IEA - UK economy riddled with damaging price controls

21 Apr 2015 12:55 PM

A swathe of price controls currently dominate the political debate

Several of the main battlegrounds in the upcoming General Election have been dominated by calls for the imposition of price controls. Politicians argue that interventions in a variety of markets – from housing to energy to consumer finance – will lower costs, but this could not be farther from the truth. Policies based on artificially capping or freezing prices are based on an extremely shaky grasp of economics and would be disastrous for the UK.

New research from the Institute of Economic Affairs documents the swathe of price controls dominating the political debate – from capping payday loans, introducing tenancy rent controls, freezing energy prices and imposing a lower tuition fee ceiling – showing how they reduce competition, consumer welfare and investment.

Price controls also cause reduced product quality, reduce innovation and cause serious problems in labour markets. Additionally this type of intervention encourages the black market to the detriment of the least-well-off. The negative impact of price controls can be especially acute because they are typically imposed in property and labour markets, affecting where people can live and work. Politicians should put good economics above politics and wake up to the pernicious effect of intervening in prices and markets.

• Payday loans and consumer finance: Political pressure to ban payday loans that has led to price caps risks harming the very people they intend to help – the poor. Evidence shows us that bans and restrictions can often make a difficult situation more difficult still. For example, interest caps in France and Germany saw financial breakdowns -  such as bankruptcy – skyrocket after a ban was imposed and there has been a huge reduction in the capacity of the UK market since price controls were introduced The government’s proposed charge caps on pension products is likely to, according to the government’s own research, reduce competition and prevent charges falling below the cap.

• Energy price caps: The Labour Party’s proposed energy price freeze comes after years of governments retreating from the policy of promoting competition which was very effective in reducing prices. In the short term, the pre-announced freeze has almost certainly led to higher prices as companies have taken action to raise the base level at which prices are frozen. More perniciously,controlling the price of energy reduces investment in exploration and new sources of energy, passing the cost onto consumers in the form of higher energy costs.

• Rail fare caps: The transport debate during this election period has been dominated by parties promising to freeze rail fares over the coming years. These caps benefit some rail travellers, but at the expense of (generally poorer) taxpayers across the country. They also artificially encourage overcrowding at peak times and on particular lines and reduce the incentive to invest in the network. The existence of fare regulation has undermined the ability of train companies to tempt passengers into changing their travelling habits to dampen demand for the busiest routes.

• Rent controls: The Labour Party’s proposal to bring down the cost of renting and improve tenant security through the introduction of tenancy rent controls will do nothing to help those in the private rented sector. Instead, the constraints this form of price control would impose on the market would result in higher initial rents, a reduction in the quality of rented property and a reduction in the supply of homes to rent – without improving affordability. Rent control is a typical example of the use of price control to suppress the symptoms of mistake polices: the fundamental reason for the cost of housing in the UK is because of highly restrictive planning laws.

• Tuition fees: Reducing the ceiling for tuition fees down to £6,000 would make universities increasingly dependent on the public purse. This will lead to yet more government interference in how universities are run. Even the current university funding model, with fees caps at £9,000 leads to bad outcomes for both the provider and recipient. Students take on vast amounts of debt while often seeing little additional value from their courses, whilst swathes of red tape continue to bind universities, which still claim to have insufficient funding. Tuition fee caps, the regulation of universities and the generous writing off of student debt prevents the very innovation that is necessary in higher education to dramatically reduce the costs to students.

• Wage floors: All of the main political parties have subscribed to a misguided belief that an ever-increasing minimum wage will tackle perceived inequality in the UK. Legislated pay rise will, however, make it more costly for businesses to take on the young and unskilled in starter jobs which provide essential experience. Whilst imposing a state decree for higher wages will benefit those lucky enough to remain in work, it will do nothing to help the young and out of work to get a foot on the employment ladder.

Commenting on the report, Professor Philip Booth, Editorial Director at the Institute of Economic Affairs, said:

“Price controls pervade almost every part of the economy. They are very damaging and, in the long run, they undermine competition and innovation that would ultimately lead to lower prices for consumers. They also end up as a political football, as we have seen in this election campaign. Politicians compete for applause from the electorate by proposing controls whilst the devastating costs are often hidden.”

Notes to Editors:

To arrange an interview about the report please contact Stephanie Lis, Head of Communications, slis@iea.org.uk or 07766 221 268.

The full report, Flaws and Ceilings: Price Controls and the Damage They Cause, can be downloaded here http://www.iea.org.uk/sites/default/files/in-the-media/files/Coyne-Interactive.pdf​.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties.