For cheap stuff
I wrote last week about the downsides of cheap stuff. I’m not against *all* cheap stuff — just against the kinds of cheap stuff that cause us harm in the long run, like predatory pricing to set up monopolies or “freemium” computer games that end up fleecing you. But several people made a very good point in response: some things really should be free at the point of use. Specifically, public goods and some public services.
Public goods — things like lighthouses, national defence, clean air — by definition have to be free. They are public goods precisely because there is no way to stop people using them, and therefore no way to charge for them. Public goods are seen as a problem in economics, because they tend to be underfunded or not funded at all, unless the state pays for them via taxation.
Public services do not have to be free, but they also suffer from a double-edged underfunding problem. If you make public services, like health, free at the point of use, you almost inevitably have to ration them. If you charge for them, some people will be unable to afford them, which for many public services is morally unacceptable in my view.
The case for public services being free varies from one service to another. For healthcare, the moral case for universal access is overwhelming, while non-price rationing can also be helpful, because healthcare often suffers from market failures that drive up prices (hi there America!). For roads, the case for free access is much weaker. In my view, the right to drive your car onto a busy road is much less fundamental than your right to healthcare, while the lack of a price signal leads to more traffic, which hurts all road users. Most other public services sit somewhere between these two, though with a bias towards free at the point of use (and policing and justice probably have an even stronger case for being free than health).
Although states like to offer free public services, they often underfund them. Even though some public services are politically salient issues, so too is taxation. As the cost of delivering public services rises, making the political case for raising taxes seems to be challenging. This is not an inevitable problem — many states run at much higher tax rates with the UK without any obvious political or economic pain — but it is not a trivial problem either, and it is clearly one the UK suffers with.
The underfunding issue also seems particularly bad for one type of spending in particular: investment. Investment spending has a habit of getting squeezed out in a time of cuts. It is often easier to cut one-off projects that may not have begun yet, and the impact of cutting investment tends to be felt less immediately. The consequences in the long term, though, are often severe: lower productivity in public services; lower economic growth; rising costs; more pressure to raise taxes.
Low investment may also disproportionately affect public goods, which often rely on heavy investments. Things like lighthouses, militaries, environmental improvements tend to be very capital-intensive.
You can tell this is a problem because one of the most common arguments for privately financing investment projects, or privatising whole industries, is that they are then insulated from the whims of future Chancellors. Agreeing a 30-year contract for the private sector to invest in something provides far more certainty than announcing something in a budget — at the cost of more expensive capital and, normally, higher bills for consumers. That is a fairly damning indictment of our political system.
Of course, some of the blame for this can be directed at the UK’s fiscal rules, and the culture of macroeconomic discourse that underpins them. But the problem clearly runs deeper than that, not least through the influence of four- or five-year electoral cycles. As Duncan Weldon said, politicians tend to overestimate their influence in the short term and underestimate their influence in the long term. Unfortunately, it is mostly what happens in the short term — and the long term effects of your predecessors’ actions — that wins or loses elections.
So, if the state tends to underinvest in public services and public goods, what can be done to push against that tendency?
First, try and separate public investment from day-to-day spending as far as possible, whether in the fiscal rules or via a less political mechanism. It is better to invest using the state’s balance sheet wherever possible, given the lower cost of capital, but if it is not possible it is often better to lock in more expensive private investment than to not invest at all.
Second, we should consider charging for some public services. There is a strong case for many public services to be free, but not all. Road pricing is the most obvious example, especially given the hole that will be left by the decline in revenue from fuel duty. Wherever the social harm of charging is limited and the economic case is sound, we should try to be less squeamish about charging for things.
Third, and most predictably, politicians just need to get better at making the case for higher taxes. They can do that in many ways, including by using the state to lower consumer bills (sometimes by tackling the bad cheap stuff). But actually, maybe the case they need to make isn’t so much for higher taxes as for more and better free stuff.
Of course this all takes political courage, and is far easier to write down than to do. But the upshot of doing it — a better-funded, more efficient state — would mean fewer tough political decisions in future. Nothing is ever truly free, but you can always lower the cost if you’re far-sighted enough.
