The decline of (economic) thinking in the UK

News from Europe is not all Brexit.  Embattled British Prime Minister Theresa May has discovered a deficit in economic fairness.  Her latest wheeze:  to stop landlords taking their properties back (without a good reason).

In a housing shortage, what could be more reasonable?  But perhaps this is to forget the history of post-war rent controls in the UK, which succeeded in transferring landlords’ wealth to sitting tenants, and in the process destroying the private rental sector for new tenants.  Private landlords built no new houses and ditched their existing stock.  The state built subsidised housing, sold it cheap to the lucky tenants and then ran out of money to build more.  Distortion piled on inefficiency.  In the 1980s, Margaret Thatcher’s government removed the controls to legalise free exchange between consenting landlords and tenants.  Over several decades a large and tolerably efficient market grew up to serve the people’s needs.

You hope Mrs May does not have a secret plan to repeat the 30 year slow march to destruction but it looks like a solid first step on the path. With this new potential for bureaucratic intervention, private landlords are likely to be more wary about letting properties for short terms or to people they don’t know (bad luck for foreigners).  And one rule often leads to another.  If you can’t get your house back, you might be tempted to charge a higher rent.  Which might result in more discussion of how to prevent ‘unreasonable’ rent increases.

The old lesson – that prices and quality in the market are signals to be understood, not challenges to be eliminated by fiat – remains valid.  If you want cheap housing, don’t impose cost-escalating controls, but find out why its expensive and then do something to increase supply (like reducing building or land costs) or grit your teeth and subsidise it.

Nor is this depressing failure in Economics 101 an isolated piece of craziness.  Britain’s Conservative party government has form in interfering in markets, ostensibly to benefit consumers but often imposing long term costs. The justification is usually on the lines of broken markets and unfairness (eg, failing to provide universal service coverage, to serve vulnerable customers or to rectify poor consumer decision making). The tool of behavioural economics is used to create a model of consumer irrationality which, with appropriate assumptions, can justify just about any intervention the regulator wants. At the heart of these is the conceit that the bureaucratic expert consistently knows better than the changing collective choices of millions of buyers.

Let’s look at a few more examples.

Having taken over direction of Britain’s electricity supply and dictation of how power must be generated, Britain’s politicians were surprised that this increased prices.  So a price cap was brought in to deal with the problem that only some customers take the time to actively search out the lowest prices.  It’s early days but there are signs that the deals are disappearing and prices are moving up to bunch around the cap.  Pressure to set the cap at below-market levels may not be far behind.

Meanwhile, at the other end of the power market, there were problems with those very consumers who chased the best deals.  Rules made the industry take over bust energy suppliers and carry the costs.  Cue entry of new firms offering too-good-to-be-true prices and asking for big customer deposits upfront; managers then awarded themselves handsome bonuses before the firms collapsed and it became someone else’s problem.

Even Britain’s hapless rail industry offers an example.  Privatised in the last gasp of 1990s liberalism (albeit with heavy price and service regulation), it has undergone a twenty year journey of steady state encroachment: state ownership of the track, increasing control of procurement, and more detailed specification of services.  Private involvement has dwindled to a rump of private companies managing services on a short-term franchise.  Now this fractional remnant of the private sector could be extinguished by a new liability for the railways’ historic pension liabilities.  Ironically, the only private companies which seem interested in bidding on this basis are subsidiaries of foreign state-owned railways. This might be a historic first – to nationalise your railway through foreign governments.

It is hard to avoid the conclusion that, armed with these tools and great confidence, so-called market-based regulation (whether from governments or from increasingly-politicised independent regulators) is over-reaching.  While a plausible case can be made for many individual initiatives, in the longer-term the picture is one of collective cost.  It would be nice if one could say this was a peculiarly British disease.  But it seems to be a longer-term trend across much of the developed world (not excluding New Zealand), eroding the market gains from the deregulatory surge of the last two decades of the twentieth century.

It may also pose a particular problem for political parties and voters of the centre-right.  Left of centre parties have a closer affinity between populist measures and the (short-term) needs of their base.  Right of centre parties using regulation to show they are just as good at ‘practical’ and ‘fair’ politics run two risks: in the short term, of confusing their supporters and, in the long term, of generating problems for the next Margaret Thatcher to fix.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.