Why the current economic crisis is far more serious than 1970s stagflation

July 12, 2022 1 Comment

The risk of economic collapse is growing by the day. High rates of inflation – in some countries already approaching hyperinflation – are quickly destroying savings, pension pots, and the purchasing power of wages.

My recent report, Hyperinflation Survival Strategies, describes various ways people can try to protect themselves from soaring prices. But many people, in the West at least, are complacent. They think a major inflationary crisis could never happen here. This article therefore sets out some of the reasons why inflation could explode.

Once the rate of price increases hits a certain threshold, there may be little governments can do to stop them rising further. The problem is loss of confidence in the currency. If pounds, dollars or euros buy less and less, then what is the point of holding on to them?

Faced with the rapid erosion of their savings, people are likely to respond by hoarding goods. Durable items will tend to retain their value far better than cash in the bank. But this “flight to real goods” increases demand, creates shortages – perhaps even panic buying – and tends to push up many prices even further.

To make matters worse, high inflation in itself tends to have a negative effect on supplies. It makes it more difficult for businesses to plan ahead. It disrupts trade and investment.

While panic buying and price hikes send a signal to increase production, this often takes months or years to come to fruition. It may require the creation of additional capacity – recruiting and training new workers, purchasing machinery etc. Entrepreneurs will also understand that the spike in demand is likely to be temporary, and could relatively soon be followed by a slump. So, investing in new capacity could be a big mistake.

A key question is under what conditions or at what point panic buying, or a perhaps more orderly “flight to real goods,” will occur.

In 1970s, for example, the official inflation rate peaked at around 25% in the UK. For much of the decade it was in double figures. Bad as things were, the economy did not spiral towards even higher rates or hyperinflation.

Yet there are a series of disturbing differences between the current situation and the 1970s, suggesting the risks of inflation taking off could now be far greater:

  • Interest rates on savings were typically much higher in the 70s than they are today, albeit still negative in real terms for much of the decade – and negative by a large margin during the short-lived inflationary spike in 1975. By contrast, interest rates across most of the West have been close to zero since the financial crisis that began in 2006. If a big gap persists between the inflation rate and interest rates, then this massively increases the incentives for savers to implement a “flight to real goods” strategy.
  • Underlying growth appears to be far lower than during the 1970s, at least in the major Western economies. In many countries, real GDP per capita in 2022 is little different to the levels of the early 2000s. By contrast, despite the fluctuations, growth was robust during the 1970s, averaging roughly 2.5% per annum in the UK, for example.
  • Government debt is now much higher. It has now reached the equivalent of c.100% of GDP in the UK (and 125% in the US), compared with around 50% back then. Worse still, off-balance-sheet liabilities such as public-sector pensions have ballooned, while sluggish growth negatively affects tax revenues, increasing the temptation to resort to money-printing to fund state spending.
  • The demographic situation is far less favourable today. An ageing population puts upward pressure on public spending – for pensions, social care, health, and so on – while also tending to reduce the number of net contributors to the tax system. The average age of active voters has also increased, making it politically difficult to cut expenditure on the elderly.
  • Society has changed in other ways since the 1970s, and arguably in a negative direction in some respects. There are big social divisions and a high degree of polarisation. Unlike older generations, much of the population has never experienced real hardship. The welfare state has encouraged short-termism and dependency on the government, so most households are likely to be ill prepared for a serious economic crisis in which preparedness, self-help and resilience are likely to be major advantages.
  • A high proportion of the population is now heavily reliant on government handouts, or works for the government or companies that depend on government contracts or favours. By contrast, those with significant cash savings are a minority. Moreover, if economic problems lead to social unrest, this is likely to be concentrated in groups with few savings and heavy dependence on the welfare state. This means there would be strong political incentives for governments to steal from savers via inflation rather than cutting spending.
  • The West’s geopolitical dominance in the 1970s enabled governments to rig markets to favour Western big business and exploit natural resource rents from the bloc’s neo-colonies. The petrodollar system is one example of how this worked in practice. But Western geopolitical power is now declining rapidly, lagging but following a diminishing relative economic weight. At a certain tipping point, the leaders of the neo-colonies are likely to seek either genuine independence or form new protection rackets with rising powers. This process is likely to speed up the West’s relative decline and intensify its economic problems.
  • Alongside waning hard power, Western elites are also losing control of the narratives fed to their populations by the media. Yes, censorship has been ramped up, but the rise of the internet means that a significant share of the population now sees through the propaganda and disinformation spread by establishment media organisations. In turn, it’s likely that more people are awake to the real causes of soaring inflation and will more easily learn how to prepare for the consequences, spreading this knowledge to their colleagues, friends and family. This was unlikely to be the case in the 1970s, when deep state-controlled media held almost complete control over the economic discourse.  
  • Finally, there are elements within the Western elite who would like to bring about a “monetary reset.” There are several aspects to the plans, which include imposing a cashless society in which every transaction is monitored, and the introduction of programmable central bank digital currencies (which potentially could only be spent on state-approved goods and services). The abolition of national currencies is another key element of this agenda, with the euro acting as a testbed for and stepping stone towards a “one world currency” that would be used across the West, its vassals, and perhaps beyond. But achieving this goal would require overcoming public opposition to a major assault on national sovereignty. A severe economic collapse could be used to manufacture consent for monetary reform, with the new system promoted as the only solution. Globalist factions within the transnational elite might therefore welcome or even encourage a hyperinflationary crisis as a means to this end.

The preceding analysis does not of course mean that very high or even hyperinflation is inevitable. A sensible approach is to view the risks as significant enough to make some basic preparations worthwhile.

Perhaps our “independent” central banks will take the difficult steps needed to get inflation rates down – even if the resulting slowdown creates widespread unrest and severe problems for the political elite, together with big losses for their cronies in the financial sector. Maybe our politicians will turn over a new leaf and implement a radical programme of deregulation and tax simplification to encourage wealth creation and growth. Perhaps they will also defy the special interests and welfare recipients by cutting spending, reducing off-balance-sheet liabilities, and getting government debt back down to sustainable levels. But how much of this is plausible given the short-term incentives facing our leaders, their tenuous grasp of economics, and their appalling track record?

Richard Wellings

Image: Shutterstock

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Is hyperinflation coming?

May 8, 2022

The key to understanding inflation is examining the incentives facing ruling elites. If their hold on power is under threat – and other options are not feasible – they resort to “printing” money on a massive scale. They use this new money to buy the support of special interests and pay the police and armed forces to protect them.

For the elite, it may actually be a bonus that ordinary people see their life savings destroyed by high inflation. If most of the population is occupied with day-to-day survival, then political dissent may be constrained. Loss of savings also breeds dependence on state handouts, which can be used as a tool of political control.

Ruling elites typically face existential crises during periods of turmoil. The German government resorted to hyperinflation after World War 1 and a subsequent period of severe political unrest, with communist and fascist groups engaging in often violent attempts to seize power.

The Russian crisis of the 1990s followed the collapse of communism, a huge economic shock, and was also marked by extreme political instability, with the new “neoliberal” elite under serious threat from more conservative forces.

There are numerous similar examples. It can be noted that countries with permanently high inflation also face permanent political instability, with a history of coups and revolutions, and their ruling elite under constant threat.

What are the lessons for the current situation? The West has experienced three major crises in a relatively short period. It never really recovered from the financial crisis. Central bank money-printing prevented necessary readjustment, replacing a short-sharp depression with a long period of stagnation and low growth.

Then came the pandemic – and once again the ruling elite resorted to money-printing to fund government spending, including huge bailouts for crony-capitalist corporations. This further depleted the financial buffers available to deal with further shocks.

And now a major war has broken out in Eastern Europe, with potentially severe economic consequences. Government finances are already in deep trouble, so it again seems likely that central banks will resort to money-printing on a vast scale in an attempt to cushion the short-term impact.

At the moment it is difficult to see how this could result in an existential crisis for ruling elites – with one possible exception.

The crisis is likely to exacerbate tensions in the eurozone – and the European Union and its vassals more widely. This in turn may threaten the political control of the EU elite. Continental Europe is particularly vulnerable to supply-side shocks, suffering from poor energy and food security. And these effects will be highly uneven, affecting some countries far more than others – a recipe for internal strife.

A likely scenario is that nations already suffering recession and a severe cost-of-living crisis (and perhaps resulting unrest) will be asked to bail out countries in an even worse situation.

If resulting tensions threaten to break apart the eurozone, or even the EU, there can be little doubt that the EU elite would resort to money-printing on a vast scale in order to pay off special interests in member states in an attempt to preserve its empire and hold on power.

Initially this might lead to double-digit inflation rates – but price rises can quickly get out of control. If the public lose confidence in the currency, we could see a flight to real goods followed by very high or even hyperinflation. Another possible scenario is that richer countries decide to exit the single currency, undermining the stability of a rump eurozone dominated by essentially bankrupt states.

My new report, Hyperinflation Survival Strategies, sets out the key warning signs that inflation is about to explode. It also explores the methods people use to protect themselves from soaring prices.

Hopefully the nightmare of full-blown hyperinflation can be avoided – but even an inflation rate of 10% can rapidly destroy people’s life savings.

Image: Shutterstock

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How to manufacture a climate crisis

October 31, 2021

The establishment is hinting that the kind of draconian restrictions imposed during the pandemic will be redeployed to enforce their climate change agenda. As with Covid-19, a key part of the plan is to generate fear across the population through psychological manipulation and media propaganda.

The desired result is a major reduction in personal mobility, with ordinary people taxed and regulated out of their cars and off flights. Heating costs will also be hiked dramatically as gas boilers are banned and replaced with expensive and less effective heat pumps. Food supplies are another target.

The aim of the ramped-up indoctrination campaign will be to convince the general public to accept this top-down assault on their living standards.

Key elements of the programme are already in place. The BBC long ago effectively banned any proper debate on its airwaves. Don’t expect to see scientists who point out flaws in climate modelling on the UK’s state broadcaster; or economists who question whether the benefits of reducing emissions are worth the costs.

Establishment journalists have also been encouraged to insert climate change into news stories. Almost every time there are floods, reporters tell viewers that such disasters are likely to get worse. The same policy is applied to heat waves, forest fires and hurricanes. Even cold snaps are blamed on global warming as part of the “extreme weather” trope.

Improved communications technology has been a great help to this campaign. Alarming footage of disasters in previously little noticed regions now spreads rapidly around the world, particularly if it fits the establishment’s narrative.

But propaganda by omission is another key element of the strategy. The public is kept in the dark about the debate over the frequency of climate-related natural disasters – and the possibility that even if their frequency were increasing there could be other causes.

The role of government policies is also conveniently neglected. Environmentalist-inspired changes to river management policies, such as reducing dredging, have made flooding more likely in some locations. The “green” agenda and its huge costs have also contributed to cuts in maintenance spending on drains and other vital infrastructure. Green land-use policies promote construction on brownfield sites, which for historical reasons are often on low-lying land near to rivers.

Another long-term factor is urbanisation, which promotes flooding as water runs off rapidly from concrete surfaces into drains rather than being delayed by vegetation and soil. (It also increases temperatures via the urban heat island effect.)  

Policy changes have also been implicated in forest fires. Management methods designed to mitigate the risks, such as thinning and clearing combustible material, have been phased out under pressure from greens. Moreover, arson is a leading cause of wild fires in some regions. This human element is another reason why assessment of long-term trends is problematic. There have been examples of environmentalists engaging in other forms of arson attack, and it is worth bearing in mind the possibility that various kinds of political actors could play a role in future incidents. 

Finally, water shortages have been made more likely by policies to obstruct the construction of new reservoirs, including in regions with growing populations. The subtext is that the resulting shortages would provide a useful rationale to reduce consumption by imposing new regulations and compulsory water meters.     

So, there is substantial evidence that many of the policies imposed by environmentalists actively contribute to the “natural” disasters that are then used by propaganda outlets to promote the idea of a climate crisis. The economic damage caused by green policies also makes societies less resilient. Yet discussion of these crucial factors is typically absent.

There are two main dangers from the one-sided propaganda and indoctrination programme currently being implemented by governments and their media assets. The first is that it will encourage the adoption of harmful policies that impose higher costs than any climate change they aim to prevent. In other words, there is a high risk that the cure will be worse than the disease, with negative effects on low-income groups and poor countries in particular. A sensible strategy would be to implement win-win policies that benefit both the economy and the environment – for example, ending the vast and inefficient state subsidies and privileges given to various polluting activities. However, governments and transnational bodies have been curiously reluctant to adopt this approach.

The second danger is that climate change will be used as a pretext to bring in a far more tyrannical economic and political system, for example by empowering unaccountable transnational institutions that lack the usual constraints. Indeed there are clear parallels with the Covid-19 pandemic, which is being used as a convenient excuse for elites to grab more power and to impose vaccine passports as a stepping stone towards a long-planned global system of digital IDs.   

A free and open debate about climate change is absolutely essential if these alarming outcomes are to be avoided. However, the wider agenda behind the climate change narrative could plausibly explain why elites are so obsessed with eliminating dissent.

First published on the Transport Watch blog.

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An injection of tyranny: from vaccine passports to digital IDs?

July 21, 2021 2 Comments

The imposition of vaccine passports represents a major expansion of state power. While they are portrayed as a means of restoring pre-pandemic freedoms, in reality they will extend restrictions on people who refuse to comply.

There is also evidence that vaccine passports form part of a wider agenda to introduce biometric digital identity systems. The EU was already making plans for vaccine passports in 2018, long before anyone had heard of Covid-19. And there are other disturbing initiatives, such as ID2020, backed by powerful transnational foundations with deep links to Western governments.

The UK appears to be following a similar path domestically, embarking on a digital identity programme and undermining civil liberties more generally. There was a previous attempt to impose ID cards under Tony Blair and support for their high-tech successors clearly remains strong within the establishment.

The agenda is proceeding particularly quickly in developing countries, where – often funded by Western governments and foundations – digital ID systems are being rolled out to control access to essential services and even food.

In this context, vaccine passports can be interpreted as a stepping stone towards comprehensive digital IDs, a way of getting the public and businesses used to presenting and accepting them.

Such IDs will hold not just health records, but also financial information, biometric details and other data on individuals. They will obviously be terrible news for privacy, but they could also be made mandatory for voting, access to jobs and bank accounts, to rent housing, conduct transactions, obtain health services etc.

They would enable governments to exclude people who refuse to take part in the system and also people who carry the IDs but upset the “elite” in some way. Dissidents could find their access to basic services switched off, both to punish them and nudge them to comply.

The imposition of vaccine passports might be less worrying if it wasn’t taking place in the context of rapidly expanding state surveillance. Suspicions about governments’ real motives are raised further by the weakness of the health arguments for the policy.

It has now been openly admitted that a key reason for vaccine passports is to encourage young people to get injected. This is basically a threat: if you don’t get jabbed you won’t be able to travel easily and you won’t be able to go to bars and restaurants.

The problem is that for the vast majority of younger people, it is far from clear that the benefits of the shots outweigh the costs. At present no one knows the long-term effects of either the jabs or Covid-19, so policymakers are groping around in the dark. It’s also unclear to what extent these unconventional treatments prevent transmission. And there’s a further danger that the jabs will encourage people to behave more recklessly.

A plausible scenario is that the injections prove less effective than hoped at preventing illness and transmission. It may also become clear that the side effects are worse and more frequent than initially acknowledged by governments and the media. At the same time, the jabs and related misinformation may encourage recipients to behave as if they can’t catch Covid-19 and can’t pass it on. Such developments could at least partly undermine the stated policy objectives, and the vaccine passports agenda would be partly to blame.

Finally, any assessment of vaccine passports should examine their economic impact. It might be assumed that a certain percentage of the population will refuse the injections, perhaps because they are at low risk of either catching Covid-19 or falling seriously ill with it.

Say 10% of adults fall into this category, plus a significant percentage of children (the figure is likely to be significantly higher in some countries). Many of the businesses forced to require vaccine passports as a condition of entry will face reduced revenues. A lot of people won’t bother going through the hassle of testing, if that is the alternative. Moreover, the unjabbed won’t be distributed evenly across areas, age groups and subcultures, so certain businesses in certain areas are likely to be particularly badly affected.

Some businesses may, however, see the trade-off more positively if they view the alternative as a return to lockdown or other restrictions. Yet presenting vaccine passports as alternatives to lockdowns and social distancing relies on highly questionable assumptions about the effects of the shots on infection, transmission and behaviour. In any case, given their recent authoritarian turn, it is possible that governments will simultaneously impose both vaccine passports and draconian lockdowns this winter.

The impact of vaccine passports on the labour market is likely to be particularly serious. It looks like certain jobs will be denied to people who refuse the injections. They will find it difficult to travel overseas too. Certain employers will therefore face a reduced pool of skills and talent, potentially resulting in recruitment difficulties and staff shortages. It will be harder to get the best person for a particular role.

The opportunities for people to engage in entrepreneurship and exchanges with partners in other countries will also be diminished. Some of the uninjected may decide to reduce their economic activity in response to all the hassle and discrimination. These effects will tend to have a negative effect on productivity and therefore tend to reduce growth in output, harming government finances in the process.

In conclusion, it is far from clear that any benefits of vaccine passports will outweigh the costs. Indeed, if the objective of vaccine passports is to protect health while opening up the economy, then the reasoning behind the policy appears to be flawed. It is difficult to imagine that political leaders, or at least their advisors and officials, are unaware of the downsides. This strengthens the suspicion that there is more to vaccine passports than meets the eye. Could their real purpose be to condition the public into accepting the widespread and routine use of privacy-destroying digital IDs?

First published on the Transport Watch blog.

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EU immigration: how to maximise the benefits and minimise the costs

July 12, 2017

In welfare states, the economic benefits from immigration may be eroded by the additional costs of government handouts and public services. This problem has been particularly evident with some refugee populations. For example, according to one estimate, just one in ten working-age Somalis in the UK is in full-time employment, while the vast majority are dependent on subsidised housing, much of it in high-cost London. Indeed, the welfare system may be largely to blame for such poor outcomes, due to the high effective marginal tax rates imposed on those moving into work.

Outcomes for EU migrants have tended to be more positive, with northern and central Europeans in particular exhibiting high employment rates. Nevertheless, the large numbers in low-paid work that pay relatively little tax may still impose significant costs, particularly households with children that receive child benefit, child tax credits, possibly housing benefit and/or social housing, childcare subsidies, and state education, which costs taxpayers around £5,000 per pupil.

In addition, there may be significant ‘externalities’ from migration, such as increased congestion on transport networks, crime and anti-social behaviour, disruption to settled communities and difficult-to-predict long-term effects on culture (both positive and negative). The strong tendency for BME groups to support the Labour Party is an example of a long-term impact on the UK’s political environment.

However, the costs identified are to a large extent not the consequence of immigration per se, but result from its juxtaposition with an extensive welfare state and government provision of services. In a truly free society, by contrast, support for low-income households and services such as education would be provided voluntarily. Taxpayers would not be forced to pay for them. At the same time, property owners, whether individually or in voluntary communities, would be far freer to decide how their land was used and would also enjoy freedom of association or dissociation. In other words, they could decide who would be allowed to enter their property, which, as well as residences and workplaces, might also include roads and other ‘public spaces’ currently owned by governments.

Various rules of entry could be adopted (see these case studies). For example, existing residents might vote on whether to allow individual applicants to move into their community. Alternatively, restricted covenants could require residents or workers to meet certain requirements before gaining entry. In some cases, simple rules of thumb might be used in order to minimise transaction costs. A completely open policy would of course be another option.

Rather than a one-size-fits-all policy imposed by government, different models would compete with one another, allowing market segmentation. Such voluntary associations could therefore be tailored to individual preferences. Cosmopolitans preferring a diverse cultural mix would be free to choose a community with an open approach. Conservatives placing a high value on their own traditions might prefer a model with far more restrictive rules of entry. The latter approach could prove popular with religious and cultural minorities wishing to preserve practices under threat from the influence of wider society.

Under such a system, property owners and voluntary associations would bear the lion’s share of the costs of their policies towards incomers. A market discovery process would ensue, with successful models attracting more business and unsuccessful ones declining. In this way, rules of entry would gradually evolve, tending to increase the benefits of migration and reduce the costs, while adjusting to changing conditions.

Contrast this with the one-size-fits-all policies imposed by governments. Politicians cannot obtain the knowledge required to set efficient quotas or entry requirements (such as points-based schemes or charging immigrants a fee), and such measures cannot be tailored to suit the wide variation of preferences on immigration. The transaction costs of state systems may also be high, with poor incentives to reduce them. Moreover, immigration policy will tend to be influenced by concentrated interests, for example ‘key’ sectors seeking special favours.

Despite the obvious flaws of immigration policies based on central planning by governments, the prospects for a voluntary system are slim. In the UK, there are very strict state controls over land-use, most transport infrastructure is government-owned and in both the UK and EU there are strict prohibitions on freedom of association/dissociation. Given the dominant political culture, it is difficult to envisage that these constraints will be removed in the near future.

This raises the question of which immigration policies should be adopted post-Brexit if a free-market model is off the table. The most straightforward way of increasing benefits and reducing costs would probably be to reduce substantially migrants’ entitlements to welfare benefits, social housing and government services such as childcare and education, while at the same time removing barriers to low-cost private provision, which eventually could be adopted by the whole population. In addition, market pricing could be introduced on transport networks to address congestion issues. Other things being equal, this approach would be likely to cut numbers significantly, while addressing directly the issue of costs imposed on taxpayers and pressure on public services.

It would avoid the central planning problems, special-interest capture and high administration burden of points-based rationing. But it would also contravene current European Economic Area rules on equal treatment, with implications for the deal between the UK and the EU. Nevertheless, because it would maintain freedom of movement, EU institutions and member states might consider it less objectionable than the alternatives.

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Is there a free-market solution to overfishing?

July 12, 2017

Overfishing is often presented as a classic example of market failure. When individual fishing enterprises are competing, the benefits of winning the ‘race to fish’ accrue to the successful ones, while the costs of depletion are shared among all the fishermen in the fishery. There are therefore poor incentives for conservation – the so-called ‘tragedy of the commons’.

This is a simplistic interpretation, however. Market feedback mechanisms offer some protection to stocks. Declining yields will tend to force less efficient fishermen out of business, for example. Providing there is free trade in fish and substitutes are available in food markets, the combination of increasing costs and declining catches may not be offset by higher fish prices. The outcome will partly depend on the species in question. Its scarcity value, reproductive behaviour and migration patterns may affect the probability that overfishing leads to a collapse in stocks.

The history of the fishing industry shows overfishing has been hugely exacerbated by government intervention, in particular subsidies for uneconomic fishing businesses. These handouts have undermined the market mechanisms that would have helped to conserve stocks. The resulting overcapacity – too many vessels chasing too few fish – has strengthened the rationale for costly and bureaucratic regulation of the sector, as exemplified by the EU’s Common Fisheries Policy. As public choice theory would predict, such regulation has inevitably been subject to politicisation and lobbying by special interests, which has meant problems with overfishing have persisted. The creation of artificial property rights by governments, such as the Individual Transferable Quotas used in Iceland, has tended to deliver superior allocative efficiency compared with other forms of regulation, but has not been immune to special-interest influence or indeed discarding.

These problems raise the question of whether an unhampered market could solve the problem of overfishing. Clearly the removal of direct and indirect government subsidies would go a long way towards resolving the issue. However, it would not remove the tendency entirely and both yields and efficiency could still be suboptimal. While collapses would be less likely, they would not be impossible – and there are indeed examples that pre-date direct state subsidies to the industry.

There would therefore appear to be a trade-off between competition and efficiency. This is the case in many sectors, for example due to the ‘transaction costs’ resulting from competition, or because competition means economies of scale are lost (the rail industry is a classic example). Indeed it is a common misperception that unhampered markets inevitably produce a high level of competition. It depends on the characteristics of the sector concerned. One way markets can reduce transaction costs and capture economies of scale is through mergers and acquisitions.

In the fishing industry there are potentially major efficiency losses from competition in the form of the ‘race for fish’, both in terms of wasteful duplication of equipment, fishing effort and the depletion of stocks to suboptimal levels. There may therefore be strong incentives for fishing enterprises to merge or evolve into one large business (which could perhaps be some kind of cooperative) that held a near monopoly over fishing in a particular region. This dominant enterprise would then determine catch levels to maximise returns.

If fisheries remained ‘open access’, how could this structure be sustained? The market solution may be vertical integration. The dominant firm would merge with the harbours and/or the distribution operations in the region and perhaps even the fish processing industry, enabling it to exclude local competitors and to capture economies of scale that would act as a further market-based barrier to entry. Competitors from further afield would face much higher costs to reach the fishery. Nevertheless, initially the dominant firm might choose to deter them by deploying some of its vessels in a ‘race to fish’ in order to drive them elsewhere. Clearly there would be strong incentives to develop agreements between neighbouring firms not to stray into each other’s area of operation, to avoid the costs of such behaviour, and possibly also rules regarding migrating fish.

Subsidies from foreign governments to their own industries could upset this market outcome by artificially sustaining the ‘race for fish’, which raises issues regarding state protection of territorial boundaries within the current system of Exclusive Economic Areas. However, in principle there is no reason why these dominant firms or associations should not straddle existing national boundaries, with their geographical extent evolving according to market conditions.

This analysis also suggests that the state ownership/subsidy of fishing ports and associated distribution infrastructure (resulting again in substantial overcapacity) is likely to be a key factor in hindering a market solution to the problem of overfishing. In some countries there could also be problems with competition rules.

Finally it is important to consider the impact on consumers. The ‘market power’ of the vertically integrated firms would be severely limited. Under free trade they would be competing with fish suppliers from around the world, including produce from fish farms. Moreover, fish can be substituted for other foodstuffs and make up only a small percentage of the overall food supply. And the benefits would be substantial. A market solution to overfishing would deliver major benefits for consumers, with higher yields leading to lower prices and improved quality. At the same time, the inefficiencies, subsidies and special-interest influence associated with state-imposed fisheries policies would be avoided.

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Why does privatisation sometimes go wrong?

February 21, 2016

The imposition of flawed privatisation models imposes economic losses far beyond the sectors concerned. Although the problems experienced in privatised industries have largely been the result of political interference and state regulation, their failure may be misused by ideological interventionists to undermine trust in markets more generally.

Both the public and opinion-formers have weak incentives to properly investigate why particular sectors have not performed well and this ignorance can be exploited. If the political culture turns against relatively free markets, the wider efficiency losses are likely to be substantial, as more and more economic activity becomes subject to high taxes and restrictive controls.

Privatisation is a political process and as such will be vulnerable to the problems afflicting political processes in general. Almost inevitably it will be influenced or even ‘captured’ by special interests. As a result, there is a risk that the outcome is not a dynamic free market, or even a lightly regulated sector. At worst, government will regulate the market to enable special interests to extract ‘rents’ from taxpayers and consumers. Such a model would protect favoured interest groups from new market entrants, competition and disruptive entrepreneurship, while participants’ profits might well rely on state subsidies.

As public choice theory would have predicted, many of the privatisations of the 1980s and 1990s did not produce anything approximating to free markets in the sectors concerned. In some industries at least, the period might more accurately be characterised as a shift from ‘state-capitalism’ Model A to ‘state-capitalism’ Model B. This raises the question whether Model B, consisting of heavily regulated markets under nominal private ownership, delivered economic benefits compared with the direct state ownership of Model A.

The answer is likely to depend both on the characteristics of a particular industry and the regulatory structure adopted post-privatisation. In an unhampered market economy, sectors characterised by major economies of scale and vast, inflexible, long-term capital investments – such as the rail industry – are likely to be dominated by large firms exhibiting high degrees of vertical integration. The ‘command economies’ within such firms will exhibit significant knowledge and incentive problems no matter what the ownership model. Thus, ceteris paribus, the benefits of privatisation are likely to be lower in such industries than in naturally more fragmented, dynamic and competitive sectors.

Nonetheless, there are particular problems associated with state ownership that are likely to apply across all sectors. These are explained in detail elsewhere, but include politicisation, producer capture, and poor incentives for entrepreneurship, innovation and cost-control. Where state regulation ensures monopolies, such pathologies may be exacerbated by an absence of competition. The poor results became apparent in the nationalised industries of 1970s Britain. Endemic misallocation of resources led to heavy taxpayer subsidies and poor quality services for customers.

However, some of the privatised sectors exhibit broadly similar problems today. The following (non-exhaustive) analysis therefore draws on theory and recent evidence to summarise some possible reasons why artificial post-privatisation markets could fail to produce efficiency gains compared with the directly state-controlled model that preceded them:

  • Politicisation – The propensity of politicians to interfere in a sector could hypothetically increase post-privatisation, resulting in increased regulation/taxation and concomitant efficiency losses. This outcome may be particularly likely in sectors with high political salience. Any change in the status quo creates risks for policymakers, providing incentives for them to intervene. The costs of such intervention are likely to be opaque and widely dispersed, leading to limited accountability.
  • Overregulation – Politicians may face fewer disincentives to impose costly regulations on a nominally privatised sector than under state ownership. In the former case, the negative effects can be blamed on private firms, whereas in the latter they are likely to be blamed directly on the government, creating higher political costs. Voters and ‘opinion formers’ have weak incentives to become well informed about such issues. Senior officials may benefit from the salary and status opportunities provided by expanded regulatory oversight, while key corporate players in the sector may welcome additional regulation if it serves their interests (for example, by raising barriers to market entry and protecting them from competition).
  • Flotation receipts – Short-term incentives to maximise flotation receipts may encourage the creation of heavily regulated ‘rigged markets’ that reduce the risks facing investors. Large, risk-averse institutional investors, such as pension funds, may prefer a model that effectively guarantees returns rather than entrepreneurial and disruptive freed markets that threaten incumbent players.
  • Transaction costs – Artificial post-privatisation markets may depart significantly from the organisational forms likely to evolve in an unhampered market economy. It is conceivable that in some instances such artificial structures increase transaction costs compared with direct state ownership, thereby reducing allocative efficiency.
  • Restructuring costs – Structural changes may weaken ‘social capital’ within a sector by disrupting working relationships, as well as losing specialist, often asset-specific knowledge and skills through the departure of long-term staff. Organisational cultures may also be weakened or destroyed. The role of such factors in efficient operations may be somewhat opaque to both policymakers and senior management.
  • Moral hazard – If sectors comprise ‘essential’ infrastructure then firms can be sure that governments will step in if they fail. Indeed, rules are typically in place that set out how this would be done. Limited liability laws and the use of special purpose vehicles also limit downside financial risks. These factors may encourage excessive risk-taking and a concomitant misallocation of resources.
  • Rent-seeking – A combination of heavy regulation and private ownership could potentially increase incentives for special interests to engage in rent-seeking activity. Profit-making businesses might have stronger incentives to lobby for regulations and subsidies that increase their profits than the less commercially minded managements of state industries. There is even a danger that ‘crony capitalism’ could emerge, as observed with privatisations in post-Soviet economies.

 

This is an edited extract from Without Delay: Getting Britain’s Railways Moving.

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The future of the railways

February 14, 2016

This debate marked the launch of my new paper on rail privatisation, Without Delay: Getting Britain’s Railways Moving. The study is heavily critical of the 1990s privatisation model, in which politicians and officials imposed a complex and fragmented structure on the industry, ignoring the lessons of both transaction cost economics and railway history.

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Ten rail capacity solutions that don’t cost the earth

September 1, 2015 1 Comment

  • Introduce more flexible pricing to flatten the peak. Passengers would have greater financial incentives to travel during the ‘shoulders’ of the peak, or indeed off-peak, thereby making more efficient use of existing infrastructure and rolling stock.
  • Phase out government subsidies and price controls so that fare levels better reflect industry costs.
  • Convert first class carriages into standard class carriages to accommodate more passengers.
  • Introduce high-capacity ‘economy class’ coaches with more standing room instead of seating (offering lower fare options).
  • Lengthen trains by adding more carriages and extending platforms. Double-length trains could even be used on busier sections and then split part-way through the journey.
  • Deploy improved signalling technology etc. to reduce the necessary gap between trains.
  • Consider using double-decker trains where the engineering costs would not be prohibitive.
  • Address bottlenecks by re-engineering junctions: relatively expensive but still much cheaper than building brand-new infrastructure.
  • Divert freight onto quieter routes, enhancing loading gauges where necessary. For example, intermodal traffic from Felixstowe to the Midlands and North can be sent via the Ipswich-Nuneaton route rather than the southern West Coast Main Line.
  • Allow full vertical integration to end the artificial separation between track and train, and between different franchisees and open-access operators. This would improve the financial incentives to make more efficient use of spare capacity.

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Greek bailout fundamentally flawed

July 15, 2015

The original upload can be viewed here, together with comments.

 

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