Governments of the centre right as of the left have come to accept and recommend a whole range of interventions in the marketplace which do harm for the best of reasons. Wanting to keep rents down at a time of rising housing costs,  rent controls have been introduced and tax and regulatory attacks on landlords in several jurisdictions. These changes become a conspiracy against those needing a rented home. Stopping landlords getting a market rent, and placing too tough a regulatory burden on them, induces many landlords to withdraw their homes from the rental market. They may sell them to owner occupiers, or keep them empty awaiting better times, or use them themselves. Supply of property for rent contracts, the very opposite of what is needed to bring rents down. If governments respond by even tougher policies, the supply will fall further. Governments who try this end up with higher rents and less choice for tenants.

        Wanting to keep energy prices down many countries introduced price controls. These prevent the companies from charging the market price, and in some  cases as in the UK electricity industry drive them straight into bankruptcy. They had to pay market prices to buy in the power, but could not charge market prices to re sell it. Those in the industry that produced their own power without a commensurate rise in their energy costs were charged a windfall tax. This puts companies off adding to capacity by making additional investment. The governments created a money go round charging higher taxes on a part of the industry to send subsidies to another part of the industry with a view to extending the period of lower prices for consumers before having to allow them up again. It is quite obvious looking at the energy crisis that the main cause of it is lack of supply. This was primarily brought on by the West’s need to take Russian oil and gas out of its supply for political reasons. It was also exacerbated by the wish to transition from fossil fuel based electricity to renewables, and to greatly increase demand for electricity by switching many more people to electric cars and heating systems.  The last thing you want to do in  such a circumstance is to tax energy producers more deterring new investment, or show them that if they are successful their prices will be curbed. Short term popularity with electors angry about high prices and profits leads to worse shortages. 

       Governments in the West also wish to accelerate the reduction in carbon dioxide output. This has led them to impose carbon taxes on energy production and industrial energy usage, as a deterrent to more use of fossil fuels. This has turned out to be a good way to show how markets work. Faced with higher costs in the EU, UK and other places with high carbon taxes, energy using industries are transferring their activities to lower cost countries with no  carbon taxes or low ones. The UK in its haste to close coal and gas power stations has got itself into a position where it needs to import electricity to keep the lights on at times of high demand and low renewable output. Cold days when the wind does not blow become problems to manage. These policies do not succeed in cutting total world output of Carbon dioxide. Instead of burning fuel at home with CO 2 produced there, the exporting country burns the fuel. In many cases switching from home production to imports increases the amount of CO 2 produced as the diesel driven ships needed to bring the product to the user adds to CO 2. The processes in the exporting countries may also be more fuel intensive. 

        Capitalism has a bad name with the left who wish to make out it is characterised by exploitation of labour, overcharging and sole preoccupation with profit. Most businesses know that offering keen prices and good service are fundamental to success. They recognise that employees are one of their main resources, so treating employees well is crucial to delivering for customers and shareholders. Capitalism works best when ownership is widely spread. Many people in prosperous free enterprise societies own a home of their own. They own shares through their pension funds and their insurance policies, or they own shares direct. Many have stakes in the businesses they work for through employee share schemes. In the self employed and small business sector individuals and families own businesses and keep the profits of their labours directly. 

       Nationalisation and state control have a bad name with advocates of free enterprise democracy. In the Uk nationalised industries in the last century sacked much of their labour. They put up  prices, using their monopoly powers. They often delivered bad service and failed to innovate. They were kept short of investment capital in many cases because their investment competed with spending on public services and was a charge on taxpayers. British Rail was famed for cancelled and delayed trains, poor  catering and high ticket prices. The Post Office telephone service fell way behind US technology and capacity prior to privatisation owing to a lack of modern investment. There were long waits to get a phone, the need to accept a line shared with the neighbour  and little choice over equipment to use on the network.  The Steel industry got big investment in five major new plants, only to be unable to sell nearly enough of the steel and to embark on a series of closures. The electricity industry concentrated on large coal burning stations. Once privatised it was transformed by a dash for gas, cleaning it up and greatly raising its energy efficiency. Socialist supporters of nationalisation look back to that era with nostalgia, wishing to see there keener prices, better service and better employment than ever existed.

       It is true that there is no single country that has adopted a purely democratic and free enterprise system of government. Nor are there many examples of complete government control, though North Korea gets close. Countries are somewhere on the spectrum with the USA and small countries like Norway, Switzerland, Singapore and San Marino clustered towards the free enterprise end with high incomes per head, and Venezuela, Cuba and North Korea at the other extreme with low incomes. Most advanced countries accept a substantial role for government. They want government to tax successful people and companies more to redistribute money to people on low and no incomes to help them have a better lifestyle. They use government interventions to keep markets more competitive and to secure other social ends. The danger all face is if they interfere too widely for however good a reason, they may end up damaging markets, restricting supply and undermining prosperity.

Markets are economic democracy in action. Free  enterprise Is essential to democracy, the other side of the same coin. Free enterprise and democracy are the strawberries and cream of the styles of government. In a democracy people have a say in who governs them. Because they can vote an elected official  out of office, they can individually and with others influence the debate or persuade the representative  to take their views seriously and to help them with their problems. Living in a free market, the same individuals can choose to spend their money as they see fit, helping summons more supply from the market as they with others concert their buying. They are free to offer their labour where they wish and to take a job that suits them best from those on offer.  They can set up in business for themselves, providing new products and services to the market. The more democratic and economic freedom people enjoy, the more overall freedom they experience. Freedom allows choices, brings opportunities and helps find solutions. 

          Autocracy, Communism and fascism  cannot  allow democracy and have to control, direct and own enterprise. Communism in the USSR  killed the independent farmers of Russia, nationalised industries and stole private property. Communism in China  controls prices, takes over businesses, scythes the tall  poppies of the residual private sector. Autocrats do not like successful entrepreneurs. They  want to be seen to be the source of all people need in life, so they can demand loyalty and obedience. Citizens in communist systems may be told where they have to work. They may need travel permits to move from their home city or town. They may find goods and services are rationed or limited in supply. They have no say over who governs them and little say over how they are governed. They need to mind their words as well as their deeds. They are required to conform to state standards and mouth state views.

        Free enterprise means anyone  can join the market to buy a good or service they want, or to sell one to others. In a free market all have equal access subject to price. If something is wanted and scarce the price will rise and more supply will then become available. If something is in glut its price will fall and supply will contract. Price changes will also affect demand, increasing it at lower prices and rationing it at higher. For individuals the market is the way they can have access to many of the things that make life pleasant without having to produce them themselves. Individuals and society are much the richer for exchange of services and goods, allowing specialisation, the transfer of skills and innovations, the accumulation of capital to reap the economies of scale, and to focus the best answers.

The danger is that political parties in democracies can demand too many controls and rules, limiting the choices of others and reducing the very freedoms essential to successful democracy.

The Bank of England did not apologise for the massive overshoot in inflation. Hiking interest rates to 4% for no particularly good reason and dodging the big issue of selling bonds at a loss, the Bank did say “Our job is to make sure that inflation returns to our 2% target”. So they accept inflation is their responsibility and they have the tools to do the job, but offer no explanation that makes sense for why they did not keep it to 2% inflation in the last two years.

They blame the higher energy prices and higher import prices the UK has faced. They do not ask themselves why China, Japan and Switzerland facing those same rising world prices kept their inflation down to 2% for China and to under 4% for the other two. They do not explain why they kept rates so low and why they kept creating money and buying bonds as they watched energy prices soar. They do not explain why UK inflation hit 5.5% before Putin invaded Ukraine.  They do confess they let demand outrun supply. They do not comment on the £150bn of Quantitative easing bond buying at crazy high prices they did in 2021 when some of us were urging them to stop.

On their central forecast they have  now slowed the economy so much this year that inflation will fall well short of the 2% target by 2025. Why? Why do the extra damage to demand and ,jobs so you generate lower inflation than  needed and worse jobs and output? We need always to bear in mind that a year before inflation took off they were confidently forecasting it would stay around 2%.

They think the longer term growth capacity of the economy has slowed again to just 1% a year. The government needs to adopt policies that prove them wrong. The Bank itself needs to revise its forecasting models and give a more prominent role to money and credit. The Monetary Policy committee fails to report to us on how much money and credit creation there has been and has  no targets for anything to to do with money. No wonder they find it difficult to get it right.

How do you best get growth?

         Capitalism has delivered fantastic growth in choice, incomes, goods and services. People on low incomes today in rich societies enjoy the luxuries of the few of past generations. In my lifetime I have seen cars, tvs, fridges and washing machines become the everyday experience of the many when many families had none of those just sixty years ago. A lot of hard manual labour to do the weekly wash, to keep the coal fire stoked, to put cables into streets, to dig and weed fields has been replaced by domestic machines, better boilers, and diggers. Working hours have been slashed, working at home established on a large scale , paid holidays have become the  norm, cheaper clothing made in heavily mechanised factories and  great value food from an agrarian revolution have all raised living standards and quality of life. Most of this has been the result of inventors, entrepreneurs, savers investing in companies and people going to work for them. Our ability to produce everything from roofing tiles to drainage pipes, from cheese to sausages, from machine knitted socks to waterproof coats in industrial quantities with machines doing most of the hard work has transformed our lives. Seasons have been abolished by glass houses and imports of food. Distances between peoples have been narrowed by jet travel and on line communication. It took the mythical magic Puck in Shakespeare’s time forty minutes to encompass the earth. 40 seconds would now be a long wait on a digital link. 

           Some say we should no longer want growth as it is uses too much of the earth’s resources and places too great a strain on our planet. Whilst I have no wish to impose controls on how many babies people have or to lecture on family size, it  may be that the lower income countries that are still growing their populations will come to want fewer children in the way the richer countries have decided by individual choices. Most advanced countries now have falling populations with a fertility rate well  below the 2 children per woman needed just to maintain numbers. The advanced countries with rising populations still are only gaining people through migration, not live births.  This would be the most obvious way of reducing claims on resources. It is also true that many of the resources we need are renewable or are in abundant supply. There is plenty of water, but there is a  need for more investment to have enough clean water for everyone’s requirements. There can be plenty of wind, solar and hydro energy, though there needs to be cost effective solutions over how to store it and share it between places and times with plenty and places and times with none. There can be enough  food adopting latest agricultural techniques, but there needs to be investment and income boosts in lower income countries to tackle under nourishment and their capacity to buy it. 

         Growth is the way to get people and countries out of poverty. Capitalism is the best way yet developed to move countries from low income to higher income. Overseas aid can alleviate the worst poverty, tackle hunger and sickness but it takes market transformation to make a Taiwan or Singapore out of a low income emerging market economy. People need to move from  low productivity jobs on the land into cities, factories and service sector facilities. It requires leaps forward in education, in training, in company formation, in innovation, in savings and banking. 

Please go to 1:23:38 – 1:30:10 to see my interview on YouTube with the link below

https://www.youtube.com/watch?v=liwuXwMJ7CE

Building Safety Debate – 30 January 2023

John Redwood

(Wokingham) (Con):
What actions will the Government take to make it more likely that people will set up new construction companies and grow smaller companies, since we clearly need more capacity and more competition to get high-quality work done?

Michael Gove
The Secretary of State for Levelling Up, Housing and Communities:

My right hon. Friend is absolutely right, and many of the provisions in the Levelling-up and Regeneration Bill are designed explicitly to aid the entry of new small and medium-sized enterprises into the construction sector. Many of those provisions follow on from the excellent work of my hon. Friend the Member for South Norfolk (Mr Bacon), who as a champion of self and custom builders has done more than anyone else in this House to help to ensure diversification in housing supply.

What is it about cutting tax rates that drives the Treasury mad? Jeremy Hunt says rightly that he wants inflation down, yet his department blocks cuts in VAT, fuel duties and other direct tax charges on activity that would do just that.

They opted for subsidies to help us with energy costs instead of taking VAT off domestic energy, or reducing the extortionate carbon taxes on business energy. They chose any way they could find to keep inflation and public spending high. They are itching to put fuel duty up again to make pump prices higher.

And why do they think putting up tax rates is the way to cut state borrowing? In the latest November budget they put up tax rates and nevertheless announced a massive 75 per cent increase in public borrowing this year.

In part, the borrowing went up because the higher tax rates slow the economy. They lead to less revenue as rich people and companies divert to lower tax places, and those who are stuck here rein in spending and investment. Overall, total revenues are always damaged by these recession inducing policies.

These officials don’t understand growth, either. In 2021-22 the government forecasts of state borrowing were more than £100 billion too high because they underestimated growth. This year they were £75 billion too low because they overestimated it. Official models have for years misjudged how crucial growth is to borrowing levels. Every extra pound of income and turnover is highly taxed, so revenue rises strongly with growth and falls away just as rapidly with recession.

This is why we need a growth strategy now to get inflation and the deficit down. High tax rates, with interest rates too high from an erratic Bank of England, will mean more borrowing. Selective tax cuts which cut energy costs, promote business investment and encourage more self employment will directly lower prices and bring more supply.

Going for tax cuts rather than clumsy subsidies will also help control spending better. The energy-money-go-round with price controls, consumer subsidies, windfall taxes and higher corporation taxes is bound to fail. It means less tax revenue as we will be forced to import more foreign energy whilst stopping investment in our own home produced supplies. It is self-defeating, a stand on your head and fall over economics.

The authorities also got their inflation forecasts hopelessly wrong because they clearly do not understand what causes it. They blame Ukraine, refusing to see that China, Japan and Switzerland also import a lot of foreign energy but did not get the high inflation, because they controlled money and credit. Now government is in denial about how inflation will fall because the Bank has lurched from too easy money to tight money, thinking they need to do more with sky high taxes as well. Inflation will fall, but they want to kill off growth too.

The Treasury and Bank advice which wrecked our economy with membership of the Exchange Rate Mechanism in the 1980s, with boom bust, did it again with the banking crash of 2008 and wants to do it again after their great bond-buying inflation.

Ministers should say “No!” and go for growth. We cannot afford their high taxes and recession. We need affordable tax cuts, alongside the rolling back of subsidies to avoid the danger of higher unemployment.

However, it is clear that ministers are frightened about spooking the government debt market, after the Bank showed it could get bond prices rising when it wanted. The Bank could help the country it serves more by working out why it got inflation so wrong and getting it right this time.

It need not go on selling so many bonds at a loss and sending the bill to the taxpayer. Its current policy of doing so seems to be another way to make the Treasury do the wrong thing and intensify the recession. The European Central Bank which made the same mistake of buying too many bonds at high prices to trigger inflation is not selling bonds to make big losses.

I want to  believe the Chancellor is earnest in his ambition to reduce taxes and inflation. But to do both effectively, he must reject groupthink.