Over the last week economic wisdom has been shoved aside twice.
First HMG introduced the mandatory National Living Wage (NLW), forcing employers to pay workers aged 25 or older at least £7.20 an hour.
This is folly any way you look at it. In purely practical terms, small businesses in particular will come under downward pressure on their profits.
Logic suggests they have three ways of dealing with it. One, they grin and bear it. Two, they reduce their staffs. Three, they pass the higher overhead cost on to the consumer.
Option One presumes so much on human goodness that it can be discounted. As Adam Smith put it, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-love…”
Option Two is more realistic: when the state makes employers pay more, they hire less. Hence a hike in unemployment, and a swelling of the welfare rolls.
The Office for Budget Responsibility warns that 60,000 jobs could go as a result of NLW. That’s a high price to pay for a publicity stunt designed to show that the Tories share and care – but hey, politicking always comes first.
Option Three is another possibility, nay certainty. Yet any economic primer will tell you that modern economy is driven by the consumer. Hence whatever hurts the consumer hurts the economy, which more or less means everybody – including those who have been granted an extra 50p an hour.
However, it’s not such practical consequences that’ll cause by far the greatest damage. This will come from yet another demonstration of the state’s power to ride roughshod over the market.
Edmund Burke warned against this more than two centuries ago: “The moment that government appears at market, the principles of the market will be subverted.”
That a nation’s prosperity is inversely proportionate to the state’s interference with the economy has been theoretically postulated and empirically proven everywhere in the world. Yet most things our government does, including the NLW, fly in the face of both wisdom and experience.
The other worrying development is the trade war breaking out over a global steel glut.
It’s obvious that a country like China, where workers are paid a fraction of what ours get, can produce steel at a fraction of our cost. It can then dump its steel on the market, jeopardising the very existence of a European steel industry.
The EU response, and the somewhat more ambivalent reaction of the nation that gave the world Adam Smith and Edmund Burke, is to slap tariffs of up to 66 per cent on Chinese steel imports. However, as has been known at least since the days of another British thinker, David Ricardo, tariffs beget counter-tariffs.
And indeed the Chinese have retaliated by slapping punitive tariffs of 46 per cent on high-tech steel produced in the EU and Britain, specifically Wales.
This has given rise to debates unheard since the time Margaret Thatcher put paid to the British coal industry in 1985. Protectionism vs. free market is the theme.
Adam Smith, whose judgement in such matters wasn’t clouded by the urgent need to win focus-group approval, was unequivocal on the subject: “To give the monopoly of the home-market to the produce of domestic industry… must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be bought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful.”
Protectionism hurts the economy in many different ways, with one being the most salient. It drives the price of the protected commodity up, thereby hurting the consumer who’ll have to bear the higher cost of everything made out of this commodity, in this case steel.
To put this into crude terms, a consumer may be forced to shell out an extra £1,000 for a car just because our steel industry is protected by punitive tariffs. That same £1,000 could otherwise be spent on the products of our high-tech industry that’s doing well and employing a lot of people.
To put this into even cruder terms, we need a sound economy more than we need a domestic steel industry. If there’s a conflict between the two, some hard thinking must be done, something of which our government is manifestly incapable.
This must include things other than just traditional economic wisdom. For example, we must consider the strategic aspects of domestic steel production, which may trump the purely economic aspects. Also the need to retrain steel workers likely to lose their jobs must be brought into the equation.
The only thing that ought to be ignored is the only thing that won’t be: short-term political expediency.
P.S. I’d be shocked by a reader’s response to my yesterday’s posting if I weren’t laughing so hard: Your blog reminded me of the song the paramedics sang while putting the princess and her lover into body bags: “Zippedy Dodi, Zippedy Di!”