FTdotcomment

I am sad to say I will be leaving this blog, as I will shortly be starting a new role as Investment Editor, writing a daily column on financial markets. Thank you to all readers and commentators.

There will be a pause of a few weeks on the blog until my successor takes over as Comment Editor, running the blog and the comment page. Please bear with us.

Nick Clegg’s newfound twin status as political wonder boy and hate figure of the Tory press seems to have made the British Liberal Democrat leader even more popular with the Twittering classes. The second-most popular topic on Twitter right now is “#NickCleggsFault“, mocking the Daily Mail, Daily Telegraph and Spectator for their rabid attacks on the previously-ignored politician.

My current favourite, from a long list, is the last of these three:

@BarneyRonay: In tomorrow’s daily mail: clegg thrashes oap with stick. Drunken clegg vomits on diana memorial. And clegg: my squirrel porn shame

The question is whether voters will like Clegg more because he’s under attack, or like him less because they buy the Mail’s (nonsensical) likening of him to a Nazi, the Telegraph’s assault on his expenses and political donations or the Conservative attempt to take on his policies and character.

Early indications are that the Twitter parody is already having an effect: the Telegraph has been put on the defensive, with Benedict Brogan denying orchestrated efforts by the press to “smear” Clegg. (EDIT: Just come across the Daily Mail-o-matic headline generator, further parodying the paper’s attacks on Clegg by producing random but intelligible Mail-esque Clegg headlines.)

At the very least, the ad hominem attacks must raise his stature. Ken Clarke, Tory former chancellor of the exchequer and now shadow business secretary, wrote in the FT today that Clegg “is a perfectly nice chap but he is not a prime ministerial candidate”. The fact that the Tories have to unleash one of their few remaining Big Beasts to deny that Clegg could be prime minister is extraordinary: even after beating the Tories in some polls, Clegg presumably doesn’t have such delusions of grandeur.

Much of the sudden bounce in the polls must be down to the public finding that actually they rather like Clegg once they see him – for the first time, the televised debate let him make his point directly to a big TV audience, and he did it well. But equally, a 10-point jump cannot be sustainable; he’s bound to slip back, and some of the mud thrown by the Tories will stick.

Any slippage in the polls will be seized on by the media as the bursting of the Clegg bubble (a classic newspaper strategy: build him up, knock him down). But all the Lib Dems need is to take 25% of the vote, well below the 30% they are polling, and they will be back to their 1983 highs (they scored 22% at the last election). That would be a phenomenal outcome for the Lib Dems. Still, some in the party must have fingers and toes crossed in the hope that the bubble lasts to May 6 and the party tops the popular vote; even then, though, the Lib Dems will probably come out third in number of MPs, and Clegg certainly won’t get to be the first Liberal prime minister since David Lloyd George.

Having run short of ways to distract British voters from the need for drastic cuts, both Labour and the Conservatives have seized on mutuals as part of their strategy. Mutuals, the thinking goes, are nice cuddly non-profit organisations that pose no threat to the future of the planet or the future of finance – unlike nasty profit-hungry multinationals and banks.

On Monday, Labour’s manifesto (complete with a 1930s-themed cover featuring socialist realist art designed to make one think Gordon Brown statues could soon spring up around the country) pledged more mutual involvement in everything from banks to public houses. Here’s the full list of Labour’s mutual pledges:

• Finance: “will consult on measures to help strengthen” mutual financial services firms. Will “encourage” a mutual solution for Northern Rock (although it is clear there won’t be one, since it also promises to ensure value for the taxpayer)
• Transport: will “welcome” bids from mutuals, among others, for rail franchises
• Childcare: will “pioneer mutual federations running groups of local Children’s Centres in the community interest”
• Health: “across the NHS we will extend the right for staff, particularly nurses, to request to run their own services in the not-for-profit sector”
• Football: “Registered Supporters Trusts enabled to buy stakes in their club”
• Pubs: “We will support pubs that have a viable future with a new fund for community ownership”
• Old buildings: will “review the structures that oversee English Heritage, putting mutual principles at the heart of its governance so that people can have a direct say over the protection and maintenance of Britain’s built historical legacy”
• Canals and rivers: “British Waterways will be turned into a mutually owned co-operative”

So far, so populist. After all, how could the John Lewis-shopping classes be against mutuals? (For anyone who hasn’t realised, the department store and supermarket group is owned by its employees, who shared a bonus pool of £151m last year as a result.)

I like John Lewis. But Labour – and the Tories, who are also pushing mutual ideas – have misunderstood the lesson from the success of John Lewis. Its mutual model may contribute to its culture, and give staff an incentive to help customers; but equally, it may not. After all, many shareholder-owned retailers also offer strong customer service and value for money. What is clear is that fierce competition in retailing gives the company, and hence its management and staff, a strong incentive to provide keen pricing and good customer service.

What of the rest of the mutual sector? Currently, the biggest mutual businesses are building societies and insurers, plus the Co-operative retail-to-banking group. Supporters of mutuals make a clear distinction: the building societies that converted to banks had to be rescued (Northern Rock, Bradford & Bingley, HBOS and Alliance & Leicester); the building societies that stayed mutual did not. Mutuals, supporters argue, are inherently less likely to blow up because they are “less prone than banks to pursue risky speculative activity”.

Unfortunately, this just isn’t true. It is not just that Dunfermline building society blew up spectacularly after pretty much the same misguided property investments as HBOS. It is not just that Presbyterian Mutual Society in Northern Ireland collapsed after a bank run, just like Northern Rock, and had made lots of buy-to-let loans, betting on the frothiest part of the mortgage market bubble. It is not just that 10 troubled building societies, most recently Stroud & Swindon, were rescued by mutual friends in the sector.

What really shows the lack of safety of the mutual movement is that the last major banking crisis in the US, the savings & loans disaster, was in fact a systemic failure caused by the US equivalent of building societies, most of which were mutual. Before that, America’s mutual savings banks fell as a series of dominos in the early 1980s.

Of course, this is not to say that banks are perfect, to put it mildly. But my point is: neither are mutuals.

As with everything, it is a question of incentives. Mutuals run by their staff – such as GP practices, owned by doctors, or Lambeth’s local authority leisure centres, outsourced to a mutual – are naturally run to suit their owners. This can lead to terrible service, as at Lambeth’s swimming pools, or short working hours at inconvenient times for patients, as in doctors’ surgeries. Competition can stop mutuals becoming self-serving, as with John Lewis, but it is hard to apply competition to GPs or large leisure centres.

This is why the Tory plans are also likely to fail, if implemented. David Cameron wants “to let nurses manage their own clinics, job advisers take over employment offices and teachers run their own schools”. Are they likely to favour staff or customers/patients/students? My guess is that if staff have no one but the government looking over their shoulder, the organisations will have even more trouble motivating staff to work hard and provide great customer service than other ownership models.

Here are my three top problems with mutuals:

The first is corporate governance. The people who run large mutuals have almost no accountability to their owners. True, shareholders in big businesses relatively rarely act to throw out management; but the management of underperforming companies are frequently ejected through hostile takeovers. The lack of accountability of management at mutuals is a serious problem if they operate in a less than fully competitive environment. The wave of demutualisations in the 1990s made management at the remaining mutuals far more accountable than it had been; but public pressure has died down since the prospect of payouts went away, and renewed member apathy has left management with few checks on what it can do.

Second, linked to this, is the question of efficient use of resources. In competitive markets mutuals have the same pressures as non-mutuals. But in less competitive markets, such as banking or medical care, mutuals are under little pressure from their owners to use resources efficiently; if they are staff-owned, rather than customer-owned, they are likely to face pressure from their owners for the inefficient use of resources, in the form of above-market pay levels.

Third, mutuals distort the allocation of resources in the economy, by tying up capital far more tightly than any public company. If they are run inefficiently, they cannot be taken out in a hostile takeover, and may – particularly under a Labour administration – find it easier to access state funds to keep them in business.

“Tory win best for economy say top bankers” screamed the Telegraph’s Friday splash headline (online, the story was downplayed and detailed, wierdly). The “top bankers” in question were Deutsche Bank’s London strategy team – great strategists, but perhaps surprised to find themselves labelled thus. Quibbles aside, a detailed strategy report from DB suggests a Tory government with plans for faster cuts to the deficit would be likely to be better for sterling, might help prevent a downgrade of the country by ratings agencies and could result in lower interest rates. Here’s what Jim Reid says in the report:

The best result for UK equities is likely to be an outright victory for the Conservative party. Although an outright Labour victory would help create certainty, the lack of urgency in their deficit reduction plans may be negative for Gilt yields and may alert the rating agencies. If Gilt yields aren’t negatively impacted by a Labour victory then their ‘spending for longer’ policy may actually be better for markets than a Conservative administration committed to fiscal cutbacks.

But the actual deficit policies from the Tories, the report accepts, don’t look much different to Labour over the term of the next parliament – the Tories have just said they would bring the cuts in sooner.

Corporate board members don’t quite have a fiduciary duty to oppose tax rises on their companies, but chief executives are hardly likely to be in favour. So, surprise surprise, herds of UK executives are bleating about the dangers of Labour’s planned rise in National Insurance, brilliantly rebranded the “jobs tax” by the Tories. And it has become a major problem for Labour.

Should we listen to business complaints? No, and yes.

No: after all, they would say that, wouldn’t they? As an employer myself, I’m strongly against a rise in NI, which I will have to pay. But I’m also, on the same purely selfish grounds, against a rise in income tax, in VAT, parking charges or the price of milk, against inflation, deflation and mice. Quite rightly, I just get my one vote, and no one is interested in my selfish opposition to any of these things. Ask companies whether they would prefer the tax rise in the form of higher corporation tax instead, and you can guarantee a stony silence from boardrooms.

But yes, there is a reason we should listen: The NI rise is a bad way to pay for the debt crisis. Leaving aside the question of how much of the deficit reduction should come from tax rises and how much from spending cuts, both the employer and employee parts of NI are a poor way to raise additional tax.

Employer NI is, as the Tories insist, a tax on jobs: the more people a company employs, and the more it pays its staff, the more it pays in tax. This at a time when the government claims to be doing all it can to reduce unemployment. My colleague Chris Giles disagrees completely. But while all taxes may, as he points out, be a tax on jobs, there is an adjustment period to new employee taxes during which employees have a lower standard of living, before they can demand higher wages to compensate – particularly at a time when employers are finding it easy to resist wage hikes. Raise employer NI, and there is an immediate incentive for companies to reduce staffing, which is hard (particularly in industries with collective bargaining) to pass on in lower wages. With low inflation, it takes longer to pass this on in future through lower wage rises, too.

Employee NI is also a bad tax. It is a tax on earned income, not paid by those with unearned income. Notting Hill trustafarians, as well as pensioners, thus miss out. Weird when you think about it, but Labour is increasing taxes on labour. If you want to encourage hard work, and discourage lazing about extracting rents, then tax the extraction of rent, not hard work. Duh. It would be far better to raise income tax, which treats income equally – except that Alistair Darling gambled that people wouldn’t notice an NI rise. The chancellor seems to have been right – but companies did notice.

Unfortunately Gordon Brown mishandled the debate spectacularly (EDIT: Dan Roberts sets this out nicely), accusing business of having been “deceived” by the Tories’ plan to pay for the scrapping of the majority of the NI rise through magical mystery savings, supposedly from additional “efficiency” savings (Gerry Grimstone, one of those closely involved in the government’s efficiency plan, insists such savings cannot be conjured up suddenly).

This, of course, is not relevant to corporate concerns: they don’t care whether the next government pays to get rid of NI through efficiency savings, genuine spending cuts or tax rises elsewhere – just as long as it isn’t a tax on them.

Related reading:

UK election 2010: National insurance nonsense FT Money Supply blog

The Conservatives have a secret plan to save Britain’s economy. Hidden in their financial documents (that’s journalist-speak for “in the briefing notes”) is an explanation of how the opposition’s tax cut plan can be squared with gilt investors baying for deep cuts: The Tories would push through immediate spending cuts of 0.5% of GDP, or £6bn.

Sounds great. You can buy a lot with £6bn nowadays: two aircraft carriers and change, or the whole of the British bank bail-out.

But there are two caveats. And they show the Tories have got zero clue about the level of spending cuts needed to satisfy the markets and maintain the country’s AAA rating.

First, this is a one-off cut. After saving an extra £6bn in 2010-11, the Tories would splurge all future savings on the cost of reversing (“most of”) Labour’s planned National Insurance rise and a freeze on council tax. Popular with the Tory base, tax cuts.

Second, the £6bn is a one-off cut equal to 0.7% of the country’s net debt. Not the deficit, but the outstanding balance. Consider this: if you had a £250,000 mortgage and were struggling with the monthly payments, this is equivalent to making a one-off payment of £1,749, then thinking you had fixed your debt problem so you could go out and buy new iPads for the whole family every year.

Here’s what the Tories say:

This is just under 0.5% of GDP and less than 1% of total Government spending. It is the result of a twin assessment of what is necessary in order to retain Britain’s credit rating and restore confidence in our economy, and what is achievable in-year without affecting the quality of front line services…

Our judgement is that this is the right amount of additional in-year savings needed to establish credibility and restore confidence in our economy.

Are they right? Is this going to solve the the market’s perception that Britain is a worse risk than, for example, Italy? Is it going to end the risk of credit rating downgrades? Simply put, no.

Here’s the reality: the voters would not accept David Cameron and George Osborne’s efforts to sell an “age of austerity”. So the Tories have switched from fiscal responsiblity to fiscal denial, spending money the country doesn’t have in the hope that markets will forgive them. Dan Roberts summed up the optics of the Tory shift nicely in the Guardian:

Either Osborne was right that Britain’s colossal deficit threatens to wreck the economy, in which case this is a reckless piece of political grandstanding. Or perhaps he is right now that there is enough wiggle-room to give voters some money, in which case what was all that stuff about economic armageddon?

A one-off £6bn saving is neither here nor there. Luckily for the markets, Osborne almost certainly knows this and will push through a true austerity budget after the election. Unluckily for democracy, the voters won’t be told what is coming, at least by the Tories.