Bernard Trafford: Whatever happened to companies saving for a rainy day?

Journal columnist and Newcastle headteacher Bernard Trafford on why we need to be rather sparing with the bailouts

Andy Buchanan/PA Wire An oil rig in the North Sea
An oil rig in the North Sea

I’m not an economist. Though I run what is by some definitions an SME, can read accounts and follow balance sheets, I don’t understand how the national financial wheels turn.

Still, over the years I’ve grasped some principles of economics, succinctly defined as “the study of the allocation of scarce resources”. It’s sometimes called a “dismal science”, because it identifies harsh realities. Unlike politicians, economists don’t believe they can have jam tomorrow if they haven’t prepared for it today. They believe in consequences, and in opportunity costs. There’s nothing for nothing; or, as that most famous of economists, the late Milton Friedman, put it: “There’s no such thing as a free lunch”.

It’s an ill wind that blows nobody any good; an economist might have written that old proverb. Current falling oil prices are serving to reduce the cost of living. Heating oil, petrol, diesel, the transport that gets to the shops all the things that we buy; even the cost of delivering stuff we’ve ordered online. All are tumbling.

That should be good news. Prime Minister David Cameron urged employers whose costs have shrunk to share the benefit with their hard-pressed employees; after all, most have had precious few pay rises or good news in recent years. His opponents ridiculed him: I think he might have a point.

Low oil prices are, of course, bad news for the petrol companies. While Saudi Arabia produces more oil than the world needs, forcing the price down, Western oil companies are feeling the draught. You might say that’s just business; it’s how the real world works.

UK-based oil companies don’t like it at all, however, demanding government intervention. They add a thinly veiled threat. Only last week it was suggested that, if government doesn’t do something to help (for example, cut the duty charged on petrol and oil), they might close down oil wells and sack employees.

It gets worse: once closed down, these wells won’t be reopened even if the price rises. We’re warned they’ll be closed off for good, the untapped oil still trapped in the ground.

Danny Lawson/PA Wire An oil rig in the North Sea
An oil rig in the North Sea
 

Hold on a minute! I thought the basis of thriving capitalism was a market-driven economy. You make lots of money in good times, less or none in the bad: no one bails you out. In the old Bible story, Joseph interprets Pharaoh’s dream of the seven fat and seven thin cows as a prophecy of good times followed by bad: so for seven years Ancient Egypt’s barns were filled with surplus harvest, which carried the people through the ensuing seven years of famine. Job done: a ring and a golden coat for Joseph (a kind of Old Testament banker’s bonus, I guess).

It seems business doesn’t work that way any more. In good times the bosses and shareholders grab all the profits in dividends and bonuses. In bad times, do they survive through that saved-up profit? Some hope! Nowadays they demand government subsidy.

The big corporations’ attempt to blackmail government with threats of job losses and oil field closures is resonant of the credit crunch. Bank profits, in the boom times, were routinely described as obscene: when the whole thing imploded, government was forced to bail them out with tax revenue in order to avoid global financial meltdown.

Capitalism, given proper welfare provision for the needy, can fuel a civilised society. Markets free from government rigging or coercion tend to operate effectively.

A North Sea oil rig
A North Sea oil rig
 

But freedom should mean just that. I don’t begrudge successful corporations their profits as long as they behave ethically and pay their taxes (that would be something!). But if they’re too greedy to put money aside for rainy days, to use the fruits of good times to fortify themselves against the bad, I don’t see why we should do it for them.

Next economics question: how can 1% of the world’s population own half of its entire wealth?

No, I can’t do that one either.

Dr Bernard Trafford is headmaster of Newcastle’s Royal Grammar School. The views here are personal.

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