GDP is becoming an ever worse measure of how we're doing

That GDP isn't a very good measure of how we're doing has been known since the concept was first pushed by Simon Kuznets coming on a century ago. It only includes monetised transactions, includes government at what it costs rather than the value it adds, doesn't discuss the distribution of income or consumption, only the gross amount and so on and on. It has its merits, in that it is also reasonably easy to calculate, something that isn't true of all of the potentially better alternatives. The really important thing to understand though is that it is not actually a measure of how well we're doing. It's a proxy for how well we're doing. And unfortunately it is becoming an ever less accurate proxy, as this new paper details:

It is also the case that zero-priced digital goods are – by definition – not counted in GDP. Some of these are advertising funded, rather than subscription funded, so the business model choice affects measured GDP – although the invariance could be restored by taking account of the imputed cost to consumers of the unwanted adverts (Nakamura and Soloveichik 2015). Zero prices and the prices of digital bundles are not accounted for in the consumer price deflators either, leading to an understatement of real growth.

Some zero-priced goods – not only products such as software, blogs, and videos, but also ‘sharing economy’ services such as house swaps or shared meals – could be considered voluntary activities, analogous to reading to children in the local school or volunteering in a charity shop. These volunteer activities are outside the conventional production boundary, just like household services.

The importance here (and the paper discusses many other reasons why GDP is getting less good as a measure) is that we're not in fact interested in production at market prices, nor cconsumption at them, at all. What we're truly interested in is how much people can consume. With physical goods we have a rough rule of thumb: the consumer surplus (that is, the value the consumer gets but which they don't have to pay for) is 100% of GDP. So, if GDP is £1.5 trillion, roughly right for the UK, we're really saying that we think that the value of all consumption, to those doing the actual consumption, is some £3 trillion. But those digital goods skew this horribly.

We measure, for example, Google's addition to GDP as being the advertising they sell here. Which, given that they sell it all from Ireland means no addition to UK GDP at all (well, OK, the wages of their support engineers do count but). But absolutely no one at all thinks that the consumption value to all of us of Google's existence is zero. Thus GDP is getting ever further out of whack with what we really want to measure, which is total consumption.

It's also true that there's no very easy answer to this either. But we should be aware of it. And for two very good reasons. Firstly, economic growth is not as slow as the standard GDP figures show us. And secondly, inequality is rather less than most think. You and I have just as much access to, and at the same price, the services of Facebook, Google and so on as Gerry Grosvenor, something that does indeed reduce the gap between the richest man in the Kingdom and us working stiffs.

People prefer neo-traditional buildings

It seems obvious to me—and I think to most people—that housing built since the 1930s is by and large much less attractive than housing built before. But if this is true, and if we are much richer now than we were in the 1930s and before, then why would we build, buy and live in housing we don't like? We have some sort of market in housing; surely if we really all preferred traditional housing styles we'd just buy it.

A new paper (slides) provides the answer—at least if we can assume the UK and the Netherlands are similar in this respect. The authors look at a large database of new-builds and sales and compare similar neo-traditional houses to houses with some traditional features and those with none. They find that, even controlling for a wide range of features, fully neo-traditional houses sell for 15% more than fully non-traditional houses. Houses with references to tradition sell for 5% more. We might reasonably speculate that truly traditional houses sell for yet more.

In their words:

Popular reports on the housing market often refer to attractive style characteristics of houses. In the case of the Netherlands specifically housing from the 1930s is very popular. It is, however, difficult to disentangle the attractive vintage effects of the dwelling from (often inner city) locational amenities.

This paper studies exactly these attractive physical features without the confounding influence of age and location effects by studying newly built houses in newly developed neighborhoods only. A rich data set of housing transactions in the Netherlands is enriched with style characteristics of houses on 86 (Vinex) housing estates across the Netherlands. This resulted in over 60,000 transactions between 1995, the starting point of the development of these sites, and 2014.

The hedonic price model that has been estimated shows a significant price premium of 15% for pure neo-traditional styles and 5% for referring to traditional styles. Various robustness checks confirm that these results are partly, but not entirely, driven by, e.g., unobserved differences in quality between houses with different building styles.

The riddle is why—if this premium exists—do developers not build mainly or purely in the neo-traditional style, to reap profits from satisfying market demand. Why do developers only build neo-traditionally—why don't they really try and ape the creations of the past? The authors blame tight regulation of both the volume of production and the inputs; local authorities effectively prescribe modern styles and proscribe prerequisites for traditional design. They find that construction cost has only a marginal or negligible impact, by contrast.

This research is especially plausible, as it turns out London and the Netherlands probably are similar in the relevant respect: some of our housing problems are caused by similar factors. Everyone wants to live in beautiful terraces, right? But new housing usually looks nothing like the most popular existing stock.

Nicholas Boys Smith and Create Streets provide an elegant explanation (pdf): building codes in London make popular traditional housing—which is very dense and could be sold very profitably—near-impossible. They blame six key barriers including: bans on recycling dead space between buildings into gardens; universal lift requirements; illogical value calculations; staircase width rules; and excessive wheelchair requirements; as well as many others with smaller individual impacts.

Top-down planning ruins cities, wherever it is tried. If we loosened regulations on the volume of building, and the type of buildings that could be built, then we could massively increase London's density while simultaneously providing the sorts of dwellings people actually want to live in.

We wish we had said this about inheritance tax

And in fact we have said things like this before:

Do you plan to leave your wealth to your children? Yes, on the understanding that they, in turn, protect it for their children and grandchildren, as I’m strongly against inheritance tax. Even at the height of my youthful Marxist fervour in the great socialist Jerusalem of the North West, I understood that the only real way to increase social mobility is to allow the working classes to keep the wealth they create and pass it on with their values, so that their children have the wherewithal – the money – to bring about change. Otherwise, you’re just giving it to out-of-touch politicians to waste and constantly pushing people off the mobility ladder.

Rather than the political classes taking a slice of the wealth each generation has created, then wasting it as is so often the case, why not a society in which wealth does cascade down the generations? We don't actually need to worry about the plutocratic fortunes: contra Piketty, absent those who pass on urban land through primogeniture those do get dispersed down the generations. What some thing of as great inherited fortunes (say, the current generation of Rothschilds) are in fact fortunes that have been generated again in that current generation.

So, why not a society in which that accumulated wealth of each generation is passed on to the children and grandchildren? A bourgeois society in which each is a sturdy independent yeoman, or one in the making?

We would hesitate to state that this is the entire and compete solution to anything at all, but what's wrong with it as a vision of future society? It doesn't look that unpleasant, does it, a world in which all have the resources to not be dependent upon the State?

Isn't it just wonderful how politics works?

If you promise someone lots of other peoples' money then you can buy their vote:

“I’m 100 percent Bernie,” freshman and first-time voter Emily Wilcox told ThinkProgress. “On education, women’s rights, equality, climate, and really everything, he’s great. He’s looking to the future and thinking about our generation.”

Wearing American flags as capes and BERNIE scrawled across their foreheads in black marker, Wilcox and her friend Summer Auvil said the campus has been leaning towards Sanders in large part because of his promise of tuition-free higher education. The students said signs for Clinton or any Republican candidate were rare on their campus.

“Bernie is just the right choice,” Auvil, a sophomore, said. “Kids are sick of being worried about paying their debt when they get out of college. I had to take out a lot of loans, and it’s a burden hanging over your head. Both of us know people who went into the military just because they couldn’t pay their loans.”

As, of course, everyone running for office has known since Demosthenes, if not since Ur of the Chaldees.

There is always some other whose money, resources, can be taken, desires thwarted, in order to achieve the goals of whoever is being addressed. And given that human beings are both selfish and greedy this is a tactic that works. Which is why we're rather grudging about this democracy thing, supporting it because it is less bad than all of the other possibilities. For there are things that do need to be collectively decided and using the power and violence of the State. But those things are few and far between which is why we are democratic minarchists, not supporters of the tyranny of the majority.

Democracy, government, they are for only those things that can only be achieved in that manner and also must actually be achieved. For everything else there's markets and personal liberty. Also known as paying your own damn way into a higher income and a professional job.

How we know that the tax justice campaign is entirely rubbish

An interesting little whine in The Independent about corporate taxation. Which contains one gem and one great truth. The gem:

So enough of multinationals treating the British state as if it were a charitable fund to which they can voluntarily contribute. ... Their vans drive on taxpayer-funded roads, and they frequently avail themselves of a legal system paid for by you and I.

The roads are more than paid for by vehicle and fuel duties, both things which local and foreign companies pay if they do actually use the UK's roads. And the commercial courts system is paid for by user fees: it isn't actually true that you and I pay for it, not unless we avail ourselves of its services. but the great truth is this:

At a time when public trust in business is plummeting, tax justice has been called 'the Fairtrade of our times' - a measure by which we tell a good business from the bad. And as with Fairtrade, when co-ops were the first to stock the products, co-operative councillors the first to demand fairtrade procurement, and Labour & Co-operative MPs the first to demand political support, it's the co-operative movement and social enterprises that have once again been ahead of the curve.

We have nothing against cooperatives whatsoever, but we do against Fairtrade. For as we've found out it doesn't in fact benefit those poor producers very much if at all. It's simply a form of outdoor relief for the dimmer members of the upper middle classes, to whom all the actual money flows. And do note that it's nor us making the comparison between Fairtrade and tax justice but someone who supports both. And thus we know that tax justice isn't something either serious nor likely to be of benefit to us all: just as Fairtrade isn't and most certainly isn't to the poor.

Reminder to CDC: Women are more than baby-portals

No one likes to receive unsolicited advice; and government recommendations are no exception to this. But the United States’ Centers for Disease Control and Prevention didn’t heed that warning when on Tuesday it released a new alcohol advisory, aimed at child-carriers (who we in the 21^st century have started to call ‘women’).

The CDC has recommended that women of a childbearing age who are not using birth control completely abstain from alcohol intake to avoid an accidental, alcohol-exposed pregnancy.

From the CDC's Principal Deputy Director Anne Schuchat, M.D.:

Alcohol can permanently harm a developing baby before a woman knows she is pregnant...About half of all pregnancies in the United States are unplanned, and even if planned, most women won’t know they are pregnant for the first month or so, when they might still be drinking. The risk is real. Why take the chance?

Why take the chance? In the off-chance that a woman could get pregnant during 3-4 decades of her life, why wouldn't she abstain from alcohol (and while she’s at it, cut out raw fish, cured meat and soft cheeses, stop skiing, avoid overheating and sign up to antenatal courses too.)

Those outside the- 4-decade span haven't been excluded fully from the press release either. While the CDC mainly addressed the effects of alcohol on pregnant women, their infographic suggests far more ambitious plans to cut down on women's alcohol consumption alltogether. Keep in mind "heavy drinking" is defined by the CDC for woman as "consuming eight drinks or more per week".

Fear-mongering much?

Quite rightfully, the Internet went ballistic over the insinuation women should be prioritizing the biological possibility of pregnancy over their daily activities, which include drinking habits.

These recommendations in the States come just weeks after here in the UK the Department of Health changed its alcohol guidelines, lowering maximum unit intake to 14 a week for both men and women, making the UK’s recommendations some of the most restrictive in Europe.

The CDC's and DoH's recommendations are different, but the recommendations of both government bodies were created with the same, faulty assumption: individuals can’t be trusted to their own lifestyle choices, and if left to make up their own minds, will engage in risky behavior.

There is indeed an appropriate way to advise women about the potential consequences of drinking while pregnant, but terrifying non-pregnant women out of a glass of wine because of ‘what might be’ falls short of providing an education tutorial.

We have to announce that all modern physics is rubbish

Well, obviously it's rubbish, eh? Because as Walter Heisenberg pointed out we can't even pin point the location of a particle using physics. So, what's the use of it, eh? We can know where an electron is going, possibly even how fast, but not where it is. So, thus, obviously, we need to take an entirely different approach to the whole subject of trying to understand the physical world around us. At least, this would be so if we were to take Tim Garton Ash on economics seriously:

The Guardian recently asked nine economists whether we’re heading for another global financial crash and they gave many different answers. Yet still we turn to economists as if they were physicists, armed with scientific predictions about the behaviour of the body economic. We consumers of economics, and economists themselves, need to be more realistic about what economics can do. More modesty on both the supply and the demand side of economics will produce better results.

Which is to entirely miss the point over what economics can tell us about the timing of crashes. The physics tells us that we cannot know both velocity and location of that electron. This is a finding from the science: it's not one of those things open to negotiation nor something that we're going to solve by using a different evidential or logical approach.

And so it is with the timing of a crash in financial or other markets. We do not in fact say "Oh, economics cannot predict that". We say that "It is impossible to predict that, we have proven it". Thus the hunt for a predictive method for a crash is a odd as a hunt for the true location and also velocity of a particle. It's not that we cannot do it with the current state of the science: it's that the science has proven that we cannot do it.

Thus, if economics fails on this point then so does all of modern physics fail on the same point. And the silly thing about saying that is that nuclear bombs still go boom even if we cannot tell which particle caused it in what manner, and economics is still, even the current economics we use is still, hugely useful in describing the larger world we live in, even if not accurate to the level of detail that physics is not.

Yes, let us be realistic about what economics can do. One of the things we know it cannot do is predict a crash.

In praise of gentrification

In a column for Inside Housing I've looked at some of the data around how gentrification affects existing residents to see if there's any reason to worry about it. Surprisingly, it doesn't look as if gentrification really does push out existing residents very much – involuntary movement out of a gentrifying neighbourhood is about 0.6 percentage points higher than city-wide averages:

Instead of displacing people, gentrifiers tend to add to a local area’s population through new builds and property conversions (like warehouses and former industrial buildings). Although rents might rise for existing tenants as overall demand for the area rises, the involuntary displacement rate is very small - in one US study, it is 1.4% compared to a city-wide average of 0.9%. . . .

And gentrification brings benefits for locals, with better jobs opening up:

It often feels like the staunchest opponents of gentrification are other gentrifiers who got there a bit earlier. The evidence from the US and the UK is that gentrification raises the incomes of people living in affordable homes and improves their credit scores.

And this is not even to mention the reduction in crime that usually takes place as well. Read the whole thing here.

Yes, we're afraid we are this cynical

That the major concerns in economics - or perhaps we should say that major concerns in political economy - have changed in recent years is true to us. But we're afraid that we are really rather cynical about why they have changed:

I hear frequently that economics needs to change, and it has, at least in the questions we ask. Twenty years go, the dominant conversation in economics was about the wonder of markets. We needed to free the banking system from regulations so it could do its important job of turning saving into productive investment unfettered by government interference. Trade barriers needed to come down to make everyone better off. There was little need to worry about monopoly power, markets are contestable and the problem will take care of itself. Unions simply get in the way of our innovative, dynamic economy and needed to be broken so the market could do its thing and make everyone better off. Inequality was a good thing, it created the right incentives for people to work hard and try to get ahead, and the markets would ensure that everyone, from CEOs on down, would be paid according to their contribution to society. The problem wasn't that the markets somehow distributed goods unfairly, or at least in a way that is at odds with marginal productivity theory, it was that some workers lacked the training to reap higher rewards. We simply needed to prepare people better to compete in modern, global markets, there was nothing fundamentally wrong with markets themselves. The move toward market fundamentalism wasn't limited to Republicans, Democrats joined in too.

That view is changing. Inequality has burst onto the economics research scene.

If we are to talk about that political economy then yes, we agree that the change has happened. We do not project this cynicism onto Professor Thoma's views, of course, but we do think we know why the change has occurred.

Because the answers to that first set of questions were correct. Things like the Washington Consensus (essentially, a list of stupid things you shouldn't do to an economy) were correct. Don't do these things, don't mess with markets where they do work and economic growth will happen. The adoption of those simple rules: let markets alone in those areas where they do work, has led to the greatest reduction in absolute poverty in the history of our entire species.

The questions were asked and answered and the answers to those questions were correct.

But of course that's not enough for some people. We too are entirely happy to agree that pure unadorned markets do not work in all circumstances. There are interventions, things that only government can do and which also must be done, that must and should be made. However, it's a very human desire to want to be able to plan the world in one's favoured image and a societal instruction set which says "intervene in these small and limited areas, otherwise leave well alone" just isn't going to be emotionally or professionally satisfying for all too many in the field.

And thus inequality. An excuse to do all sorts of societal management, management and fiddling that the answers to the previous set of questions ("How do we make the poor rich?" "How do we make all richer?") largely preclude, as people who would wish to manage society for emotional reasons would prefer.

As an example we think of the work of Piketty, Saez and Zucman. It's entirely clear in the economics of taxation that transactions taxes, wealth taxes and capital taxes are to be abjured. They make everyone poorer to no good reason. Yet if we start shouting about inequality then we can impose those things which we know to be deleterious. That is, the concentration upon inequality is simply a result of people desiring to do those things that the previous set of answers say not to do. So, obviously, change the subject and quickly.

Yes, this is cynical: but then we are about the motivations of our fellow humans. Oxfam has spent decades arguing that the only solution for abject poverty is that the rich world transfer more to the poor. Recent decades have shown that the cure for abject poverty is for rich people to buy things made by the abjectly poor in abjectly poor places. But there is still that very strong desire to tax the heck out of the rich: so the same original policy is now proposed it's just using inequality, not poverty, as the excuse. We are being less cynical about Oxfam there than we are about economics in general.

As it happens inequality is a problem which is going to go away of its own accord. Global inequality, as a result of that fall in absolute poverty, is falling. And in country inequality is going to start falling as a result of the change in demographics. The last few decades, as we added those poor to the global economy, have seen a relative rise in the amount of labour compared to he amount of capital. The returns to, the price of, capital have thus risen. The working age population, globally, started falling relative to the supply of capital last year. Thus inequality will decrease for the opposite reason that it increased. It's a self-solving problem: but that won't stop the calls to soak the rich for of course the soaking is the point, the answer whatever the question is.

All we've got to keep an eye out for in the future is the next reason they'll give for the policies they so desire. Who knows, they might even come up with a valid one one day.

We wholly approve of voluntary migration

No, we're not quite thinking of the wave of migration entering Europe just at present although obviously open borders do have their attractions. Rather, we're thinking of migrations in which people sort themselves into the sort of State that they desire. Like, for example, American "liberals" moving to Canada to find a society that they desire rather more:

“If Americans want to live in a country where there is an investment in public education, where people aren’t afraid of going bankrupt because they get sick, and where democracy is taken seriously, they should move, because an alternative exists,” said Tom Kertes, 43, who moved from Seattle to Canada with his now husband Ron Braun in 2007. ... For Laura Kaminker, however, that’s completely out of the question. In the 20 years before she and her partner Allan Wood finally moved to Canada from New York City in 2005, she had “lost hope” in the country she saw plagued by “civil liberties crackdowns” and “endless wars”. Although she still has her American citizenship, she doesn’t vote any more in US elections, and whenever she comes back to Canada after visiting family or friends in the States, she breathes a sigh of relief.

“Every time I say, ‘God, I’m so glad to be out of that crazy country,’” she said.

That's not a view of the United States that we share but then we are liberals not "liberals". Chacun a son gout and good luck to all who sail in her is our motto. And if you don't like the society you're in but can see a better one, by your lights, just over the horizon then great, move to it.

It certainly strikes us as a great deal more honest, more adult even, to go and live in a society that operates as you wish one did rather than try to insist that your 320 million fellow countrymen must follow your own plans. It's not so much that we would say good riddance to those who with to be more statist, it's that we do indeed understand that different people have different ideas about what the good society entails. and we're just fine with people going off to one they find more congenial. As, of course, is the foundational myth of the United States itself.

It's just that we'd really rather hope that the tolerance would be mutual, that we might move, or if they do we might remain, in a society more attuned to our own tastes and prejudices but that never really does seem to happen, does it?