Social housing is too subsidised!

Over at my gaff we've been having a little shout about housing benefit, the idea that, horrors, people might have to make do with less than the annual median wage as a subsidy to their lifetyles (the annual median wage before tax that is: the new caps will still allow above the post-tax annual median wage to be paid in housing benefit). And up in the comments popped someone (presumably a political operative alerted to the monstrous allegations we were making that, you know, perhaps this isn't a Third World standard of living that such subsidies force upon people) who insisted that:

Council rents are not, in any way shape or form, directly or indirectly, subsidised by the tax payer.

Which is really quite remarkable. For we know very well that council (or if you prefer, social) rents are below market rents. The subsidy must be that difference between the two.

We even know how much that subsidy is. At least we have a couple of attempts at quantifying it. The Hills Report told us that the annual cost was some £6.6 billion. The ONS tells us that the market value (ie, the capital value) of below market rate tenancies is some £600 billion.

We tried to point this out a few times but our visitor was having none of it. That there isn't a direct transfer from general taxation to social renters means that there's no subsidy, full stop. Even after the concept of opportunity cost had been explained (repeatedly, in several different forms) it just didn't sink in.

Which leads me to a wish for this coming year. There are really only two things that you have to know about economics. As with, say, the two things about boxing: hit, don't get hit. In economics these are 1) incentives matter and 2) opportunity costs. The first of these we all intuitively grasp, the second sadly vast swathes of the country do not. And the wish is that we get the education system sufficiently sorted out so that every child does indeed understand this vital idea.

For those of you who haven't got it, it is this. Because we are not charging market rents for social housing there is some money left on the table there. It might be that £6.6 billion. This is thus £6.6 billion of government money that cannot be spent on something else: teaching children economics say. It might be that £600 billion as a capital value: if we were able to sell all of that off at true market prices then we'd have three times over the £200 billion we need to invest in renewables according to DECC.

That we are doing one thing with the resources at our command means that we cannot be doing something else with those same resources. The opportunity cost of lower than market rents is not teaching children economics, not having money to spare to build a renewables system.

Please note, for those who still do not understand. This does not mean that lower than market rents is a bad idea. I think it's a bad idea, true, but that's a very different thing. All that opportunity cost means is that lower than market rents are indeed a subsidy, the cost of that subsidy being what we cannot do with the resources we've allocated in that manner. Maybe the cost is worth it, maybe it isn't: but we do have to start by acknowledging the cost and then comparing it to what else we could be doing with that money.

Just as an example. There's a recent report that says that the UK needs £5 billion a year investment in renewables. We have Hills telling us that we lose, by not charging market rents, £6 billion and change a year. Imagine that was the only money we had.

Maybe below market rents is a better use of the money than renewables. Maybe it isn't. But I do, as does every economist across the land, insist that as we cannot have both plumping for one means that the cost of having that one is the loss of not having the other.

So yes Virginia, social rents are subsidised. And the cost of the subsidy is all the other things we cannot do with that £6.6 billion (or £600 billion). And if every schoolchild in the land understood that then not only would there be fewer confused commenters on my blog but politics, which is after all the allocation of our tax money, would be immeasurably more efficient.

Antidote to New Year blues

Well, that was a depressing kick off to 2012. Have you ever seen so much doom and gloom in New Year forecasts, starting with our own Prime Minister and on out to every pundit, analyst, politico, clergy and media outlet?

Here it is Tuesday morning after the bank holiday and the BBC’s Blues Combo is already in full throat with fraught reports on “failing” social care, private pension “collapse” and more hand wringing about the catastrophic consequences of a eurozone break-up. We’re quickly off to a long year of seeing every last bit of hope and optimism ground out of us.

So here’s a couple of quick antidotes that may help deflect at least some of the negative waves. It’s the Iowa caucuses today and long-time libertarian Ron Paul is doing well in advance polling. The Iowa caucuses are a poor indicator of ultimate presidential candidate winners but, if you need a caffeine hit on this miserable, storm-tossed day, spend some time at Ron Paul’s official 2012 campaign website. Realistic libertarians know we can never get everything we want in any single candidate but there’s a refreshing consistency to Mr Paul’s agenda of truly bold alternative thinking.

And in preparation for the end-of-day optimism-pummelling from Newsnight, try business news channel CNBC at 8 pm London time for its Closing Bell show (Sky channel 505 and Virgin channel 613). It’s a riotous and frenetic look at the state of the world from the financial markets’ perspective and kicks off with reports from the stock, commodities, currency and bond markets. Oh, they’re all unashamed hucksters for capitalism and the American dream but at least the show features people who actually put their own money where their mouth is, not taxpayer money where somebody else’s mouth is.

Mr Paul may soon fade away and the financial markets may lose all your money but we can all use the sugar hits they offer. 


Perhaps DECC would like to do their sums again?

There's been various amounts of head scratching around the place as DECC says that renewables will be cheaper than fossil fuels in the future. Even though we know that each of the individual elements that make up the renewables path are more expensive than each individual unit in the fossil fuel path. Which is really very puzzling indeed, that the whole is less than the sum of the parts.

Over and above the various problems that I and others have noted elsewhere, there's this that has me confused too:

Natural gas for February delivery settled Friday at $2.989 per million British thermal units, the lowest closing price for the commodity since September 2009. It closed below $3 in the winter for the first time in nearly a decade.

This is the result, of course, of the US practice of fracking for shale gas. And we know that the UK has vast reserves of this, underneath and around Blackpool. Decades at least of supply, if not a century or more.

Now, I've looked around the DECC spreadsheet trying to find the price assumptions they make about natural gas and other fossil fuels. And I'm afraid I just can't find it, just can't find it at all. Cannot see what prices they have assumed, whether they've got a version that deals with the implication of having lots and lots and lots of very cheap natural gas or not.

And I have a very strong feeling that that is one of the possibilities that they should tell us the results of. For they are telling us that whatever we do is going to cost £200 billion or more in the coming years, £5,000 per year per household. And we know that building gas fired power stations is cheaper than almost any other form of energy generation. So if we are floating on that much gas and we can get it for something like the American price, might that not reduce the costs per household?

Don't you think we ought to be told? After all, yes, fracking causes earthquakes, small ones and this might be vaguely detrimental to life as it is lived in Lancashire. But what if it saved us, say, £100 billion?

Well, what is Lancashire worth then?

I can't prove or show anything because I cannot find the crucial assumptions. But I do have a feeling in my water that if we were to rerun these calculations with reasonable assumptions, like, say, that we've as much if not more natural gas than the US does, then we might find that renewables really aren't an option that anyone would go for. Which, if I were cynical enough, might be why that calculation isn't presented to us.

What neoliberalism hath wrought

As we all know it's a fairly common trope over on the left to say that the mid 70s were when everything was best. The UK was more equal at that time than at any other point before or since, the labour share of the economy was at its highest ever and, well, in general, everything has been downhill since then. Internationally, the rise of "neoliberalism" with Maggie in 1979, Ronnie in 1981 and that appalling system of ideas, the Washington Consensus (essentially a list of things not to do because we know they will screw up an ecoonomy) has right royally messed things up internationally.

I beg to differ:

Despite the recent hiccup caused by global recession, between 1970 and 2010, average incomes in the UK more than doubled, according to data from the World Bank. And wealth has been spreading worldwide, so that poverty measured as the proportion of the population living on less than $1.25 a day has more than halved since 1990, thanks not least to rapid growth in China and India.......The average Briton born in 1960 could expect to live to 71. Today, the average Brit will live 10 years longer. Indeed, fewer people are dying at every stage of life. Nearly 3% of infants born in Britain died before their fifth birthday in 1960. Today that figure is one half of 1%......In 1990, nearly 12 million children worldwide died before they had reached their fifth birthday; today, that figure is below 8 million......There were 24 wars worldwide in 1984, but by 2008 that figure had dropped to five. The worldwide annual death toll from war, already very low by the previous century's standards in 2000, fell by a further 40% between then and 2008.......The Polity database, maintained by George Mason University in the US, rates the world's countries on their status between absolute autocracy and perfect democracy. The average global Polity score across countries has never been as high as it is today. Recent events in the Middle East are just the latest manifestation of a heartwarming fact: democracy is now the default for political systems worldwide.....Vaccines reduced measles mortality in Africa from 400,000 deaths a year to below 40,000 between 2000 and 2006 alone.

That listing is, would you believe it, from the Observer.

Now I wouldn't make the mistake of trying to say that the world's perfect, or that there haven't been elements of two steps forward, one back. But there's very definitely an element of the future's so bright I've gotta wear shades there, we the British are getting richer and living longer lives, fewer of our children are dying cruelly young. The same applies right across the world in fact, except for those ever fewer places plunged into war, civil or otherwise.

Not perfect, but the world's becoming an ever better place and if the prevailing political ideology is going to be blamed, as it is, for the state of the world then that prevailing political and economic ideology also gets to take the plaudits, where such are due. And they are due.

Greater economic and political freedom, which is all "neoliberalism" is after all, has made the world a better, richer place. Long may it continue.

No, we're not going to build a large model of the financial markets

No, we're really not, whatever BIS says about it being a wonderful way to spray taxpayers' money at favoured parties.

Felix Salmon tells us all about why the banks and the financiers won't pay for it. Largely because if it finds anything then they'll be more regulated. And you can read what BIS thinks about it here in 40 or more pages.

We conclude with an argument that, in the specific case of the global financial markets, there is an urgent need to develop major national strategic modelling and predictive simulation capabilities, comparable to national-scale meteorological monitoring and modelling capabilities. The intent here is not to predict the price-movements of particular financial instruments or asset classes, but rather to provide test-rigs for principled evaluation of systemic risk, estimating probability density functions over spaces of possible outcomes, and thereby identifying potential “black swan” failure modes in the simulations, before they occur in real life, by which time it is typically too late.

No, no and thrice no. Even, scream "Noooooo!" while fleeing the country that would do such a thing.

Allow me to introduce our two computing experts to an economist. A certain Mr. Hayek who taught for a number of years in our fair and pleasant land.

You cannot model the market because the only method we have of modelling the market is the market itself.

Too much knowledge is local, there is too much knowledge to attempt to capture it, it is simply not possible to model something as complex as the financial markets using anything other than the financial markets themselves as the model. If you like, you cannot map the territory it is only possible to use the territory itself as the map.

Now, if were just a few programmers playing with a box or two, well, leave them to it perhaps. But quite apart from that not being what will happen (they are already calling for a programme the size of the weather prediction business, supercomputers and all) and thus much more money than that will be wasted, the programme itself will introduce horrible uncertainty into the system. For, you see, the regulators, the lawmakers, will think that having spent tens, hundreds, of millions to map the territory, model the markets, will think that they actually understand them. That there are no little grey areas, no bottomless pits of ignorance into which they can fall, no relationships or linkages unknown.

And yet we know that this is impossible. They simply cannot manage to create a model which does not have these lacunae: and there's nothing on the planet more dangerous than a politician who thinks that they really do understand something.

Well, there you go, hundreds of millions saved and financial calamity averted. Yes, I'll wait until the next Honours List for my MBE, that's fine. And could I just add a little routine that I'd hope that the Government Office of Science might like to follow in future?

When you've got non-economists making suggestions about matters economic, would you like to just run their ideas past an economist before paying anyone anything? Would save both time and money you know.

Abolish Driving Licences Now!

Those of us who are econ geeks will know about the Pelzman Effect. Regulations that supposedly make us safer (say, seatbelts or cycling helmets) don't actually make us safer as behaviour changes to take account of the new safety. Almost as if there's what we consider to be an acceptable risk to take and reducing it in one manner just allows us to be silly in another so as to maintain that risk we're comfortable with. What I didn't know (but better econ geeks than I might have done already) is that there is a Reverse Pelzman Effect.

Exploiting an interesting natural experiment, the authors of that paper are able to show that we should abolish driving licences. The various States of Mexico found that bribery was impossible to avoid when attempting to gain a licence. So, to varying degrees, they changed their issuance system, some deciding simply not to have them any more. So, of course, death rates from car accidents went up, didn't they?

Erm, actually, no, they didn't. Those places that didn't bother with licences any more, allowing absolutely anyone at all to get in and drive, saw no change in such death rates any different from those that had now (well, hopefully) incorruptible issuance systems.

Yes, the death rate on Mexican roads is indeed appalling: but it's no worse in those areas that demand licences than it is in those that don't nor vice versa. Thus drivers' licences are not needed and we can abolish them.

I would have known this if I'd ever bothered to listen to Pater. I only remember it now because he's reminded me. The basic lesson of driving is always to drive as if every other driver is drunk, mad or incompetent. Or all three. And as it turns out, when we really do recall this because no one has to take a test then we do adjust our driving habits to take account of their madness or incompetence.

I look forward to the UK being the 22 nd largest economy in the world

Oh dear, oh dear, looks like we've got a nasty outbreak of league tables on our hands again.

CEBR chief executive Douglas McWilliams said: "Brazil has beaten the European countries at soccer for a long time, but beating them at economics is a new phenomenon. Our world economic league table shows how the economic map is changing, with Asian countries and commodity-producing economies climbing up the league while we in Europe fall back."

However over the next 10 years, Britain is expected to fare better than France, which is currently the fifth-largest economy behind the US at number one, China, Japan and Germany.

The CEBR forecasts that the UK will be the eighth largest economy by 2020, with France in ninth spot, Germany in seventh spot and Russia and India in fourth and fifth place.

It simply doesn't matter which country has the largest economy. For an economy is not a country nor is a country an economy. What we actually want to measure is how well the economy of any place (whether village or continent and anything in between) adds to the gaiety of life in that place, how it aids in increasing the happiness of those who live there. Possibly even their freedom and liberty, sdmiles on children's faces and the choices that people are able to make.

Which means that looking at this 192 million people over here (Brazil) and comparing it to this 62 million over here (the UK) is simply nonsense. For once we've adjusted for population size we find that the UK manages three times the living standards of Brazil: sunshine, capirinhas and football be damned.

I myself look forward to the time that the UK has the 22 nd largest economy in the world. For as the 22 nd largest nation by population that would mean that the billion odd Chinese have overcome decades of Maoist lunacy, the more than a billion Indians have got through decades of Nehru's foolishness, that 230 million Indonesians have overcome Suharto's (and Sukharno's) greed corruption and avarice and joined us in that sunny upland of being just about as rich as it is possible to be at our current level of technology along with everyone else as well.

For the economy really isn't a zero sum game and their getting rich will make us richer too. And who really wouldn't want that to happen?

The ASI's best of 2011: Sam Bowman

Sam Bowman, Head of Research:

It was a pretty good year for films, both because of some excellent rereleases (Apocalypse Now, Jurassic Park, The Lion King – thankfully shown in 2D as well as 3D) and terrific independent films. The Guard was the funniest film I saw this year, about an rural Irish policeman teaming up with a black FBI agent to bust up a gang of drug smugglers, although some of the humour may be lost on a non-Irish audience. (I usually side with the drug smugglers in films like these, but they were suitably nasty in this one.)

Drive was extremely slick, and had a great soundtrack — it wasn't the most profound film ever, but it was a good watch. We Need To Talk About Kevin was well-made but deeply unpleasant to watch, and its polar opposite My Week With Marilyn wins the Most Enjoyably Frothy award from me. I should also give special mention to Attack the Block, which I haven’t seen yet but may be in one scene as a background extra. (I'm a big fan of its director, Joe Cornish, from his TV shows and radio programmes with Adam Buxton.) The most outstanding film of the year, for me, was Tinker Tailor Soldier Spy. Mark Kermode insists that it's a film about the tense relationships between men (and not, as you might think, about spying), so the fact that every man at the ASI has chosen it as one of our films of the year might say something about us!

Most books I read this year were released before 2011. Of the 2011 crop, Detlev Schlichter’s Paper Money Collapse was one of the best. Schlichter reframed the Misesian theory of the business cycle for modern times, giving a stark prediction about a Weimar-like future for the world’s fiat currencies. Of the fiction I read, the most enjoyable were the fantasy A Song of Ice and Fire books (on which the Game of Thrones TV series is based). I'm working my way through Tony Judt's history of Europe since 1945, Postwar, but it is so vast that I tend to dip in and out.

It wasn’t as good a year for music as some previous years, but there were still a few notable releases. Kate Bush’s 50 Words for Snow (sample song) was a languid, dreamy snowscape, and a return to form after the disappointing Director’s Cut. From Britain, the only outstanding album for me was Metronomy’s The English Riviera (sample song). St Vincent’s Strange Mercy (sample song), Lykke Li’s Wounded Rhymes and Bon Iver’s Bon Iver were all pretty good, but I wasn’t grabbed by many albums this year overall.

Most of my favourite TV at the moment comes from the US. Game of Thrones proved that HBO could do fantasy, fusing the epic setting of the Lord of the Rings with the characterization of The Wire or The Sopranos. I finally saw Band of Brothers, which was brilliant. But the best show I saw this year was Parks & Recreation, a hilarious successor to the US Office set in a small town local government department which also included possibly the first openly libertarian character on TV. (If you decide to try P&R, skip the weak first season.)

My favourite YouTube video was Nicholas Cage Losing His Sh*t (video may be NSFW). That's pretty much how I feel whenever I read the newspaper nowadays and see stories like this. I don't have a favourite politician of the year, but I like Gary Johnson and hope he does well on the Libertarian Party ticket in 2012. Ron Paul has an ugly past, but I like him and hope he does well in the GOP primaries.

What to hope for in 2012? I think the silent film The Artist will be great and loved the trailer. If I'm lucky, Joanna Newsom might do another album, and musicians I love like Of MontrealJanelle Monae and Dirty Projectors are all expected to as well. And I'm hugely enjoying my advance copy of Daniel Klein’s book Knowledge and Coordination, in which he makes the case for a liberalism based on a synthesis of Adam Smith and FA Hayek, and which I will review on the blog when it is released. 


The ASI's best of 2011: Madsen & Eamonn

Madsen Pirie, President:


The best movies I saw were

The Eagle

A great tale of adventure, loyalty and friendship in Roman Britain

Tinker Tailor Soldier Spy

It holds up splendidly against the Alex Guinness TV version, with more than a nod in its direction.


A brilliant, atmospheric and absorbing tribute to the early pioneers of cinema. Beautifully shot with effective use of 3D.


The best books I read were

Dictators' Houses (by Peter York)

How fascinating to see how dictators live, unrestrained by taste. 

The Churchill Memorandum (by Sean Gabb)

A fast-paced romp through an alternative post-war history in which all of the political opponents I have despised are cast as traitors or mass murderers!

What Am I Still Doing Here (by Roger Lewis)

Roger Lewis looks with dispassionate eyes at the sometimes squalid lives of people and places he has known, but never without humour.


Among the events I enjoyed were:

The Royal Wedding

I celebrated it with friends, decorating a balcony in Nice and with a union jack cake and champagne to toast the happy couple.

Reagan Statue unveiling

I joined the crowds in Grosvenor Square unveiling the great man's statue, and in Guildhall to hear Condoleeza Rice and William Hague celebrate his achievement.

Mont Pelerin Society meeting

I had the chance to mingle with great intellects in Istanbul, and to cruise the Bosphorus in style.


Eamonn Butler, Director:

Best film:

Tinker Tailor, Soldier Spy - different from but just as gripping as the TV series with Alec Guiness.

Best book:

Nicholas Phillipson's Adam Smith - An Enlightened Life.