hindutva hooligans in their anti-Mamata melee recently. Likewise, in ancient India, the nastiks or non-believers (from the Hindu fold) challenged Brahmin hegemony and suffered for it.
Gleaning from several recent reviews of the landslide Modi win, it appears to have become fashionable to accuse an imagined airy-fairy, unintelligent intellectual class, supposedly unconnected with the masses and allegedly confined to the upmarket Khan Market and British-built Lutyens’ Delhi, for the political debacle of the Congress and the left. The truth is that barring the excellent Bahri bookshop that still holds true to its intellectual purpose, Khan Market was transformed into a hub of flashy consumerism bereft of any thinking capacity from the 1990s, offering a fertile ground for the arriving right-wing menace to grow and prosper. As for Lutyens’ Delhi, that is where Hindutva leaders reside, including Prime Minister Modi, mostly in quarters vacated by assorted architects of Nehru’s India. It is difficult to understand the grudge against Indian liberalism, when that is all one has to save and fight for.
The flip side is just as true. The point apparently missed by Muslim votaries of Partition to everyone’s detriment in the subcontinent was that the more real fight had existed towards the end of British rule not between Hindus and Muslims, but between Hindus and Hindus and between Muslims and Muslims. Imagine if Jinnah had met Gauri Lankesh or Girish Karnad and joined their fight against regressive Hinduism. What if they had struck up an alliance with the Dravida social justice movement of southern India and other equally progressive Hindu (though some called themselves anti-Hindu ideologues)? The Muslim League might have had a different view about the future of a united India.
Just as there emerged regressive forces to disrupt Jinnah’s secular quest in Pakistan, the intense rivalry between Tilak and Ranade presaged the contest between a secular opposition and the RSS. Tilak represented British India’s reactionary impulses laced in narrow nationalism, which were to be co-opted by Hindutva forces.
Many of his heirs have lurked on in the Congress. They include those who bear hostility towards Dalit reformist Ambedkar and other progressive groups. Ranade, the reformist stalwart, embodied the best in India’s quest for social equality, an amalgam of progressive forces set into motion in Bengal by Ram Mohan Roy, and in Maharashtra by Jyotiba Phule and several others.
History is witness to this phenomenon on both sides of the border. Soon after the Quaid’s death, his dream of a secular state was smashed by those lurking in the shadows of Muslim revivalism. In India, Nehru, who dreamt like Jinnah of a parliamentary democracy with an egalitarian intent, was overwhelmed in his own cabinet by stubbornly regressive but powerful satraps. (Read Nehru’s desperate letters to the chief minister of Uttar Pradesh under whose watch the early Ayodhya-centric communal campaign was unleashed.)
Detractors of the Nehruvian worldview gained enormously from the rise of the Hindu right, which was spurred unwittingly by Manmohan Singh’s economic reforms, although he claims to be an ardent devotee of the first prime minister. Singh helped create a nouveau-riche middle class with definitive regressive and feudal social features. This new urban populace can hardly qualify as a liberal vanguard of anything. Rather it has swamped the main opposition Congress as much as it has spurred the consolidation of the RSS and its many arms, including the BJP.
It may disturb some in the left to be reminded that the neo-liberal consumer society did not spare their rank and file either. If after 70 years of struggle for the Orwellian sugar-candy mountain, all that the left have to show for their cultural legacy is the annual Durga Puja in Bengal, then it becomes easy to see how the cadres slip out occasionally to vote for the BJP or desert the party altogether. Worse, the left’s innate sectarianism does not allow for a pause to see that if Mamata Banerjee goes, the Hindutva sway over Bengal would be complete.
Rather than holding her alliance with Muslims responsible for the BJP’s victory in Bengal — a dishonest assessment — the left should make an existential accord with Mamata to stave off its own and ultimately India’s disastrous denouement.
Banerjee is a Bengali Brahmin of a secular hue and the RSS is a Brahmin-led body of the Hindu right with origins in the intense intra-Brahmin rivalry that goes back to pre-Independence Poona, now Pune. It was here that nationalist leader B.G. Tilak took a violently hostile stance against M.G. Ranade’s social reformist interventions at annual Congress sessions. Tilak’s men would raid Ranade’s camps with sticks and stones, not dissimilar to the hooligans unleashed by the Hindu right today.
Given the spurious but all-pervasive critique of Indian liberalism under way, blaming them for the opposition’s rout by Narendra Modi, this equation between Brahmins and Brahmins (or Hindus and Hindus) needs to be clearly borne in mind. In today’s context, Prime Minister Modi is vocal about a Congress-free India, which in the Hindutva echo chamber may sound like Muslim-free India.
It is difficult to understand the grudge against Indian liberalism, when that is all one has to save and fight for.
But the real targets are reformist and secular Hindus. Tilak wanted a Ranade-free India. W.C. Bonnerjee, the socially regressive president of the Indian National Congress, would have preferred a Brahmo Samaj-free India. The Samaj was the progenitor of reformist Ishwarchand Vidyasagar, whose bust was razed by Hindutva hooligans in their anti-Mamata melee recently. Likewise, in ancient India, the nastiks or non-believers (from the Hindu fold) challenged Brahmin hegemony and suffered for it.
Gleaning from several recent reviews of the landslide Modi win, it appears to have become fashionable to accuse an imagined airy-fairy, unintelligent intellectual class, supposedly unconnected with the masses and allegedly confined to the upmarket Khan Market and British-built Lutyens’ Delhi, for the political debacle of the Congress and the left. The truth is that barring the excellent Bahri bookshop that still holds true to its intellectual purpose, Khan Market was transformed into a hub of flashy consumerism bereft of any thinking capacity from the 1990s, offering a fertile ground for the arriving right-wing menace to grow and prosper. As for Lutyens’ Delhi, that is where Hindutva leaders reside, including Prime Minister Modi, mostly in quarters vacated by assorted architects of Nehru’s India. It is difficult to understand the grudge against Indian liberalism, when that is all one has to save and fight for.
The flip side is just as true. The point apparently missed by Muslim votaries of Partition to everyone’s detriment in the subcontinent was that the more real fight had existed towards the end of British rule not between Hindus and Muslims, but between Hindus and Hindus and between Muslims and Muslims. Imagine if Jinnah had met Gauri Lankesh or Girish Karnad and joined their fight against regressive Hinduism. What if they had struck up an alliance with the Dravida social justice movement of southern India and other equally progressive Hindu (though some called themselves anti-Hindu ideologues)? The Muslim League might have had a different view about the future of a united India.
Just as there emerged regressive forces to disrupt Jinnah’s secular quest in Pakistan, the intense rivalry between Tilak and Ranade presaged the contest between a secular opposition and the RSS. Tilak represented British India’s reactionary impulses laced in narrow nationalism, which were to be co-opted by Hindutva forces.
Many of his heirs have lurked on in the Congress. They include those who bear hostility towards Dalit reformist Ambedkar and other progressive groups. Ranade, the reformist stalwart, embodied the best in India’s quest for social equality, an amalgam of progressive forces set into motion in Bengal by Ram Mohan Roy, and in Maharashtra by Jyotiba Phule and several others.
History is witness to this phenomenon on both sides of the border. Soon after the Quaid’s death, his dream of a secular state was smashed by those lurking in the shadows of Muslim revivalism. In India, Nehru, who dreamt like Jinnah of a parliamentary democracy with an egalitarian intent, was overwhelmed in his own cabinet by stubbornly regressive but powerful satraps. (Read Nehru’s desperate letters to the chief minister of Uttar Pradesh under whose watch the early Ayodhya-centric communal campaign was unleashed.)
Detractors of the Nehruvian worldview gained enormously from the rise of the Hindu right, which was spurred unwittingly by Manmohan Singh’s economic reforms, although he claims to be an ardent devotee of the first prime minister. Singh helped create a nouveau-riche middle class with definitive regressive and feudal social features. This new urban populace can hardly qualify as a liberal vanguard of anything. Rather it has swamped the main opposition Congress as much as it has spurred the consolidation of the RSS and its many arms, including the BJP.
It may disturb some in the left to be reminded that the neo-liberal consumer society did not spare their rank and file either. If after 70 years of struggle for the Orwellian sugar-candy mountain, all that the left have to show for their cultural legacy is the annual Durga Puja in Bengal, then it becomes easy to see how the cadres slip out occasionally to vote for the BJP or desert the party altogether. Worse, the left’s innate sectarianism does not allow for a pause to see that if Mamata Banerjee goes, the Hindutva sway over Bengal would be complete.
Rather than holding her alliance with Muslims responsible for the BJP’s victory in Bengal — a dishonest assessment — the left should make an existential accord with Mamata to stave off its own and ultimately India’s disastrous denouement.
Saturday 8 June 2019
Bright star to black hole: the rise and fall of fund manager Neil Woodford
Rupert Neate in The Guardian
He was, the BBC declared in 2015, “the man who can’t stop making money”. He was the rock star of pensions and fund management, awarded a CBE for his services to the economy. But now, since Neil Woodford stopped investors from withdrawing their own money from his flagship fund, he is in the spotlight for all the wrong reasons.
His Woodford Equity Income Fund holds the pension savings and investments of tens of thousands of people. But it has been performing so badly that investors were withdrawing money at the rate of £10m a day.
-----Also read
It can be Hard to tell Luck from Judgment
-----
Last week, after 23 consecutive months in which withdrawals from the fund had been greater than the new money coming in, Woodford found he couldn’t realise cash quickly enough to meet the withdrawal requests – at least at a decent price. He closed the fund to withdrawals, leaving legions of investors angry and in limbo for 28 days.
In a YouTube video he posted on Wednesday to finally apologise to investors, he looked anything but the archetypal City fund manager, with his close-cropped hair and trademark casual jumper rather than suit and tie. In the video, filmed at his fund’s headquarters on an industrial estate near Oxford, Woodford said: “I’m extremely sorry that we’ve had to take this decision. We understand our investors’ frustration. All I can say in response to that is that this decision was motivated by your interests.”
Woodford said he had been forced to “gate” the fund because so many big investors were trying to pull money out that he wasn’t able to meet the demand. His funds hold unusually big stakes in smaller and early stage unlisted companies, which are hard to sell quickly.
The final straw had been Kent county council pension fund’s request to take out its £263m holding. The trustees of Kent’s pension fund – who had been trying to stem the losses Woodford had racked up for its 110,000 members – decided to pull out when it emerged at the end of last month that the flagship fund had shrunk by £560m to £3.77bn in just four weeks. At its peak the fund was worth more than £10bn.
Of the £560m lost, just under £190m was made up of withdrawals. The rest – more than £370m – represented yet further declines in the value of the investments held in the fund, which at the end of April was made up of stakes in 101 companies ranging from housebuilders such as Barratt Developments and Taylor Wimpey to logistics business Eddie Stobart and a large number of esoteric healthcare firms.
Under EU rules aimed at ensuring that funds which hold unquoted – and therefore potentially hard-to-sell – shares can retain their stability, these shares are permitted to make up no more than 10% of the portfolio. Woodford got around those rules, quite legally, by putting some of them into his separate, quoted Patient Capital investment trust – and taking Patient Capital shares into the main fund. He also listed some of them of the Guernsey stock exchange.
But the Kent fund had left it just too late: instead of getting its cash back, its request triggered Woodford’s suspension of trading in the fund.
The video apology, in which Woodford set and answered his own questions, followed months during which he had been dismissing the concerns of investors and financial experts about his fund’s prolonged poor performance.
In February, his Woodford Equity Income Fund was listed for the first time on a “Spot the Dog” list compiled by Bestinvest, which highlights underperforming “dog” funds. Bestinvest criticised some of his worst investments and described the fund as “a Great Dane-sized” new entrant to its list.
Just a few weeks later, Woodford told the Financial Times that the investors who were pulling out were making “appallingly bad decisions”, influenced by “a mountain of fake information and fake analysis” that “pisses me off”.
Neil Woodford apologises to investors in a still from his YouTube video last week. Photograph: Woodford Investment Management/PA
In December 2017 he said in an interview that they key to successful investing was to “have a sufficiently strong arrogant gene to back your judgment, back your conviction”.
That arrogance is now provoking widespread anger, not just from his investors but also among other fund managers, who say Woodford has tarred the whole industry with the same loss-making brush.
Last Wednesday the Financial Conduct Authority, the City’s watchdog, said it was considering a formal investigation into the fund, and the following day, Bank of England governor Mark Carney told an audience in Tokyo that funds such as Woodford’s (although he died not name him) needed closer scrutiny to lessen the risk of fire sales triggering market disruption. The Bank, he said, would start stress-testing funds to ensure they couldn’t threaten a system-wide crisis.
This is a staggering fall from grace for Woodford, who had been one of the UK’s very best and most reliable stock pickers. Anyone who invested £10,000 at the start of his quarter-of-a-century career at Invesco Perpetual would have seen their money grow to almost £250,000 by the time he left.
Mark Dampier, director of research at stockbroker Hargreaves Lansdown, declared in 2015 that Woodford was “arguably the best fund manager of his generation”. Just weeks ago, despite the growing cloud surrounding Woodford, Hargreaves told its clients “we retain our conviction in him to deliver excellent long-term performance” and reminded them that he had “built his career by investing against the herd” and “shown an ability to get the big calls right”.
Hargreaves’s customers had £2bn invested with Woodford at the end of March – roughly a fifth of all the money in his three big funds.
Only when the fund was gated did Hargreaves, which has heavily promoted Woodford at discounted fees, finally drop Woodford Equity Income from its influential “Wealth 50” list of favourite funds, which it marketed to its more than a million clients.
FacebookTwitterPinterest Bank of England governor Mark Carney has suggested that funds such as Woodford’s need more scrutiny. Photograph: Hannah McKay/Reuters
Asked if he regretted his support for Woodford and the controversial discount fee structure, Dampier said: “Our aim is to enable our clients to choose the best-in-class funds at lower fees. Our favourite fund choices have, for the most part, beaten their sector averages and benchmarks. Not every fund has, and we share our clients’ disappointment and frustration when they don’t.”
Other big backers have also deserted Woodford. St James’s Place last week took its clients’ £3.5bn to another manager. On Thursday another supporter, Openworks, did the same with its £330m.
Woodford fell into fund management by accident. He had never even heard of the business until he rocked up in London in the 1980s, sleeping on his brother’s floor while looking for a job. He had left school wanting to fly fighter jets but couldn’t pass the RAF’s aptitude test, and instead read agricultural economics at the University of Exeter.
In 1988 he joined Invesco Perpetual and built a reputation as a brilliant contrarian investor. When others piled into dotcom shares at the turn of the century, he decided against, and backed more traditional companies. He made huge gains when the dotcom crash came. He eschewed banking stocks before the financial crisis – and avoided that crash too.
He held big stakes in giant companies, whose chief executives needed to retain his support. In 2012 his criticism of AstraZeneca chief executive David Brennan was widely regarded to have cost Brennan his job, and his criticism of BAE’s attempted £28bn merger with Airbus was seen as one of the reasons the deal collapsed.
In 2014, feeling that he had outgrown Invesco Perpetual, where he personally managed some £25bn of funds, he set up his own firm, Woodford Investment Management. Within two weeks of launching, he had raised £1.6bn, a UK record, and this quickly grew to £16bn. In its first year, his flagship fund made a 16% return and Woodford, a devotee of veteran US investor Warren Buffett, was called the “Oracle of Oxford”.
FacebookTwitterPinterest Woodford is a keen student of the US investor Warren Buffett. Photograph: Andrew Harnik/AP
But since then things have turned sour. Over the past four years, investors in Woodford Equity Income have collected a return of less than 1% – compared with 29% for the market as a whole. Over that same four-year period, Woodford has paid himself some £63m.
In the 2017-18 financial year alone, which was a dreadful period for his funds, Woodford Investment Management paid a £36.5m dividend to a company called Woodford Capital. Woodford holds 65% of that firm, and his business partner Craig Newman has the remaining 35%.
Woodford, who has spoken out against the huge bonuses awarded to other fund managers, and to the bosses of companies he has invested in, declined to answer any questions about his own pay, or to elaborate, beyond his YouTube video, on the fund’s tricky situation.
The firm’s public relations officer asked the Observer to point out that Woodford had donated some of his pay to charity. But he was unable to state how much money had been donated, or to which causes. The PR person declined to comment when asked whether Woodford would consider pumping any of his personal millions back into the fund.
Those who know Woodford say he is “decidedly unflashy” and that it is “difficult to fathom where all that money goes”. Well, a lot of it appears to go on horses. He and his wife Madelaine have a few dozen top showjumpers training at a vast equestrian complex near their home in the Cotswolds.
The house, near Tetbury, was built on land the Woodfords bought for nearly £14m in 2013. They moved to the Cotswolds after a planning application to construct a dressage arena and 28-horse stabling block near their previous estate, in Buckinghamshire, was rejected following a row with neighbours. One of those neighbours, the BBC’s Jeremy Paxman, described Woodford’s planned addition as “enormous, unsightly and environmentally unfriendly”.
The Tetbury venue, however, got the planners’ green light and includes a full-size manège (dressage arena). Woodford, who came to the sport only after meeting Madelaine – a keen rider whom he married in 2015 – has put in the hours at the manège and now often takes part in eventing competitions on a bay gelding called Willows Spunky.
Woodford’s other passions are fast cars and racing bicycles. He starts up the Porsche at 5am every weekday to drive to his fund’s minimalist offices on an industrial estate in Cowley, Oxford. At weekends he drives it down to the couple’s £6.3m glass-walled holiday home in Salcombe, Devon.
Woodford’s huge pay and luxury lifestyle haven’t gone unnoticed by his investors, many of whom are relying on him to be a safe pair of hands and to increase the value of their retirement or rainy day fund.
A comment on his YouTube video, by someone with the username Platoreads: “Arrogance, Incompetence, Complacency and greed: your name is Woodford! You have failed, Neil. Return the funds to your investors (including that £37m bonus you pocketed this year despite a disastrous performance in all three funds).”
Luke Hilyard of the High Pay Centre said: “This particular instance of an investor making tens of millions while losing money for ordinary savers raises questions about the governance of the funds and platforms channelling other people’s money into Woodford’s fund, and the regulatory oversight of the process.
“The case is also a microcosm of our wider business culture and economic system, where superstar managers in investment, banking, retail, commodities and other industries have been treated like gods and rewarded accordingly, yet ultimately have shown themselves to be highly fallible mortals whose success was always partly contingent on timing and luck.”
Woodford, who made his name at Invesco by backing big companies, but then switched to a new strategy of investing in smaller and unquoted companies in his own funds, has now pledged to change direction.
In his video he said he would now be targeting bigger companies, especially FTSE 100 stocks – even though only a few weeks ago he was insisting that his approach was the correct one and that the best investment opportunities were “absolutely not” in large companies.
Big bad bets
Woodford bought big stakes in many companies that performed very poorly. They include:
• Kier (construction) -74% in 12 months; Woodford funds own 20%
• Circassia (biotech) -74%; Woodford owns 28.5%
• Prothena (biotech) -36%; Woodford owns 29.9%
• Stobart Group -46%; Woodford owns 18.8%
• Redde (support services) -39%; Woodford owns 28%
• Allied Minds (technology) -31%; Woodford owns 27%
• Spire Healthcare -51%; Woodford owns 5%
• Utilitywise, energy broker that collapsed in Feb 2019; Woodford owned 29%
What Woodford investors say:
“I invested £60,000 three years ago and have lost over 20%. Luckily I sold nearly half my investment the week before the fund closed. I’m going to hold my remaining units until after Brexit as a high-risk bet.”
Simon, 51, Brighton
“I‘m getting married on 10 August and we’ve been saving for over two years. My final bill to the venue and suppliers is due at the start of July. If I can’t withdraw my money I’m going to be looking to beg, borrow or steal until I can get it released.”
James M, 28, Newcastle
“I inherited some money, and chose on a stocks and shares Isa, following suggestions from Hargreaves Lansdown, then watched the value dwindle. On 31 May I decided to take the hit and sell. The deal was shown as “pending” until Wednesday morning, but that disappeared and I was told I wouldn’t be able to sell my units. I don’t think I’ll be getting much back when trading opens again.”
Sally Williams, 53, London
He was, the BBC declared in 2015, “the man who can’t stop making money”. He was the rock star of pensions and fund management, awarded a CBE for his services to the economy. But now, since Neil Woodford stopped investors from withdrawing their own money from his flagship fund, he is in the spotlight for all the wrong reasons.
His Woodford Equity Income Fund holds the pension savings and investments of tens of thousands of people. But it has been performing so badly that investors were withdrawing money at the rate of £10m a day.
-----Also read
It can be Hard to tell Luck from Judgment
-----
Last week, after 23 consecutive months in which withdrawals from the fund had been greater than the new money coming in, Woodford found he couldn’t realise cash quickly enough to meet the withdrawal requests – at least at a decent price. He closed the fund to withdrawals, leaving legions of investors angry and in limbo for 28 days.
In a YouTube video he posted on Wednesday to finally apologise to investors, he looked anything but the archetypal City fund manager, with his close-cropped hair and trademark casual jumper rather than suit and tie. In the video, filmed at his fund’s headquarters on an industrial estate near Oxford, Woodford said: “I’m extremely sorry that we’ve had to take this decision. We understand our investors’ frustration. All I can say in response to that is that this decision was motivated by your interests.”
Woodford said he had been forced to “gate” the fund because so many big investors were trying to pull money out that he wasn’t able to meet the demand. His funds hold unusually big stakes in smaller and early stage unlisted companies, which are hard to sell quickly.
The final straw had been Kent county council pension fund’s request to take out its £263m holding. The trustees of Kent’s pension fund – who had been trying to stem the losses Woodford had racked up for its 110,000 members – decided to pull out when it emerged at the end of last month that the flagship fund had shrunk by £560m to £3.77bn in just four weeks. At its peak the fund was worth more than £10bn.
Of the £560m lost, just under £190m was made up of withdrawals. The rest – more than £370m – represented yet further declines in the value of the investments held in the fund, which at the end of April was made up of stakes in 101 companies ranging from housebuilders such as Barratt Developments and Taylor Wimpey to logistics business Eddie Stobart and a large number of esoteric healthcare firms.
Under EU rules aimed at ensuring that funds which hold unquoted – and therefore potentially hard-to-sell – shares can retain their stability, these shares are permitted to make up no more than 10% of the portfolio. Woodford got around those rules, quite legally, by putting some of them into his separate, quoted Patient Capital investment trust – and taking Patient Capital shares into the main fund. He also listed some of them of the Guernsey stock exchange.
But the Kent fund had left it just too late: instead of getting its cash back, its request triggered Woodford’s suspension of trading in the fund.
The video apology, in which Woodford set and answered his own questions, followed months during which he had been dismissing the concerns of investors and financial experts about his fund’s prolonged poor performance.
In February, his Woodford Equity Income Fund was listed for the first time on a “Spot the Dog” list compiled by Bestinvest, which highlights underperforming “dog” funds. Bestinvest criticised some of his worst investments and described the fund as “a Great Dane-sized” new entrant to its list.
Just a few weeks later, Woodford told the Financial Times that the investors who were pulling out were making “appallingly bad decisions”, influenced by “a mountain of fake information and fake analysis” that “pisses me off”.
Neil Woodford apologises to investors in a still from his YouTube video last week. Photograph: Woodford Investment Management/PA
In December 2017 he said in an interview that they key to successful investing was to “have a sufficiently strong arrogant gene to back your judgment, back your conviction”.
That arrogance is now provoking widespread anger, not just from his investors but also among other fund managers, who say Woodford has tarred the whole industry with the same loss-making brush.
Last Wednesday the Financial Conduct Authority, the City’s watchdog, said it was considering a formal investigation into the fund, and the following day, Bank of England governor Mark Carney told an audience in Tokyo that funds such as Woodford’s (although he died not name him) needed closer scrutiny to lessen the risk of fire sales triggering market disruption. The Bank, he said, would start stress-testing funds to ensure they couldn’t threaten a system-wide crisis.
This is a staggering fall from grace for Woodford, who had been one of the UK’s very best and most reliable stock pickers. Anyone who invested £10,000 at the start of his quarter-of-a-century career at Invesco Perpetual would have seen their money grow to almost £250,000 by the time he left.
Mark Dampier, director of research at stockbroker Hargreaves Lansdown, declared in 2015 that Woodford was “arguably the best fund manager of his generation”. Just weeks ago, despite the growing cloud surrounding Woodford, Hargreaves told its clients “we retain our conviction in him to deliver excellent long-term performance” and reminded them that he had “built his career by investing against the herd” and “shown an ability to get the big calls right”.
Hargreaves’s customers had £2bn invested with Woodford at the end of March – roughly a fifth of all the money in his three big funds.
Only when the fund was gated did Hargreaves, which has heavily promoted Woodford at discounted fees, finally drop Woodford Equity Income from its influential “Wealth 50” list of favourite funds, which it marketed to its more than a million clients.
FacebookTwitterPinterest Bank of England governor Mark Carney has suggested that funds such as Woodford’s need more scrutiny. Photograph: Hannah McKay/Reuters
Asked if he regretted his support for Woodford and the controversial discount fee structure, Dampier said: “Our aim is to enable our clients to choose the best-in-class funds at lower fees. Our favourite fund choices have, for the most part, beaten their sector averages and benchmarks. Not every fund has, and we share our clients’ disappointment and frustration when they don’t.”
Other big backers have also deserted Woodford. St James’s Place last week took its clients’ £3.5bn to another manager. On Thursday another supporter, Openworks, did the same with its £330m.
Woodford fell into fund management by accident. He had never even heard of the business until he rocked up in London in the 1980s, sleeping on his brother’s floor while looking for a job. He had left school wanting to fly fighter jets but couldn’t pass the RAF’s aptitude test, and instead read agricultural economics at the University of Exeter.
In 1988 he joined Invesco Perpetual and built a reputation as a brilliant contrarian investor. When others piled into dotcom shares at the turn of the century, he decided against, and backed more traditional companies. He made huge gains when the dotcom crash came. He eschewed banking stocks before the financial crisis – and avoided that crash too.
He held big stakes in giant companies, whose chief executives needed to retain his support. In 2012 his criticism of AstraZeneca chief executive David Brennan was widely regarded to have cost Brennan his job, and his criticism of BAE’s attempted £28bn merger with Airbus was seen as one of the reasons the deal collapsed.
In 2014, feeling that he had outgrown Invesco Perpetual, where he personally managed some £25bn of funds, he set up his own firm, Woodford Investment Management. Within two weeks of launching, he had raised £1.6bn, a UK record, and this quickly grew to £16bn. In its first year, his flagship fund made a 16% return and Woodford, a devotee of veteran US investor Warren Buffett, was called the “Oracle of Oxford”.
FacebookTwitterPinterest Woodford is a keen student of the US investor Warren Buffett. Photograph: Andrew Harnik/AP
But since then things have turned sour. Over the past four years, investors in Woodford Equity Income have collected a return of less than 1% – compared with 29% for the market as a whole. Over that same four-year period, Woodford has paid himself some £63m.
In the 2017-18 financial year alone, which was a dreadful period for his funds, Woodford Investment Management paid a £36.5m dividend to a company called Woodford Capital. Woodford holds 65% of that firm, and his business partner Craig Newman has the remaining 35%.
Woodford, who has spoken out against the huge bonuses awarded to other fund managers, and to the bosses of companies he has invested in, declined to answer any questions about his own pay, or to elaborate, beyond his YouTube video, on the fund’s tricky situation.
The firm’s public relations officer asked the Observer to point out that Woodford had donated some of his pay to charity. But he was unable to state how much money had been donated, or to which causes. The PR person declined to comment when asked whether Woodford would consider pumping any of his personal millions back into the fund.
Those who know Woodford say he is “decidedly unflashy” and that it is “difficult to fathom where all that money goes”. Well, a lot of it appears to go on horses. He and his wife Madelaine have a few dozen top showjumpers training at a vast equestrian complex near their home in the Cotswolds.
The house, near Tetbury, was built on land the Woodfords bought for nearly £14m in 2013. They moved to the Cotswolds after a planning application to construct a dressage arena and 28-horse stabling block near their previous estate, in Buckinghamshire, was rejected following a row with neighbours. One of those neighbours, the BBC’s Jeremy Paxman, described Woodford’s planned addition as “enormous, unsightly and environmentally unfriendly”.
The Tetbury venue, however, got the planners’ green light and includes a full-size manège (dressage arena). Woodford, who came to the sport only after meeting Madelaine – a keen rider whom he married in 2015 – has put in the hours at the manège and now often takes part in eventing competitions on a bay gelding called Willows Spunky.
Woodford’s other passions are fast cars and racing bicycles. He starts up the Porsche at 5am every weekday to drive to his fund’s minimalist offices on an industrial estate in Cowley, Oxford. At weekends he drives it down to the couple’s £6.3m glass-walled holiday home in Salcombe, Devon.
Woodford’s huge pay and luxury lifestyle haven’t gone unnoticed by his investors, many of whom are relying on him to be a safe pair of hands and to increase the value of their retirement or rainy day fund.
A comment on his YouTube video, by someone with the username Platoreads: “Arrogance, Incompetence, Complacency and greed: your name is Woodford! You have failed, Neil. Return the funds to your investors (including that £37m bonus you pocketed this year despite a disastrous performance in all three funds).”
Luke Hilyard of the High Pay Centre said: “This particular instance of an investor making tens of millions while losing money for ordinary savers raises questions about the governance of the funds and platforms channelling other people’s money into Woodford’s fund, and the regulatory oversight of the process.
“The case is also a microcosm of our wider business culture and economic system, where superstar managers in investment, banking, retail, commodities and other industries have been treated like gods and rewarded accordingly, yet ultimately have shown themselves to be highly fallible mortals whose success was always partly contingent on timing and luck.”
Woodford, who made his name at Invesco by backing big companies, but then switched to a new strategy of investing in smaller and unquoted companies in his own funds, has now pledged to change direction.
In his video he said he would now be targeting bigger companies, especially FTSE 100 stocks – even though only a few weeks ago he was insisting that his approach was the correct one and that the best investment opportunities were “absolutely not” in large companies.
Big bad bets
Woodford bought big stakes in many companies that performed very poorly. They include:
• Kier (construction) -74% in 12 months; Woodford funds own 20%
• Circassia (biotech) -74%; Woodford owns 28.5%
• Prothena (biotech) -36%; Woodford owns 29.9%
• Stobart Group -46%; Woodford owns 18.8%
• Redde (support services) -39%; Woodford owns 28%
• Allied Minds (technology) -31%; Woodford owns 27%
• Spire Healthcare -51%; Woodford owns 5%
• Utilitywise, energy broker that collapsed in Feb 2019; Woodford owned 29%
What Woodford investors say:
“I invested £60,000 three years ago and have lost over 20%. Luckily I sold nearly half my investment the week before the fund closed. I’m going to hold my remaining units until after Brexit as a high-risk bet.”
Simon, 51, Brighton
“I‘m getting married on 10 August and we’ve been saving for over two years. My final bill to the venue and suppliers is due at the start of July. If I can’t withdraw my money I’m going to be looking to beg, borrow or steal until I can get it released.”
James M, 28, Newcastle
“I inherited some money, and chose on a stocks and shares Isa, following suggestions from Hargreaves Lansdown, then watched the value dwindle. On 31 May I decided to take the hit and sell. The deal was shown as “pending” until Wednesday morning, but that disappeared and I was told I wouldn’t be able to sell my units. I don’t think I’ll be getting much back when trading opens again.”
Sally Williams, 53, London
Friday 7 June 2019
Thursday 6 June 2019
‘Socialism for the rich’: the evils of bad economics
The economic arguments adopted by Britain and the US in the 1980s led to vastly increased inequality – and gave the false impression that this outcome was not only inevitable, but good writes Jonathan Aldred in The Guardian
In most rich countries, inequality is rising, and has been rising for some time. Many people believe this is a problem, but, equally, many think there’s not much we can do about it. After all, the argument goes, globalisation and new technology have created an economy in which those with highly valued skills or talents can earn huge rewards. Inequality inevitably rises. Attempting to reduce inequality via redistributive taxation is likely to fail because the global elite can easily hide their money in tax havens. Insofar as increased taxation does hit the rich, it will deter wealth creation, so we all end up poorer.
One strange thing about these arguments, whatever their merits, is how they stand in stark contrast to the economic orthodoxy that existed from roughly 1945 until 1980, which held that rising inequality was not inevitable, and that various government policies could reduce it. What’s more, these policies appear to have been successful. Inequality fell in most countries from the 1940s to the 1970s. The inequality we see today is largely due to changes since 1980.
In both the US and the UK, from 1980 to 2016, the share of total income going to the top 1% has more than doubled. After allowing for inflation, the earnings of the bottom 90% in the US and UK have barely risen at all over the past 25 years. More generally, 50 years ago, a US CEO earned on average about 20 times as much as the typical worker. Today, the CEO earns 354 times as much.
Any argument that rising inequality is largely inevitable in our globalised economy faces a crucial objection. Since 1980 some countries have experienced a big increase in inequality (the US and the UK); some have seen a much smaller increase (Canada, Japan, Italy), while inequality has been stable or falling in others (France, Belgium and Hungary). So rising inequality cannot be inevitable. And the extent of inequality within a country cannot be solely determined by long-run global economic forces, because, although most richer countries have been subject to broadly similar forces, the experiences of inequality have differed.
The familiar political explanation for this rising inequality is the huge shift in mainstream economic and political thinking, in favour of free markets, triggered by the elections of Ronald Reagan and Margaret Thatcher. Its fit with the facts is undeniable. Across developed economies, the biggest rise in inequality since 1945 occurred in the US and UK from 1980 onwards.
The power of a grand political transformation seems persuasive. But it cannot be the whole explanation. It is too top-down: it is all about what politicians and other elites do to us. The idea that rising inequality is inevitable begins to look like a convenient myth, one that allows us to avoid thinking about another possibility: that through our electoral choices and decisions in daily life we have supported rising inequality, or at least acquiesced in it. Admittedly, that assumes we know about it. Surveys in the UK and US consistently suggest that we underestimate both the level of current inequality and how much it has recently increased. But ignorance cannot be a complete excuse, because surveys also reveal a change in attitudes: rising inequality has become more acceptable – or at least, less unacceptable – especially if you are not on the wrong end of it.
Inequality is unlikely to fall much in the future unless our attitudes turn unequivocally against it. Among other things, we will need to accept that how much people earn in the market is often not what they deserve, and that the tax they pay is not taking from what is rightfully theirs.
One crucial reason why we have done so little to reduce inequality in recent years is that we downplay the role of luck in achieving success. Parents teach their children that almost all goals are attainable if you try hard enough. This is a lie, but there is a good excuse for it: unless you try your best, many goals will definitely remain unreachable.
Ignoring the good luck behind my success helps me feel good about myself, and makes it much easier to feel I deserve the rewards associated with success. High earners may truly believe that they deserve their income because they are vividly aware of how hard they have worked and the obstacles they have had to overcome to be successful.
But this is not true everywhere. Support for the idea that you deserve what you get varies from country to country. And in fact, support for such beliefs is stronger in countries where there seems to be stronger evidence that contradicts them. What explains this?
Attitude surveys have consistently shown that, compared to US residents, Europeans are roughly twice as likely to believe that luck is the main determinant of income and that the poor are trapped in poverty. Similarly, people in the US are about twice as likely as Europeans to believe that the poor are lazy and that hard work leads to higher quality of life in the long run.
FacebookTwitterPinterest ‘There’s been class warfare going on for the last 20 years, and my class has won’ … US billionaire Warren Buffett. Photograph: Kevin Lamarque/Reuters
However, if the only function of the state is to support private ownership rights (maintaining a legal system, police, and so on), it seems that taxation could be very low – and any further taxation on top could still be seen as a form of theft. Implicit in this view is the idea of incomes earned, and so ownership rights created, in an entirely private market economy, with the state entering only later, to ensure these rights are maintained. Many economics textbooks picture the state in this way, as an add-on to the market. Yet this, too, is a fantasy.
In the modern world, all economic activity reflects the influence of government. Markets are inevitably defined and shaped by government. There is no such thing as income earned before government comes along. My earnings partly reflect my education. Earlier still, the circumstances of my birth and my subsequent health reflects the healthcare available. Even if that healthcare is entirely “private”, it depends on the education of doctors and nurses, and the drugs and other technologies available. Like all other goods and services, these in turn depend on the economic and social infrastructure, including transport networks, communications systems, energy supplies and extensive legal arrangements covering complex matters such as intellectual property, formal markets such as stock exchanges, and jurisdiction across national borders. Lord Lloyd-Webber’s wealth depends on government decisions about the length of copyright on the music he wrote. In sum, it is impossible to isolate what is “yours” from what is made possible, or influenced, by the role of government.
Talk of taxation as theft turns out to be a variation on the egotistical tendency to see one’s success in splendid isolation, ignoring the contribution of past generations, current colleagues and government. Undervaluing the role of government leads to the belief that if you are smart and hard-working, the high taxes you endure, paying for often wasteful government, are not a good deal. You would be better off in a minimal-state, low-tax society.
One reply to this challenge points to the evidence on the rich leaving their home country to move to a lower tax jurisdiction: in fact, very few of them do. But here is a more ambitious reply from Warren Buffett: “Imagine there are two identical twins in the womb … And the genie says to them: ‘One of you is going to be born in the United States, and one of you is going to be born in Bangladesh. And if you wind up in Bangladesh, you will pay no taxes. What percentage of your income would you bid to be born in the United States?’ … The people who say: ‘I did it all myself’ … believe me, they’d bid more to be in the United States than in Bangladesh.”
Much of the inequality we see today in richer countries is more down to decisions made by governments than to irreversible market forces. These decisions can be changed. However, we have to want to control inequality: we must make inequality reduction a central aim of government policy and wider society. The most entrenched, self-deluding and self-perpetuating justifications for inequality are about morality, not economy. The great economist John Kenneth Galbraith nicely summarised the problem: “One of man’s oldest exercises in moral philosophy … is the search for a superior moral justification for selfishness. It is an exercise which always involves a certain number of internal contradictions and even a few absurdities. The conspicuously wealthy turn up urging the character-building value of privation for the poor.”
In most rich countries, inequality is rising, and has been rising for some time. Many people believe this is a problem, but, equally, many think there’s not much we can do about it. After all, the argument goes, globalisation and new technology have created an economy in which those with highly valued skills or talents can earn huge rewards. Inequality inevitably rises. Attempting to reduce inequality via redistributive taxation is likely to fail because the global elite can easily hide their money in tax havens. Insofar as increased taxation does hit the rich, it will deter wealth creation, so we all end up poorer.
One strange thing about these arguments, whatever their merits, is how they stand in stark contrast to the economic orthodoxy that existed from roughly 1945 until 1980, which held that rising inequality was not inevitable, and that various government policies could reduce it. What’s more, these policies appear to have been successful. Inequality fell in most countries from the 1940s to the 1970s. The inequality we see today is largely due to changes since 1980.
In both the US and the UK, from 1980 to 2016, the share of total income going to the top 1% has more than doubled. After allowing for inflation, the earnings of the bottom 90% in the US and UK have barely risen at all over the past 25 years. More generally, 50 years ago, a US CEO earned on average about 20 times as much as the typical worker. Today, the CEO earns 354 times as much.
Any argument that rising inequality is largely inevitable in our globalised economy faces a crucial objection. Since 1980 some countries have experienced a big increase in inequality (the US and the UK); some have seen a much smaller increase (Canada, Japan, Italy), while inequality has been stable or falling in others (France, Belgium and Hungary). So rising inequality cannot be inevitable. And the extent of inequality within a country cannot be solely determined by long-run global economic forces, because, although most richer countries have been subject to broadly similar forces, the experiences of inequality have differed.
The familiar political explanation for this rising inequality is the huge shift in mainstream economic and political thinking, in favour of free markets, triggered by the elections of Ronald Reagan and Margaret Thatcher. Its fit with the facts is undeniable. Across developed economies, the biggest rise in inequality since 1945 occurred in the US and UK from 1980 onwards.
The power of a grand political transformation seems persuasive. But it cannot be the whole explanation. It is too top-down: it is all about what politicians and other elites do to us. The idea that rising inequality is inevitable begins to look like a convenient myth, one that allows us to avoid thinking about another possibility: that through our electoral choices and decisions in daily life we have supported rising inequality, or at least acquiesced in it. Admittedly, that assumes we know about it. Surveys in the UK and US consistently suggest that we underestimate both the level of current inequality and how much it has recently increased. But ignorance cannot be a complete excuse, because surveys also reveal a change in attitudes: rising inequality has become more acceptable – or at least, less unacceptable – especially if you are not on the wrong end of it.
Inequality is unlikely to fall much in the future unless our attitudes turn unequivocally against it. Among other things, we will need to accept that how much people earn in the market is often not what they deserve, and that the tax they pay is not taking from what is rightfully theirs.
One crucial reason why we have done so little to reduce inequality in recent years is that we downplay the role of luck in achieving success. Parents teach their children that almost all goals are attainable if you try hard enough. This is a lie, but there is a good excuse for it: unless you try your best, many goals will definitely remain unreachable.
Ignoring the good luck behind my success helps me feel good about myself, and makes it much easier to feel I deserve the rewards associated with success. High earners may truly believe that they deserve their income because they are vividly aware of how hard they have worked and the obstacles they have had to overcome to be successful.
But this is not true everywhere. Support for the idea that you deserve what you get varies from country to country. And in fact, support for such beliefs is stronger in countries where there seems to be stronger evidence that contradicts them. What explains this?
Attitude surveys have consistently shown that, compared to US residents, Europeans are roughly twice as likely to believe that luck is the main determinant of income and that the poor are trapped in poverty. Similarly, people in the US are about twice as likely as Europeans to believe that the poor are lazy and that hard work leads to higher quality of life in the long run.
Ronald Reagan and Margaret Thatcher in 1988. Photograph: Reuters
Yet in fact, the poor (the bottom 20%) work roughly the same total annual hours in the US and Europe. And economic opportunity and intergenerational mobility is more limited in the US than in Europe. The US intergenerational mobility statistics bear a striking resemblance to those for height: US children born to poor parents are as likely to be poor as those born to tall parents are likely to be tall. And research has repeatedly shown that many people in the US don’t know this: perceptions of social mobility are consistently over-optimistic.
European countries have, on average, more redistributive tax systems and more welfare benefits for the poor than the US, and therefore less inequality, after taxes and benefits. Many people see this outcome as a reflection of the different values that shape US and European societies. But cause-and-effect may run the other way: you-deserve-what-you-get beliefs are strengthened by inequality.
Psychologists have shown that people have motivated beliefs: beliefs that they have chosen to hold because those beliefs meet a psychological need. Now, being poor in the US is extremely tough, given the meagre welfare benefits and high levels of post-tax inequality. So Americans have a greater need than Europeans to believe that you deserve what you get and you get what you deserve. These beliefs play a powerful role in motivating yourself and your children to work as hard as possible to avoid poverty. And these beliefs can help alleviate the guilt involved in ignoring a homeless person begging on your street.
This is not just a US issue. Britain is an outlier within Europe, with relatively high inequality and low economic and social mobility. Its recent history fits the cause-and-effect relationship here. Following the election of Margaret Thatcher in 1979, inequality rose significantly. After inequality rose, British attitudes changed. More people became convinced that generous welfare benefits make poor people lazy and that high salaries are essential to motivate talented people. However, intergenerational mobility fell: your income in Britain today is closely correlated with your parents’ income.
If the American Dream and other narratives about everyone having a chance to be rich were true, we would expect the opposite relationship: high inequality (is fair because of) high intergenerational mobility. Instead, we see a very different narrative: people cope with high inequality by convincing themselves it is fair after all. We adopt narratives to justify inequality because society is highly unequal, not the other way round. So inequality may be self-perpetuating in a surprising way. Rather than resist and revolt, we just cope with it. Less Communist Manifesto, more self-help manual.
Inequality begets further inequality. As the top 1% grow richer, they have more incentive and more ability to enrich themselves further. They exert more and more influence on politics, from election-campaign funding to lobbying over particular rules and regulations. The result is a stream of policies that help them but are inefficient and wasteful. Leftwing critics have called it “socialism for the rich”. Even the billionaire investor Warren Buffett seems to agree: “There’s been class warfare going on for the last 20 years and my class has won,” he once said.
This process has been most devastating when it comes to tax. High earners have most to gain from income tax cuts, and more spare cash to lobby politicians for these cuts. Once tax cuts are secured, high earners have an even stronger incentive to seek pay rises, because they keep a greater proportion of after-tax pay. And so on.
Although there have been cuts in the top rate of income tax across almost all developed economies since 1979, it was the UK and the US that were first, and that went furthest. In 1979, Thatcher cut the UK’s top rate from 83% to 60%, with a further reduction to 40% in 1988. Reagan cut the top US rate from 70% in 1981 to 28% in 1986. Although top rates today are slightly higher – 37% in the US and 45% in the UK – the numbers are worth mentioning because they are strikingly lower than in the post-second-world-war period, when top tax rates averaged 75% in the US and were even higher in the UK.
Some elements of the Reagan-Thatcher revolution in economic policy, such as Milton Friedman’s monetarist macroeconomics, have subsequently been abandoned. But the key policy idea to come out of microeconomics has become so widely accepted today that it has acquired the status of common sense: that tax discourages economic activity and, in particular, income tax discourages work.
This doctrine seemingly transformed public debate about taxation from an endless argument over who gets what, to the promise of a bright and prosperous future for all. The “for all” bit was crucial: no more winners and losers. Just winners. And the basic ideas were simple enough to fit on the back of a napkin.
One evening in December 1974, a group of ambitious young conservatives met for dinner at the Two Continents restaurant in Washington DC. The group included the Chicago University economist Arthur Laffer, Donald Rumsfeld (then chief of staff to President Gerald Ford), and Dick Cheney (then Rumsfeld’s deputy, and a former Yale classmate of Laffer’s).
While discussing Ford’s recent tax increases, Laffer pointed out that, like a 0% income tax rate, a 100% rate would raise no revenue because no one would bother working. Logically, there must be some tax rate between these two extremes that would maximise tax revenue. Although Laffer does not remember doing so, he apparently grabbed a napkin and drew a curve on it, representing the relationship between tax rates and revenues. The Laffer curve was born and, with it, the idea of trickle-down economics.
The key implication that impressed Rumsfeld and Cheney was that, just as tax rates lower than 100% must raise more revenue, cuts in income tax rates more generally could raise revenue. In other words, there could be winners, and no losers, from tax cuts. But could does not mean will. No empirical evidence was produced in support of the mere logical possibility that tax cuts could raise revenue, and even the economists employed by the incoming Reagan administration six years later struggled to find any evidence in support of the idea.
Yet in fact, the poor (the bottom 20%) work roughly the same total annual hours in the US and Europe. And economic opportunity and intergenerational mobility is more limited in the US than in Europe. The US intergenerational mobility statistics bear a striking resemblance to those for height: US children born to poor parents are as likely to be poor as those born to tall parents are likely to be tall. And research has repeatedly shown that many people in the US don’t know this: perceptions of social mobility are consistently over-optimistic.
European countries have, on average, more redistributive tax systems and more welfare benefits for the poor than the US, and therefore less inequality, after taxes and benefits. Many people see this outcome as a reflection of the different values that shape US and European societies. But cause-and-effect may run the other way: you-deserve-what-you-get beliefs are strengthened by inequality.
Psychologists have shown that people have motivated beliefs: beliefs that they have chosen to hold because those beliefs meet a psychological need. Now, being poor in the US is extremely tough, given the meagre welfare benefits and high levels of post-tax inequality. So Americans have a greater need than Europeans to believe that you deserve what you get and you get what you deserve. These beliefs play a powerful role in motivating yourself and your children to work as hard as possible to avoid poverty. And these beliefs can help alleviate the guilt involved in ignoring a homeless person begging on your street.
This is not just a US issue. Britain is an outlier within Europe, with relatively high inequality and low economic and social mobility. Its recent history fits the cause-and-effect relationship here. Following the election of Margaret Thatcher in 1979, inequality rose significantly. After inequality rose, British attitudes changed. More people became convinced that generous welfare benefits make poor people lazy and that high salaries are essential to motivate talented people. However, intergenerational mobility fell: your income in Britain today is closely correlated with your parents’ income.
If the American Dream and other narratives about everyone having a chance to be rich were true, we would expect the opposite relationship: high inequality (is fair because of) high intergenerational mobility. Instead, we see a very different narrative: people cope with high inequality by convincing themselves it is fair after all. We adopt narratives to justify inequality because society is highly unequal, not the other way round. So inequality may be self-perpetuating in a surprising way. Rather than resist and revolt, we just cope with it. Less Communist Manifesto, more self-help manual.
Inequality begets further inequality. As the top 1% grow richer, they have more incentive and more ability to enrich themselves further. They exert more and more influence on politics, from election-campaign funding to lobbying over particular rules and regulations. The result is a stream of policies that help them but are inefficient and wasteful. Leftwing critics have called it “socialism for the rich”. Even the billionaire investor Warren Buffett seems to agree: “There’s been class warfare going on for the last 20 years and my class has won,” he once said.
This process has been most devastating when it comes to tax. High earners have most to gain from income tax cuts, and more spare cash to lobby politicians for these cuts. Once tax cuts are secured, high earners have an even stronger incentive to seek pay rises, because they keep a greater proportion of after-tax pay. And so on.
Although there have been cuts in the top rate of income tax across almost all developed economies since 1979, it was the UK and the US that were first, and that went furthest. In 1979, Thatcher cut the UK’s top rate from 83% to 60%, with a further reduction to 40% in 1988. Reagan cut the top US rate from 70% in 1981 to 28% in 1986. Although top rates today are slightly higher – 37% in the US and 45% in the UK – the numbers are worth mentioning because they are strikingly lower than in the post-second-world-war period, when top tax rates averaged 75% in the US and were even higher in the UK.
Some elements of the Reagan-Thatcher revolution in economic policy, such as Milton Friedman’s monetarist macroeconomics, have subsequently been abandoned. But the key policy idea to come out of microeconomics has become so widely accepted today that it has acquired the status of common sense: that tax discourages economic activity and, in particular, income tax discourages work.
This doctrine seemingly transformed public debate about taxation from an endless argument over who gets what, to the promise of a bright and prosperous future for all. The “for all” bit was crucial: no more winners and losers. Just winners. And the basic ideas were simple enough to fit on the back of a napkin.
One evening in December 1974, a group of ambitious young conservatives met for dinner at the Two Continents restaurant in Washington DC. The group included the Chicago University economist Arthur Laffer, Donald Rumsfeld (then chief of staff to President Gerald Ford), and Dick Cheney (then Rumsfeld’s deputy, and a former Yale classmate of Laffer’s).
While discussing Ford’s recent tax increases, Laffer pointed out that, like a 0% income tax rate, a 100% rate would raise no revenue because no one would bother working. Logically, there must be some tax rate between these two extremes that would maximise tax revenue. Although Laffer does not remember doing so, he apparently grabbed a napkin and drew a curve on it, representing the relationship between tax rates and revenues. The Laffer curve was born and, with it, the idea of trickle-down economics.
The key implication that impressed Rumsfeld and Cheney was that, just as tax rates lower than 100% must raise more revenue, cuts in income tax rates more generally could raise revenue. In other words, there could be winners, and no losers, from tax cuts. But could does not mean will. No empirical evidence was produced in support of the mere logical possibility that tax cuts could raise revenue, and even the economists employed by the incoming Reagan administration six years later struggled to find any evidence in support of the idea.
George Osborne, who lowered the UK’s top rate of tax from 50% to 45% in 2013. Photograph: Matt Cardy/PA
Yet it proved irresistible to Reagan, the perennial optimist, who essentially overruled his expert advisers, convinced that the “entrepreneurial spirit unleashed by the new tax cuts would surely bring in more revenue than his experts imagined”, as the historian Daniel T Rodgers put it. (If this potent brew of populist optimism and impatience with economic experts seems familiar today, that might be explained in part by the fact that Laffer was also a campaign adviser to Donald Trump.)
For income tax cuts to raise tax revenue, the prospect of higher after-tax pay must motivate people to work more. The resulting increase in GDP and income may be enough to generate higher tax revenues, even though the tax rate itself has fallen. Although the effects of the big Reagan tax cuts are still disputed (mainly because of disagreement over how the US economy would have performed without the cuts), even those sympathetic to trickle-down economics conceded that the cuts had negligible impact on GDP – and certainly not enough to outweigh the negative effect of the cuts on tax revenues.
But the Laffer curve did remind economists that a revenue-maximising top tax rate somewhere between 0% and 100% must exist. Finding the magic number is another matter: the search continues today. It is worth a brief dig into this research, not least because it is regularly used to veto attempts to reduce inequality by raising tax on the rich. In 2013, for example, the UK chancellor of the exchequer George Osborne reduced the top rate of income tax from 50% to 45%, arguing Laffer-style that the tax cut would lead to little, if any, loss of revenue. Osborne’s argument relied on economic analysis suggesting that the revenue-maximising top tax rate for the UK is about 40%.
Yet the assumptions behind this number are shaky, as most economists involved in producing such figures acknowledge. Let’s begin with the underlying idea: if lower tax rates raise your after-tax pay, you are motivated to work more. It seems plausible enough but, in practice, the effects are likely to be minimal. If income tax falls, many of us cannot work more, even if we wanted to. There is little opportunity to get paid overtime, or otherwise increase our paid working hours, and working harder during current working hours does not lead to higher pay. Even for those who have these opportunities, it is far from clear that they will work more or harder. They may even decide to work less: since after-tax pay has risen, they can choose to work fewer hours and still maintain their previous income level. So the popular presumption that income tax cuts must lead to more work and productive economic activity turns out to have little basis in either common sense or economic theory.
There are deeper difficulties with Osborne’s argument, difficulties not widely known even among economists. It is often assumed that if the top 1% is incentivised by income tax cuts to earn more, those higher earnings reflect an increase in productive economic activity. In other words, the pie gets bigger. But some economists, including the influential Thomas Piketty, have shown this was not true for CEOs and other top corporate managers following the tax cuts in the 1980s. Instead, they essentially funded their own pay rises by paying shareholders less, which led in turn to lower dividend tax revenue for the government. In fact, Piketty and colleagues have argued that the revenue-maximising top income tax rate may be as high as 83%.
The income tax cuts for the rich of the past 40 years were originally justified by economic arguments: Laffer’s rhetoric was seized upon by politicians. But to economists, his ideas were both familiar and trivial. Modern economics provides neither theory nor evidence proving the merit of these tax cuts. Both are ambiguous. Although politicians can ignore this truth for a while, it suggests that widespread opposition to higher taxes on the rich is ultimately based on reasons beyond economics.
When the top UK income tax rate was raised to 50% in 2009 (until Osborne cut it to 45% four years later) the composer Andrew Lloyd Webber, one of Britain’s wealthiest people, responded bluntly: “The last thing we need is a Somali pirate-style raid on the few wealth creators who still dare to navigate Britain’s gale-force waters.” In the US, Stephen Schwarzman, CEO of private equity firm Blackstone, likened proposals to remove a specialised tax exemption to the German invasion of Poland.
While we may scoff at these moans from the super-rich, most people unthinkingly accept the fundamental idea behind them: that income tax is a kind of theft, taking income which is rightfully owned by the person who earned it. It follows that tax is, at best, a necessary evil, and so should be minimised as far as possible. On these grounds, the 83% top tax rate discussed by Piketty is seen as unacceptable.
There is an entire cultural ecosystem that has evolved around the idea of tax-as-theft, recognisable today in politicians’ talk about “spending taxpayers’ money”, or campaigners celebrating “tax freedom day”. This language exists outside the world of politics, too. Tax economists, accountants and lawyers refer to the so-called “tax burden”.
But the idea that you somehow own your pre-tax income, while obvious, is false. To begin with, you could never have ownership rights prior to, or independent from, taxation. Ownership is a legal right. Laws require various institutions, including police and a legal system, to function. These institutions are financed through taxation. The tax and the ownership rights are effectively created simultaneously. We cannot have one without the other.
Yet it proved irresistible to Reagan, the perennial optimist, who essentially overruled his expert advisers, convinced that the “entrepreneurial spirit unleashed by the new tax cuts would surely bring in more revenue than his experts imagined”, as the historian Daniel T Rodgers put it. (If this potent brew of populist optimism and impatience with economic experts seems familiar today, that might be explained in part by the fact that Laffer was also a campaign adviser to Donald Trump.)
For income tax cuts to raise tax revenue, the prospect of higher after-tax pay must motivate people to work more. The resulting increase in GDP and income may be enough to generate higher tax revenues, even though the tax rate itself has fallen. Although the effects of the big Reagan tax cuts are still disputed (mainly because of disagreement over how the US economy would have performed without the cuts), even those sympathetic to trickle-down economics conceded that the cuts had negligible impact on GDP – and certainly not enough to outweigh the negative effect of the cuts on tax revenues.
But the Laffer curve did remind economists that a revenue-maximising top tax rate somewhere between 0% and 100% must exist. Finding the magic number is another matter: the search continues today. It is worth a brief dig into this research, not least because it is regularly used to veto attempts to reduce inequality by raising tax on the rich. In 2013, for example, the UK chancellor of the exchequer George Osborne reduced the top rate of income tax from 50% to 45%, arguing Laffer-style that the tax cut would lead to little, if any, loss of revenue. Osborne’s argument relied on economic analysis suggesting that the revenue-maximising top tax rate for the UK is about 40%.
Yet the assumptions behind this number are shaky, as most economists involved in producing such figures acknowledge. Let’s begin with the underlying idea: if lower tax rates raise your after-tax pay, you are motivated to work more. It seems plausible enough but, in practice, the effects are likely to be minimal. If income tax falls, many of us cannot work more, even if we wanted to. There is little opportunity to get paid overtime, or otherwise increase our paid working hours, and working harder during current working hours does not lead to higher pay. Even for those who have these opportunities, it is far from clear that they will work more or harder. They may even decide to work less: since after-tax pay has risen, they can choose to work fewer hours and still maintain their previous income level. So the popular presumption that income tax cuts must lead to more work and productive economic activity turns out to have little basis in either common sense or economic theory.
There are deeper difficulties with Osborne’s argument, difficulties not widely known even among economists. It is often assumed that if the top 1% is incentivised by income tax cuts to earn more, those higher earnings reflect an increase in productive economic activity. In other words, the pie gets bigger. But some economists, including the influential Thomas Piketty, have shown this was not true for CEOs and other top corporate managers following the tax cuts in the 1980s. Instead, they essentially funded their own pay rises by paying shareholders less, which led in turn to lower dividend tax revenue for the government. In fact, Piketty and colleagues have argued that the revenue-maximising top income tax rate may be as high as 83%.
The income tax cuts for the rich of the past 40 years were originally justified by economic arguments: Laffer’s rhetoric was seized upon by politicians. But to economists, his ideas were both familiar and trivial. Modern economics provides neither theory nor evidence proving the merit of these tax cuts. Both are ambiguous. Although politicians can ignore this truth for a while, it suggests that widespread opposition to higher taxes on the rich is ultimately based on reasons beyond economics.
When the top UK income tax rate was raised to 50% in 2009 (until Osborne cut it to 45% four years later) the composer Andrew Lloyd Webber, one of Britain’s wealthiest people, responded bluntly: “The last thing we need is a Somali pirate-style raid on the few wealth creators who still dare to navigate Britain’s gale-force waters.” In the US, Stephen Schwarzman, CEO of private equity firm Blackstone, likened proposals to remove a specialised tax exemption to the German invasion of Poland.
While we may scoff at these moans from the super-rich, most people unthinkingly accept the fundamental idea behind them: that income tax is a kind of theft, taking income which is rightfully owned by the person who earned it. It follows that tax is, at best, a necessary evil, and so should be minimised as far as possible. On these grounds, the 83% top tax rate discussed by Piketty is seen as unacceptable.
There is an entire cultural ecosystem that has evolved around the idea of tax-as-theft, recognisable today in politicians’ talk about “spending taxpayers’ money”, or campaigners celebrating “tax freedom day”. This language exists outside the world of politics, too. Tax economists, accountants and lawyers refer to the so-called “tax burden”.
But the idea that you somehow own your pre-tax income, while obvious, is false. To begin with, you could never have ownership rights prior to, or independent from, taxation. Ownership is a legal right. Laws require various institutions, including police and a legal system, to function. These institutions are financed through taxation. The tax and the ownership rights are effectively created simultaneously. We cannot have one without the other.
FacebookTwitterPinterest ‘There’s been class warfare going on for the last 20 years, and my class has won’ … US billionaire Warren Buffett. Photograph: Kevin Lamarque/Reuters
However, if the only function of the state is to support private ownership rights (maintaining a legal system, police, and so on), it seems that taxation could be very low – and any further taxation on top could still be seen as a form of theft. Implicit in this view is the idea of incomes earned, and so ownership rights created, in an entirely private market economy, with the state entering only later, to ensure these rights are maintained. Many economics textbooks picture the state in this way, as an add-on to the market. Yet this, too, is a fantasy.
In the modern world, all economic activity reflects the influence of government. Markets are inevitably defined and shaped by government. There is no such thing as income earned before government comes along. My earnings partly reflect my education. Earlier still, the circumstances of my birth and my subsequent health reflects the healthcare available. Even if that healthcare is entirely “private”, it depends on the education of doctors and nurses, and the drugs and other technologies available. Like all other goods and services, these in turn depend on the economic and social infrastructure, including transport networks, communications systems, energy supplies and extensive legal arrangements covering complex matters such as intellectual property, formal markets such as stock exchanges, and jurisdiction across national borders. Lord Lloyd-Webber’s wealth depends on government decisions about the length of copyright on the music he wrote. In sum, it is impossible to isolate what is “yours” from what is made possible, or influenced, by the role of government.
Talk of taxation as theft turns out to be a variation on the egotistical tendency to see one’s success in splendid isolation, ignoring the contribution of past generations, current colleagues and government. Undervaluing the role of government leads to the belief that if you are smart and hard-working, the high taxes you endure, paying for often wasteful government, are not a good deal. You would be better off in a minimal-state, low-tax society.
One reply to this challenge points to the evidence on the rich leaving their home country to move to a lower tax jurisdiction: in fact, very few of them do. But here is a more ambitious reply from Warren Buffett: “Imagine there are two identical twins in the womb … And the genie says to them: ‘One of you is going to be born in the United States, and one of you is going to be born in Bangladesh. And if you wind up in Bangladesh, you will pay no taxes. What percentage of your income would you bid to be born in the United States?’ … The people who say: ‘I did it all myself’ … believe me, they’d bid more to be in the United States than in Bangladesh.”
Much of the inequality we see today in richer countries is more down to decisions made by governments than to irreversible market forces. These decisions can be changed. However, we have to want to control inequality: we must make inequality reduction a central aim of government policy and wider society. The most entrenched, self-deluding and self-perpetuating justifications for inequality are about morality, not economy. The great economist John Kenneth Galbraith nicely summarised the problem: “One of man’s oldest exercises in moral philosophy … is the search for a superior moral justification for selfishness. It is an exercise which always involves a certain number of internal contradictions and even a few absurdities. The conspicuously wealthy turn up urging the character-building value of privation for the poor.”
Subscribe to:
Posts (Atom)