Energy and Environment

ESFL conference speech: Why free-marketeers have the best solutions to poverty

On 10 October 2015, European Students for Liberty held their London Regional Conference. The IEA’s Kristian Niemietz gave a presentation on free market solutions to poverty, on which the article below is based.

Poverty has long been a tricky subject for classical liberals and libertarians. It is a subject where we have a real credibility problem: even people who are somewhat sympathetic to our ideas often don’t see how those ideas could work for poor people. There is a widespread perception that free economies may be good at raising aggregate measures of living standards, such as GDP, but that they also exclude many people from that overall prosperity. Our critics then ask: of what use is a high GDP, or a high rate of foreign direct investment, to somebody who relies on a food bank and a payday lender?

The perception is that if you want to help those people, you cannot rely on the market economy, you need a big, activist state. You need high levels of income redistribution, extensive social services, high minimum wages, an ‘industrial strategy’, a strategy to strengthen trade unions, and so on.

That is the dominant line of thinking in social policy academia, as well as in the ‘poverty industry’ – campaign groups like Oxfam and the Child Poverty Action Group. The basic problem with this line of thinking is that it rests on the assumption that the state is, or at least could be, a big, institutionalised Robin Hood, a benevolent organisation that exists for the benefit of the poor. But as we know from Public Choice economics, this is absolutely not the way politics works.

The political process generally works best for those who are best able to organise themselves politically, to form interest groups, and articulate their interests in the public arena. The people who are able to kick up a fuss, to build up political pressure, to cause trouble. These are the people who benefit from a large state. This can be an influential producer group (think of farmers), a group that shares a particular mindset (think of the Public Health lobby, or the ‘diversity and equality’ crowd), or a combination of both (think of the ‘green blob’). And these will generally be highly educated, highly articulate and fairly well-off people. They will not be the social housing residents living around here [in Brixton, where the event was held].

But a lot of government activity that is driven by such groups actually damages poor people, either by inflating the cost of goods and services they buy, or by locking them out of lucrative markets. Yes, if you look at fiscal accounts, you will see a lot of net redistribution from the middle classes to the poor. But what you cannot see in those accounts is the redistribution from the hard-working poor to the politically well-represented. You don’t see it, because it happens outside of the tax and benefit system, through the extraction of political rents.

And it is this latter aspect, the extraction of political rents at the expense of the poor, which mainstream poverty campaigners never talk about. It is a huge blind spot in their activities. Why? Because it does not fit into their mindset. They are so fixated on the idea that the state is this benevolent entity, the protecting power of the poor, that they cannot see the many ways in which government hyperactivism harms the poor. This is something that we can bring to the table, because we naturally have a more pessimistic – and in this case, ‘pessimistic’ means ‘realistic’ – idea of how government really works.

We have a truly absurd policy mix at the moment. We have one hand of government clobbering the poor, by driving up their housing costs, their energy bills, their grocery prices, and so on. And then we have the other hand of government doling out money to the poor, in large part to compensate them for the damage done by the first hand.

Let’s have a look at some examples. The most important one is the housing market. House prices and rents in the UK are among the highest in the world, both in absolute terms and relative to income levels. The reason is that the UK has some of the most extreme planning restrictions in the world, which has led to Britain having lower levels of housing construction than any comparable country for over three decades. The relationship between planning restrictions and housing costs is very well established empirically, it is one of the few subjects where virtually all economists who have ever done any research on broadly agree. For the British case, the best estimate that I’ve seen suggests that 35% of the average house price is directly attributable to the planning system. That is the ‘planning premium’, if you like, the share of the price that is purely politically induced, rather than due to scarcity of land or anything else. That, I should add, is a very cautious and conservative estimate, and it is much more than that in London and the Southeast, which is where most people want to live.

But this planning premium is only the most direct effect. If you raise the cost of land and premises, you really raise the cost of almost everything, because you raise the cost of business premises, of selling space, of office space etc. The cost increase is then passed on to consumers. That, too, is a planning premium of sorts, a premium that you pay every time you buy your groceries, a cup of coffee or a pint of beer. This isn’t just grey theory. If you compare countries with restrictive planning systems to countries with more relaxed ones, you will see this reflected in the structure of relative prices. A simple example: in Germany, takeaway food is a lot cheaper than here, while household electronics are not. Why? Because household electronics can be stored in warehouses somewhere, and shipped in on demand, so to some extent, you can cut land out of the production process. You canot do that in sectors like takeaway food.

Another policy area where government is making life harder for the poor is agriculture. The EU’s Common Agricultural Policy is a combination of import tariffs, quotas, production limits and minimum prices. Their combined effect is to raise food prices in the EU above world market levels by between 10%-20%. It has been created, and persists, because the farm lobby is well organised, while consumers are not. That is, of course, the classic public choice problem: the benefits of the policy are heavily concentrated, while the costs are widely dispersed.

But there are alternatives. Up until the early 1980s, agricultural protectionism in New Zealand was even worse than here. They then liberalised that sector very rapidly, and as a result, food prices in New Zealand tumbled. They are now virtually identical to world market prices, and there have been a number of positive side effects. It was as a result of this that New Zealand became a leading wine exporter. Once farmers were exposed to global competition, they had to move into subsectors where they had, or could build up, a comparative advantage, one of which was wine. The fact that we are now flooded with New Zealand Sauvignon Blancs and Pinot Noirs is a direct result of the agricultural liberalisation of the 1980s. We could liberalise agriculture along the same lines here, and we should also get rid of Luddite restrictions on the use of GM food. Like most environmentalist scares, this anti-GM nonsense is a typical obsession of the Guardian-reading middle-classes. And that’s what I meant earlier: Big Government doesn’t work for the poor, it works for the Guardian-reading middle-classes. It reflects their priorities, their fads, their fashions, their obsessions.

Which leads me to the energy sector. Changes in wholesale prices aside, one of the big drivers of energy prices over the last years have been green energy policies. Broadly, what happens is that energy companies are obliged to use a certain amount of renewable energy, which is more expensive than conventional energy. The cost difference is then passed on to consumers through their energy bills.

It is usually justified by the need to combat climate change, a topic that I don’t want to go into, but it has nothing to do with that. Carbon emissions are already capped, at the European level, through the EU’s carbon cap-and-trade system. Renewable energy subsidies cannot cut carbon emissions any further, they can just shift them from one sector to another. It is a redistribution from consumers to a politically favoured industry. And it accounts for a bigger share of energy bills than industry profits.

This is a bit more than just a classic interest group policy. There are a lot of people who do understand, or should understand, how the policy works, and still defend it. The reason is that support for renewable energy has become a ‘signalling opinion’, a way to signal green credentials. Implicitly, the message in any discussion about this subject is that small minds worry about their energy bills, while great minds worry about the planet. When things are framed in this way, which side do you want to be on? People don’t want to speak out against renewable energy subsidies, because they are afraid that it makes them look ignorant. That is nonsense, but this is the barrier that those of us who oppose this regressive policy have to tackle.

Last but not least, there’s the issue of sin taxes, like alcohol and tobacco duties. These are regressive taxes, and unlike the other measures I have described, they are quite transparently regressive. But they persist because, again, government reflects the fads and obsessions of the Guardian-reading middle-classes, not the concerns of low-income earners. Officially, sin taxes are justified as necessary to internalise the cost of ‘sinning’, such as higher policing costs due to drunkenness, and the cost of treating alcohol- and tobacco-related diseases on the National Health Service. There are problems with that argument on its own terms, but there’s no time to go into that now. Let’s just say that if you justify sin taxes in this way, then they have to be proportionate; they have to be commensurate to that cost. The cost is not precisely known, but we have several estimates, and the revenue from sin taxes is currently well above the highest estimate. If this is really about internalising externalities – rather than punishing ‘sinful’ activities – then you would have to cut sin taxes substantially. That may mean some increase in smoking and drinking, but since demand for these products is not that price-responsive, people would mostly just pocket the difference.

In summary, poverty is not a topic that should make classical liberals and libertarians uncomfortable. A pro-market perspective on this subject can identify a lot of important issues that conventional – that is, left-wing – poverty campaigners would never talk about. In an economy in which the basics of life, generously defined, are easily affordable for everybody, it would be very difficult to be destitute. Creating such an economy is the most cost-effective and the durable way to deal with poverty. It is only an open and competitive economy which can achieve that. Therefore, poverty is not a left-wing issue. It a classical liberal issue, it is a libertarian issue. It is our issue, and we should grab it.

Dr Kristian Niemietz is the IEA’s Head of Health and Welfare. He is the author of the IEA monographs Redefining the Poverty Debate and A New Understanding of Poverty.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Editorial Director, and Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

3 thoughts on “ESFL conference speech: Why free-marketeers have the best solutions to poverty”

  1. Posted 30/10/2015 at 13:12 | Permalink

    When I was involved not long ago (with Steve Davies and Liam Halligan) in a debate against Jeremy Corbyn at the University of Warwick, we won the debate narrowly, against the Corbyn proposal for aggressive redistribution of wealth on a global scale. The killer argument that Corbyn had no answer to was: how come some 300 million Chinese have been lifted out of poverty in the last thirty years or so? Our answer was that overwhelmingly economic growth was the cause of this impressive reduction in poverty — not redistribution of income or of wealth. Corbyn et al wanted to talk about reducing inequality, rather than reducing poverty; and they did not want to acknowledge the critical role of economic growth.

  2. Posted 01/11/2015 at 17:22 | Permalink

    The goal of optimal economic efficiency and reducing both absolute and relative poverty are one and the same. This involves not taxing output and using land and other economic rents for public finance instead. As land by value is highly concentrated towards the wealthy and the older generation, an average working UK household would pay around £11,500 per year less in taxes from such a shift. The fall in land prices to zero would also save them £6500pa less in mortgage repayments, making housing four times more affordable as a ratio of discretionary income. This shift would also level the playing field among the regions, as land values are concentrated towards London and the SE, so that business investment and demand for housing would be more efficiently allocated. Of course, those with vested rent seeking interests and their defenders prefer to blame State regulations for all our economic and social ills. A real double whammy. Resulting in higher inequality, and lower output. Not to mention the combined symptoms like housing affordability issues for example. Free markets, without fair distribution, results in a large, expensive State apparatus to mitigate their ill effects. For a small State with minimal regulation we instead need efficient markets, which can easily be achieved with a few simple changes to our tax system.

  3. Posted 02/11/2015 at 11:57 | Permalink

    Is there a typo in the German Take Away v Electronics example?

    I would have thought a Take Away dependant on expensive Central Area land would be dearer whilst a warehouse full of electronic goods aus Buxtehude would have cheaper land and therefore cheaper costs?

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