29 July 2022

What would Britain look like if it was run by benign economists?

By

Congratulations Britain; having swept to power in a bloodless coup, I’ve been appointed dictator for life, free to make policy without the constraints of ‘elections’, ‘a free and fair press’, or indeed ‘sanity’. I’m sure you’re all absolutely thrilled. Luckily for you, it turns out my behaviour is almost exactly that of the benevolent social planner of economics fame. And what I really want to do is make Britain a better, happier place to live.

How am I going to do this? In a word: growth. In four words: growth and allocative efficiency. As a good economist, my plan for Britain is one where people get steadily richer year after year, where pollution, noise, and other ill effects are rendered irrelevant by Coasean bargaining, Pigouvian taxation, and carefully designed markets, and where no one can be made better off without someone else losing out; there’s no waste, and no mutually beneficial exchange foregone.

This is, to be fair, a very strange dream. Most people at this point would be halfway through designing the uniforms for the legions of scantily clad attendants waiting on them at their mansion, and informing their Cayman Islands accountant exactly how they planned to siphon off the nation’s wealth. But economists are very strange people, so here we are.

Britain is very far from a good economist’s vision, however. This is both good and bad news. On the one hand, we’re much poorer than we could be. On the other, there are so many simple, easy steps we could take to make ourselves substantially better off. Some of these policies are politically feasible. Others have about as much chance of coming about as I have of, well, becoming dictator for life. But just because they may not be plausible doesn’t mean it isn’t interesting to set them out. So what would Britain look like if it was run by economists?

Tax

We can start off with the tax system. An economist designing a tax system from scratch would start off with the principles that you design the system around efficiency and ‘sin’; for a given level of state spending and redistribution, you want to minimise the economic distortion created. Otherwise, people are forced into second and third-best choices.

Taxing for efficiency generally means we want to vary tax rates based on how sensitive supply and demand are to changes in prices; if they’re very responsive, a given level of tax has a greater negative effect. We also want to tax economic rents; when a resource generates far more profit in one activity than its next best use, the surplus is ‘rent’. You can tax this with minimal negative effects, because the owner is unlikely to change its use. Taxing for ‘sin’ means charging for externalities – pollution, noise, and other things that spill over and negatively affect other people.

How would we put these principles into action?

Let’s start at a low level. If you’re going to charge tax on consumption goods, we’d prefer to tax things like alcohol and cigarettes where demand is solid and pretty constant. Land should clearly be taxed, as the supply doesn’t really respond to price. The best way to introduce this would be a land value tax; a tax on the unimproved value of land, avoiding any disincentive to improvement. Alongside this, we’d like to abolish stamp duty, which taxes assets when they change hands, introducing a wide array of unhelpful distortions by reducing the incentive to sell.

An even more radical policy would be to replace income taxes with consumption taxes, on the basis that we would tax people when they spend money rather than earn it. This would reduce distortion in saving decisions by avoiding the taxation of investment income until spent. If that’s too far for you, we could stick with the idea of making the top rate of income tax 0%. The intuition is simple: beyond a certain point, people stop earning. You can tax this additional income at 0%, increase the size of the economy, and have no effect on revenue.

One tax we probably wouldn’t charge is fuel duty. It’s useful to tax pollution, but it’s better still to make people pay for road use properly. Every time you get in a car, you add to traffic on the road. This creates congestion, slowing other drivers’ journeys. This cost isn’t internalised by you. Road pricing – charging per mile driven – makes people take this into account, making better use of the scarce space on our roads.

Regulation

Away from tax, a whole suite of regulation would be tossed out. GDPR, the Online Safety Bill, and other bits and pieces that hold back economic growth would get short shrift. Restrictions on mutually beneficial exchange would go overnight; Sunday trading laws, licensing restrictions on the serving of alcohol, and limited hours of operation for pubs, restaurants, and nightclubs. In a perfect theoretical world, neighbours would be able to name their price for the property right to a quiet night’s sleep, levying the fee on the ‘polluter’. In the real world, set fees for disruption might have just about the same effect; we’d end up with a more efficient use of housing as people who happen to like (or at least tolerate) nightlife move in, and those who don’t move out.

Our NHS

The National Health Service would vanish overnight. I’m sorry, but you deserve better. On day one, it would cease to exist. Before you start panicking, the staff would still be there. The hospitals would still be there. So would the ambulance service. What would change is the funding system.

Everyone would be required to purchase health insurance from private insurers, who would be forbidden from declining applications. Government redistribution would ensure that people could afford to purchase their policy, so the system would remain universal. Breaking centralised funding creates greater room for efficient resource allocation to well-run hospitals, putting pressure on bad providers. Competition between insurers drives efficiency gains. Small deductibles provide an incentive to avoid the misuse of services. The net result is not an American-style system, but one resembling those of the Netherlands or Switzerland – hardly dystopian hellscapes.

Freed from the arms of the state, hospitals would be free to spend more efficiently, offloading burdensome administration from doctors and nurses onto specialised bureaucrats. This would make better use of the workforce currently available. At the same time, the restrictions on training places available for would-be doctors and nurses would vanish overnight. When the health system is crying out for more staff, and recruiters are actively looking overseas, it’s simply foolish to deny our own citizens the chance to develop skills we need.

Planning

Bid farewell, too, to our horribly outdated, growth-destroying 1940s planning system, replaced with a presumption of a right to develop. Meet certain basic safety and aesthetic standards within defined areas, and do as you will. Want to build lab space in Cambridge? Go for it. Want to build a vast set of suburbs outside a city where industry is booming? You can.

Letting people live where they want, work where they want, take up the best jobs, build the offices, labs, and factories they need would boost GDP by a ridiculous figure – more than enough to pay off anyone deeply unhappy with the change. Social housing would be a thing of the past; rather than give people city-centre housing, redistribution would simply take the form of cash for those below a certain income. What they do with it is up to them; they can spend it all on rent, or move to a cheaper city and enjoy a better standard of living.

Energy

The dysfunctional energy market would be radically reformed. The system as it stands today is dependent on government decision-making to function, which is about as far away from optimal as it’s possible to be. Barriers to nuclear power generation would be stripped away; these technologies are safe, reliable, and green. Carbon prices, rather than government-driven decisions, would do the work of decarbonising the energy grid, .

This would just be day one, of course. There’s much more to do in the drive to make Britain the world’s richest country. But even a supreme dictator has to take things one step at a time. Colonising Mars will have to wait until at least next week.

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Sam Ashworth-Hayes is an economist and writer.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.