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Inequality is often worsened by government intervention

My Times column on industrial strategy:

In her first speech on the steps of 10 Downing Street Theresa May said that she intends to listen to those who “just about manage”, not to the wealthy and mighty. “When it comes to opportunity, we won’t entrench the advantages of the fortunate few.” Dead right: but how?

In pursuit of that objective she has signalled that she may favour an industrial strategy intended to help those areas that have it toughest. Some have interpreted this as a sign that markets are out of fashion and that government intervention is back. That certainly seems to be part of the thinking of her aide Nick Timothy and think-tank influences such as David Skelton. Mr Timothy says it is time that politicians “questioned the unthinking liberalism of the policies they support”. Greg Clark, the business secretary, says he is thrilled to take charge of a “new department charged with delivering a comprehensive industrial strategy”.

That worries me. The history of industrial strategies is littered with attempts to pick winners that ended up picking losers. Worse, it is government intervention, not laissez faire, that has done most to increase inequality and to entrench wealth and privilege. For example, the planning system restricts the supply of land for housebuilding, raising property prices to the enormous benefit of the haves (yes, that includes me) at the expense of the have-nots. The government favours private pensions, creates tax loopholes and subsidises farming and the opera.

Why are salaries so high in financial services? Because there are huge barriers to entry erected by government, which hands incumbent firms enormous quasi-monopoly advantages and thereby shelters them from upstart competition. Why are cancer treatments so expensive? Because governments give monopolies called patents to the big firms that invent them. Why are lawyers so rich? Because there is a government-licensed cartel restricting the supply of them. Why do civil servants get so many knighthoods — symbols of inequality? Because they control the supply of them.

I am not saying that all these interventions are wrong. Clearly, we want government to ensure that beauty spots are protected from development, that financial firms are not shysters, lawyers are not crooks and that drugs are safe and effective. But is it possible that both companies and regulators have a common interest in restricting competition, and subsidising each other, at the expense of consumers? Of course it is.

Our current “industrial strategy” for energy — to subsidise offshore wind, solar, biomass and nuclear — is responsible for the fact that domestic electricity prices are the seventh highest of the 29 countries that are members of the International Energy Agency, 21 per cent above the median, while our industrial energy prices are fourth highest and 43 per cent above the median.

Domestic electricity bills are a higher proportion of household budgets for the poor than for the rich, so this policy is regressive; doubly so, because the wind and solar subsidies mostly go to the rich. High industrial electricity bills are a big part of the cost of aluminium, steel and other blue-collar industries, and bear a heavy responsibility for the painful closures at Lynemouth and Redcar. The policy has been tough for blue-collar workers and poorer people.


So the biggest source of inequality is government intervention on behalf of crony capitalism, not the free market. Indeed, in the way it drastically cuts the costs of goods, the free market is a great equaliser. “The capitalist achievement does not typically consist in providing more silk stockings for queens, but in bringing them within reach of factory girls,” as Joseph Schumpeter put it. Or cars, computers and foreign holidays.

Besides, no industry is run on laissez-faire lines these days. There is hardly any sector of the economy, apart from illegal drug dealing, where lobbying government is not as large a part of being in business as marketing your products. The further you are from London, and the less likely you are to bump into Sir Humphrey at Glyndebourne, the worse your chances of favourable government support.

Take Sunderland, a city that came to represent all that the southern chatterati think is wrong with the Brexit-voting north. Sunderland’s problem is not an excess of free market commerce; it’s a dearth of it. The one huge success story near by, the Nissan plant, may have arrived with government support, but it now thrives because it repeatedly wins competitions to be the most reliable and cost-effective maker of new cars for Nissan. It has good co-operation between unions and management not because of government intervention, but because of an enlightened approach on both sides.

There are signs that Mr Timothy at least recognises that government intervention is often the problem not the solution. He has called Britain’s energy policy a “unilateral and monstrous act of self-harm” in the context of the closure of the Port Talbot steelworks. In effect, he also argues that we currently intervene when it suits the rich — wind farms — and not when it suits the poor: immigration and its effects on wages and public services.

Of course, the government must sometimes take an active role. It must choose between infrastructure projects. It should cancel Hinkley Point, which has become a fiasco both financially and technologically, and HS2, which is a white elephant likely to come to life just when driverless cars arrive on our overcrowded motorways. It should get on with a runway in the southeast — anywhere! — as fast as possible, and build plenty of new roads. Likewise, it should break up BT so that the market can deliver fibre broadband, in which we are falling rapidly behind.

But the rest of what it should do is negative: it needs to clear the drains of invasive roots, push the legal roadblocks aside and remove the parasites from the system. Thanks to some excellent work by George Osborne, with things such as the seed enterprise investment scheme and entrepreneur’s relief, Britain is experiencing a wave of innovation and business formation, especially in digital, financial and biotechnology, so the economy will respond.

That’s the best industrial strategy: to plough the ground and let a thousand flowers bloom. The appointment of George Freeman, MP, as chairman of the prime minister’s policy board is a good sign: as life sciences minister he has been a fervent champion of innovation within the National Health Service and elsewhere. As far as possible, government’s best industrial strategy is to trust 65 million people who alone can judge what it is that they want done and how.

By Matt Ridley | Tagged:  rational-optimist  the-times