Why the most regulated parts of Britain's economy are the least affordable

Last week, I posted a chart showing UK prices splitting cleanly in two since 2000. It attracted more disagreement than anything I have written this year. I thought I should write up a more complete explanation.

Since 2000, the prices of cameras, computers and televisions in Britain have fallen by 94%, 93% and 80%. Over the same period, electricity is up 425%, house prices 218%, childcare 193% and rail fares 143%. Inflation over the whole stretch was 80%. Wages, 86%.

I posted that chart last week and argued the dividing line was regulation: where markets compete, prices fall; where the state sets the rules, they run away.

Over thirty comments later, I have been told the chart is misleading, the causality is backwards, and that I am comparing globally shipped electronics with services that are naturally local monopolies. These are serious objections from serious people, and some of them are partly right. So let me make the argument properly.

The objection worth taking seriously

The strongest criticism runs like this: nearly nothing that got cheaper is made in Britain. Cameras, computers and TVs fell in price because of China, the WTO and forty years of manufacturing productivity gains, not because Whitehall left them alone. The things that got dearer are produced here, by people, and services delivered by people tend to rise in price as wages rise. Economists call this Baumol's cost disease. On this reading my chart simply shows tradeable goods versus domestic services, and regulation is a bystander.

WikipediaBaumol effectIn economics, the Baumol effect, or Baumol's cost disease, is the tendency for wages in jobs that have experienced little or no increase in labour productivity to rise in response to rising wages in other jobs that have experienced high productivity growth.

This is partly true, and I should say so plainly. Nobody in Westminster deserves credit for the collapsing price of a laptop. If the chart claimed otherwise, it would indeed be misleading.

But the argument proves too much, because Britain produces domestic services that behaved like the green lines, not the red ones. Communication – broadband, mobile, telephony – is delivered here, by British workers, over infrastructure dug into British soil. It is up just 33% since 2000, less than half the rate of inflation, while the service itself improved beyond recognition. Air travel, another labour-intensive service delivered by people paid in pounds, fell in real terms after Europe liberalised the market in the 1990s.

BBC NewsOfcom tells BT to open up cable network to rivalsCommunications watchdog Ofcom has said BT must open up its cable network, allowing competition to improve internet connection for homes and businesses.

Baumol's cost disease did not spare telecoms and aviation out of kindness. They were spared because regulators forced competition into them: Ofcom compelled BT to open its network to rivals, and open-skies rules let anyone with an aircraft challenge the flag carriers.

So the dividing line is not imported versus home-grown. It is contested versus administered.

The test that settles it

If Baumol and China explained everything, every rich country would show the same picture, because every rich country imports its electronics and pays its nurses and nursery staff domestically. They do not show the same picture. Britain is an outlier, and it is an outlier in precisely the sectors where British policy is most distinctive.

Start with electricity, my chart's top riser at +425%. In 2023 the UK had the highest industrial electricity prices of the 24 countries reporting to the International Energy Agency: roughly 50% above France and Germany, four times the United States.

Here is the detail that matters: our industrial gas prices sit below the IEA median. The fuel is not the problem. The difference is policy. Renewables obligations, feed-in tariffs and the climate change levy account for around a tenth of industrial bills, subsidy schemes cost over £10bn a year, and unlike Germany or the Netherlands, Britain loads every one of those policy costs onto the bill rather than general taxation. I am not arguing here about whether decarbonisation is worth it. I am observing that the price of electricity in Britain was chosen, line item by line item, and it is strange to look at the result and blame the market.

Childcare, +193%, tells the same story. Britain spends more public money on childcare as a share of GDP than most of the OECD, and parents still face among the highest out-of-pocket costs in the developed world. The Institute for Fiscal Studies, hardly a free-market pressure group, finds England remains an expensive outlier even after correcting for the measurement problems in international comparisons.

Why? England requires one adult for every three children under two and one for every four two-year-olds. Ireland and Germany allow six; France, eight; Denmark and Sweden set no national ratio at all. Every extra pair of mandated hands is a cost that lands on parents. German parents are not braver than British ones. Their state simply prices the trade-off differently.

House prices, +218%, are the clearest case of all, because here the mechanism has been measured. Hilber and Vermeulen, in the Economic Journal, found that if the South East had merely matched the planning restrictiveness of the North East – itself tightly regulated by world standards – house prices there would have been roughly 30% lower by 2015.

Over the past four decades real house prices have risen faster in Britain than in any other OECD country. Real incomes have not. A planning system that refuses permission is not a market failing. It is a market being forbidden.

Which way does the causality run?

The wittiest objection I received: markets that are messed up attract regulation, so blaming regulation for high prices is like asking why all the bad neighbourhoods are full of police. Fair. Natural monopolies and safety-critical services get regulated for good reasons, and I am not arguing for unregulated nurseries or a free market in grid connections.

But the police analogy answers the wrong question. The question is not why these sectors are regulated. Every rich country regulates them. The question is why British outcomes are so much worse than in countries regulating the very same sectors.

France regulates electricity; French industry pays a third less for it. Germany regulates childcare; German parents pay a fraction of what British parents pay. The variable is not whether the state is present but what kind of regulation it writes.

Regulation that polices conduct and forces incumbents to face entrants – telecoms is the proof – is compatible with falling prices. Regulation that restricts supply, whether of nursery places, housing plots or dispatchable power, is not. Britain has arguably specialised in the second kind.

The privatisation point deserves the same treatment. Yes, rail and the grid were privatised, and right-to-buy shrank the council stock. But privatisation without contestability just changes who owns the administered price. Rail fares are set by formula, strike prices are set by auction design, and the supply of homes is set by planning committees. Private ownership of a state-designed market is not competition. It may well be the worst of both worlds.

Why I keep banging on about this

For thirty-five years my job has been to ask what a price is telling me. The prices in that chart are telling us something uncomfortable: the sectors where Britain has chosen administration over contest are precisely the ones eating household budgets, and their costs cascade into everything else.

Expensive electricity is a tax on every factory. Expensive childcare is a tax on every working parent. Expensive housing is a tax on every young worker and, through wages, on every employer.

I believe the instinct to answer unaffordability with another layer of rules is the instinct that got us here, and the evidence from our own telecoms market suggests the alternative is not deregulation but regulation that lets someone new have a go. Whether any government has the appetite for that is another matter.

On current form, I suspect not.