May 28, 2000

Fair privatisation is the way to social equity

Posted in Banks ·
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One of the greatest forces for both economic change and (unfortunately) social division in the coming years will be the ownership of assets. If the present boom has done anything, it has driven a deep financial wedge between those who own assets such as land, stocks and property and those who rely solely on wages for their income.

This is the nature of booms and associated credit expansions. Upswings reduce the relative spending power and value of cash while increasing the spending power and value of assets. Twenty years ago, when asset prices were stable, the financial muscle of wages was almost on a par with assets. Now the opposite prevails.

Given this division, it is not surprising that we have recently heard a growing numbers of voices criticising the disparity between the haves and the have-nots.

Many people are concluding that the government should refrain from prioritising tax cuts and spend cash on public services instead. The argument is that the government should care less about growth and more about equality. But like it or not, the government we elected is ideologically committed to a five-year tax-cutting budgetary strategy and it, like “the lady”, is clearly not for turning.

Sadly tax cuts alone are unlikely to solve the distribution dilemma. Tax cuts only raise the wage proportion of take-home income and, as the boom is constantly reducing the spending power of cash/wages relative to assets, ongoing tax cuts might put more people in work but won’t help make society more equal.

Indeed there is an argument that tax cuts amplify asset price upswings. For example, a 2 per cent tax cut at a time when credit is freely available could drive asset prices up 5 per cent. (I have not run the numbers but the ratio of property price increases to tax cuts in Ireland would be much greater than 2 to 5.)

This process prices most average workers yet further out of the system, making them feel relatively worse off, despite their modest increase in take-home shekels.

We also know that the government (or at least some of its more crusading members) believes that the boom is here in perpetuity and it must realise what it is doing will only, at best, have a modest impact on social equity.

What can we do to give people a stake in the economy and in the process ensure that a significant “employed yet poor” underclass does not develop?

Privatisation might hold the key. Let’s look at Eircom. Yes, the share price has fallen, but this may prove temporary. Certain quarters are suggesting that the government overpriced the shares under pressure from a greedy Department of Finance. This might well be the case, but in present markets what is fair value today might not be tomorrow and so the pricing point is inconclusive. The real crime, in my opinion, is the national larceny committed when our government sold to the citizens an asset that it did not own in the first place.

Over the years, taxpayers’ money built up Telecom Eireann and the rest of our nationalised industries. We owned Eircom. We didn’t need to buy it twice. Were we not the eejits to buy an asset that we, the people, actually owned in the first place?

The question is why did the government not give Eircom shares away free to every citizen rather than selling them at a deep discount to a minority of citizens. By giving the shares back to the people who owned them, the government could have started the process of building a real stakeholder democracy in Ireland.

On the day of issue, every Irish employee would become an owner of capital and, probably more importantly than giving them a nest egg, give every adult citizen a chance to learn how to manage financial capital.

What’s more, the additional income could have been used to shore up the national pay agreements which are now under so much pressure. The state could have bought industrial peace by combining a 5 per cent pay increase with the wealth associated with Eircom shares (over �2,000 per worker if we divide �4.8 billion by every adult worker discounted annually over the course of the agreement). This wealth could have topped up the pay of the low-skilled, thus enabling people to take low-paid work and still be better off than claiming the dole.

In a world where ownership of assets is crucial, it is essential to engender real wealth creation. Giving every adult citizen a stake in privatised national assets could have been the first step to wrestling wealth away from an elite and making the whole economy and every citizen really capitalist.

There are no compelling budgetary arguments against this approach. It is not as if the state needs the cash. The government found itself unable to spend the money for cyclical reasons last summer, so they decided to put some of the cash into a pension fund. What does this really mean?

It signals that the government does not believe that we are to be trusted with our own cash. But hold on a minute, are these people not the great tax-cutting, free marketeers who believe fundamentally in the economic sovereignty of the individual?

At least that was the spiel during the individualisation malarkey last winter. Is this not the government that believes it cannot spend your money wiser than you can? Yet, by preferring a centralised state pension fund (financed by cash that

was not theirs in the first place) to a stakeholder democracy, the government is embracing the Nanny State, not the free market. Now who’s the real pinko leftie?

The state of Alaska has adopted this stakeholder approach by using revenues associated with its natural resources as “dividend” income for its citizens. That is not to say that there are no problems that need to be ironed out. For example, voucher privatisation in eastern Europe led to average people selling stakes almost immediately to big business, resulting in significant concentration of national assets in a few hands. But we now know these pitfalls and with a financial system as sophisticated as ours and a little thought, the share ownership dilemma could be solved.

Looking forward, if asset ownership and familiarity with capital are the keys to wealth creation, why not give everyone a stake in our society? We could then move some way towards keeping our low tax economy while addressing wealth inequality through the market, not the dole office. We have everything to gain and nothing to lose.