Wednesday, 25 September 2013

Rent Prices & Social Care; Too Much Restriction?

On BBC's Question Time last Thursday we had a first time panellist (I think it was her first time) - The New Statesman columnist Laurie Penny - whose contribution in most cases demonstrated a half-witted misunderstanding of the topic under consideration, and whose answer in most cases was just about as wrong as you can be. Laurie Penny seems a good candidate to join the likes of Johann Hari, Owen Jones, Medhi Hasan, Salma Yaqoob, Francis Beckett and Polly Toynbee, as part of a group of continually irrational, misinformed and poorly reasoned social commentators who make me want to throw things at the TV when they're on there pontificating.

Her opening statement - that rent control is the answer to the housing shortage - is the focus of my attention here, as it's close to another issue of mine (social care), as well as being the opposite of the truth. Rent control actually does the reverse of the remedy required; it creates scarcity of supply and it exacerbates housing market shortages.

So, what does that have to do with social care? It's another one of those issues where things are going wrong, thanks to the successive governments' inability to address the situation properly. Suppose someone has a family member who is paying thousands of pounds a month for social care, which is happening throughout the country. For many people this amounts to extortionate rates where the person’s life savings are being swallowed up to go into the hands of private care firms. The right question, then, is; are the profits the care homes are making excessive? The other right question is, if they are excessive to the point that other alternatives are preferable, why are elderly people not freer to employ whom they want to care for them (say, 2 family members or friends that need the work)?

One of the golden rules of economics is that if a company is earning excess profits this should create an opportunity for potential competitors to enter the market and charge less while still making a profit. When this occurs in a free market, competition drives prices down to the level of the costs of the most efficient supplier (where costs include the cost of capital). So if a business can sustain these "excess profits" then something must be preventing other suppliers from competing within the care market.

Just like rent controls, imposing a price control will do no good, because if the government does impose a price cap, the cap will almost certainly be too low (a cap too high would have no effect, because to be too high it must exceed current prices, otherwise no one would notice as current prices would be under the cap). By imposing a price cap that will inevitably be too low, the government will only succeed in reducing supply, and thereby harm consumers of care services.

There is a shortage of cheap housing for the same reason that there is a shortage of cheap social care - government restrictions. In the case of housing, the shortage occurs because the government specifies rigid building standards, restricts the use of land, and subsidises mortgage borrowing (all these policies push up the cost of housing and create a scarcity of suppliers). Some people do argue that these restrictive policies are a good idea, and some (like me) argue that they're too bureaucratic and too much of an infringement on the free market. Opinions vary, and that's fine - but those who adopt the view that these restrictive policies are a good idea should not then complain that there is a shortage of cheap housing and a scarcity of suppliers, because the shortage and the scarcity are consequences of the restrictions.

Clearly as there’s a shortage of cheap care homes it would seem that something is preventing competition, as there appears to be a block in care industry with excessive regulations. This is what the government needs to address in order to allow competition to flow. That said, for a balanced analysis, it's worth pointing out that care home running costs aren't all that cheap for the providers; as well as the standard carer costs covering 24 hours shifts, there'll be costs for management and supervisory staff, staff to administer medicine, laundry and cleaning staff, cooking staff, and building maintenance (to name but a few).

So while I'm sure profits are being made, and government restrictions don't help the social care market - a few thousand pounds per month is deemed by some as a pretty reasonable and necessary price, given that the home needs all those staff and services, and has such expenditure.  But that's to miss the main point; it's fine if you're willing, but if you're not then your alternative options are seemingly being restricted too much by the heavy legislative measures imposed upon the system by the government.

Here's how the free market works ordinarily for consumers of goods and services. If any particular supplier seems too expensive, we look to switch to other suppliers. If all suppliers seem expensive, then either entry into the industry is blocked by regulatory constraints, or if it isn't blocked then the activity probably just has an expense to justify such prices. Clearly this isn't the case with providers of social care, because the barriers that deter (being handed a lawsuit for malpractice, incurring capital costs that necessitate such steep charges) would not apply in a situation in which an elderly relative needs a couple of carers, and there being 2 willing family members ready to care for her, and badly needing the money (with her badly wanting the money to go to them rather than into the hands of excessive care firms).

That this can’t happen, and that elderly people are held captive in this way, gives indication that important alternatives (competition to drive down prices, or relatives or friends willing and able to take on the role) are being suffocated – and suffocation in the free market is seldom a healthy thing.

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