Daniel Hannan: What broken windows can teach the Chancellor about mending the economy

8 Jul

Daniel Hannan is a writer and columnist. He was a Conservative MEP from 1999 to 2020, and is now President of the Initiative for Free Trade.

Anyone can spin the spending taps open. It’s screwing them back again that is the problem. Once vast subsidies have gurgled down the plughole, it becomes almost impossible to resist demands for an extra spurt here or there. Sums that were considered colossal in February now seem, next to the hundreds of billions of pounds spent on quantitative easing and the furlough scheme, almost trivial.

Don’t get me wrong. The Coronavirus outbreak was an exceptional event that called for an exceptional response. Almost every small-government type I know acknowledged that there was a one-off case for interventions. The worry is that these interventions will turn out not to be one-offs; that, rather as happened after 1945, the electorate has come to expect a higher level of state intrusion, so the dial won’t return to where it was.

There was a practical and moral case for helping businesses through the lockdown. The practical case was that keeping a firm’s heartbeat going is cheaper, in the long run, than letting it expire and requiring a completely new business to be launched afterwards. The moral case was that the government had a duty to rescue its own victims: if an otherwise profitable enterprise, such as a pub or a theatre, was closed by law, it had a claim to compensation.

So far, so uncontroversial. But what when the restrictions are lifted? Should the state carry on supporting sectors that have been adversely affected? Should it, for example, continue to subsidise pubs or theatres, even when they are allowed to operate again, on grounds that their customers are staying away? What about sandwich shops hit by the shift to working from home – a shift that may be permanent? Or charities hit by a general drop in donations?

What of payouts that are not directly to do with the lockdown? It was striking, for example, that the clamour for more free school meals was far louder than the clamour for schools themselves to reopen in full. Demanding money on someone else’s behalf is always satisfying and, in current circumstances, the demands are hard to resist. When we are spending a hundred billion on the furlough scheme alone, who is going to cavil about £19 million for poor kids?

The dynamics of that decision illustrate, in microcosm, why demands for higher spending end up being granted. Those who called for higher spending were described as brave and principled, their opponents as selfish and stingy.

In fact, there is nothing brave about saying “Listen – hear me out on this, I know it’s controversial – we should do more to feed poor kids”. That position might be justified, but expressing it requires no courage. Indeed, by far the bravest thing I saw during the controversy was a Tweet by the kind and clever Therese Coffey, gently correcting Marcus Rashford’s claim that people might be cut off by water companies for want of means. Therese pointed out that that would be illegal, prompting a pile-on of the nastiest kind from an online mob who did not want facts to interfere with their self-righteous rage.

Few MP want to be accused of being “mean” or “heartless” (to quote the adjectives chosen by Sir Michael Wilshaw, the former head of Ofsted). They know that, however absurdly, they will be judged as if it were their own money they were trying to save, not taxpayers’.

Yet the economic facts remain. Britain’s output is down by more than a quarter. So far, the hit has been taken largely by business but, eventually, it will be felt by everyone: students, public sector workers, pensioners and, not least, those the poet calls “your children yet unborn and unbegot”. I wish it weren’t so. But we can’t defy economic gravity by intoning “Our NHS heroes deserve a pay rise!” or “Supporting the arts is an investment in the future!” or “The government needs to create more green jobs!”

Yes, fiscal loosening is appropriate in the aftermath of an economic catastrophe. Yes, it makes sense to bring forward some spending, especially on infrastructure. But the only way out of this mess is economic growth, and the way to get growth to cut taxes.

Think of it like this. The government can put more cash into circulation by spending more or by taxing less. The argument for the second is that the money will be more wisely directed by individuals on the ground than by civil servants drawing up project criteria. Britain’s immediate priority, as the furlough scheme tapers out, must be to get businesses investing and hiring. That means cutting corporation tax, stamp duty, national insurance and capital gains tax.

Why tax cuts rather than grants? Partly because grants are blunt instruments, expensive to administer and prone to unintended consequences. Mainly, though, because of what the nineteenth-century French economist Frédéric Bastiat called “ce qu’on voit et ce qu’on ne voit pas” – what we see and what we don’t.

Bastiat famously gave the example of broken windows. Replacing a shop window generates lots of activity: the shopkeeper pays six francs to the glazier, who can then spend that sum on new shoes, meaning that the cobbler now has more to spend and so on. Why, then, can’t a country make itself rich by hiring boys to go around smashing panes of glass? Because, Bastiat says, of the unseen costs: the shopkeeper could have invested the six francs on something more productive, the glazier had to turn down another customer to make time to fix the window and so on.

It’s an argument a ten-year-old can understand, yet we seem unable to internalise its logic. When a government takes money out of the economy to spend on, say, green jobs, it is creating unseen costs. We might regard those costs as justified in the name of environmental protection; but they are still costs. Subsidising jobs is no more a route to growth than smashing windows.

Who, though, is prepared to make that case in the current mood? Who will argue for balanced budgets and low taxes? The lockdown may be ending, but I fear our economic woes are just beginning.

Daniel Hannan: What broken windows can teach the Chancellor about mending the economy

8 Jul

Daniel Hannan is a writer and columnist. He was a Conservative MEP from 1999 to 2020, and is now President of the Initiative for Free Trade.

Anyone can spin the spending taps open. It’s screwing them back again that is the problem. Once vast subsidies have gurgled down the plughole, it becomes almost impossible to resist demands for an extra spurt here or there. Sums that were considered colossal in February now seem, next to the hundreds of billions of pounds spent on quantitative easing and the furlough scheme, almost trivial.

Don’t get me wrong. The Coronavirus outbreak was an exceptional event that called for an exceptional response. Almost every small-government type I know acknowledged that there was a one-off case for interventions. The worry is that these interventions will turn out not to be one-offs; that, rather as happened after 1945, the electorate has come to expect a higher level of state intrusion, so the dial won’t return to where it was.

There was a practical and moral case for helping businesses through the lockdown. The practical case was that keeping a firm’s heartbeat going is cheaper, in the long run, than letting it expire and requiring a completely new business to be launched afterwards. The moral case was that the government had a duty to rescue its own victims: if an otherwise profitable enterprise, such as a pub or a theatre, was closed by law, it had a claim to compensation.

So far, so uncontroversial. But what when the restrictions are lifted? Should the state carry on supporting sectors that have been adversely affected? Should it, for example, continue to subsidise pubs or theatres, even when they are allowed to operate again, on grounds that their customers are staying away? What about sandwich shops hit by the shift to working from home – a shift that may be permanent? Or charities hit by a general drop in donations?

What of payouts that are not directly to do with the lockdown? It was striking, for example, that the clamour for more free school meals was far louder than the clamour for schools themselves to reopen in full. Demanding money on someone else’s behalf is always satisfying and, in current circumstances, the demands are hard to resist. When we are spending a hundred billion on the furlough scheme alone, who is going to cavil about £19 million for poor kids?

The dynamics of that decision illustrate, in microcosm, why demands for higher spending end up being granted. Those who called for higher spending were described as brave and principled, their opponents as selfish and stingy.

In fact, there is nothing brave about saying “Listen – hear me out on this, I know it’s controversial – we should do more to feed poor kids”. That position might be justified, but expressing it requires no courage. Indeed, by far the bravest thing I saw during the controversy was a Tweet by the kind and clever Therese Coffey, gently correcting Marcus Rashford’s claim that people might be cut off by water companies for want of means. Therese pointed out that that would be illegal, prompting a pile-on of the nastiest kind from an online mob who did not want facts to interfere with their self-righteous rage.

Few MP want to be accused of being “mean” or “heartless” (to quote the adjectives chosen by Sir Michael Wilshaw, the former head of Ofsted). They know that, however absurdly, they will be judged as if it were their own money they were trying to save, not taxpayers’.

Yet the economic facts remain. Britain’s output is down by more than a quarter. So far, the hit has been taken largely by business but, eventually, it will be felt by everyone: students, public sector workers, pensioners and, not least, those the poet calls “your children yet unborn and unbegot”. I wish it weren’t so. But we can’t defy economic gravity by intoning “Our NHS heroes deserve a pay rise!” or “Supporting the arts is an investment in the future!” or “The government needs to create more green jobs!”

Yes, fiscal loosening is appropriate in the aftermath of an economic catastrophe. Yes, it makes sense to bring forward some spending, especially on infrastructure. But the only way out of this mess is economic growth, and the way to get growth to cut taxes.

Think of it like this. The government can put more cash into circulation by spending more or by taxing less. The argument for the second is that the money will be more wisely directed by individuals on the ground than by civil servants drawing up project criteria. Britain’s immediate priority, as the furlough scheme tapers out, must be to get businesses investing and hiring. That means cutting corporation tax, stamp duty, national insurance and capital gains tax.

Why tax cuts rather than grants? Partly because grants are blunt instruments, expensive to administer and prone to unintended consequences. Mainly, though, because of what the nineteenth-century French economist Frédéric Bastiat called “ce qu’on voit et ce qu’on ne voit pas” – what we see and what we don’t.

Bastiat famously gave the example of broken windows. Replacing a shop window generates lots of activity: the shopkeeper pays six francs to the glazier, who can then spend that sum on new shoes, meaning that the cobbler now has more to spend and so on. Why, then, can’t a country make itself rich by hiring boys to go around smashing panes of glass? Because, Bastiat says, of the unseen costs: the shopkeeper could have invested the six francs on something more productive, the glazier had to turn down another customer to make time to fix the window and so on.

It’s an argument a ten-year-old can understand, yet we seem unable to internalise its logic. When a government takes money out of the economy to spend on, say, green jobs, it is creating unseen costs. We might regard those costs as justified in the name of environmental protection; but they are still costs. Subsidising jobs is no more a route to growth than smashing windows.

Who, though, is prepared to make that case in the current mood? Who will argue for balanced budgets and low taxes? The lockdown may be ending, but I fear our economic woes are just beginning.