Social Wealth Funds: A Key Ingredient of a New Alternative Economic Strategy

By Stewart Lansley

 Tackling growing inequality will not succeed without fundamental reform of the current model of corporate capitalism and the “de-concentration” of capital ownership. One of the most powerful tools for achieving such change would be by the creation of one or more collectively-owned social wealth funds.

 

Since 2008, the Anglo-Saxon model of capitalism – with its emphasis on markets, weak regulation and the concentration of private capital – has been fast losing friends. The model, operated most forcefully in the UK and the United States, has led to entrenched inequality, and far from delivering stable, long term growth, has brought growing economic turbulence. Even former cheerleaders are questioning its sustainability. As the IMF recently asked, “Has Neo-liberalism been oversold”.1

Yet despite the growing scepticism about its merits, the neo-liberal model of corporate capitalism remains largely intact. Driven by decades of rolling privatisation, de-regulation and an antipathy to collectivism, the fruits of economic activity in the UK have been increasingly colonised by a small business and financial elite, leading to one of the world’s heaviest concentrations of wealth and capital.

UK Plc is dominated by large companies. Those with over 250 employees account for 52% of total private sector turnover.2 Great chunks of vital economic activity – from energy supply to food production and accountancy services – are controlled by a handful of giant firms. Big corporations wield disproportionate power over consumers, small businesses and sometimes – because they are “too big to fail” – government. Shareholding has become increasingly concentrated, speculative and destabilising, with less than 12% of shares owned by individuals. Big business has used the rise in the profit share since the 1980s to enrich a small financial and corporate elite, rather than to invest in the long term future of the economy.

Today, the UK is a society ever more divided between extreme affluence and mass impoverishment.3 Since 2008, the wealth gap has continued to widen. As the official wealth statistics have shown, aggregate wealth enjoyed by the top fifth as a ratio of the bottom fifth has risen from 92 to 117 since the 2008 Crash.4 Median real earnings are still well below their peak level in 2009, while relative child poverty is predicted to rise sharply.5 Far from countering these trends, the thrust of state policy since 2010 – loose monetary policy, austerity fiscal policy and regressive tax/benefit changes – has boosted asset values, while transferring income from the poorest quarter of the population to the affluent top.6

Big business has used the rise in the profit share since the 1980s to enrich a small financial and corporate elite, rather than to invest in the long term future of the economy.

There are plenty of voices calling for change. But most suggestions involve tinkering with the existing pro-inequality model. A serious attempt at reform needs to build an alternative “sharing political economy”, one that disperses capital ownership, power and wealth, and ensures that the fruits of growth are more equally divided. Central to such a model must be the de-concentration of capital ownership. Without such a break-up, inequality will continue to rise.

 

There are many ways of achieving such “de-concentration”. The French economist, Thomas Piketty, for example, favours a global tax on wealth, while accepting it is a somewhat utopian idea.7 Encouraging the spread of alternative business models – from co-operatives to partnerships – that allow the greater sharing of economic gain – would also help disperse ownership.

But an especially powerful weapon for building a sharing economy would be the building of collectively-owned social wealth funds. These are publicly owned financial funds, created from the pooling of existing resources and used for the wider social benefit of society. By helping to secure a more even economic balance between collective and private ownership and ensure that more economic gains are evenly shared, social wealth funds are a direct way of tackling the over-dominance of capital, and thus one of the key sources of inequality.

Such funds are widely used. More than 60 countries – from Singapore to China – have introduced state-owned sovereign wealth funds resourced through the exploitation of oil. While many of these are run in a non-transparent way as little more than the investment arm of the state, sometimes without obvious public benefit, several examples offer a blueprint for a model social wealth fund. Since the early 1980s for example, Alaska has operated a highly popular fund which pays an annual dividend to all citizens. Perhaps the most successful and transparent of these funds is the $700 bn Norwegian Fund. Overseen by an independent ethics committee, it holds one percent of global equities.8

The UK has had two key opportunities to create its own funds. The first came with the North Sea oil bonanza in the mid-1980s. But instead of investing for the long term, British governments have used oil revenue to finance tax cuts and boost current consumption, a clear example of recent political failure.

Estimates suggest that such a fund would have been worth between £450 billion (that’s bigger than the wealth funds of Kuwait, Qatar and Russia combined) and £850 billion today.9 If one had been created, the UK would today have a much larger asset base, and the public sector net worth (total public assets minus the national debt) would be positive instead of negative.10 There would be considerably less panic about the national debt and Britain’s economy would be operating on a much more secure footing. There is, rightly, much gnashing of teeth about corporate short-termism, yet Governments have been just as culpable and have fewer excuses.

The UK has had two key opportunities to create its own funds. The first came with the North Sea oil bonanza in the mid-1980s. But instead of investing for the long term, British governments have used oil revenue to finance tax cuts and boost current consumption, a clear example of recent political failure.

The second missed opportunity came with the decision, again in the mid-1980s, to start selling off the family silver. Instead of the rolling privatisation juggernaut – another example of blatant jam-today politics – existing public assets (land, property and public companies) could have been pooled into a single ring-fenced fund to form a giant pool of commonly held wealth. Imagine the shape of the British economy today if such a fund had been established in the mid-1980s. With close to £200 bn sales since then, and part of the fund reinvested, it would have grown to represent a very sizeable chunk of the economy’s overall wealth, providing a powerful balance to private capital.

Despite these historic errors, it is not too late to establish such a fund. While billions of assets have been sold, remaining public assets are worth some £1.2 trillion.11 Such a move would bring an end to today’s politically expedient sell-off of public assets, preserve what remains of the family silver and ensure that the revenue from the better management of such assets is used to boost essential economic and social investment.

Instead, the government is accelerating the privatisation programme, with the revenue used to help pay down the deficit. Yet it makes little sense to use long term capital assets to finance a temporary revenue gap. The family silver can only be sold once. Soon Britain will be all debt and no assets. This is indefensible short-termism that will be paid for heavily by subsequent generations.

Of course, the private sector will always have a big role to play in any progressive economic model and in the process of wealth creation. But most other countries are much less fixated about the virtues of private ownership and recognise the important role to be played by the state and by collectively organised activity. Fifteen nations – in Europe, Asia and the Middle East – have already created public ownership funds which manage all state-owned commercial assets. Many of these – from the Singapore to the Austrian fund – have achieved a higher annual return than the private sector, providing dividends to the Exchequer.

There are other ways one or more social wealth funds could be established. Although the UK has already spent most of its oil revenue, such a fund could be established using other sources of income including the dividends from other natural resources (that should be commonly shared) such as minerals, urban land and the electromagnetic spectrum. The occasional one-off taxes on windfall profits, such as those levied in the past on banks, energy companies and oil producers, could also be paid into such a dedicated fund, possibly in the form of shares. More radical options for funding might include a direct charge on those financial and commercial transactions – such as merger and acquisition activity – which contain a high element of rentier activity. Another alternative might be an annual charge on share ownership, a direct way of diluting private capital ownership.

The creation of one or more funds would help secure a more even economic balance between collective and private ownership.

Social wealth funds could play a vital role in the economy. In the 1960s, the Nobel Laureate, James Meade, advocated just such a fund to help promote a “property owning democracy” in which all citizens have access to assets. He argued that such a fund should be financed by the dilution of existing capital ownership, through, for example, an additional, modest levy on share ownership, with the annual revenue used to pay an annual citizen’s dividend, through a modest contribution from a very privileged social group.12

The creation of one or more funds would help secure a more even economic balance between collective and private ownership. By adding to the value of public assets, they would also greatly improve the public finance balance sheet. By extending the scale of common ownership and using the proceeds for wider community benefit, such as investment in social infrastructure, they would strengthen the productive base and help tackle inequality from both ends. Their benefits would be spread across generations. It’s time such an idea was given serious consideration by political leaders across the spectrum.

 

Featured image courtesy of: ZRyzner

 

About the Author

photo-2-editStewart Lansley is a visiting fellow at Bristol University. He is the author of A Sharing Economy: How Social Wealth Funds Can Reduce Inequality and Help Balance the Books, Policy Press, 2016; the co-author (with Joanna Mack) of Breadline Britain, Oneworld, 2015, and the author of the Cost of Inequality, Gibson Square, 2011.

 

References

1. JD Ostry, P Loungani and D Furceri, ‘Neoliberalism: Oversold?’, Finance & Development, IMF, June 2016, Vol. 53, No. 2
2. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/377934/bpe_2014_statistical_release.pdf
3. S Lansley and J Mack, Breadline Britain, The Rise of Mass Poverty, Oneworld, 2015.
4. ONS, Chapter 2: Total wealth, Wealth in Great Britain, 2012 to 2014, ONS, 2015
5. J Brown and A Hood, Living standards, poverty and inequality in the UK: 2015-16 to 2020-21, IFS, 2016.
6. P De Agostini, J Hills and H Sutherland, ‘Were we rally all in it together?`, CASE Working Paper 22, LSE, 2015.
7. T Piketty, Capital in the Twenty-First Century, Harvard University Press, 2014.
8. S Lansley, How Social Wealth Funds Can Reduce Inequality and Balance the Books, Policy Press, 2016, ch 4.
9. Quoted in A Chakrobortty, ‘Dude: Where’s My North Sea Oil Money’, Guardian, 13 June, 2014.
10. AB Atkinson, Inequality: What Can Be Done?, Harvard University Press, 2015, p 176-177
11. S Lansley, How Social Wealth Funds Can Reduce Inequality and Balance the Books, Policy Press, 2016, ch 5.
12. J Meade, Efficiency, Equality and the Ownership of Property, Allen and Unwin, 1965.

 

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.