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Everyone knows bureaucracies don’t shrink themselves. Why on earth would they? Rather, their sole aim is to grow bigger, concluded economist William Niskanen in his budget-maximising theory of 1968.
No one in Britain should have expected a smaller state under Labour. In the US, Donald Trump’s “big, beautiful bill” is forecast to raise federal debt by a fifth relative to output by 2035. Even the pfennig pinching Germans wish to be more Latin America circa the 1980s these days.
Politicians are much to blame for our indebtedness. But worryingly for investors, the problem transcends party politics. Both left and right have lost control of spending. Populism is on the rise with promises galore. Voters across the spectrum refuse to sacrifice.
Hallelujah for global bond markets, therefore — pretty much the last guys standing when it comes to holding wayward governments to account. A spasm here and Liz Truss was toast. A wobble there and Trump chickened out on tariffs. So-called bond vigilantes scrutinise everything. Even the smallest of tear drops.
Bond vigilantes are doing a great job. We just need more firepower. So isn’t it time we added some hardcore equity vigilantism into the fight?
For an asset class that is almost as large as bonds, it is pathetic how supine the equity investor complex has been when it comes to scaring the bejesus out of policymakers.
To be sure, plummeting stock markets can push central banks into cutting interest rates. Share owners are also vocal on issues such as antitrust or climate change when it suits them. And there’s always corporate lobbying, which has reached almost $5bn per annum in America alone.
So it is not as if the equity world doesn’t care. Rather, it has never focused on state profligacy in the name of economic and financial stability. Given the importance of both to prosperity, and therefore to company earnings, one wonders why not.
Certainly, few actions are as effective as the dumping of sovereign bonds, which automatically drives borrowing costs higher. States don’t issue shares that can be sold off. Still, equity vigilantes could apply a tonne of pressure to governments if they wanted to.
To understand how, remember that companies are merely constructs made up of four groups of people: shareholders, employees, customers and suppliers. The groups all compete with each other for a slice of the corporate pie. In collusion they would have enormous power.
Politicians obsess over stock market levels — and the prospect of a negative wealth-effect from diminished share prices, pension pots and other savings vehicles might concentrate their minds.
Equity vigilantes could target specific issues. Reckon a nation’s woeful infrastructure is holding it back (as well as hurting corporate returns)? Dump its listed utilities until they are cheap enough to be taken over. Or purchase lots of shares and install a pro-growth management team.
Similarly, investors in the UK could agree to threaten to use their voting powers to reduce domestic capex unless Labour gets a grip on the number of young people currently out of work.
How about a letter to the chancellor from every boss of a FTSE 100 company? “Dear Rachel, we are all planning to move our tax jurisdiction to Ireland — or our primary listing to New York — unless debt to GDP falls by 10 percentage points by the end of this parliament.”
The White House is known to be particularly sensitive to levels of inward investment. Your tax and spending bill must be fiscally neutral, S&P 500 companies could have told Trump (too late now), or we’ve agreed with our suppliers to move one factory each to Mexico.
Equity vigilantes can leverage a massive payroll too. There are 36mn employees in Europe. In America, the number is 40mn. That’s a lot of voters. Multiples more if you include customers. Public companies don’t traditionally do politics — but why not? Unions aren’t shy to recommend candidates.
Employees also pay tax. It is estimated that up to $20bn of unclaimed income, child and educational tax credits is left on the table each year in the US. Staff could be trained by employers in the art of claiming these credits — as well as in how to maximise deductions. Money talks.
When tax and spend goes mad, equity vigilantes must mobilise. When governments borrow money, it’s over to the bond markets. Maybe if they work together, politicians can be disciplined. They sure as hell won’t do it alone.
stuart.kirk@ft.com
