Andrew McNally is Chief Executive Officer of Equitile Investments and author of Debtonator: How Debt Favours The Few and Equity Can Work For Us All.
Andrew, in your book Debtonator: How Debt Favours the Few and Equity Can Work For All of Us, you discuss how the widespread over-reliance on debt – brought about by corporate tax regimes that favour debt, central bank action that keeps credit costs low and an ingrained, but misguided orthodoxy among bankers and business owners alike that debt is better than equity – is damaging both business and society because it focusses wealth in the hands of the few. This contributes to extreme inequality of both wealth and asset ownership, and undermines corporate sustainability. In explaining this debt-addiction, your book points to unrealistic assumptions within the economic theories that underpin financial models still dominant today. Yet, over the last few years, we have increasingly read in the press and heard from those in the financial industry that the economy is functioning differently from how it used to. To what extent do you think economic models have moved on to reflect this new economic normality?
Economics as a discipline is in a state of turmoil and on the cusp of the sort of revolution historically seen in other sciences. However, economics is still taught the same way it was 30 years ago. Equilibrium as an idea has become cast in stone and is based on the idea that humans are rational calculating machines. Nothing could be further from the truth though.
Despite that, central banks’ models and those used in the banking and asset management sectors to measure risk, are still sticking doggedly to this idea of equilibrium. Scrapping the idea of rationality would, therefore, upend most of the models used in finance today.
Do you think central banks need to reconsider their mandate to take a broader approach than just keeping inflation to roughly 2%? Do they need to think about their wider role in society?
There are two problems with central banks’ core thinking. Firstly, they think debt doesn’t matter, that it is a zero-sum game because one person’s debt is another person’s asset. That is absolutely not the case because banks can create credit out of thin air. Secondly, central banks believe that the breadth of ownership doesn’t matter. They don’t care who owns the pool of assets, but it absolutely does matter. The distribution of debt affects the broader outcome. Without breadth of ownership, capitalism is not inclusive and therefore has all sorts of adverse effects. We are seeing evidence of this today.
Central banks don’t think it is their job to worry about the distribution effects of monetary policy. But how can governments manage equality if such a powerful economic influence, which is increasingly broadening its mandate, absolves itself of responsibility for the outcomes it creates?
In my book, I talk about how the issues arising from monetary policy are rarely recognised by experts, never mind the wider population, even when their influence is plain to see. Historically, hyperinflation in the Weimar republic, for example, was blamed on tourists’ greed, peasants, wage demands of labour, industrialists and profiteers, Jews and speculators – basically everyone except the money printing press. Today we see something similar: the blame for inequality has been directed at globalisation, immigration, greedy bankers, corporate raisers, political corruption and biased tax systems – again, everyone and everything except central banks. Governments really need to get a handle on this.
You mentioned biased tax systems. To what extent do you think corporate tax frameworks need fundamental reform if we are going to address the growing problem of extreme inequality in society?
Corporate tax goes well beyond the corporate. There is no greater structural bias in favour of debt finance that corporate taxation. How companies finance themselves has a direct impact on the distribution of returns from those companies’ activities. Corporate tax policies that allow companies to off-set debt interest expenses against their tax bill were introduced as a temporary measure in the US in 1918, but somehow turned into a permanent feature of the tax regime, which has now been adopted by the vast majority of countries around the world. The incentive for companies to use debt is therefore overwhelming.
Add to this central banks’ low-or-zero-interest rate policies, and both monetary and tax policies have facilitated corporate debt financing and focussed returns in the hands of the few, creating extreme inequality.
Governments have responded through ‘statist’ policies, such as minimum wages or benefits spending, but a much healthier approach would be to promote broader ownership of assets. That means fundamental changes to the models used for corporate tax and to set central bank policy.
Andrew's book is available to buy here.
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