January 21, 2020

Introduction

It’s a great pleasure to be here at the World Economic Forum annual meeting — better known as Davos. This year the theme is “Stakeholders for a Cohesive and Sustainable World.” Last year it was “Globalisation 4.0: Shaping a Global Architecture in the Age of the Fourth Industrial Revolution.”

Honestly, where do they get this rubbish?

Do they just write buzzwords on bits of paper and pick them out at random? Or is there a special machine, like a National Lottery draw? A random balls generator would certainly seem to be involved. What does this Davos-speak achieve? What does it change?

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What’s not in this speech

I’ll admit that’s a question that could be asked of a lot of ministerial speeches too. In fact, most of them. Normally, a speech from a Chancellor of the Exchequer at Davos would go something like this:

To start with, some awkward bonhomie, with obligatory unfunny joke. Then I’d big up the British economy — as if blather from a politician is the basis on which people like you make investment decisions.

Next, there’d be a policy section. By law, this has to be introduced with the words: “building on strong foundations.” But it wouldn’t be anything you hadn’t heard before. And, of course, that’s the idea.

The message of every ministerial speech since the British people voted for Brexit is that nothing’s really changed. But it has. Because in 2016 and 2019 people didn’t vote to keep everything the same. They voted for change.

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Things must change

The reason for that is right here at this resort. The global elites. From business, politics, academia and the media. We’re all here to talk about the world’s problems as if they were nothing to do with us. As if the policy disasters of the 21st century weren’t of our doing. As if the electoral backlash that we failed to see coming is all the fault of the voters.

Their failure to listen to us…

…to hear what we have to say about their ignorance…

…to take lectures about their privilege from a tenured intelligentsia…

…to be moved by the advertising of woke corporations…

…to accept their lot as indebted consumers…

…or as outsourced workers….

…or as hollowed-out communities.

We make high-minded speeches about an international rules-based framework, but what too many of our people actually experience is a system rigged against their interests.

*

From their perspective, this place feels like it’s a million miles away. And they’re right. In almost every respect, it’s another world — socially, economically, culturally. But not electorally. Democracy is what keeps this Elysium tethered to planet Earth. We can’t float away.

The voices that we silence in the boardroom, the lecture hall, the TV studio — make themselves heard at the ballot box. That’s a verdict that we can’t ignore. Or overturn. Or bypass.

So, no, I’m not here to plead for corporate favour. To tell you that nothing has changed. Things will change. Things must change. And if I do have a feel-good message, it’s that, in Britain, things can change.

The state of the global economy

If I could change the title of this year’s Davos, I couldn’t do better than something that Sir David Attenborough said last week: “The moment of crisis has come.”

At the start of a new decade we have to look back at the last decade and realise that we can’t go on this way. Not in the environmental sphere. And not in the economic sphere either. It may be ten years since the last recession.

And capitalism is still standing. But I’m not going to stand before you today and pretend that all is well with the global economy. Something is badly wrong and it lies at the heart of our troubles.

Consider the following fact: in August of last year, the global money markets had 17 trillion dollars invested in negative yield bonds.

17 trillion dollars.

In bits of paper guaranteed to make you a loss. Now I used to be a banker. I understand that managed money needs to go somewhere and that, at times, a very low but reliable yield might be the best option compared to a high risk investment.

But ladies and gentlemen, these are not normal times. The conventional economics that we grew up with doesn’t work any more. We’ve now had a decade of ultra-low interest rates. But without runaway inflation.

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In some countries, we’ve also had a decade of job creation. In the UK, employment levels didn’t just recover after the recession — they’ve risen to new heights. Again, without the inflationary pressure that conventional economics would lead us to predict.

However, growth has been slow. Wages flat. And poor productivity a continuing drag on prosperity.

*

In the first decade of the 21st century, economists spoke of a “Great Moderation” — an end to the boom and bust cycles of the 20th century. We all know where that ended up: With the worst crash since the Second World War.

The Left proclaimed the end of capitalism. The Right worried that QE would unleash inflation. Both sides were wrong. The story of the second decade of the 21st century is the Great Zombification. A global economy that staggers on, but doesn’t respond to stimulus.

*

I think we need to question the stimulus itself. Low interest rates encourage lazy, unproductive investment. Companies borrowing to buy back their shares…

…or to buy out the competition…

…or corner a market…

…or inflate an asset bubble…

These things engineer rewards for a lucky few. But they don’t build prosperity.

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Low interest rates have a deadening effect on the banking sector too. When rates are low, margins are low, and banks err on the side of caution. Genuinely innovative businesses are starved of funds, while essentially bankrupt firms are kept on life support — for fear of recording a loss.

Capital is left tied up in all the wrong places. Killing growth. Killing productivity. Killing opportunity.

*

Who’s to blame? Let’s start with governments. They are the world’s biggest debtors — and people who owe money pay the lowest interest rates they can get away with.

But they’ve been getting away with for more than a decade now. The market keeps lending money to the state at rock-bottom prices. And that’s because it’s got nothing better to do with it. If there were enough productive uses for the world’s cash, interest rates would return to normal. But clearly, there’s a shortage.

 

Reforming the private sector

The key question is why. I believe it’s about the wrong incentives. We’ve made life too difficult for the inventors and entrepreneurs, and too easy for the hangers-on.

Public sector waste is an obvious problem, but there’s a parasitic load in the private sector too. The tax avoiders, the polluters, the speculators and the rentiers. All the industries that profit from the productive economy without contributing to it.

I’m reminded of what Peter Thiel said about Silicon Valley — which is that most of the venture capital that he invests goes not into product development, but to “landlords, to commercial real estate.”

It’s time to unrig the system. Public sector reform is not enough. We have to change the incentives in the private sector too.

Take the tax system, for instance. Taxing work more heavily than the unearned profits of land ownership cannot be right. And all the more so when those profits disappear abroad. Britain must and will remain a country open to talented people from around the world.

If you wish to live and work here, supplying the skills and knowledge that our economy needs, then you are very welcome. Indeed, we’ve already acted to extend the welcome offered to overseas students. However, if all you want to do is use our green and pleasant land as a piggy bank then you will pay handsomely for the privilege.

The hard truth is that much of what we call “foreign direct investment” in the UK is foreign direct speculation. And the same applies to billions of pounds of domestic investment too. A flow of capital that drives up the cost of buying or renting a home (or workplace) is the sort of investment we can do without.

Therefore we will act unilaterally on this matter, reforming the tax treatment of land and property, to support home ownership and productive enterprise.

 

The international order

On other issues, however, the effort to rebalance economic incentives must be international. For instance on the issue of tax avoidance, I would say this to our friends in the European Union:

Britain will not become an offshore tax haven. We will work with you to ensure that wealthy individuals and corporations pay their fair share of taxes. And, yes, that does include the tech titans of Silicon Valley. Of course, the EU will need to deal with its own tax havens.

We will also cooperate with our international partners to uphold the polluter pays principle. Earlier this month, Ursula van der Leyen, President of the European Commission, set out some ground rules for a trade agreement with the UK.

“No tariffs, no quotas, no dumping,” was her key phrase. I’m in full agreement with that.

Dumping, as you know, is when one country takes advantage of lower standards to export products at an unfair advantage. For instance, a country that continues to fuel its economy on coal — especially the filthiest kind of brown coal — would be guilty of environmental dumping. As we strive to achieve net zero emissions by 2050s we need a level playing field from Beijing to Berlin and beyond.

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Open versus closed

Given the global scale of the challenges and opportunities that lie ahead, some form of rules-based international order is necessary. But it’s not inevitable though. If it’s skewed against some of the participants, it will be resisted.

Rule-makers must understand the difference between rules and their impact. Equally applied does not mean equally felt. For instance, within the EU, the UK was subject to the same rules as everyone else on free movement, but it should have been obvious that the practical effect would not be the same.

An English-speaking country with an open labour market and a non-contributory social security system was always going to be affected differently to most other EU states.

It was the refusal to take this into account that more than anything led to Brexit. As we build new frameworks, we should remember the role that flexibility plays in sound construction.

*

This applies as much to relationships within nations as it does between them. A country as a whole may sign up to the same set of rules, but the impact on different communities will not be the same.

Attitudes to global integration have come to define a new “open-versus-closed” spectrum within our politics. In many countries, it has become more important than Left versus Right. It’s why we’ve got a Conservative MP in Leigh and a Labour MP in Canterbury. The trouble is that the terminology of open-versus-closed, as used by one side only, is utterly self-serving.

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Working class communities are in fact more open to the disruption caused by globalisation than the professional elites secure within their regulatory barriers.

The so-called knowledge class may be more open to the idea of internationalism, but in practice their lives are lived within environments which are carefully controlled, if not closed altogether. For instance, here we are in Davos surrounded by a state-of-the-art security fence and a no-fly-zone. Where better to extol the virtues of a borderless world?

 

Unrigging our own rules

It’s not only the international order that needs reform. British politics is also skewed by rules of our own making. These include the Treasury rules on public investment.

Though meant to be objective these skew funding towards certain parts of the country because they are deemed to be more productive — and thus provide a greater return. It’s a catch-22 that ensures that other parts of the country don’t get the investment in research, skills and infrastructure that would make them more productive. 

This too must change — and it will.

I’ve already ordered a comprehensive re-write. We will also go much further in transferring power from the centre to our cities and towns far beyond our capital. The people of this country did not vote to take back control from Brussels only see it stuck in Whitehall.

And I promise it won’t be.

 

Conclusion

Ladies and gentlemen, there are two equal and opposite errors made about capitalism. On the Left, it’s that the system is a flimsy construction, about to collapse under the weight of its contradictions. On the Right, it’s that the market is a force of nature, a fundamental property of the universe that only the over-mighty state can interfere with.

Neither is true. Given the chance, people will trade freely with one another. However it is government that gives them that chance. Capitalism relies on a framework of law and justice.

Right now, however, the rules aren’t fair — if indeed they work at all. We must either change them — or have them changed for us.

Thank you for listening.

ENDS

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