In preparation for the election, it is my intention to analyse the economic consequences of the three major British parties (well the two major British parties and the Lib Dems) main policies. I obviously won’t have time to read through all of the manifestos and will only be looking at key points. I am also aiming to do this without party bias. I will not tell you which way I am intending to vote.
In every policy, there is a trade off. I won’t be able to talk about all of the trade offs and which is worth more than which. That is a subjective matter and one that only you have the answers to. If you are a floating voter, then this piece isn’t to encourage you to vote a certain way, but to try and describe some of the economics behind the policies. Unlike the referendum pieces I wrote, which were subjective, this is objective and is being written to inform as opposed to persuade. I will say my opinions and try to justify them, but yours may be different ad that’s why politics is so wonderful.
Please remember THAT I AM BEING CRITICAL and will be critical of all party manifestoes as I present them from a different angle to deliberately make you consider policies and economic effects in a different, more advanced, way
Corbyn’s manifesto is a risk. It is a real jump to the left that has not been seen in the past thirty years. Undoubtedly, it will appeal to some, but truly alienate others. The big concern is that it won’t attract centrist swing voters that you need to win an election. Furthermore people don’t like him. Therefore a rejection of him could be seen as a rejection of socialism entirely.
Jeremy Corbyn’s main area of interest is re-nationalisation. Is re-nationalisation good? Well that is a tough question. In my humble opinion, generally no, but it depends purely on the industry. For the sake of economics beginners, a nationalised company is owned by the tax-payer/government. A privatised company is owned by an individual or company. The most common example of a nationalised company is the NHS. What makes the NHS different is that it is provided for free. Other nationalised companies aren’t.
There are two big problems with nationalization:
- The cost: Government pays above the odds in order to buy all of the shares of a company. They also under sell shares when nationalizing. The most recent example of this is George Osborne selling Royal Mail shares far too cheap.
- Monopoly: Anybody who reads my blog at all knows that monopolies are bad. They promote high prices and shortages of goods as they are the only company in the industry. Nationalised companies are generally protected by the government. Again, the royal mail are a clear example of this as the government put a price floor (minimum price) on how much other firms can charge for delivering letters.
HOWEVER, there is such thing as a natural monopoly where there has to be a monopoly due to high costs and ways in which only one firm can be the monopoly and it is impossible for more to be (rail for example). Generally, public monopolies (nationalized) can be seen as better than private monopolies as they look to break even and not exploit the customer.
Any decisions about renationalisation should consider these and the wider economic implications. Corbyn wants to renationalize railways, energy networks, water system and the royal mail. Each one of these is different.
- Rail: The government owns the railways and sells the license to run train services on them. The way that Corbyn will nationalize the railways is waiting for franchises to expire. Therefore, they won’t cost as much. It also shouldn’t cost too much in the future as the nationalized railways break even. Trains also have to be a natural monopoly as if many firms had the same region on the limited routes and rails, there would be havoc. As I stated above, a public monopoly is better for the consumer than a private monopoly. High train tickets are also a real problem at current. Nationalisation should lower the prices. This would make people more able to commute and possibly slow down the price rise of properties around big cities. It also allows workers to be more flexible, making the labour market more efficient. There is generally a strong economic argument for it.
- Utilities: These will be MUCH more expensive as Corbyn changes the licensing and tries to make at least one publicly owned energy company in every region throughout the UK. The private monopolies argument again holds and with rising energy prices there is the argument that nationalizing energy companies, leading to lower bills is worth it. However, with such a high cost, the benefit of this is much more clouded. I discussed trade-offs in the introduction and this is a clear case of where it is applicable. He could just put energy caps on firms, like Miliband would have.
- Royal Mail: The royal mail was originally put together in order to allow people to get letters across the country easily as transport wasn’t good. Now, however, it isn’t needed as transport is better. There is no need for it to be a private or public monopoly. It is not worth the cost. The best thing the government could do is lower the protections for the royal mail and make letter delivery competitive. This gives people many options and will lower the price. Renationalizing royal mail makes very little economic sense.
Labour plan to take in almost £50bn of extra tax. £6.4bn of this will be from the top 5%. Almost £20bn will be from corporation tax. £6.5bn will be from tax avoidane. Income tax of 45% on earnings over £80000 & 50% for any earnings over £123000. This means any earnings after your 123000th pound will be taxed at 50%.
This is easier said than done. There is a common argument that higher tax rates do not generate higher tax returns. This is because higher tax rates incentivize people to go to greater lengths to avoid tax as there is a greater reward. The Laffer curve is a common economic representation of this. This idea is by Andrew Laffer. He says after a point, increasing tax rates will lower tax returns for the above reasons.
So what is the golden tax level? Well, nobody knows, maybe I should write a dissertation about it. Or maybe just a blog post.
With a Brexit around the corner, increasing corporation tax rates will further push firms to relocate their investment as they seek locational attractions. However, we are in a concerning place in the world where there seems to be a race to the bottom, both in terms of tax rates and in terms of regulation. However, the good thing for Britain is that it has the English language and an intelligent work force. But Britain needs to be smart because saying “We’re great Britain” isn’t good enough to get investors.
The 50% tax earnings puts in a moral issue as well as the tax rates vs returns issue above. That sees a point where you only get half of the income you’re working for. If this is the case, productive people may just stop bothering once they’re up there. More importantly, there is a question of should we take half of what you’re earning. One for you, one for me. Again this is a moral question that you have to ask yourself and if the answer is yes, then Labour may be the party for you.
Corbyn wants to reform the labour market. One way is to ban zero hour contracts. These were originally made in order to help the work force become more flexible. However, these days they are more exploitative as certain companies employ all staff on zero hour contracts. Should they be banned. I will argue that they shouldn’t be. Certain firms can only afford to take on workers on zero hours. They also help certain groups such as students in part time jobs. However, I feel that they should be regulated as follows:
- Zero hours should not be given to anybody over 25 or under 65, so those who want flexible hours can have them. This can help youth get a foot into the labour market as well.
- Only 5-10% of workers can have zero hours contracts. The rest must be permanent. This means that zero hour contracts will then be functioning as they should be, purely for when extra staffing is required.
The problem with banning zero hour contracts is that firms are finding ways around them, such as one hour contracts. Therefore, better regulation as opposed to banning would be more logical.
Corbyn will also raise the minimum wage to £10 per hour by 2020. This would make those on low incomes better off, but it would push up everyone else’s incomes as well as they see others having a pay rise. The question is, will prices rise at the same rate? Maybe they will. When Blair introduced the minimum wage, that was meant to end the economy, but it didn’t. The question is just how high can the minimum wage rise?
He is also planning to re-unionize Britain. Will this help? In a previous blog post, I explained that unions can be inefficient because of the following:.
Consider, if you want to, a demand and supply curve (figure 1) which considers wage and employment. If wages are higher, more people are willing to work, while if wages are lower, employers are more willing to hire people, basic economic intuition. There will be employment where supply = demand (employment = 100 & wage = 100). However, if a trade union demand a minimum wage for a job (180), there will be a new supply curve (figure 2). As a result, wage will increase (to 180) but employment will fall (to 50) and as a result there is more unemployment (180-50).
Collective bargaining can also be considered unfair by workers who are ambitious enough to want to increase their wage, but can’t. However, it can be considered helpful for them as they are not racing to the bottom of the wage pool.
He is also going to enforce all worker’s rights to trade unions at work. This feels much more forced . These were devastating in the 70’s, however Unions have proven helpful in some instances and still have a place in improving working conditions, but some argue that there is a time where unions have too much power and are dangerous. The question you have to ask yourself, Do you want unions to have more power and is how much is too much?
This is only the start of the manifesto watch. Over the next week I look at them in more detail. Here is the plan for the week
Labour Part 1 2/6 (Workers, Brexit, Tax)
Conservative Part 1 3/6 (Business, Brexit, Tax)
Labour Part 2 4/6 (Education, Environment, Social Care, Brexit, Migration, Energy, Housing)
Conservative Part 2 5/6 (Social Care, Immigration … TBC)
Lib Dem 6/6 (TBC)
Generic Endorsement post 8/6 (TBC)