How Houston densified beautifully through markets

I recently came upon a 2011 document (pdf) from a local architect working in a suburb of Houston that I have become somewhat obsessed with. Basically, it's a pictorial account of how Houston—which has practically no land-use regulations at all—has developed as a city.

First, it sprawled outwards, but as the sprawl and population growth created more economic activity, and agglomeration benefits, the demand for housing near the centre rose and rose. Since there was no restriction on simply adding a few floors to buildings, and filling in gaps between them, to maximise the value of plots, and how many people they could accommodate, developers simply did this. And they did it beautifully and harmoniously, rippling outwards to make Houston denser and better.

Houses like these...

...quickly become houses like these

The document, by architect Barbara Tennant, mainly tells its picture through stories, so you should check out the whole thing, as they say. But it has a few key lessons, repeated throughout: restrictions were minimal, with no height limits, freedom of style and design, and only a few rules on setbacks (how far properties must be from the street).

The results are impressive. Houston is cheap, diverse, rich, and growing, and this policy experiment should make us more sanguine about the results to London's skyline if we drastically reduced land-use regulations. The results of private development seem to be very attractive; by contrast planning restrictions seem to make things uglier and less popular.

Greenery...

...and dense beauty

Happy 117th birthday, Hayek

F A Hayek, the Anglo-Austrian Nobel economist and liberal thinker, was born yesterday in 1899.
Hayek’s economic works in the 1930s, researched with his mentor Ludwig von Mises, showed how boom and bust cycles arose from the inept government manipulation of credit; and he became the leading critic of collectivism, central planning and the expansionist interventionism of John Maynard Keynes (1883–1946), arguing that the latter would lead to inflation and economic dislocation. 

The Second World War turned his attention to political science, and his bestselling The Road to Serfdom (1944) traced the roots of totalitarianism, arguing that central planning, being counterproductive, requires increasing compulsion to maintain. 

In The Constitution of Liberty (1960), he set out ideas for a free social and economic order. He updated the classical liberal idea of self-regulating, spontaneous social orders, showing how they emerge from the regular behaviour (or ‘rules’) followed by individuals. He argued that these orders, though unplanned, could process a huge amount of knowledge – held by individuals but dispersed, partial, personal and often ephemeral – more knowledge that any planning agency could process, even if it could access it. 

In The Fatal Conceit (1988), he argues that it is a delusion to imagine that we could shape such complex orders using the tools of the physical sciences, and that conscious attempts to redesign them would destabilise them and lead to social and economic disaster. 

Hayek also founded of the Mont Pelerin Society, which has become a powerful international forum for classical liberal thinking.

Eamonn Butler is author of Friedrich Hayek – His Ideas and Influence.

Economic numbers are important, yes, but it's what they're telling us that is

Roger Bootle here is nominally telling us about how difficult a problem high executive pay is. We don't think that's a problem but that's not our point here. Rather, to examine one of the numbers being used to bolster the argument. We don't think this number is telling us what people think it is:

As Smithers points out, the aggregate data from both the US and the UK tell a worrying tale. In both these countries, fixed investment as a share of GDP has fallen substantially. There are all sorts of possible explanations for this decline but surely a leading candidate is the prevailing structure of executive pay which incentivises business leaders to minimise investment.

Interestingly, this has major implications for the performance of earnings more generally. In America, surely much of the reason for the Trump phenomenon is the extremely disappointing performance of real earnings for the average American. This, too, has several roots. But one is surely US firms’ low investment.

We are, at best, deeply, deeply, unsure about this. We have two reasons floating around in our minds about this.

The first is that what we have traditionally recorded as fixed investment might not be quite what we are recording as it now. We recall one Goldman Sachs report which looked at business investment in software. This was static (as a portion of GDP) over the past decade, decade and a half. So, where is that technological revolution? Fair enough except: investment here is defined as things which are depreciated, written off, over more than one annual accounting period. That's where we get our investment figures in GDP from, corporate accounts. And you may have noted that there's been rather a change in the way that business buys software these days. All that cloud, software as a service stuff. Instead of (at the margin of course) buying proprietary software people are renting structures. To buy a two year licence of Microsoft Office is business investment in software. To sign up to Office 365 is simply monthly running costs. Yet it's (to all intents and purposes) the same software doing the same job.

That is, much of what actually is business investing in software, in computing, is no longer recorded in GDP as business doing so. The size of this difference being usefully indicated by the size of the cloud and Saas businesses out there. That size being large enough to significantly change this line in GDP.

The other is this complaint that extant businesses are paying out ever more of their earnings in dividends and share repurchases, leaving little to reinvest within the corporation. But this is something that we positively desire: we no longer think that the conglomerate is the correct business structure. Further, capital markets are hugely more efficient in allocating capital than they used to be. For example, Nat Rothschild, Bob Diamond and Tony Hayward (with varying levels of success to be sure) have been able to raise large sums from a standing start to go and create new businesses.

That extant, profitable, businesses are paying out those returns back to shareholders, who can then reinvest into other businesses, is not a failure nor an aberration, it's actually something we've long desired that large corporations do.

It is of course possible that CEO pay is a problem, that more investing should be done, as you like. Our point here is that the usual metrics pointed to on this subject don't seem to us to be telling us quite this story. And underlying this is our insistence that yes, economic numbers are indeed important. But the most important part of them is understanding the details of what they're saying. And we're really deeply unconvinced that people are so understanding.

The Panama Papers manifesto

The leaker who hacked Mossack Fonseca and thus led to the massive leak of sensitive information (for example, did you know that the British Prime Minister pays all the taxes he owes? In full and on time?) has released his manifesto. Or at least his justification for his actions. It does appear that he is rather remarkably mal-informed about matters:

Income inequality is one of the defining issues of our time. It affects all of us, the world over. The debate over its sudden acceleration has raged for years, with politicians, academics and activists alike helpless to stop its steady growth despite countless speeches, statistical analyses, a few meagre protests, and the occasional documentary. Still, questions remain: why? And why now?

The Panama Papers provide a compelling answer to these questions: massive, pervasive corruption.

That's his opening and it's just plain flat out wrong.

We agree that within country inequality has risen in recent decades just as global inequality has fallen. But this has absolutely nothing whatsoever to do with any secrecy nor use of offshore. For the quite simple reason that the inequality we're measuring does not include any effects of secrecy or offshore. Because, you see, things that are secret are not included in public information and calculations, and things that are offshore are not included in estimations of in country inequality.

That is, the information revealed has absolutely nothing whatsoever to do with the thing being complained about, that already measured inequality.

This is, by the whistleblower, logic worth of Richard Murphy. Sadly, the manifesto is, logic and facts aside, too well composed for it to have come from that source so we're still left wondering who it is.

How a poverty meme gets created

We're privileged to be at the birth of a new poverty meme. We can actually watch how it is done. First, you create your own definition of some form of poverty. As the Joseph Rowntree Foundation have done here. They define destitution as being the following:

The number of destitute people in the UK isn’t measured officially, despite growing concerns about rising use of food banks, homelessness and other indicators of severe poverty in recent years. In fact, when we started this research we found there wasn’t even a widely accepted definition of destitution which we could apply to everyone in the UK. The research team at Heriot-Watt University worked with experts to develop a robust definition, which was then tested with the general public.  Using this, we define destitution as being when someone lacks two or more basic essentials in one month, and so has experienced two or more of the following; slept rough, had one or no meals a day for two or more days, been unable to heat or to light their home for five or more days, gone without weather-appropriate clothes or gone without basic toiletries.

We agree, those are not things which should be happening to people in a rich country. We would also note that the major cause of all and any of these things is the incompetence of the anti-poverty bureaucracy run by the government. But do note that there is an important point about the numbers here:

This week we have published the first comprehensive study into destitution in the UK, which shows that 1.25 million people, including over 300,000 children, were destitute over the course of 2015. 

I any one month the number being failed by that State is some 100,000 people. 100,000 too many, of course, but it is 100,000 who experience perhaps a couple of days of that "destitution" in any one month.

And then, only a week later, see how this meme has subtly altered in the popular press (to the extent that The Guardian is popular of course):

This is what destitution looks like. More than 1 million people in the UK are so poor they can’t afford to eat properly, keep clean or stay warm and dry, according to new research by the Joseph Rowntree Foundation (JRF). What’s emerging in austerity Britain is a new level of class inequality: not simply between the wealthy and the poor, but between people who have enough money to buy toilet rolls and cook a hot meal and people who don’t.

They're referring to the very same report. And yet that meaning has hugely changed, hasn't it? From this destitution being a brief period for that 1 million over the course of a year to something that is happening to that 1 million all year.

And thus are memes created. Invent your own definition, however reasonable, attach a caveat, a qualification, and watch everyone run with the uncaveated, unqualified, extreme version. This has been done for decades now with the definition of poverty itself: the modern definition means "not as much as others" rather than the older meaning of poverty of "not much". 

We don't hold with it ourselves, think this is tantamount to lying to us all. But just look around, it's a very common tactic.

Naomi Klein just doesn't understand the real world

We've had our differences with Ms. Klein before. We recall a central tale in her most recent offering: she complained that the WTO's insistence on lifting local content rules on Canadian solar power reduced in some manner the fight against climate change. When, of course, allowing people to install cheaper Chinese made solar panels rather than more expensive Canadian made ones will, presumably, increase the number of such panels installed.

That is, there doesn't seem to be a great knowledge nor understanding of the real world in her oeuvre. and so it is with this claim: 

“There is no clean, safe way to run an economy built on fossil fuels. There is no peaceful way to do it ... If nations and people are regarded as other, it’s easier to wage wars and stage coups,” she said.

“We are running out of cheap ways to get to fossil fuels. This sees the rise of fracking which is now threatening some of the prettiest places in Britain.”

Now it's true that we don't see the problem with fracking and Ms. Klein obviously does have some problem with the technology. But imagine that you are against fossil fuel use, as she is. The one and really important observation you would have to make about said technology of fracking is that it is incredibly cheap.

It is this cheapness which is driving out the use of coal for energy production in the US for example. Where fracking has been widely deployed, as in said US, it is the cheapness of fracking which is driving the conversion of LNG import terminals into LNG export terminals. It is the very cheapness of fracking which is leading to convention gas production plans being put on ice.

We're also really rather confused as to how drilling a few holes in Lancashire is going to increase the number of wars or likely to produce a coup or two.

There simply doesn't seem to be any connection between Ms. Klein's observations and the real world out there. We therefore don't think she or her pontifications are a very good guide to what we should be doing. 

Whitehall should manage the what, not the how

BIS may not have noticed the British steel industry going to the wall but they at least deserve sustained applause for getting something right. For twenty years and more they have been assessing their International Trade Advisers on how they spent their time, not what they have achieved.  Critics have been suggesting that, as ITAs were supposed to be turning SMEs into exporters, maybe they should be assessed by the number of new exporters, or the value of exports they produced.  Now, UK Trade and Industry, under the leadership of the excellent Dr Catherine Raines, has done exactly that.
 
We taxpayers give Whitehall our money for things we could not otherwise achieve for ourselves. Is it not blindingly obvious that value for money should be assessed by what that money achieves, not by some contrived analysis of  how public servants spend their time?
 
Yet department after department has not got the message.  The Department of Health thinks it knows how to be a doctor better than doctors do.  Education likewise thinks it knows how to run schools better than teachers do.  The most disgraceful, perhaps, example is safeguarding children, or perhaps failing to do so.  The Department’s response to each child abuse scandal is to commission another enquiry.  This then further complicates the way child workers are supposed to spend their time which in turn leads to more safeguarding failures and so it goes.  Rotherham at 1,400 abused children and counting may prove an all time high but child workers are so busy with redundant admin that you can bet the abuse continues willy nilly. 
 
One such enquiry was headed by Lord Laming who, in 2003, said:
 
 “17.65 There was no doubt that the work of each of the key agencies supporting children and families should be rigorously monitored. In the past, the tendency has been to concentrate on the measurement of inputs; for example, the size of the budget, the number of staff, or the range of equipment used. This approach is of limited value and does not address the more important question of what is actually being achieved, and whether the lives of children and families are being improved by the investment.”
 
13 years later that attitude has not changed. This summer we are expecting another “Single Inspection Framework” from Ofsted setting out how social services should spend their time to please Ofsted, not how outcomes should be measured, still less how they should be used to assess child workers’ achievements.
 
When the Minister’s attention was drawn, again, to the need to monitor outcomes, the response (19th April 2016) was, if the status quo was inadequate, to consider “alternative models of delivery”, i.e. having child workers spend their time differently and, no doubt, confusing them further thereby.  Please, Minister, just establish the required outcomes and let child workers get on with it.  

No wonder housing in London is so expensive

We're continually told that housing in London is expensive just because there's no land to build upon. And of course we can't let the place expand outwards because green belt. Thus, well, everyone should just get used to it. It's not entirely obvious that this is the true cause as this little story shows:

Anyway, once seen, the beauty of the wetlands turns you swiftly soppy: 11 hectares of reedy heaven, all cherry trees and tufted grebes, warblers and thrilling mid-air dust-ups between gulls and geese. Plus an education centre and nice caff in the former dining room of Thames Water’s staff.

The wetlands are the fruit of the labours of more than 50 local volunteers spearheaded by the London Wildlife Trust, whose representatives showed round the press and the project’s patron, David Attenborough, on Saturday. And the bill?About £1.3m, half of which was met by lottery money, with Berkeley Homes and reservoir landlord Thames Water chipping in about 20% each, and Hackney council 10%. Just to reiterate: the company whose skyscrapers overlook the wetlands, whose newly released range of apartments is called the Nature Collection, and are billed as being “set on the banks of an abundant nature reserve and animated by urban wildlife year-round” has contributed about half the cost of one of its cheapest flats – which apparently paid for the boardwalk.

Is it naive of me to assume that companies whose coffers are set to swell enormously might have an obligation to invest in the surrounding landscape for everyone? The initial stages of the redevelopment were signed off years ago, and did involve the fulfilment of various section 106 agreements – the bargaining chips for greater-good improvement councils can demand in return for consent.

11 hectares of that oh so expensive land in the middle on one of the world's great cities must be a wildlife haven? More than that, the people building the houses on other land must cough up to pay for it? 

If you further restrict the supply of land and then load the costs of non-housing related issues onto housing itself then housing is only going to become more expensive, isn't it? And yet the argument now is that we should demand even more of these things in order to what? In order to make housing cheap again?

How to make East Africa poorer: ban imports

This really does have to be one of the sillier pieces of economic policy now being tried out. The East African Community has proposed banning the import of second hand clothes.

In February, however, the East African Community (EAC), an intergovernmental organisation, proposed a ban on imported used clothes and shoes. The aim is to encourage local production and development within member countries: Burundi, Kenya, Rwanda, Tanzania and Uganda.

The problem here is that people are not understanding the most basic point about trade, poverty and jobs. Imports are the purpose of trade, poverty is the inability to consume and jobs are a cost of doing something. Thus this is nonsense:

Many orthodox economists disagree with banning imports because it goes against the principles of free trade. Rather than having the freedom to choose imported used clothing, east African consumers will have to buy higher priced local goods or new clothes imported from Asia. 

Increasing the cost of clothing will hit east Africa’s many low-income consumers, but the shock effect could be reduced if a ban was imposed gradually. If a tax on used clothing imports was introduced before an outright ban, this could subsidise local production and increase local manufacturing capacity.

A revitalised local market would ultimately boost the EAC’s economy by providing more jobs than the second-hand sector while retaining money that currently goes to Europe and the US to pay for second-hand imports.

It's not that economists oppose this in order to support free trade. It's that economists understand all three of those points. Poverty is reduced when people can consume more in return for less of their labour. This ban will lead to more jobs locally, yes it will. But it will also lead to all local people having to expend more of their labour in return for being clothed:

It is important to emphasise, however, that turning off the supply of used clothing alone will not enable the growth of local manufacturing. The proposed ban on imports doesn’t include new clothing imports from outside the EAC. While foreign garments will be more expensive than used clothes, they are likely to be cheaper than locally manufactured clothes as has been found in South Africa.Efforts to ban used clothing imports are therefore unlikely to be beneficial for the local economy unless there are similar controls on new clothing imports. This would require the strengthening of customs and borders.

That is, all people in the EAC will have to labour more hours in order to gain the same amount of clothing. Or, if you prefer, they will have less clothing for the same amount of labour. That is, they will be poorer.

And no, it's not the correct goal of economic policy to make some of the poorest people in the world poorer. 

If banning imports did make people richer then places with very few to no imports would be rich places, wouldn't they? And the examples of Cuba and North Korea don't seem to bear that out. This is a ludicrous idea and they really, really, shouldn't do it.

Can National Pay Bargaining in the NHS Kill?

Pay for NHS clinical staff (nurses and physicians) is set nationally, with very little variation to take into account local labour market conditions. This is a problem because in the UK regional pay differences are high, even when you control for things like education and skills. As a result, there are large differences in the UK between wages inside and outside sectors where pay is strictly regulated like the NHS. In some regions NHS clinical staff are overpaid relative to local labour market conditions, while in others (London and the South East) clinical staff are underpaid and would get higher pay if they left the NHS for the private sector.

This leads to worse outcomes for patients according to a 2010 paper from Propper and Van Reenen. Looking at the hospital death rate for heart attacks alone, they find that national pay setting for NHS clinical staff (nurses in particular) leads to 366 extra deaths every year.

In effect, national pay setting in the NHS for nurses acts as a price ceiling in high wage regions, which in the absence of other countervailing factors should generally lead to an undersupply.

There are two major predictable effects of this defacto price ceiling.  First, we should expect nurses to move from areas where their wages are relatively low (London and the South-East) to areas where their wages are relatively high (South-West and the North-East). Second, we should expect nurses in London and the South East to leave the regulated sector (NHS) for the unregulated sector (private nursing homes) where they can expect higher pay. Put simply, we should expect the NHS to get better in low wage regions, and get worse in high wage regions. 

Now this alone doesn’t really tell us much about the overall effect of setting pay nationally in the NHS. Perhaps the benefits of better service in the North-East outweigh the harm of worse service in London.

However, the data implies that regulating pay leads to worse outcome across the NHS on balance. Part of the problem is that people have strong area-based preferences: they aren’t willing to just up sticks and move across the country unless they’re getting a serious jump in wages. So instead they’ll be more likely to stay in the high wage region and just leave the NHS altogether to move into the nursing home sector where pay isn’t set nationally. 

On balance, this leads to 366 extra heart attack deaths each year across the NHS. But the authors suggest this figure might, if anything, be understating the harms of national pay setting:

If we were able to calculate the fall in quality across a much wider range of illnesses (deaths and more minor loss of quality of life), we would scale up the social loss by a very large amount.

If we devolved pay negotiation and hiring powers to trusts, we could raise standards across the NHS and most importantly, save lives!