Forced bank lending the latest instalment in Labour’s doomed spiral of intervention

Alistair Darling appears set to commit an 80 year old mistake. In his misguided attempts to control the UK economy and force businesses to conform to New Labour’s agenda, he is again going to intervene between banks and their customers.

He has already intervened countless times over the past year, but this latest intervention is pitifully predictable. Indeed, as was explained 80 years ago, it was inevitable that his previous interventions would have unintended consequences that would be the opposite of what he intended, and that to counter those consequences he would be obliged to intervene again and again to ever greater degrees.

Published in 1929, just as another depression was about to rock the world economy, Ludwig von Mises’s Critique of Interventionism demonstrated that as soon as politicians began to intervene in the economy, they would have to continue to do so until ultimately the entire system came under their control. According to von Mises, interventionism was simply unsustainable: either one accepted the laws of economics or one was forced to implement socialism.

We can see how this works if we consider price controls – an example that has striking relevance to Mr. Darling’s current dilemma.

If government tries to fix the price of a commodity, it will not be able to sustain prices below those that the unhampered market would set. This is because with price controls:

"Sellers are forced to sell their goods at lower prices, so that proceeds fall below costs. Therefore, the sellers will abstain from selling and hold on to their goods in the hope that the government regulation will soon be lifted. But the potential buyers will be unable to buy the desired goods."

The result, therefore, will not be the increasing availability that the government sought but a reduced availability of the good resulting from suppliers having no wish to supply at such a low price. To raise supply to the level the government desires at the price the government has mandated, it must therefore intervene again to force suppliers to supply the good: “…it tends to supplement the price ceiling with an order to sell all goods at this price as long as the supply lasts."

However, as the good is now on sale for below its real value, far more customers will emerge than would do so if the good was priced naturally. And since the price is "below that which the unhampered market would set, the same quantity of goods faces a greater number of potential buyers who are willing to pay the lower official price. Supply and demand no longer coincide; demand exceeds supply, and the market mechanism, which tends to bring supply and demand together through changes in price, no longer functions."

There is still not enough of the good to go round, but now it is not because of suppliers reticence but excess demand caused by under-pricing. Government has prevented the price mechanism from operating to prioritise this demand. Therefore another means must be found to decide who gets what, which leads to the third wave of intervention: Rationing.

"Of course, government cannot be content with this selection of buyers. It wants everyone to have the goods at lower prices, and would like to avoid situations in which people cannot get any goods for their money. Therefore, it must go beyond the order to sell; it must resort to rationing. The quantity of merchandise coming to the market is no longer left to the discretion of sellers and buyers."

But why, if the price is below that at which suppliers can make a profit, would they produce the good at all? Only if the government intervenes to force the production of the good. Consequently, the fourth intervention takes place:

"When that is exhausted the empty inventories will not be replenished because production no longer covers its costs. If government wants to secure a supply for consumers it must pronounce an obligation to produce."

And how can this be achieved when costs are below prices? Only by driving down costs, which requires government to intervene to set the prices of the factors of production that go into producing the good. Ergo, "it must fix the prices of raw materials and semi-manufactured products, and eventually also wage rates, and force businessmen and workers to produce and labor [sic.] at these prices."

But what, you may ask, has this to do with Mr. Darling? If one considers money and borrowing to be commodities, the answer is everything.

Government has long been intervening to keep the cost of borrowing below the market rate. This is the role of central banks: they enable governments to control the supply of money by forcing lending rates down below the market rate, so stimulating artificial and unsustainable booms that keep the voters sweet until the next election. The Bank of England did this again last month. Under normal circumstances, a “credit crunch” should result in an increase in the cost of borrowing. This would result in more saving and less borrowing until a new equilibrium was reached. However, the government has intervened to keep the cost of borrowing low.

As von Mises predicted, however, this has had unintended consequences. The government may have wanted low interest rates, but the banks were still inclined to set interest rates based on risk: as default is more likely now than it was a couple of years ago, the cost of borrowing is raised to take an actuarial account of risk. Also, as the banks have limited capital, they are bound to lend to the most profitable borrowers: those who will pay higher rates. So inevitably the government is again inclined to intervene to force banks to lower rates.

The predictable result is that banks won’t lend. They’d rather buy government securities or look abroad for more valuable investments than lend to businesses and householders at rates that are no higher than inflation or make a tiny real return but involve huge risk (companies will go to the wall; mortgagees will default). So the third intervention comes, as Darling forces the banks to lend.

Not to everybody, mind. Already the rationing is appearing: the BBC suggests that the intervention will be for favoured groups, which at this stage consists of “Small businesses” (which means it might be time to sack that 50th employee and cut one’s borrowing costs!).

One can only begin to guess at what the unintended consequences of this latest intervention will be. However, the two things of which we can be sure are that further interventions will inevitably follow as long as Labour ministers believe that they can over-ride the laws of economics, and that these interventions will continue to have unintended and negative consequences for all of society.

Lib Dem’s turn to have Darling steal their policies

The great policy thief looks like he is about to strike again!

Alistair Darling, Labour Chancellor and policy plagiarist, is rumoured to be about to “unveil a host of new measures in his first budget on Wednesday aimed at cutting carbon emissions” in what is to be billed as “Labour’s greenest [budget] to date.”

Should we be surprised? Of course not. In his first pre-Budget report, Darling ditched months of Labour plans in a naked attempt to out-Tory the Conservatives by offering an Inheritance Tax cut that Nick Clegg argues will help just 6 per cent of the population. Nick suggests that these are richest 6 per cent, though the most South Easterly 6 per cent might be nearer the mark!

Now, Darling appears poised to out-Lib Dem the Liberal Democrats by finally addressing Climate Change in his budget. Naturally, however, the real motivation is not the global but the financial climate, as he faces a hole in his budget that will require tax rises of £8 to £9 billion a year

In truth what we can look forward to is a token gesture on the environment in a budget that will not satisfy environmentally or equitably.

The Liberal Democrats have proposed a massive shift of taxation from income to pollution. Lib Dem proposals would seek to raise (if I remember correctly) £18bn a year from new environmental taxes, with which we would finance a massive tax cut off the basic rate, reducing it to the lowest level since… well… the last time the Liberals were in power. The personal allowance would soar to well over £7,000 a year, so that those on very low wages would pay almost nothing. And the Council Tax would be abolished forever – a long overdue measure.

By comparison, we can expect a rather lukewarm series of ill-thought-out measures from Darling. For example, the rumoured "showroom tax" of £2,000 on the price of the most gas-guzzling cars may indeed discourage consumers from buying them, but it is not the purchase of these cars but driving of them that is the source of pollution: this measure will not only unnecessarily penalize those who drive very short distances in very flash cars, but will also create no incentive to those who have already bought such a car, or who choose to do so despite the new tax, to economise on fuel. Indeed, perversely, economic theory suggests that if the car is more expensive, the owner needs to drive it more to ensure that they get their money’s worth!

By far a more effective means of tackling carbon emissions would be to abolish all taxes on the purchase of cars, and raise the money instead by increased in fuel duties. As somebody who has become painfully aware of the cost of petrol recently, I can attest to the fact that there is nothing more effective at encouraging economic use of fuel than seeing the counter on the petrol pump spin round.

Sadly, while it is unlikely that Darling will satisfy anybody with his budget, it is equally unlikely that the media will recognise that he is beginning to accept the wisdom of Lib Dem policy. And with a General Election probably two years away, we are saddled with Labour incompetence for some time to come.

Another old Labour story: taxes are rising

Yesterday I reported that unemployment was rising under Labour. Today, it’s the turn of income taxes. Hard working taxpayers are being squeezed as never before.

Taxes on average incomes are at their highest since records began in 1987. The Office of National Statistics reports that taxes on incomes are now 23.6 per cent of wages and salaries.

This must be borne in perspective; taxes on average incomes have hovered between 20 and 23 per cent throughout the two decades in which they have been measured. But taxes are creeping up, with no sign now that in the near future they will be reigned in.

The squeeze is especially painful for two reasons. Firstly, it is outpacing rises in wages: taxes rose by 6.7% compared to wage rises of 4.6%. Secondly, this comes as other inescapable costs are also rising: interest rates are rising; inflation is rising; utility bills are rising. Consumers are under intense strain. This year’s Christmas cheer is increasingly being funded by savings rather than income, which can only be a short-term solution.

2007 is likely to be a very happy new year for Gordon Brown as he finally realises his lifetime ambition and moves into Number 10. In doing so, he will leave behind a Treasury in a parlous state. Whomever he makes his Chancellor (and my bet is on Alistair Darling) will inherit a poisoned chalice; inflation, unemployment and taxes are all rising as Brown’s public sector profligacy bites home. A happy new year for Mr. Brown, perhaps, but for the rest of us, the long hangover is coming.