A defence over the government’s action in Scunthorpe

grant-100x100by Grant Fage

Anyone following the crisis in the steel industry can’t help but feel for the workers of Scunthorpe: 1200 people made redundant thus causing great upset and uncertainty for them and their families. The issue clearly has a human cost which many can empathise with as almost everyone knows someone who’s employed in a similar way to those who worked for Tata Steel. The problem is that once the heart strings start to be pulled upon, it can cloud our judgement because we automatically latch on the emotiveness of the human cost and it’s hard not to feel that that cost has to be softened whatever the price. I accept that government has a responsibility to the workers made redundant; what I don’t accept is the case put by those who are arguing for intervention in the steel industry itself. To many it may seem like the easy and obvious thing to do but often situations are a little more subtle and sophisticated than first meets the eye and this can be hard to see particularly when emotions are running high.

The question that I pose is this: what is the cost that has to be incurred in order to protect those jobs at Tata Steel?

A good starting point is to ask what exactly is happening in the steel industry. Much of the answer is that China is producing a lot of steel which when combined with its artificially weak currency, has forced the world price down. Furthermore demand from China for British steel was very high for many years but has since fallen given slowing Chinese growth and a strong pound. All of this obviously puts downward pressure on the demand for British steel.

One very obvious conclusion can be drawn and that is that British steel is not as desirable as it used to be. Sure it may be better quality than Chinese steel and other products, but obviously other countries’ steel and other metals offer better value for money than British steel does.

Many, particularly those in Scunthorpe, seem to be crying out for the government to engage in some sort of subsidy or loan or share purchase: this would be very irresponsible and deserves serious scrutiny.

Whatever method government uses of these three, it does not alter the fact that the demand for British steel has fallen: the price will still be low and this part of the industry will remain unprofitable. Regardless of whether the government throws the kitchen sink at saving those jobs or whether it does nothing at all, it will remain the case that the government has absolutely no control over those factors.

The exact monetary cost of government action is kind of irrelevant, what’s important is the principle of who bears that cost. The government intervening means the government spending money; the money the government has at its disposal is one of only two things: taxes or borrowing. Admittedly both of these can be justified in certain situations however the situation in Scunthorpe is not one of them. What we have is a product that ultimately people don’t want. What this means is that government action would require taking money from the present generation in the form of taxes, or borrowing at the expense of future generations, in order to provide something that people don’t want anymore. When the fax machine became redundant the government didn’t start throwing money at it in order to save the jobs of the people who built fax machines. I accept steel is a bit different because it’s a concentrated community which is affected rather than some people who are scattered all over the country, but the economic point of principle remains the same. If government were to engage in that sort of practice then it may as well pay those steel workers to sit around and do nothing because at the end of the day, people don’t want their product anymore so they may as well be paid not to produce it. Obviously at that point the notion of intervention becomes a load of nonsense because all government would be doing is taxing people and offering nothing in return.

There’s something even more important here though and that is that government intervention sends a pretty bad message to the world of industry, particularly big companies which employ large numbers of people in a particular community. By saving those jobs the government is effectively saying “it does not matter how the company acts, it is too important to the community to be allowed to fail”. That discourages sustainably and it diminishes the incentives for firms to find efficiencies. A very real fear of failure has to be present in order to incentivise firms to be efficient and to act in a way that can last. I believe in a responsible kind of capitalism which benefits consumers, workers, capitalists and the tax-man: clearly this would do little to encourage that.

What then could be the solution? As an economist I’d argue for a different kind of intervention. The case has to be to build a different kind of manufacturing industry in Scunthorpe. That doesn’t mean a government subsidy or even a government backed loan, it means the government creating a business friendly economy with low taxes and minimal red tape. The government can still play a role: notably trying to bolster deals with major international corporations and emerging economies much like the recent deals with the Chinese President and much like what Margaret Thatcher did with getting Nissan to locate to Sunderland. This is a very powerful free-marketering form of intervention which results in a product that people want and that doesn’t burden tax payers with a bill to prop up a failing firm. I think the Conservatives have recognised this but it’s just not politically popular to put it in such blunt terms as I have. The people of Scunthorpe deserve jobs and they deserve them soon however those jobs are best provided by the market so that the community can hold its head high and stand on its own two feet. The Conservatives have got it right: it’s only a matter of time before a major firm sees Scunthorpe’s potential and gives the people and the community back the dignity it deserves.

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