Sometimes it feels that the famous Churchillian phrase about democracy could be applied equally to free markets; ‘democracy is the worst form of government – except for all the others that have been tried.’ It is an analogy that can cross boundaries to economics!
Western capitalism as we know it is under threat. The disparities of wealth in many countries have grown; injudicious tax cuts in the US for the better off, global asset price inflation due to quantitative easing, elements of corruption and elitism, now the pandemic. The list is long. Much of it has fuelled populism which, of course, is a poor solution to inequality. Just think Trump, Bolsonaro and Modi for a start. They may not intentionally have set out to undermine capitalism/free markets but their sense of entitlement, acceptance of corrupt practices, particularly when supporters are involved, and a disastrous handling of the pandemic have all contributed to greater inequalities and capitalism’s malaise.
So, it is a huge relief and very welcome that the world’s leading economies yesterday signed up to a plan to force multinational companies to pay a global minimum corporate tax rate of at least 15 per cent. It is a recognition that things have to change. Many multinationals, notably technology companies, have reached a size where they face little competition and accountability, moving money around the globe to dodge legitimate taxation. No longer. A fair treatment of companies, large and small, global and local is crucial to the survival of Western capitalism. The ‘little person’ should have an equal voice and this initiative could raise at least an extra $100bn in taxation potentially for public investment. No mean feat.
Future initiatives to strengthen capitalism should involve more active corporate governance to curb senior executive pay. For example, according to the latest Chartered Institute of Personnel and Development (CIPD) report on executive remuneration, the average FTSE 100 Chief Executive gets 119x the remuneration of the average full-time employee. This multiple has risen pretty much consistently over the years and apparently there is no tangible evidence as we emerge from the pandemic that companies have begun to address the fundamental flaws in the executive pay-setting process.
Incredibly, one might not even be averse to considering some form of wealth tax which seems the only solution to dealing with the inequality of wealth caused by excessive asset price inflation since the 2008 crash and the advent of quantitative easing.
The world faces multiple crises as it tries to escape the pandemic. In the West, in particular, there are huge challenges facing economies including infrastructure investment, lifetime education to reskill the workforce and access to comprehensive health and social care. Populism and threats to democracy will only be defeated in the longer term if disparities of wealth are narrowed to pay for much needed improvements in how society operates.
Agreeing a global minimum corporate tax rate, whilst seeming a little dry to grab many headlines, is a huge step forward for capitalism and another visible benefit of President Biden’s victory over Trump. There is still much work to do, however, to convince all voters that Churchill’s comments on democracy apply equally to free markets as we know them.
Inside Right Politics 