Higher state investment is one thing Labour’s manifesto gets absolutely right

There are some rules of thumb in politics. If you want to keep something secret, say it on the floor of the House of Commons. If you want to publicise something, mark it “secret” and leave it lying around near a photocopier. And if you want people to be misled about what you are proposing, let the right-wing press explain it.

The shadow Chancellor, John McDonnell, first announced plans to spend an additional £250bn over a decade on state investment if Labour wins power in a speech almost a year ago. The surprise would have been if this long-standing pledge had been dropped from the party’s manifesto, not that it made the cut.

But what makes the hyperventilating of the pro-Tory press pack in response to this particular line in the leaked manifesto even more risible is that they appear to have little grasp of how moderate this supposedly ruinous investment promise is.

Public sector net investment in 2017-18 is already set to be £40bn. Labour’s planned increase of around £25bn a year would take that to around £65bn. As a share of GDP that would represent an increase from 2 per cent of GDP to 3 per cent, taking us roughly back to where public investment as a share of national income was when George Osborne took an axe to it in his 2010 austerity drive.

We’re also told, in horrified tones by papers such as the Daily Mail and The Sun, that this investment spending would be financed not by extra taxes but by borrowing. The Times points out that Michael Foot’s 1983 manifesto also promised to pay for industrial investment spending by borrowing.

Yet what they fail to note is that George Osborne, in his original fiscal mandate, did exactly this too. The former Chancellor’s 2010 deficit target, which was naturally hailed by the right-wing press for its fiscal rectitude, was to achieve balance on the “current budget” over five years. And the current budget, of course, excludes public sector net investment.

In fact, it’s been the norm for governments to permit borrowing for investment for the very sound economic reason that investment in infrastructure – whether road repairs, rail electrification projects or new broadband networks – increases the future productive capacity of the economy. This should increase GDP growth rates and hence future tax receipts. In the medium term well-targeted infrastructure spending should pay for itself.

Labour’s state investment pledge also needs to be understood in the wider economic context. Private business investment as a share of national income has been falling since 2000 and in 2016 stood at just 9 per cent of GDP. This decline, in combination with the cuts to public investment since 2010, has dragged total economy-wide investment down to about 17 per cent of GDP. This is below the share of national income spent on investment in other peer countries such as the US (20 per cent), France (22 per cent) and Germany (19 per cent). All of this may well explain, in part, our major national productivity shortfall relative to those countries.

Labour’s proposal to bump up direct state investment, along with its plan to establish a National Investment Bank to lend an additional £250bn over a decade, is a serious response to what the OECD has called the UK’s “historic underspending” on infrastructure. The fact that private investment spending is also under pressure due to Brexit-related uncertainty about the UK’s future trade arrangements is another strong argument for the Government picking up some of the slack.

From abolishing tuition fees, to jacking up corporation tax to 28 per cent, to abolishing zero hours contracts outright there are plenty of economic policies in Labour’s manifesto that can reasonably be criticised. But higher state investment spending is not one of them. Its critics largely discredit themselves.’

#fiscalrules #JohnMcDonnell #Labour #publicsectornetinvestment

Europe shows that nationalised industries don’t have to be 1970s-style disasters

If you want to go “back to the Seventies” you don’t need to hope Jeremy Corbyn enters Downing Street on 9 June and hoists the red flag over the black door of No 10.

If you want to experience public ownership of industries you might try sending a letter in Norway, where Posten Norge (Norway Post) is a state-owned company. You might ride on a train in Switzerland, where the Schweizerische Bundesbahnen (Swiss Federal Railways) is a corporation whose shares are wholly in the hands of the Swiss cantons.

You might try boiling a kettle in Paris, with energy supplied by the state-owned Électricité de France. Or maybe do the same in Hamburg, where the energy grid is in the process of being reacquired by the city government. While you’re in Germany, you might like to open an account at one of the country’s hundreds of local government-owned Sparkassen, or savings banks.

It may surprise you to learn, given the hysterical reception being given to the leaked Labour manifesto and its proposals for a partial renationalisation of various British industries, that none of those above experiences in continental Europe will be a Soviet-style nightmare.

Indeed, one will find that many of those industries provide a superior service in countries with a strong element of public ownership, compared to their counterparts do here in Britain where such things are “left to the market”. There are probably few Southern Rail commuters who wouldn’t trade their experience with those Germans who enjoy services operated by the state-owned Deutsche Bahn.

But of course, we don’t leave everything to the market here in Britain either. When you board a train here in Britain, you will step on to a privately-owned piece of rolling stock operated by a private franchise. But the tracks over which you travel are owned by the publicly-owned Network Rail, founded after the collapse of the privately-owned Railtrack. And that private rail franchise may well be part of a larger European state-owned group. Arriva is an outpost of Deutsche Bahn. The Essex-operator C2c is part of Trenitalia, the Italian state rail company.

Similarly, if you’re getting domestic energy supplied by EDF, it’s that same group that powers the Parisian kettle. As many have noted, we do have public ownership in UK rail and energy markets. It’s just that the government ownership is by foreign governments.

The question of national versus private ownership is less important than many people imagine. What really matters is the structure of the wider industry, the incentives for managers, the quality of regulation and the political and social context in which firms operate.

The privatisations of British Airways, British Telecom and British Steel were a success not because high quality private managers were brought in to replace low-grade state bureaucrats. The management teams were often the same before and after privatisation. What changed was the introduction of competitive pressures and the imposition of credible budget constraints, forcing these same managements to compete, cut costs, work more productively, invest and innovate.

But it’s harder, if not impossible, to inject competitive pressure into natural monopolies such as rail and energy generation, and utilities such as water, through privatisation. And because they are natural monopolies (with unsurmountable barriers to market entry by potential competitors) they are always going to be tightly regulated, even when they are in private ownership. It would be a brave politician who proposed to let a private water company charge households in its area whatever the market would bear.

The issue of the cost of renationalisation is also something of a red herring. When the state privatises an industry, presuming it sells the business to private investors for what it is actually worth, the state does not register a profit in a comprehensive accounting sense. What it gains in sale receipts it loses in future profits. The same is true in reverse. Assuming it doesn’t overpay, the cost to the state of buying back, for instance, the Royal Mail or the National Grid will be balanced by the flow of future net revenues from those businesses.

The key question, from a public policy perspective, is whether the business assets are likely to be run more efficiently in the interests of the public in one form of ownership than the other. Will the absence of the risk of bankruptcy result in budget indiscipline from public managements? Will public managers be more attuned to the whims of ministers and employees rather than the needs of customers? Or, on the other hand, will private managers under invest to increase dividends to shareholders? How likely are civil servants to draw up franchising contracts that will provide good value for taxpayers?

These ought to be empirical questions, informed by analysis, evidence (including from abroad) and judgement. Yet for much of the British media and political classes it is, alas, a matter of ideology.

#nationalisation #southernrail

The energy market is broken but customers stubbornly refuse to be liberated from their tariffs

In a new book James Kwak describes the curse of “economism”. This is the tendency for people to engage in public debates about economic policy brandishing nothing more than a supply and demand curve and a conviction that all government interventions in markets are inevitably destructive. 

Purveyors of economism treat all markets as simple and identical. They disregard context and assume perfect information from participants. They reason as if they have read only the early chapters of an introductory economics textbook and that they never grasped that the models described in those chapters are useful abstractions, not descriptions of the real world.

There’s been a lot of economism in the debate about the Conservative proposal for price caps on certain residential energy tariffs (just as there was when Labour under Ed Miliband promised an overall price freeze two years ago). Fearful outcomes apparently range from a collapse of investment in new supply to a Venezuelan-style social collapse.

The first challenge to the simplicities of economism is detail: an analysis of the characteristics of the market in question. Around 70 per cent of UK households, despite much prompting from ministers and advertising from switching websites, are not getting the message that they could save money by changing suppliers when their fixed-term contracts come to an end. 

Now this could be because they enjoy paying over the odds for their energy, which seems unlikely. It could be because they love their existing supplier too much to ever think about changing, which again seems somewhat implausible. Or, more likely, it could be because they are baffled by the artificial complexity of the tariff contracts offered and feel too intimidated and confused by the concept of a market in domestic energy to switch.

Of course, a third of people do switch supplier, leading to complaints that capping the standard variable tariffs of the non-switchers will undermine this functioning element of the market. Yet this brings to mind the polite curate who told his host that his boiled egg was “good in parts”. It’s difficult to argue that a market is functioning only in parts.

If a majority of customers don’t switch, that undermines the pressure on providers to provide a good service to anyone. It’s no coincidence that the heart sinks at the thought of having to ring one of the major providers to question a bill – and that the “big six” come out notably badly on customer satisfaction surveys.

Another solvent for economism is some history. Electricity was once provided, in the majority of areas, by local authorities as a kind of public good. There followed a national monopoly after the Second World War.

And controls were only last month re-imposed by the regulator on charges on pre-payment metres (which are a common feature of the homes of the poorest). Intervention and tight regulation have been the norm in the residential energy sector for most of its history.

It is now seventeen years since the residential energy supply market was liberalised. But most people stubbornly refuse to be liberated. One can take the view that further effort is required to nudge them into the switching habit.

Or another, reasonable, conclusion is that domestic energy may simply never be the fast-moving and competitive market that was once envisaged and that some form of limited price control is now justified to put a stop to the egregious gouging of vulnerable customers by complacent private incumbents.

In his 1953 poem The Solution Bertolt Brecht satirically lamented that the people had forfeited the confidence of the government and that the time had come to dissolve the people and elect another. We should beware the temptation to blame customers for letting down the residential energy market.

#BertoltBrecht #economism #energycap