Oxfam completely wrong on global inequality

In this television debate, I argue that current concentrations of wealth are largely the result of pervasive state intervention, including bailouts, quantitative easing and monetary inflation more generally (explained in more detail here). Oxfam’s proposals to address inequality by further expanding the role of government are likely to be counterproductive. High taxes and heavy regulation trap the poor in poverty.



ECB money printing will prop up zombie banks

How to destroy crony capitalism

The recent Oxfam report on inequality and the ‘top 1 per cent’ is riddled with statistical errors. Worse still, its proposed solutions risk harming the poor through ill-conceived government interventions.

Nevertheless, current patterns of wealth distribution raise important questions about ‘crony capitalism’ and the extent to which concentrated special interests have succeeded in rigging markets to benefit themselves at the expense of the wider population.

As might be expected in ‘state-capitalist’ economies characterised by high public spending and pervasive regulation, it would appear that a significant proportion of the ‘top 1 percent’ do indeed owe a large part of their fortunes to special privileges granted by governments.

Several powerful ‘crony capitalist’/protected interest groups can be identified, including:

  • Elements of the financial sector propped up by quantitative easing, monetary inflation more generally, bailouts, taxpayer guarantees, regulation, tax breaks, government-imposed monetary systems, state borrowing etc.
  • Beneficiaries of government contracts, who are often well connected to the political and bureaucratic elites who determine official spending priorities.
  • Landowners whose property was stolen by the state and then transferred into private ownership. This category would include many of the European aristocrats who still make up a significant proportion of their national rich lists, but could also be extended to include mining, energy and agribusiness enterprises benefiting from government land-theft around the world.
  • Property developers, often well connected to political elites, who are able to gain permissions that are unavailable to the general population due to planning and building regulations, and who profit from the resulting scarcity value. They may also be indirectly subsidised by taxpayer-funded transport infrastructure and regeneration grants.
  • Enterprises dependent on state protectionism in the form of illegitimate ‘intellectual property rights’ such as patents.
  • Professionals whose lucrative jobs depend on regulation and/or whose high remuneration relies on occupational licensing. Examples include lawyers, doctors and accountants.

Some of the individuals and firms benefiting from special privileges could of course also thrive in an unhampered market economy based on voluntary exchange – but it seems likely that a high proportion of the above groups would either be eliminated entirely or see a major fall in their relative wealth in the absence of state protection.

The precise impact on overall inequality would depend on the social structures that evolved under a system based on free exchange. However, it is clear that both patterns of wealth distribution and absolute levels of wealth would be very different if markets were freed. Crony capitalism, special-interest influence and rent-seeking behaviour tend to undermine genuine wealth creation. Accordingly, the emergence of ‘distributional coalitions’ is a serious problem for contemporary ‘state capitalism’.

Tackling the cronies will not be easy, but identifying some of the most egregious special interests provides a useful starting point. A combination of honest, free-market money and deregulation would destroy the privileges of the financial sector. Dramatically shrinking public spending would undermine the government contractors. Scrapping patents would subvert that insidious form of protectionism. Planning liberalisation would reduce the advantages of crony-capitalist property developers. And land restitution (which raises many difficult issues) might start to address the widespread government-corporate theft of individual and communal property. Finally, abolishing occupational licensing would bring much-needed competition to state-protected professions.

Unless otherwise stated, all articles on this website are written in a personal capacity.

How HS2 could be descoped to hide cost overruns

handcar204There are two main ways of dealing with cost overruns on big government projects without scrapping the scheme in question. The first is to ask the Treasury for more money – and this often works given the political embarrassment of half finished infrastructure.

The second method is ‘descoping’, which involves delivering less for the same budget. Examples include reducing the length of a route, making greater use of existing infrastructure, or lowering the quality of interconnections at stations. In recent years several schemes have been descoped to address rising budget estimates, including Crossrail, the Edinburgh tram and the planned high-speed line in California.

There is some tentative evidence that a similar approach has now been adopted for HS2, perhaps reflecting fears that further increases in the official budget would be politically disastrous at this stage of the project. (This may also explain why the budget is still quoted in 2011 prices in 2015). The HS1-HS2 link through Camden would appear to have been abandoned for the time being and there is now a major question mark over the £1 billion Warrington spur.

If the next government deployed economic logic it would scrap High Speed 2 entirely. However, the strength of the special interests backing HS2 raises the possibility of further descoping as a face-saving compromise.

Perhaps the least damaging ‘descoping’ option would be cancel current plans and speed up the existing West Coast main line instead, rebranding it as a high-speed route. One train operator has suggested London-Birmingham travel times could be cut to under one hour given improved signalling (and this would be to New Street, giving comparable overall travel times to HS2). At the same time various strategies could be undertaken to increase the capacity of the existing infrastructure (perhaps including the Chiltern Line to Birmingham).

Far less desirable, though still a big cost-saver and hugely preferable to current plans, would be to abandon Phase 2 entirely but keep elements of Phase 1. Now that Phase 1 is planned to reach Crewe, it could be argued by politicians that the line more or less reached the North of England. Northern cities could be bought off with (much cheaper) better links across the Pennines, together with improvements on the ECML.

Phase 1 could then be descoped by abandoning the Euston terminus and ending the line instead at Old Oak Common. This could reduce construction costs by roughly 25 per cent and would also undermine efforts by Transport for London and the Greater London Authority to ‘bully’ the Treasury into funding Crossrail 2 – now costed at an astounding £27 billion. Similarly the Birmingham spur could be scrapped with trains using existing tracks instead. Once again this could eliminate substantial ‘off balance sheet’ costs. Devious politicians might recycle some of these savings into longer tunnels in the Chilterns and better compensation to ‘buy-off’ opposition.

With the budget deficit stubbornly high and other spending priorities growing in political salience, cuts to the scope of HS2, and hopefully full cancellation, now seem increasingly likely. Observers should also watch out for hidden budget increases disguised by pushing elements of the project off-balance-sheet or delaying them until after the core scheme is completed.