Sunday, 26 April 2015

British house prices are a disgrace.

House price increase since 1980 adjusted for inflation:

Above chart is from here.

I’m not sure that it’s totally accurate because I’ve seen other sets of figures which indicate that house price increases in some other countries are a bit higher than in the UK. But certainly UK house prices are amongst the highest in the world. (The Economist interactive house price index is a useful source of information.)

And the explanation for high UK house prices is simple: reluctance on the part of the authorities to release land for house building, i.e. to allow building to take place on land currently used for agriculture - or which is OSTENSIBLY used for agriculture. I say “ostensibly” because a significant proportion of so called agricultural land is nothing of the sort: thanks to Europe’s crazy agricultural policies, such land is actually not being used at all.

The extent to which that reluctance to permit building contributes to the rise in house prices is easly calculated by looking at the difference between the price of agricultural land and land with building or planning permission.

The price of agricultural land HAS RISEN substantially in the UK in recent decades. But that is completely DWARFED by the price of land with planning permission. According to this article, the price of farmland rose from £54 an acre 60 years go to £6,900 today.

In contrast, the average price of land with planning permission in the UK rose to £4million per hectare in 2008 (roughly £2million per acre). That’s according to this source.

That £4million per hectare DID FALL BACK to £2,400,000 in 2010. Nevertheless, hopefully I have established that the rise in the price of farmland over the decades is near irrelevant. The important point is the PREMIUM that has to be paid to obtain land with permission to build.

As an Institute of Directors publication put it in bold type on its first page, “At the root of high prices and small new houses is the high price of land with planning permission for residential construction.” (Publication title: “Land Supply and the Housing Market”.)

Or as this Policy Exchange work on the subject concluded, “Our planning system set out to predict and provide the housing we need, but as the flaws in the socialist model of provision became obvious it evolved to become a system that constrained development in order to protect the countryside. This has significant costs – we now live in some of the oldest, pokiest and most expensive housing in the developed world.”

As to the actual extent to which artificial restrictions on permission to build contribute to the cost of the average house, this work estimates that those restrictions added £40,000 to the cost when the average house price was £120,000. I.e. a substantial relaxation on those restrictions would cut the cost of the average house by approaching one third.

Let’s provide immigrants with nowhere to live!

One of the barmy elements in all this is the fact that the average Brit adheres to two mutually exclusive ideas on this subject. First the average Brit favours mass immigration (probably because it’s PC to favor immigration, and/or because some nastly little leftie will scream “racist” at you if you aren’t too keen on immigration).

Second, Brits almost invariably oppose housing development in their own neighbourhood. All of which raises the question: where does the average Brit suppose that immigrants are going to live? The Outer Hebrides perhaps?

As the above Policy Exchange work puts it in reference to the question as to why the UK has such severe restrictions on allowing houses to be erected on greenfield sites: “Why has this come about? One answer is that the political alliance to protect the countryside is very strong.  The Campaign to Protect Rural England is one of  the most successful pressure groups in Britain with about 59,000 members.”

Incidentally, I’m not suggesting immigration is necessarily the biggest factor on the DEMAND side of the equation: another important factor is the decline in the number of people per household in the UK over the decades. But immigration is certainly a SIGNIFICANT contributor.

To summarise, Brits need to get something into their thick skulls. If they want mass immigration and fewer people per household, and a garden and assuming Brits don’t want to live in the smallest and most expensive houses in Europe, then more countryside will have to be allocated to house building.

Does the bank system contribute to house price increases?

And finally, a currently popular explanation for recent house price increases is that private banks can create money out of thin air and lend it, for example to mortgagors. Unfortunately there is a very obvious flaw in that argment, namely that we’ve had that bank system for almost two hundred years. Thus there is no reason it should have contributed to house price increases just in RECENT decades. (That system is sometimes called “fractional reserve”).

It may of course be that lending standards HAVE BEEN relaxed in recent decades, and no doubt that would contribute to a rise in house prices. But then WHATEVER bank system you have, and given a relaxation of standards, the effect would probably be the same.

Government and household budgets - cartoon.

(h/t to Andy B.)

Wednesday, 22 April 2015

New law of lending and borrowing.

Least I think it’s new?!?

There has been an argument in recent years between those who adhere to the so called “loanable funds” theory and those who adhere to the endogenous money theory.

The first lot claim that banks intermediate between borrowers and lenders and that one person cannot borrow till another has saved up and loaned money to a bank. In contrast, the endogenous money lot claim that saving is not needed because a bank can simply create money out of then air and lend it out. That is, commercial banks when they see creditworthy potential borrowers can simply open accounts for them and credit them with money (perhaps after having taken collateral off the borrowers, or perhaps not).  

Well now, if an economy is at capacity (aka full employment), then the extra aggregate demand (AD) that stems from creating and spending that new money is just not permissible: else excess inflation ensues, unless savings are increased (which has a deflationary effect). If savings DON’T increase and if market forces don’t raise interst rates and choke off additional borrowing, then the central bank will raise interest rates so as to bring AD back to its “acceptable inflation” level (NAIRU, if you like acronyms).

On the other hand, if the economy is NOT AT capacity, then there is no need for new lending to be constrained by how much is saved.

So the loanable funds lot are right where the economy is at capacity, and the endogenous money lot are right where the economy is NOT AT capacity. So the new law (untill such time as I decide it’s nonsense and withdraw it…:-)) runs as follows.

“Where, or to the extent that an economy is at capacity, lending is constrained by saving. But where or to the extent that an economy is NOT AT capacity, lending is NOT constrained by saving.”

(Incidentally, the latter law occurred to me while taking part in a discussion on this blog about the loanable funds v endogenous money argument. That’s the beauty of blogging: it forces you to THINK!)


P.S. (24th April 2015). Re my above suspicion that the above "law" is not original, it actually looks like Keynes said something similar: i.e. that when it comes to the effect of additional loans on interest rates, there is a difference between where the economy is at capacity and where it is not.

Monday, 20 April 2015

Study “reveals” that the rich have knobbled government.

I like this United Press International article entitled “The US is not a democracy but an oligarchy, study concludes.” The study has apparently been done by folk at Princeton and Northwestern Universities.

The summary of the article reads "The central point that emerges from our research is that economic elites and organized groups representing business interests have substantial independent impacts on US government policy, while mass-based interest groups and average citizens have little or no independent influence.”

Er yes. I suspect most taxi drivers are aware that Jamie Dimon and Lloyd Bankfiend make regular trips to the White House with a view to licking the president’s arse - sorry I meant with a view to discussing paying for election expenses. Any connection between those payments and subsequent bank friendly legislation, and a continuation of “socialism for the rich” are of course entirely coincidental.

I wouldn’t describe the above study as revelatory.

Sunday, 19 April 2015

More rubbish on secular stagnation.

Summers’s original SS idea, was that we’re doomed because there’s been a significant rise in the desire to save and there’s nothing we can do about it because interest rate cuts are the only way of raising demand, and interest rates are currently at or near zero. (More on the latter point here.)

Summers may not have heard of Keynes, but Keynes pointed to the same problem about seventy years ago. Keynes called that the “paradox of thrift”. That’s the fact that saving money reduces demand and raises unemployment. And as Keynes rightly pointed out, the solution is essentially to print more money and spend it till “savings desires” are met (to use MMT parlance).

However, the Financial Times has done us the great service of adding to the nonsense. In this op-ed article the FT claims that the solution to SS is “Investment and productivity have meanwhile disappointed. These factors strengthen the case for the government borrowing to invest. The purpose would be to raise the sustainable growth rate.”

Well there’s certainly a strong case for Keynes’s “print and spend” solution, but why concentrate on “investment”?

Of course “investment” is an EXTREMELY SEXY word. If you run around advocating more investment and you’ll have a HUGE following, even if the investment you propose is completely pointless. Investment involves sacrificing current consumption, and ever since the world began, human beings have adhered to a variety of religions all of which have one thing in common: sacrifices must be made to placate the Gods. God knows (pardon the pun) why that desire to lash oneself with chains like Shiite Muslims on their way to Karbala is so ingrained in the human brain, but it just is.

Anyway, returning to economics, whence the assumption made by the FT, namely that because stimulus is needed, that therefor the stimulus must take the form of more investment? There is only one valid reason for making an investment, and that’s the fact that the investment seems to pay for itself: i.e. it’s a cheaper way of doing something than a more labour intensive method.

And there is very little reason to think that the number of potential investments which meet the latter criterion will hugely expand just because stimulus is needed.

As for the fact that productivity improvements have recently been poor, that poor performance is NOT NECESSARILY down to lack of investment: it could be that the pace of technological change is slowing (or to be more accurate, the pace at which technological change can boost productivity via sundry investments may have slowed).

So how do we determine the truth or otherwise of the latter point? Well it ‘s easy: just carry on making investments where they pay for themselves, and not  where they don’t. To repeat, the fact that stimulus is needed to counter secular stagnation has no bearing on the latter “pay for themselves” point.

But I’m probably wasting my breath. The desire to lash oneself with chains overrides logic.

Saturday, 18 April 2015

Does Adair Turner understand debt?

I’m a fan of Adair Turner (former head of the UK’s Financial Services Authority). But he rather goes off the rails in this article, where he (and co-author Susan Lund) worry about rising levels of debt.

As Turner and Lund point out, just under half the increase in debt worldwide in the last five years or so is attributable to increased NATIONAL debts. The first flaw in that argument is that (as pointed out by Martin Wolf in the Financial Times recently) national debt at low rates of interest is essentially the same thing as money (base money to be exact).

As Wolf put it, “Central-bank money can also be thought of as non-interest-bearing, irredeemable government debt. But 10-year Japanese Government Bonds yield less than 0.5 per cent. So the difference between the two forms of government “debt” is tiny…”. Indeed interest rates on government debt is currently at an all time low (Greece and one or two other countries apart).

Another relevant factor when it comes to the similarity between government debt and money is the TERM of the debt: i.e. the time till maturity. That is, government debt is simply a promise by government to pay the debt holder $X in Y days or Z months time. And if there’s say just one week till maturity, then what’s the difference between $X on the one hand, and on the other, a promise by government to pay you $X in a week’s time? Not much difference!

Indeed, short term government debt is used in lieu of cash in the world’s financial centres.

So when T&L say “Much of this debt accumulation was driven by efforts to support economic growth in the face of deflationary headwinds after the 2008 crisis”, that can be more accurately re-phrased as “It has proved necessary to supply the private sector with a larger money supply in order to keep the private sector spending at a rate that brings full employment”.

And frankly I don’t see much wrong with doing that. If people want to carry around more dollar bills in their wallets (or keep wads of dollar bills under their mattresses), what’s the problem? Let them have the dollar bills they want!

T&L then say “But excessive reliance on debt creates the risk of financial crises, which undermine growth.” Really? Japan has had HUGE levels of government debt for a long time and far as I know, no “financial crises” has resulted from that.

I’m not suggesting that supplying the private sector with a larger than normal stock of money (in the form of government debt or base money) is TOTALLY without risks: it’s always possible the private sector goes wild and tries to spend it all at once which would cause rampant inflation, unless government managed to counter that with some sort of deflationary measures. But it’s better aim for full employment and accept that risk, than have excess unemployment isn't it?

Private debt.

As distinct from government debt, there is PRIVATE debt, and that, as T&L rightly point out has risen substantially. On the other hand, and to repeat, interest rates are at record lows. In fact they’ve been declining steadily for thirty years. Thus debtors can now take on more debt than they used to. So to that extent, there is nothing to worry about.

P.S. (6.30, same day): I should perhaps have answered the question as to what to do if and when interest rates rise on national debts. Answer: don't roll them over. I.e. just print money and pay back creditors. And if that's too inflationary, then raise taxes, i.e. grab that money back from the private sector. Easy.

Friday, 17 April 2015

Make work and the WPA.

An idea which has been around for a VERY LONG TIME, is that it is in theory possible to abolish unemployment by simply having government pay the unemployed to do SOMETHING instead of nothing (well, “nothing” plus a bit of job searching).

Those refusing this sort of work, could be regarded as having turned down work, and could thus perhaps no longer be classified as unemployed. Hey Presto: unemployment vanishes. Well in theory it does!

That sort of idea was implemented big time in the 1930s, for example there was the “Work Project Administration” in the US which built vast numbers of roads, bridges, buildings, etc. And 2,600 years ago Pericles in Ancient Athens did the same: put the unemployed onto public construction projects (according to  “Unemployment in History” by John Garraty, Ch.2, p.13)

I’ll call this idea “Job Guarantee” (JG) because that’s currently a popular label. And one important question to sort out is whether JG should take the form of SPECAILLY SET UP PROJECTS, as was the case with the WPA in the 1930s, or whether such work should be merged with the EXISTING public sector: i.e. should JG employees be allocated to EXISTING public sector employers (schools, the armed services, etc)? I’ll consider whether JG employees should be allocated to existing PRIVATE SECTOR employers below.

In fact there’s a simple flaw with specially set up projects which is that (almost by definition) they involve a odd ratio of different inputs – permanent skilled labour, unskilled labour, materials, and capital equipment.

That is, a typical JG “specially set up” project consists of a relatively large number of recently unemployed people (who tend to be unskilled) working alongside a smaller than usual quantity of skilled labour, capital equipment, etc. And that means inefficiency.

Of course a JG specially set up project CAN INVOLVE a relatively large amount skilled labour, capital equipment etc as was the case with many 1930s WPA construction projects, but in that case, such schemes come to the same thing as a normal or regular employer! In short, specially set up JG schemes are in check mate: either they involve an odd ratio of inputs, or they don’t in which case they amount to a normal employer.

In the UK there is a JG scheme up and running at the moment called the “Work Programme” which allocates subsidised employees to existing employers public and private. So in that that scheme allocates JG people to existing employers, the Work Programme makes sense (not that I’m suggesting the Work Programme is anywhere near perfect.).

Incidentally, some readers may want to raise the objection at this point that public sector employers like schools and hospitals can find work for hoards of unskilled youths is plain unrealistic. That’s true, but private sector JG solves that problem. Speaking of which….

Private sector JG.

A second important question that needs answering in relation to JG is whether JG people should be allocated to PRIVATE SECTOR employers.

A plausible reason for limiting JG to the PUBLIC SECTOR is that no extra DEMAND is needed in order for the output to be produced and consumed: that is, the output is simply given away. Ergo (allegedly) there’s no inflationary threat. 

However, an obvious flaw in that idea is that we’ve seen a HUGE INCREASE in the proportion of GDP allocated to the public sector (aka the “give away” sector) over the last century or two, yet there’s been no corresponding decline in unemployment. So what’s the explanation? Well we need to look in a little detail at what causes inflation (demand pull inflation to be exact).


The cause of inflation.

Inflation rises when employers cannot find enough of the ultimate source of all supply, i.e. labour (skilled labour in particular). And when people get regular jobs they normally cease looking for alternative jobs: i.e. they cease being a source of skilled labour for labour shortage areas (skilled ones in particular).

Thus if employment is at the maximum feasible level (sometimes called NAIRU) and government creates new public sector jobs, that will be inflationary NOT JUST because of the extra spending, BUT ALSO because skilled labour shortages are exacerbated.

So if JG labour is to be allocated to private sector employers, a way must be found to increase demand which DOES NOT increase demand for skilled labour. And JG ought to do that since JG labour is supplied to employers at a subsidised rate (or for free), which in turn means employers will raise the number of unskilled employees they take on relative to the number of skilled employees.

Plus (to repeat) it’s important not to reduce the efforts by JG people to find regular or unsubsidised work when they get JG work. And that can probably be achieved by having pay for JG work about the same as the pay obtainable on unemployment benefit. Indeed the UK’s Work Programme pretty much fulfils that requirement: pay is not spectacular.

Another point in favour of private sector JG is that the “post JG” employment records of those who have done private sector JG is much better than those who do JG jobs in the public sector or charity sector, according to some Swiss research. See here and here.

And a further advantage of private sector JG is that the private sector is better at employing the relatively unskilled than the public sector.


Is JG worth it?

That is, does the output obtained from JG employees exceed the administration costs of JG schemes? The administration costs of the Work Programme have been so high that it’s questionable whether JG schemes are worthwhile. Or maybe it’s the Work Programme as such that is at fault.

One possibility which might have a better cost/benefit ratio is to make JG purely voluntary (as was the case with one Swiss JG scheme): that is not incorporate any sort of Workfare element. By “Workfare element” I mean “do this job else your benefit gets cut”.