The housing crisis has a simple solution: build, baby, build

Over at the IB Times I've written about the government's housing targets (not worth the paper they're written on, basically), and why we want to concrete over the green belt – well, at least some of it:

By freeing up green belt land the supply of housing could grow enough to let prices fall considerably. All of this would actually require very little green belt land to be built on – less than 1.5% of it would give us the space we'd need to build an extra 1.4 million new homes. We could build one million homes around London on just 3.7% of the capital's green belt.

Could the private sector do it? It already has – during the 1930s housing boom, private construction rose from 133,000 houses per year in 1934-45 to 279,000, in just one year – and these houses were affordable. If you come, they will built it.

The cost of extra infrastructure could be more than covered by capturing "planning gain", with the government buying green belt land, reclassifying it and selling it at the market rate to the private sector, keeping the gains for itself.

Trimming the edges of the green belt would suffice, but I'd like to go further. Much of the countryside is worth protecting, but much of the green belt itself is not. It doesn't provide amenity to anyone who doesn't live there already, it's bad for the environment, and it makes housing cripplingly expensive.

Read the whole thing. I've tried to make it as comprehensive as possible, as a useful 'cut out and keep' piece to send to people who haven't thought about how easily we could solve the housing crisis.

At last, now we know what's too expensive for renewable energy

An interesting article in The Guardian insisting that the Swansea tidal barrage should be junked. Not that they quite put it that way but that is what their argument means. What they're actually saying, these Green glitterati, is that the Hinkley C reactor should not go ahead:

So how do the operators, the French company EDF, expect Hinkley C – even if it can be built – to be economically viable? By extracting from the government a price guarantee of £92.50 per megawatt hour for the electricity it produces, index-linked for 35 years.

This is simply astronomical. It is more than twice the current wholesale price of electricity, and more than the government is now paying for solar power, whose costs are expected to fall greatly during the lifetime of the nuclear plant. Against current prices, the government’s guarantee represents a subsidy of over £1 billion a year.

OK, let's accept that that is too expensive. And that the usual argument, that prototypes always cost more doesn't really work here:

EDF argues that, as it learns from experience elsewhere, the cost of construction will come down. But the problem with the design is that these plants have to be built almost entirely on site, so each power station is, in effect, a one-off. The costs of technology fall when modular construction is possible: turning out identical units in a factory.

Fine, let us, as usual, accept their arguments at face value and then consider the implications of this. For example, Swansea:

Mandarins from the Department of Energy and Climate Change (DECC) and the Treasury are poring over the details before deciding whether it should be funded though a ‘contract for difference’ scheme.

The cost of lagoon power – a predicted £168 per MW/hour – is considerably higher than for offshore wind, or the £92.50 for nuclear.

If £92.50 is too high then £168 is definitely too high, isn't it? Thus, based upon the impeccable logic presented to us by Mssrs. Lynas, Monbiot and Goodall, the Swansea Barrage scheme is a dead duck, isn't it?

We look forward to these fine gentlemen making their opposition clear in due course. For, as they say:

Yes, we are still pro-renewables. But not at any price.

Putting the brakes on railway nationalisation

The new Labour Party leader Jeremy Corbyn wants to re-nationalise the railways? It is a political totem for the Left, of course. But is there an economic case too? The main economic argument made for nationalisation is that private providers have to make a profit, so a private service is necessarily more expensive. But this is untrue. Where there is competition, the need to make a profit is what drives improvement by pushing private providers to deliver better services cheaper. If they do not keep improving, they will lose business their competitors. In the case of rail, that means other companies who would be delighted to win franchises off them.

Remember too that investing in a service that has to keep improving in order to keep its customers is expensive. Investors quite reasonably expect a profit in return for giving up and risking their capital in such an enterprise. If the government did not generate the same profit, it would, in reality, be subsidising the industry – at taxpayers' expense. So there really is little or no 'saving' to be made.

Another argument is that a nation-wide service would reap economies of scale. But remember that there are diseconomies of scale too: large state industries are notoriously hard to manage. And any supposed economies would soon be eclipsed by inefficiencies when there are no competitors to keep the provider on its toes.

The old British Rail, of course, did not make profits at all; indeed, it made a large annual loss. It was inefficient and vastly overstaffed, and yet survived. As with other nationalised industries, the problem was that decisions were made politically.

In the first place, a nationalised industry has to compete for investment with other government departments and services. Spending decisions owe more to the political necessities of the moment (like elections) than long-term investment strategy. Second, politicians fear that cutting staff costs causes them political problems, while cuts in capital investment are barely noticed: the service just gets slowly less reliable. Third, the lack of competition in a nationalised service gives huge strike-threat power to the staff yet leaves service users with no power take their custom elsewhere. And the lack of competition means that there is no pressure to change, to adapt to customer needs, stay up to date, modernise and cut costs.

Even where, for practical reasons, competition is limited (as in railways), the public is better served by an independent regulator scrutinising private providers than a nationalised industry responsible only to ministers and Parliament. The independent regulator can fearlessly point out when things are not up to standard. The minister, being responsible for the provision of the service, will never admit to failures. And independent regulators can become highly expert on every aspect of the sector they regulate – transient ministers with many other responsibilities cannot.

Competition, of course, is the best regulator, and much can be done to improve competition in most industries that have been privatised, including railways. Competition opens each and every part of the service provision up to scrutiny – and potential replacement – by others.

Prior to 1992, just a couple of years before the rail industry was privatised, British Rail did not even bother to keep punctuality figures. Is there a more eloquent statement of the dismal nature of nationalisation?

Better information makes drugs markets work better: so why not legalise them to make them work even better?

Over at Quartz there's a fascinating piece where the economist meets the pot dealer. And the two discuss how the dark net, the use of Tor and illicit drugs markets on it, improve the markets for drugs. Now, of course, it's entirely possible to insist that drugs are fer' the devil and we should simply stamp it all out. And given that no human society yet has managed to do that that's probably not going to be successful. That idea also doesn't address our own belief that consenting adults should be allowed to ingest what consenting adults wish to ingest: it is, after all, their own body doing the ownership and we're all pretty sure these days that no one, not even the state, owns the body of a consenting adult other than that consenting adult. Given those two, it is therefore interesting to see what happens when dealers need to stand by their product and reputation is important:

The root cause of this market inefficiency is information asymmetry. You don’t know how good an illegal drug is until you consume it, and you can’t turn to the law to enforce agreements, return a substandard product, or complain to your dealer if he tries to rob you. That prevents price discovery and risk compensation, key features of a well-functioning market.

What makes the dark web a game-changer is that it has those features. Suppliers have detailed reviews on their product, the market is competitive, and people can shop around easily. Aspiring sellers struggle to get a foothold without a history of good reviews; sometimes they offer special deals and an easy exchange policy in return for good reviews. And the markets are global, so it’s possible to see prices in other countries. All this produces a well-behaved price distribution like the one you’d find in any functional, legal market.

Assuming that those are all features that we'd like to have where consenting adults do as consenting adults do, that's a good argument for the legalisation, not just the decriminalisation, of drugs. For while these illegal markets do work by reputation, just as brands do for many consumer items (and in exactly the same manner too) it is of course better to have such promises baked up by the usual resources of the civil law.

as above, some part of the opposition to the taking of drugs is simply this idea that people shouldn't. Which is a projection of personal desires onto the lives of other which we do not think has a part of a liberal society. Once that is over come then we want the provision of whatever it is to be as efficient and simple, with the greatest consumer protections, as possible. And given the way that these illegal markets are developing, we can see how they would continue to develop if legal. Towards being markets much like those for toothpaste and canned soup. Reliant upon reputation, delivery, quality, rather than who has the most and most violent thugs to control a particular territory.

We find it difficult to imagine why anyone would be against such beneficial developments quite frankly.

New ASI Paper: "Utility Gains: Assessing the Record of Britain’s Privatized Utilities"

A new Adam Smith Institute paper, “Utility Gains: Assessing the Record of Britain’s Privatized Utilities” assesses the various utility sales of telecoms, gas, water and electricity companies during the 1980's and 1990's and looks at how government, shareholders and customers fared since the privatisation process. The paper argues that the following benefits occurred for each stakeholder:

For the government – various general benefits accrued, such as a pronounced surge in investment. It benefited financially, both from one-off sales proceeds and from ongoing sizeable Corporation Tax receipts.

For shareholders, like pension funds, have generally done very well, with many privatizations – particularly the 12 RECs – heavily outperforming the FTSE 100. Privatized water stocks, too, have powered ahead. There are a few notable exceptions to this, such as Railtrack, British Energy and British Telecom.

For utility customers the financial benefits have been less tangible – in a period of massively rising wholesale prices there has been little to pass on. But investment has been much higher and much-needed improvements in customer service have been developed. Telecoms prices have actually fallen materially, while domestic gas, water and electricity prices have all risen sharply in real terms. However, domestic energy prices have risen mainly due to much higher wholesale gas costs – not because of private sector ownership.

The paper finds investment in utilities is now much higher than before privatization, especially in the electricity distribution and water sectors. In the latter case, substantial real price increases have helped finance this investment which had been woefully inadequate prior to privatization in 1989. Over the 25-year period, roughly £110 billion has been invested in the water sector, with the overwhelming majority of this sum being spent by the ten privatized water companies. Currently, over £4 billion per year is being invested.

The paper argues that the privatisation of utilities also created an innovation spike, specifically in the telecoms sector. Privatising British Telecom in 1984, it argues, created a new industry as the staid former Post Office subsidiary started to participate in an international marketplace, in which mobile telephony was developing at a rapid pace. Within a few years, Vodafone had become the pioneer of mobile telephony to such an extent that, by 1999, it had become the fourth most valuable company in history within just two decades of its founding. Had British Telecom remained state-owned, it is probable that the broadband rollout would have been delayed even further.

Click here to read the full press release.

For further comments or to arrange an interview, contact Head of Communications Kate Andrews: kate@old.adamsmith.org | 07584 778207.

Misunderstanding why people tutor their children

The latest horror to assail our civilisation is apparently the idea that parents might hire tutors for their children. No doubt it's the upper middle classes deploying their superior financial resources to make sure that their own special little snowflakes get ahead in the race to grasp the great big brass ring that status and position offer in our society.

In those circumstances, it matters that an ethnic divide is opening up.

Quite right: if those with an enhanced melanin content are being held back by the privileges going to the melanin deficient then this is indeed something we should act upon. Do something about even. Perhaps we should ban private tutorials? Or possibly even reform the education system itself so that none is needed?

We would go with that second option ourselves: all taxpayers cough up for the current publicly funded education system so, yes, all should benefit from the best it has to offer. Except there's one little wrinkle to this:

From the age of 11, as many as 22% of UK children are seeing tutors. But there is a big gap between, on the one hand white children (20%) and, on the other, black children (47%) and Chinese children (48%).

It is not those pinkish hued upper middle classes who are giving their snowflakes a leg up. Given the population distribution in the country, with ethnic minorities largely concentrated into the inner cities, it's actually the people suffering under the yoke of the inner city school systems that are attempting to make up for the deficiencies of those inner city school systems.

The answer thus is not to ban private tutoring but to set off more than a few rockets under those running the inner city school systems.

Although we agree, that's always an unlikely conclusion to a Guardian article....

Getting the effect of cash entirely wrong

An amusing proof that it's possible to start from an interesting place and then fall over into complete nonsense. The point at issue being that the amount of cash floating around the British economy has increased in recent years. OK, well, why, and what, if anything, might we want to do about it?

The chief cashier of the Bank of England says that only about a quarter of the cash they put into circulation is used to buy and sell things. The rest of it is either shipped overseas – which we will put to one side for the moment – kept outside of the banking system ie (hoarded), or used to support the shadow economy (iestashed). In other words, not in circulation at all but stuffed under mattresses.

If you look at the trend growth of that cash “in circulation” over the last few years, it has accelerated past GDP growth as well as past the amount of money being taken out of ATM machines. And we also know that the use of cash in retailing has continued to fall steadily. That means the “cash gap”, between the small amount of cash that is used to support the needs of commerce and the large amounts of cash that are used for other purposes, has been growing. The interesting question is: why?

There are two pretty simple alternatives. If the amount of cash that is being hoarded has been growing, that would suggest people have lost confidence in formal financial services. Or, that they have so little knowledge of basic arithmetic that they are happy to have inflation eat away their store of value while forgoing the safety and security of bank deposits, no matter what value of the interest paid.

Well, no, not really, a bit of elementary economics would tell us that when interest rates are on the floor, as they have been "over the last few years", and inflation has been notable by its absence, then people will be more willing to hold cash, even just inert cash, than when they could have stuck it in the bank and got some interest to over the losses from inflation. So, actually, an increase in cash in circulation is just what we would have expected in recent years. And we've not even any evidence that this produces an increase in the financing of the grey or black economies: after all, our general analysis of monetary conditions currently is that the velocity of circulation has fallen. Meaning that we need more cash to finance the same amount of activity: just as we need more base money to finance the rest of the economy which is why QE.

So, the terrors are unproven. But what really boggles is this:

Charles and Jonathan estimate that the grey economy in the UK could have expanded by about 3% of UK GDP since the beginning of the current financial crisis. That means there are an awful lot of people not paying tax, and simple calculations will show that the tax lost that can be attributed to cash is vastly greater than the seigniorage earned by the Bank of England – the money the bank earns from issuing notes. Cash makes the government considerably worse off – and that means us.

It's that last phrase. We are not the government and the government is not us. It's not necessary to come over all entirely Mancur Olson to note this. If the government has insufficient money to defend the nation that might indeed impact us in a negative manner, if it's not got enough to finance Ed Miliband's pension then that's of less impact upon the rest of us.

And, clearly, if government is sucking less money out from our own economic activities to finance those of Ed Miliband then we are better off (even if Ed and Justine are not).

Another way of putting this is that it is not true that everything belongs to the government and we only get what is left after its exactions. Even if the grey and or black markets are expanding this does not make us worse off: it is, after all, difficult to see how an expansion of economic activity does make us worse off.

There is a deeper point behind all of this which is that there are those entirely seriously suggesting that in the near future the country should simply stop using cash. In order, so it is said, to crack down on the horrors that is tax evasion. Which is silly in one manner, because cash is simply a method of keeping score of who owes what to whom, as is all money. And if people are denied one method of doing so then another will be invented. But the part that horrifies us is this idea that the erasure of tax evasion would be worth the the erosion of the simple freedom to truck and barter as one wishes. Where all transactions, even the most minor, would be open to both the examination of the State and the payment of its tithe.

Yes, we really are saying that some level of tax evasion is the only outcome consistent with the maintenance of the general liberty. And we'd rather have that general liberty than we would the payment of the supposedly proper tithes, thank you very much.

Maybe Cuban refugees did hurt unskilled Miamians after all

How do refugees affect the wages of natives in the places they settle? I’ve written on the (few) studies of this effect that I’ve seen, but a new paper contradicts one of them. David Card’s 1990 study of the Mariel Boatlift, where 125,000 Cubans fled the Castro regime to settle mostly in Miami, found that there was no negative effect for unskilled natives. Card’s results suggested that the city’s existing garment and agricultural industries absorbed the extra workers and the influx did not cause downward pressure on the wages of unskilled workers already in Miami.

But a new working paper by Harvard’s George Borjas seems to undermine Card’s conclusions. Borjas looks at a particular sub-section of Miami’s unskilled workforce, high school dropouts, and compares Miami to a different set of cities to Card which, says Borjas, were more like Miami in terms of employment growth before the Boatlift took place.

When you do that, the Boatlift seems to have affected high school dropouts’ earnings very badly: they fell by between 10 and 30 percent, relative to the wages of high school graduates and college graduates. The gap between white and black workers’ wages grew substantially too – black workers’ wages fell by 20 percentage points.

The chart below shows the percentage difference in high school dropouts’ wages relative to college graduates’ wages during this period – the different ‘placebos’ show how dropouts’ wages performed in other samples of cities over the same period.

Borjas concludes that the Boatlift put significant downward pressure on the wages of natives with skills similar to those of the migrants, which may also be the case with other similar influxes of immigrants.

It’s an important paper for anybody interested in the immigration debate. But there are also some important things that should make us cautious about extrapolating too much from this.

Most notably, the relative wages of high school dropouts recover entirely by 1990 – the effect Borjas has found only holds in the short-run. And Borjas's study shows that the impact was negative for people at the bottom, but Card's conclusions about the impact on native workers more generally still seem reasonably solid.

The Mariel immigrants were ‘exogenous’ to Miami’s economy – they did not come primarily to get jobs, but to escape Cuba. So the effect might not apply at all to economic migrants from other EU countries who are coming to the UK to work. But for refugees fleeing war, Borjas’s findings might well be repeated.

David Card may reply with some objections that throw doubt on some of Borjas’s choices, and as some people have pointed out a very influential paper by Borjas from 2003 was later undermined itself by replication and slight changes to assumptions. This doesn’t mean we should be skeptical of Borjas in particular, but it is a reminder to avoid drawing firm conclusions from just a couple of studies. Whatever their findings, more research like this can only be a good thing.

Should Britain emulate Venezuela’s economic policies?

Some of the new Opposition leadership have been inspired by Latin America. They believe Venezuela provides a shining example of economic progress. Jeremy Corbyn has previously lauded Venezuela as “an example of what social justice can achieve”. Shadow Health Minister Dianne Abbott says Venezuela provides proof that “a better way is possible.” She’s a Patron of the Venezuela Solidarity Campaign, which aims “to defend the achievements of the Bolivarian Revolution”.

Without dwelling on the politics of Chavez and Maduro, or the accusations of tyranny, how has the economy performed? Should Britain emulate these policies? The short answer is no. Venezuela is one of the world’s worst managed economies. The policies have had tragic results.

Venezuela is poorer than its neighbours despite a wealth of oil, on which it is now extremely dependent. Chile, Argentina, Uruguay, and Panama all have higher per capita income.

It is in the midst of a deep recession. Inflation rates are amongst the world’s highest at over 100%. It holds the top spot globally for the Misery Index.

Venezuela is ranked 176^th for Economic Freedom, just behind Zimbabwe and second last in the region. Ease of doing business is poor, property rights are insecureand investments are risky - entrepreneurs receive the lowest rates of return despite their efforts.

The Bolivar has massively devalued despite their currency restrictions. Price controls have resulted in severe shortages, long queues, and a black market for basic goods from toilet paper to milk, flour and medical supplies. Healthcare is in disarray, with crumbling hospitals and patients forced to search for drugs on the streets – hardly a model for our NHS either.

Even just focusing on equality, the case for Venezuelan polices is weak. Its Gini Coefficient, the traditional measure of wealth distribution, is less equal than that of the UK.

Venezuela’s performance has fluctuated over the years. It has done better when the market for oil is strong, and the profits have been partly directed towards social justice causes. Yet the overall picture is damning for this socialist paradise, regardless of the measure. The policies have failed with great cost. We should be very afraid of any proposals that wish to emulate their folly.

Now we've won, let's kill what works!

The victory of Jezzbollah and the Corbynistas appears to be turning politics in a French direction. That is, let's not worry about whether something works of not, let's check that it conforms with theory. And so it is with the various market reforms in the NHS. As Kristian Niemietz points out:

So when Corbyn used his acceptance speech to congratulate the Welsh government for ending the “internal market” in the Welsh NHS, declaring that this is “something we want to do in the rest of Britain”, he was not setting out a new policy stance – he was merely expressing a fait accompli. It was not Corbyn who exorcised the ghost of NHS reforms past. His party did that before he was even nominated. Which is strange, because these reforms were a qualified success story.

Quite so, one of the things in recent years was that NHS England had rather more of that market reform than NHS Scotland or NHS Wales did. Entirely unsurprising to people like us NHS England also did rather better over those years than NHS Wales or NHS Scotland. But for Jezzbollah and fellow travellers markets are inefficient: so they must go, whether they worked or not:

The Scottish and the Welsh NHS are the closest thing to a counterfactual, because they are still more or less run like the old (and, if the Corbynistas get their way, the future) English NHS. Even though they are, in per capita terms, better funded and generally better staffed than their English counterpart, their performance lags on most measures. Rates of mortality amenable to healthcare are higher than in England, waiting times are longer, and hospital infections are more prevalent.

Niemietz has a fuller paper exploring the subject at that link.

It's entirely possible for people to paint our own love of markets as being simply ideological. Enough people do that enough of the time that of course it's possible. But our commitment to them is actually practical. We're entirely happy to admit that there are times when competitive markets are not the solution. We do know our history and that time of competing private armies was called the Wars of the Roses and it's not generally held to be a happy time. But we do support markets when they work.

As they do in the provision of health care to the populace. Those parts of the NHS system that have been flirting with markets provide more and better health care than those that don't. We really do not see this as evidence that markets should be removed from the provision of health care. However French and conformant to theory our politics becomes.