Last weekend the Labour Party pledged to re-introduce rent controls in England. Their stated aim is to cap residential rent increases at no more than the inflation rate for three years. Landlords will also be obliged to offer tenants new, longer leases that provide greater certainty than the current system. Labour appears to believe that the rental market has failed and government intervention is required to protect 'Generation Rent.' This is not a new theme for them. They have already announced an energy price freeze addressing the perceived failure of the market to protect the interests of consumers from overly aggressive pricing by energy companies.
Predictably, the Conservatives have criticised the rent control policy on the grounds that it won't work. In their eyes it will serve only to restrict the supply of rental accommodation and drive rents higher. This may be true, but, their response was somewhat half-hearted, perhaps because the Conservatives are not without stain when it comes to intervention when it suits them. They too have cried 'market failure' when it helped justify their plans. Despite their declared faith in free markets, they used the state's balance sheet to subsidise the cost of residential mortgage funding when they launched the ‘Help to Buy’ scheme.
A forgotten narrative
Believers in market forces will be aghast at how politicians, on the left and right, are back in the game of second guessing the market. They may also be surprised at how strangely silent politicians are on the economic arguments against state interference. A once influential body of work by economists including Hayek and Schumpeter argued that meddling with the freedom of markets to set prices and allocate resources would produce less beneficial outcomes for citizens. These arguments encouraged a previous generation of politicians to let go of the economic reins and allow market forces to have a primary role in determining capital allocation and prices.
Over time it became accepted wisdom – even under the (New) Labour Party – that this was the best way to manage the economy. But a hidden cost of the almost universal acceptance of market forces has been that politicians have relinquished the habit of explaining why it is the best way to manage the economy. Somewhere along the way, the narrative in favour of markets has been forgotten.
That has mattered ever since the supremacy of markets was first challenged by the global financial crisis. That seemingly unstoppable panic was ended only by profound government market intervention. Gordon Brown was not so wide of the mark when he claimed to have “saved the world”. His policy of injecting equity capital into the UK banking system led the US administration to change tack with their own Troubled Asset Relief Program (TARP). Instead of using public money to buy bad assets from the banks, they elected to inject fresh equity into the US banking system. When every bank had taken TARP – whether they wanted it or not – confidence returned to the financial markets. Government action had saved the day.
Far from normal
At the time, these crisis measures were anticipated to be a one-off, but today there continues to be a high level of political interference globally. The intrusions into energy, housing, and rental markets are significant, but the most ‘extra’-ordinary intervention of them all is within asset markets. Governments continue to inject enormous quantities of newly created money into the asset markets through their central banks, almost all of which are arms of the state.
These interventions have unquestionably supported asset prices in recent years, and there are few signs of these policies ending soon. Indeed, it may be fair to say the markets have come to see money printing as the normal state of affairs. In truth, it is far from normal for governments to intervene in this manner. It will be interesting to see how the politicians and the central bankers relieve themselves of the additional responsibility they have taken on of managing the markets. For now, no-one seems especially keen on this coming to an end.
So, hands up for governments getting out of the markets and the restoration of untrammelled market forces? — What, no hands?
Bill McQuaker, Henderson Global Investors
