In the medium term, I think the vote for Brexit will turn out to be a very good thing. In the short term, it’s going to give us volatility and endless hot air. Never has an event caused so little to actually happen, but so many newspapers to print so much about what their columnists think might happen.
The result – and this was inevitable – is that the vote has now been made to look as if it is the key driver behind every single bit of news there is. So this Wednesday the Financial Times ran the headline: “Sterling leads UK assets down as Brexit fallout fears grip markets.” That headline, as commentator Pippa Malmgren pointed out, could just as easily have been: “Italian bank losses spur global market fears.”
The fact is that Brexit can’t be the cause of any of the problems you read about over the next few months. It might push us to start thinking about problems we already have (huge private and public debt, an out-of-control tax credit system driving that debt, miserable productivity, a property bubble, the insolvency of Italian banks, etc, etc). But it won’t have caused them. On the plus side, whether our leaders and financial sector find a way to blame it all on Brexit or not, the vote does give us a fabulous opportunity to look at the UK’s version of capitalism – and to make it better.
How? Michael Gove picked up a lot of our thoughts in his speech last week. He mentioned the rise of huge merger deals, financed by cheap, tax-deductible debt. They don’t generate much shareholder value, he says – just fees for bankers and bonuses for CEOs. We’d add that they aren’t good for competition (the best driver of growth there is): the bigger our firms get, the more inevitable the rise of oligopolistic power.
One part of the solution is to change the way we treat debt: our system has long favoured it over equity (the cornerstone of stable economies). This has driven everything from the rise of the super-huge company and dominance of the financial sector, to the shrinking number of high-growth companies being listed on global stock exchanges (why sell shares when you can borrow?).
Another part of the solution might be executive pay. This has been a bugbear of ours for years. We are intense capitalists at MoneyWeek, but we don’t think the fact that top executive pay has risen from 60 times average income to 180 times is a good thing. That doesn’t reflect capitalism as we understand it: instead it gives leaders an incentive to keep wages and capital investment down to keep profits up. Not good.
Still, if MoneyWeek had been writing Gove’s speech, we’d have gone further. The reset in politics might also give the UK a chance to sort out its state: for a root-and-branch review of our tax system (let’s talk about flat taxes again?) and our high levels of public spending (tax credits in particular). Opportunities such as this don’t come round often. Wouldn’t it be wonderful if we ended up with a leader who could make the most of them?