Saturday, 8 September 2012

Predistribution: In which The Eds dress up in flares, put on kipper ties and groove at the disco


It's that deja vu all over again. Labour wants to return to a snappily rebranded version of wage and price control. The Eds present this as new an radical but I think we've been there before:

In order to safeguard the real value of wages, the Labour Government launched the first serious attack on the rising cost of living. The weapon specially fashioned for this attack is the policy for productivity, prices and incomes, which forms an essential part of the National Plan. Without such a policy it is impossible either to keep exports competitive or to check rising prices at home. The alternative, in fact, is a return to the dreary cycle of inflation followed by deflation and unemployment.

Substantial progress has been made in working out, with management and the unions, the objectives and criteria of such a policy. An essential part of the machinery, the Prices and Incomes Board, is now operating. But the policy needs further development. 

Yes folks, that was the 1966 Labour Manifesto. A manifesto that ushered in the age of tripartite meetings over beer and sarnies in Downing Street - the new age of the "National Plan". A manifesto that (coupled with the sheer incompetence of Heath's 1970-74 Conservative Government) paved the way for the collapse of manufacturing industry, inflation rates of over 25%, an endless parade of strikes and levels of unemployment not seen since the 1930s.

And Labour is returning to this?

The great strength of predistribution is that it does not cost the state a penny to pursue. Rather than relying on taxation to narrow the gap between the rich and the poor, Miliband will harness the instruments of legislation and regulation. Rail companies, for instance, would be barred from raising fares by more than 1% above inflation

The central element in this is that first sentence - there is no cost to the state. Instead, the use of regulation means that costs (in the form, it seems, of wage and price controls) are placed on businesses. And this, of course, means that you and I pay a de facto tax when we purchase goods and services.

Even the fans of socialist economic policies have their doubts:

Let's take the original(ish) and bad part of this first - the idea of capping rail and utility prices. This runs into several problems:

- It redistributes most to heavy users, who are not necessarily the poor. Commuters and people living in big houses gain more than poor people in small flats.
- Lower prices encourage the use of scarce resources. High prices, remember, are signals to use the product sparingly.
- Price caps tend to reduce profits. To offset this, companies will try to cut costs - for example by reducing maintenance spending. The upshot will be a worse service and job cuts.

For reasons such as these, economists have traditionally hated the idea of using the price mechanism to redistribute incomes - a dislike embodied in the second theorem of welfare economics.

Not a ringing endorsement of 'predistribution' there from the left!

In truth this entire policy is simply to revisit the idea of a partially planned economy. A system where prices and wages aren't determined in an efficient market place but through inefficient negotiations between government ministers, business leaders and trade unions. Or worse where this tripartite arrangement is replaced by a bureaucracy of price and wage control.

With each iteration of its economic policy, Labour inches closer to that 1970s model of regulated wages and prices, protectionism, credit control and implicit bureaucratic direction of business and industry. Decisions about prices for essential goods - food, fuel, housing - will be effectively within the purview of the government with the resulting relentless downwards pressure on prices. The same interference that, from the mid 1960s (along with the indulgence of trade union militancy) played such a part in destroying British manufacturing industry.

It is good politics to promise price cuts - The Eds know this. But, as an economic strategy - especially linked to running the printing presses a full whack - it is a recipe for collapse, for unemployment and a sclerotic, corrupt private sector that focuses on lobbying government rather than delighting customers. Labour's leaders, in a fit of depressing nostalgia, have donned their flares, attached the kipper ties and headed off down the disco. They'll be sporting mullets next!


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