Ryan Bourne is the Head of Public Policy at the Institute of Economic Affairs. He is a co-author of ‘Smoking out red herrings: the cost of living debate’, which is released today.
Over the past three years, the Labour leader Ed Miliband has sought to draw together a narrative for his agenda for government under the banner of tackling ‘the cost of living crisis’ and ‘low pay’. Though attempting to keep the main focus on the state of the macroeconomy, many Conservative MPs have responded positively to particular parts of this agenda (particularly on the minimum wage and childcare policy).
Unfortunately, the ‘solutions’ of Miliband and others to this linked problem of ‘low pay’ and rising living costs are as predictable as they are economically misguided. The essential premise appears to be that ‘markets are failing’, necessitating new government interventions to control wages and prices. Yesterday we saw, from Miliband, the first half of this agenda manifest itself with a commitment to a higher minimum wage. This complements existing announcements to freeze energy prices, to introduce tenancy rent controls, to exert downward pressure on regulated rail fares and extend ‘free’ childcare for families with young children.
This approach seeks to treat the symptoms of problems rather than providing a robust analysis of underlying causes. It appears devoid of any understanding of why prices in these markets are high in the first place or the damage that state control of prices and wages could bring. Furthermore, we know that in many of these markets, existing government policies or interventions push up the cost of living already.
Given all this, one might have expected a Conservative party which believes in competitive markets to be able to articulate supply-side policy changes that could help alleviate costs pressures in areas like housing, energy, childcare and food, whilst articulating the economic perils of even greater state control of certain sectors of the economy.
This hasn’t happened. In fact, in many respects, the coalition government has engaged in somewhat of an arms race to be seen to be acting with new interventions: think ‘Help to Buy’, the new ‘Tax free childcare’ policy, urging the regulator for greater control of retail energy market tariffs and a number of voices calling for an increase in the national minimum wage.
Over the next two weeks, my colleagues and I at the Institute of Economic Affairs will be mapping out what a genuine pro-market supply-side approach to high prices in a range of industries might look like. We’ll outline the huge gains that could be seen for households on modest incomes from reforms to housing (planning liberalisation), energy (a reversal of those aspects of green policies that are especially inefficient), childcare (de-formalisation of the sector), food (elimination of EU CAP and biofuels policies and planning reform) and the scaling back of highly regressive ‘sin taxes’.
But before outlining this sort of agenda, it is worth assessing why the arguments of the interventionists are misguided. In a paper released today, called ‘Smoking Out Red Herrings: the cost of living debate’, Kristian Niemietz and I assess in some detail the misguided claims, half-truths, red herrings and fallacies which unfortunately lead to muddled thinking on policies advocated in a range of product markets, sin taxes, welfare and the minimum wage.
On housing many claims are made by disparate commentators and thinkers, from ‘we don’t need more homes, just a better distribution’, to ‘brownfield development is the solution’, ‘the market has failed to build, so the state must step in’, and ‘greedy landlords are to blame for high rents, that’s why we need rent controls’. High prices for energy and rail are blamed on privatisation.
We’re told childcare subsidies are good for the economy because they increase maternal employment and ‘make childcare cheaper’ and that extortionate duties on tobacco, alcohol and fuel are justified because of the ‘social costs of these activities’. Proponents of higher minimum wages like to claim the statistical fact that ‘most poor people are in work’ is a killer justification for higher statutory wage rates (alongside suggestions that a higher minimum wage is necessary because taxpayers ‘subsidise’ employers through tax credits).
In our paper, we show how all of these arguments either ignore the real issue or are fallacious. Our hope is that when these issues continue to be debated, politicians, commentators and those interested in informed policy discussion will be able to draw on our analysis in order to prevent economically dangerous policies being implemented in the name of faulty conventional wisdom.