‘Smoking out red herrings: the cost of living debate’

Anti-market policies are not the solution to high living costs – they’re the problem

BY RYAN BOURNE

Since the Great Recession, UK household incomes have been squeezed significantly. Median household incomes were still 6.2 per cent below their pre-crisis peak at the end of 2013/14. If the financial crisis had never occurred, households might have expected to have real incomes 20 per cent higher than they do now.

This squeeze on real incomes has rightly brought policymakers’ attention to the high cost of living. In particular, prices of many goods and services one might consider essential – housing, energy, childcare and food, for example – were rising even prior to the financial crisis. These items take up a higher proportion of the incomes of those on low incomes, meaning that rising prices can worsen poverty. Policymakers are therefore under pressure to find policies which can ease this living cost squeeze, whilst accepting the fiscal constraints of the UK’s deficit reduction programme.

One might think of two broad approaches to thinking through the related ‘high cost of living’/’low pay’ problem.

One approach would be to examine each of the product markets and the labour market in turn, analysing why prices are high in certain markets before assessing whether there are any supply-side policies which might enable a structural lowering of costs for goods and services or improvements to the productivity of labour.

An approach like this would find that the UK’s extremely tight planning laws – particularly ‘greenbelt’ zones around some of the most successful cities like London, Oxford and Cambridge – are a key structural reason for high house prices. It would show that the UK’s approach to carbon mitigation has led to more expensive energy for consumers (beyond that necessary to achieve international carbon reduction targets).

In childcare, it would observe how UK costs are high on an international basis – both in terms of taxpayer subsidy and ‘out of pocket costs’ for families. Government policies encourage the use of formalised, pre-primary education care settings, but also extensively regulate informal care suppliers, driving up costs. Though recent food price increases have mainly been driven by international forces, it would also highlight how the Common Agricultural Policy and biofuels policies at an EU level put upward pressure on prices.

Taking this approach, one would likely conclude that there are significant pro-market supply-side reforms which could be undertaken to reduce the cost of living. Unfortunately, the UK political parties take a very different approach ...

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Read more: www.capx.co

The red herrings which distort 

the cost of living debate

by Ryan Bourne

Since the publication of Kristian Niemietz’s seminal work Redefining the Poverty Debate in 2012, many of us have been arguing for a new approach to the perceived problem of poverty and low pay. Our contention has always been that there are numerous areas where existing government policies drive up the cost of living, particularly for those on modest incomes. Reversing many of these damaging distortions, we believe, would be an effective means of improving living standards.

Unfortunately, in areas from housing to childcare, energy to food, welfare to rail fares, the politicians and anti-poverty campaigners tend to take a different approach. Advocating rent controls, price controls in energy, renationalising parts of the railways, offering up new demand side subsidies for housing or childcare, or pushing for higher minimum wage rates, their belief seems to be that markets don’t work effectively and are the cause of high prices – requiring governments to step in.

How have we reached such a degree of anti-market sentiment for these challenges? What doesn’t help here is that the debate in many of these areas is polluted with a host of myths, half-truths, straw men and red herrings which shape the views of the public, commentators and politicians towards anti-market solutions.

Some of these are more common or important than others. But in a new paper called Smoking Out Red Herrings: The Cost of Living Debate, Kristian Niemietz and I assess 14 of them. That’s 14 claims or lines of argument that we hear often in the debate surrounding the cost of living and low pay which would lead to bad policymaking.

Many of these have been things we’ve touched on before on this blog. When discussing housing, for example, it’s common to hear that ‘brownfield development is the solution to our housing shortage’ or that ‘we have enough housing, it’s just badly distributed’. Pinning the blame for high energy prices or high rail fares on ‘privatisation’ is a line of argument also increasingly prevalent. There’s the argument for more government subsidies for childcare on the basis that it will ‘be good for maternal employment and the economy’ and it will help ‘lower living costs for working families’. And on welfare, how often do we hear people claiming that ‘most people in poverty are in work’ or ‘tax credits subsidise employers’?

Our paper examines all of these claims and more (the full list is below), using economic logic and evidence to assess how true they are. We hope that the paper will provide a useful reference point for those concerned with the cost of living and the effects of policy-induced high prices on living standards and welfare policy.

To access the paper, click here.

The full list of claims assessed is listed below:

- Housing: ‘We do not need more homes’

- Housing: ‘Brownfield development can solve our housing crisis’

- Housing: ‘The market has failed to build, we need a public house building programme’

- Housing: ‘Greedy landlords are to blame for high rents, we need rent controls’

- Energy: ‘Privatisation of the energy market is to blame for high energy bills’

- Rail: ‘Privatisation of the railways is to blame for high fares’

- Food: ‘Food banks are a sign of food being too expensive. The food industry needs to take more responsibility’

- Childcare: ‘Subsidies are good for the economy because they get women back to work’

- Childcare: ‘Childcare subsidies reduce the cost of childcare’

- Sin Taxes: ‘Sin Taxes merely reflect the externalities of certain activities’

- Sin Taxes: ‘Sin Taxes are voluntary taxes’

- Welfare: ‘Higher benefits and more government spending are needed to reduce poverty’

- Welfare: ‘Most people in poverty are in work’

- Welfare: ‘The taxpayer subsidises employers through tax credits, so we need a higher minimum wage’

Source: www.iea.org.uk