Ryan Bourne: The folly of Labour’s interventionism

There’s a reason this phrase has outlived many other political slogans. The aftermath of the financial crisis has seen UK households’ real incomes fall dramatically. They are still well below their pre-crisis peak. But the main reason the “cost of living crisis” has got so much resonance is that the prices of a range of essentials like housing, energy, food and childcare, have been increasing significantly, in many cases even prior to the financial crisis.

It is right that policy-makers should therefore see the high cost of living and the related issue of low pay as cause for concern. Prices of essentials rising significantly has a very regressive impact, because those on modest incomes tend to spend a higher proportion of their budgets on them. But what is key is to try to develop policies which do not distort the economy but could help bring down living costs for consumers.

So far the approaches of all political parties have been lamentable. Politicians have reached for predictable but ill-founded policy tools: attempts to control prices, demands for higher minimum wages and new subsidies.

There has been little attempt to understand the structural reasons for high prices in any of these markets.

While all political parties are guilty of this, Mr Miliband’s agenda is perhaps the most obvious example. Most of his suggested interventions seem to be predicated on the idea that there is significant market failure in housing, energy, childcare and rail markets, necessitating substantial new government intervention. Over the past year, he has advocated an energy price freeze, rail fare caps, more “free” childcare and tenancy rent controls. At the same time, he has argued that the minimum wage should be substantially increased.

The climate which has facilitated such a broad array of new interventionist policies is dominated by anti-market sentiment. Anti-poverty campaigners and pressure groups often appear to see the causes of the cost of living squeeze as the fault of capitalism. High house prices and rents are blamed on developers and greedy landlords, high energy prices and rail fares on privatisation; childcare is seen as a failing market, which needs significant subsidy, whereas employers are lambasted for seemingly failing to pay a “living wage”.

Most of these lines of reasoning are based on a series of red herrings, fallacies and myths, which my colleague Kristian Niemietz and I investigate in our new publication Smoking out red herrings: the cost of living debate.

In the paper we show that far from being a consequence of a lack of government intervention, high prices are often a consequence of too much government intervention already.

The policies advocated by Mr Miliband and others therefore risk significant economic side-effects whilst not addressing the real issue.

For example, the fact that house prices and rents are so high is not due to greedy land-hoarders or unscrupulous landlords, but is a result of years of under-building housing owing to our sclerotic planning system. Energy bills are not high because of “privatisation” but because of the combination of a steep rise in wholesale costs and the significant burden of recent governments’ environmental agendas. Childcare is not expensive because it must be, but because the sector has been warped by existing government policies which encourage the use of formalised care settings and heavily regulate childcarers.

There would be significant scope for a policy agenda which sought to unpick these supply-side problems, in turn facilitating a much lower cost of living. But supply-side reform requires attention to detail and a willingness to take on vested interests. Unfortunately, thus far at least, our politicians have been unwilling to go there. Instead it looks like we’re set for a period of greater government intervention – more subsidies, more regulation and more wage and price controls. It’s almost as if we have forgotten what the history of these sorts of agendas has taught us.

• Ryan Bourne is Head of Public Policy at the Institute of Economic Affairs and co-author of a new report called Smoking out red herrings: the cost of living debate.