Theresa May and Jeremy Corbyn have unveiled major policy initiatives this week, including an energy cap and a rise in the minimum wage. Could they both fall victim to the Law of Unintended Consequences?
Here’s a simple question for a Friday morning: what do Theresa May and Jeremy Corbyn have in common with rats and cobras?
It’s all to do with the Law of Unintended Consequences.
During the colonial rule in India, the British authorities were concerned about the number of venomous cobra in Delhi. The governor hit on a brilliant plan and started paying a bounty for every dead cobra handed in. Initially, the plan worked well – but then private enterprise reared its venomous head and people began to breed cobras. As soon as the governor became aware of this he naturally stopped the reward scheme. Result? Everyone set their now-worthless snakes free, sending Delhi’s cobra population way beyond what it had been before the bounty was introduced – leading to ‘the Cobra Effect:’ when the attempted solution to a problem makes the problem worse.
Well, clearly the French authorities in Hanoi had not been paying attention. The problem? Too many rats. The solution? A bounty paid for every rat’s tail handed in. The inevitable result? An explosion in Vietnamese rat breeders. The bounty stops, the rats are released back into the city in record numbers…
Our politicians might be making the same mistake
So what does all this have to do with our Prime Minister and the leader of Her Majesty’s Opposition?
Simply this: in the General Election campaign both of them have proposed policies which could very easily have exactly the opposite effect to that which they intend.
So ladies first, and Theresa May’s proposed cap on energy prices. According to a survey for Compare the Market, this is number one on consumers’ ‘personal finance wishlist’ ahead of the General Election. Apparently, it finished ahead of an increase in personal tax allowances and more state support for long-term care costs. Clearly, the focus groups reported back to Conservative HQ and there was our Prime Minister espousing a policy which sounded remarkably similar to the ‘freeze’ proposed by Labour leader Ed Miliband at the last election.
Why was Theresa May so keen to promote an energy cap? Because she thought it would help those people at the top of her priority list: the JAMs – people who are ‘just about managing.’
Reaction to the energy cap
The idea was rapidly savaged – and not just by the Tory press, who were not hugely impressed by their champion borrowing an idea from ‘Red Ed.’
More dispassionate commentators pointed out that an energy cap would actually push up prices. In fact, this is already happening, with the idea of capping energy prices first being floated in October last year – since when the price of the cheapest energy deals has risen sharply. One provider, SSE, raised its cheapest gas and electricity tariff by 40% between October 2016 and May 2017: for someone on average household usage, this meant a rise from £782 a year to £1,072 a year.
With a cap in place – or even suggested – the energy companies will simply narrow the gap between their best deals and their standard tariffs: if they can, they will also look to increase the standard tariff before any cap comes into force. We wrote about the energy price hikes in March: nothing in that article has changed.
A cap on energy prices also removes competition between the companies and means there is little point in customers ‘shopping around’ for the best deals – which the government was previous trying to encourage.
Far from helping those who ‘just about managing’ an energy cap will have exactly the opposite effect. The only way for the JAMs to save money would be to turn the heating down – and presumably, move from ‘just about managing’ as ‘just about freezing.’
The minimum wage
Meanwhile, over at Labour HQ, the election manifesto has been leaked to the press.
The manifesto contains a pledge to raise the minimum wage to £10 an hour by 2020 and to extend that rate to all workers aged 18 to 25, with the exception of those on the apprentice rate. At the moment the minimum wage (recently re-branded as the ‘living wage’) is £7.50 per hour for those aged over 25: if you are 21 to 24 it is £7.05 and for those aged 18-20 it is £5.60 an hour.
Clearly, this is a policy designed to help the lower paid: as a Labour spokesman said,
“The increase is in line with forecasts of the wage needed to maintain a decent standard of living by 2020 and put an end to poverty pay.”
Who could disagree with that? The policy would see full-time employees better off by more than £2,500 a year while 21-24-year-olds on low wages could be in line for a £4,500 pay rise. In total, around 5.6m workers would see their pay go up, with the move being especially beneficial to traditionally low paid regions such as Northern Ireland, the East Midlands and the North East.
The government must agree with the principle, if not the amounts: when he was Chancellor, George Osborne gave a commitment that the minimum wage would reach £9 an hour by 2020.
The IFS pour cold water on the idea
But then along comes the Institute for Fiscal Studies warning that higher wages for lower paid workers would be paid for with reduced profits, lower investment and higher prices. Most crucially, “there must also be a point beyond which higher minimum wages have substantial impacts on employment.” Put simply, there comes a point at which employers can no longer afford to employ some of their staff.
Let me give you a personal example. I have an 18-year-old son, who – when he is not doing his A-levels – works two nights a week as a waiter in a hotel. He is paid £5.60 an hour (the current minimum wage) plus a share of the tips. He has a great relationship with the owners of the hotel: it has been an ideal first job. But they have already told him that there is “no way” they could afford to pay him £10 an hour. Far from getting a hefty pay rise, he would lose his job. The result, for him and thousands of other teenagers? Being forced to rely on their parents, or needing money from the government, which in turn would be forced to expand a scheme like the Educational Maintenance Allowance in order to keep 18-year-olds in education or training and off the unemployment figures.
Once again, the Law of Unintended Consequences applies a scheme designed to help the lower paid could end up doing exactly the opposite.
But take heart: it’s not just our elected rulers and British colonial governors that get it wrong. In 2003 singer Barbra Streisand unsuccessfully sued Pictopia for publishing a picture of her home online. Before the lawsuit – obviously intended to protect her privacy – only six people had downloaded the picture, and two of those were Streisand’s attorneys. Thanks to the lawsuit and the attendant publicity, 420,000 people subsequently downloaded the picture. Ah well, at least she got the Streisand Effect named after her…