The government’s current deregulatory push – from planning reform to financial services – has led some on the centre-left to ask whether such a policy approach really counts as progressive.
To try and answer this question, we need consider several things.
First, the aim of the government’s recent announcements is to stimulate economic growth, so we need to look at whether deregulation is likely to be successful in that objective and how widely shared the benefits of that growth are likely to be.
If planning reform makes it easier for people on low and average incomes to buy an affordable home because there is a greater supply of them, rather than the government having to resort to expensive and risky subsidies on the demand side, this seems like a piece of deregulation that is both sensible and progressive.
On financial services the judgment is more finely balanced. Deregulation to attract more financial services business to the UK could create jobs, though the progressive benefits will be more limited if the new jobs are all for high earners in London. The tax revenue from the new jobs could also be used for progressive ends but this needs to be weighed against the consequences for financial stability of allowing banks to take more risks, the costs of which could end up being borne by people on lower incomes across the country, as we saw in the financial crisis.
But there are some broader questions too.
Which market outcomes require intervention from a progressive government?
And which kinds of intervention, including – but certainly not limited to – regulation, are likely to be most effective?
The economic cycle can lead to recessions which cause unemployment and misery. These downturns can be ameliorated through macroeconomic policy: a fiscal stimulus, through temporarily higher spending or lower taxes, or a monetary stimulus, through lower interest rates or quantitative easing.
Unemployment can also be reduced through an active labour market policy. In the short term, this could mean job guarantee schemes and, in the long term, improving education, skills and mobility.
The market may also leave certain services under- or unprovided for those who cannot pay for them, for example in health or education. The government can step in to provide such services itself, as in the NHS, or it can provide subsidies, for example in public transport.
The government can redistribute money from the better-off to the worse-off, through taxes, tax credits and benefits.
It can also enforce the law, including competition law and consumer protection law, against companies that treat customers in a market unfairly. This can deter cartels, prevent monopolies and promote the effective operation of markets.
So there is quite a lot that a progressive government can do before it even gets to regulation i.e. creating new rules to try and make people or companies behave in certain ways.
But regulation has certain attractions that some of these other tools do not. When a company engages in behaviour that the public or policymakers consider undesirable, proposing a new rule to ban it can be intuitively attractive and politically popular. It also has the merit of imposing little if any upfront cost to the Exchequer so there need be no difficult conversations with the Treasury.
The problem is that there are quite a few things that tend to get in the way of regulations working as intended.
For a start, there are challenges in designing a new regulation. They tend to be created in the midst of media pressure and political lobbying, so even if there is a case for a new rule in theory, what ends up coming out of the regulatory sausage machine may be quite different.
Second, once a rule has been created companies face the direct administrative costs of complying with it.
Third, there are the unintended consequences e.g. the companies might decide to reduce investment in the UK because of the higher costs or even exit the market completely; and the new rules might constitute a barrier to other companies entering the market, meaning competition is reduced.
Fourth, the new rules might not eliminate the problem fully, or its knock-on effects might create pressure for the regulation to be tweaked (usually making it more complex), meaning the cycle continues.
Fifth, this creates a need for more bureaucrats (possibly in a new regulator) to do the monitoring, tweaking and enforcing. This does cost money to the Exchequer, and to the affected companies who will now spend money trying to capture the regulator.
Sixth, there is the cumulative effect of regulations which individually might be sensible but which collectively undermine economic dynamism. Might there be a straw that breaks the camel’s back?
These are not just theoretical concerns. We have seen in practice that over time regulation tends to get more complex and to cost more money to the economy, while the productivity of the bureaucracy appears to decline. The cumulative effect of this happening across a range of sectors is to increase the cost of doing business in the UK and to divert the attention of talented people from productive economic activity to rent-seeking.
And all too often, the regulation does not even serve the progressive ends for which it is intended. Take energy. Regulation of the gas and electricity sector has become more complex and intrusive over the past twenty years, but in that time prices in Britain have gone from the lowest in Europe to the highest. Meanwhile, trust in regulated sectors is no higher than in unregulated ones.
There are some things that governments can do well. They tend to be good at pulling quite simple levers, like changing tax rates or spending money. And they are good at redistributing pots of money from one group of people to another.
But governments tend to be much less good at designing and enforcing rules to change people’s behaviour. That is why regulation should be a tool that governments turn to rarely rather than instinctively. And if a rule is not working as originally intended, deregulation can be a thoroughly progressive policy tool.
