How Japan gets it right on housing

Japan is often seen as an exotic oddity among the major developed nations. Though not as well known as manga or sushi, the Japanese housing market is no exception.

Japanese architects let their imaginations run free: just look at Reflection of Mineral by Atelier Tekuto. Designers in Japan are not held back by paying homage to history or a desire for extreme longevity. Buyers do not need extensive permission to demolish their house and construct them anew—so they do it a lot. And in spite of government incentives for durable housing, the disposable-home culture has boomed. Projects like Reversible Destiny Lofts indicate a willingness to move rapidly with the times.

Like many Japanese crazes you come across online, these hyper-modernist and experimental schemes are not typical across Japan. In rural areas machiya (traditional wooden housing) is far more common. The price of these houses is surprisingly low, and even falling. The country's population has begun to decline, and rural areas like Kyoto prefecture have seen emigration to the country's capital. The attraction of the hustle and bustle of Tokyo, not to mention its economic dynamism, has pulled resdients away.

In spite of this mass migration, rents property prices in Tokyo have barely changed, and apartments are getting bigger. Relaxed regulations have underwritten a free and elastic housing supply: when there a plot can be put to a better use than it current one, it is legally easy to knock it down, extend it up, or switch it to a new use. Both the relative lack of deference to historical preservation, and the cheap housing, are in stark contrast to the situation in London, San Francisco, or other major metropolieses.

This is creating a sharp divide between rural and urban Japan. Few actually demolish their empty houses in the countryside, due to waste disposal laws that the Japanese government is only now overturning. But there are still around 8 million unoccupied buildings in Japan, according to a government count — a far cry from the British worry about second houses and foreign ownership. Towns with large numbers of abandoned houses have been dubbed ghost towns.

Japan is yet further proof that reports of the death of the traditional city were greatly exaggerated. The job market in urban Japan is still sucking in workers: now 45% of Japan's entire population lives in just three city regions: Tokyo, Osaka and Nagoya. Herd mentality has furthered the divide: the greater the number of people living in an area, the more economic relationships they can have, the more they are paid, and the more stuff they can buy. On top of that, other young people move for fear of being left behind.

The economic disparity is widened by lower levels of "parasite singles" (パラサイトシングル)—those living with their parents well into adulthood—in cities. In Tokyo it is increasingly common for unmarried women to buy or rent flats on their own indefinitely—significant when the group has faced so much stigma for so long. This would be impossible without the low prices and wide choices that such a liberal supply affords.

Japan's housing market is full of contrasts—Tokyo's modern buildings versus machiya, disposable-houses versus ghost towns—but at both ends they've managed to do something the West seems incapable of: keep housing affordable!

Did Microsoft's antitrust prosecutions give us the iPhone? Um, no.

Tom Forth writes about the Microsoft antitrust case (which is my earliest memory of a competition lawsuit, and which I followed with interest as a child). Many of the responses to the EU’s Google ruling have compared it to the Microsoft case, including my own on this blog and in City AM.

He argues that the threat of more antitrust lawsuits were what drove Microsoft to effectively bail out Apple in 1997, when it was close to bankruptcy. Without the $150m injection of cash and commitment to maintain Office software for Macs that Microsoft gave Apple, we’d have had no Apple and hence no iPhone. Keeping Apple afloat allowed Microsoft to point to the existence of a viable rival – so no monopoly and no need for investigation.

It’s a good story, even if it’s a little strange to assume that without Apple, nothing like Apple or the iPhone could have existed – a sort of domino theory of innovation, where ours is the best of all possible worlds. (Tom acknowledges this point, but says he’s just not convinced by it. On Twitter he argues that the lack of competition in English bus services justifies his scepticism.)

But the story Tom tells is basically wrong – it’s the conventional folk history of what happened, sure, but it actually misinterprets the situation with Microsoft at that time. First, note that the $150m cash injection was a relatively trivial sum of money – the real ‘bailout’ came from promising to maintain software support for things like Internet Explorer and Office for Mac.

Microsoft was throwing its weight around in the 1990s. It was blocking the sale of alternatives to its software and demanding that Windows PCs be shipped with other Microsoft products too. But there was such an abundance of complaints that prosecutors decided to focus on what they saw as Microsoft’s most egregious crime: bundling Internet Explorer with Windows.

But this took Apple out of the picture. As Daniel Eran Dilger says:

By narrowing the monopoly case, prosecutors effectively took the majority of business between Apple and Microsoft out of the picture; the existence or disappearance of Apple would simply have made no difference in a trial that revolved primarily around Netscape's Navigator and Microsoft's Internet Explorer on Windows.

Microsoft didn't need to bail out Apple to pretend that the Mac platform was providing effective competition to Windows. Further, doing so would not really help its case, since the existence of the Mac did nothing to put Netscape on OEM PCs or to make it appear that Microsoft had not violated its 1994 consent decree.

Included in the findings of fact is a summarizing statement that demonstrates how little bearing Apple's Mac had on the outcome of the decision:

“Viewed together, three main facts indicate that Microsoft enjoys monopoly power.  First, Microsoft's share of the market for Intel-compatible PC operating systems is extremely large and stable. Second, Microsoft's dominant market share is protected by a high barrier to entry. Third, and largely as a result of that barrier, Microsoft's customers lack a commercially viable alternative to Windows.”

In other words, bailing out Apple was irrelevant to the main lawsuit against Microsoft, including to the judge ruling on the case. (Dilger’s post is fascinating and detailed on this whole affair – I recommend a full reading if this case is interesting to you.)

In fact, antitrust was not the reason Microsoft decided to bother with Apple. 

Further underlining the fact that the agreement had nothing to do with antitrust violations, Microsoft demanded that Apple make Internet Explorer the default web browser on the Mac. If the company was at all worried about its monopoly case, such a deal would be an absurd way to create the appearance of an open market. 

Far from bailing out Apple to avoid the appearance of a monopoly, they were trying to use Apple to squeeze Netscape – a quarter of whom were Mac users – in the browser space even more! Microsoft’s bailout was for the exact opposite of what Tom claims.

The real reasons were to do with expanding Microsoft software usage to make money and to defuse impending lawsuits from Apple. Apple had amassed a large patent warchest and was reported to be planning to sue Microsoft for patent infringement and for using stolen code for its video processing on Windows. 

To head these off, Microsoft wanted to tie Apple users into its software more (Internet Explorer and Office) and give Apple a series of sweeteners to persuade it to drop the lawsuits. Bailing out Apple wasn’t relevant to Microsoft’s monopoly lawsuits. It was driven by a desire to be more monopolistic and to avoid being sued for intellectual property theft by Apple. 

Whether the actual Microsoft antitrust case was justified is a discussion for another post. A few points, though: I agree with Lawrence Lessig, one of the regulators behind and Special Master during the lawsuit, that history has proved it to have been misguided – the emergence of Linux shows that the operating system space can be competitive even if a dominant firm is being extremely aggressive in trying to destroy its competitors. 

In my previous post I explained why competition within a software platform doesn’t matter if there is or can be competition between platforms. And Thomas Hazlett has shown that antitrust lawsuits against Microsoft lowered the overall value of the computer industry – a sign that the enforcement has not been good for the sector as a whole.

But the folk story that Tom cites is widely misunderstood, and misses the real dynamics of why Microsoft helped to bail out Apple. I hope people aren’t misled by it.

Odd what The Guardian doesn't report about East Coast Trains, isn't it?

Or perhaps we might not be all that surprised. Stagecoach has announced its results and the bit that all are interested in is the East Coast Line. They're the private operator who took the line out of the Direct Management Organisation. That's when the government was running it directly and it was making a profit, thus a payment into state coffers.

This of course prompted cries that if a railway could make a profit in state operation, then renationalise them all!

Stagecoach says it has overpaid for East Coast rail contract as profitability plunges

Isn't that great? Well, perhaps not if you're a Stagecoach shareholder but for us taxpayers we've got lots of extra lolly.

Andy McDonald, the shadow transport minister, said the East Coast line – the scene of a dispute between Jeremy Corbyn and Virgin East Coast about overcrowding – showed privatised rail was “dysfunctional, broken and needed to be brought to an end”. The RMT union said re-privatising the line had been a “gamble doomed to failure”.

The normal sorts of comments from the normal sorts of people. But this is odd from The G:

The dispute raises the possibility that Stagecoach could end up paying something closer to the £235m that state-owned Directly Operated Railways (DOR) did in the final year of a franchise it took on in 2009, when the government seized control from National Express.

Erm, what? From the Stagecoach accounts:

As a result, Virgin Trains East Coast has amongst the highest customer satisfaction of any franchised rail operator. At the same time, Virgin Trains East Coast has continued to meet its contractual and financial obligations, including delivering around £525m to 29 April 2017 in premium payments to the taxpayer. This is around 30% more than the average monthly payments made by Directly Operated Railways when it ran the East Coast route. 

Privatisation means that we, we taxpayers, get more money from the line than when government ran it directly? Isn't that proof that privatisation of the railways works?

And might not The Guardian tell us so? For that's the one thing they manage not to mention, that the profit from the line for all of us is higher under this arrangement. Isn't that odd.

A teeny tiny bit of self-promotion

When I agreed to write this blog at the start of the week it was intended to be on the importance of detailed scrutiny of the Government during the Brexit negotiations - with a focus on a small but important issue at the UK-Irish border.

But today didn't go quite go to plan...

Instead of guiding the news to Adam Smith objectives I ended up becoming the story after making a light-hearted joke on Channel 4 last night.

So instead of a post on the intricacies of Border Inspection Posts you get a whole load of self-promotion!

The house was successfully divided. Good amounts of abuse and praise came my way on Twitter and then the papers caught it. The Telegraph picked it up straight away, Guido covered it, with other news pieces in The Sun, the Daily Mail, the HuffPo and the Evening Standard.

I'm now off for a weekend away - so all my love and a promise of a more detailed and relevant blog-post next time will have to do!

Matt

There's no outrage like a faux outrage

"Facebook rules do not protect black children from hate crime" reports The Times today.

A rather striking headline I'm sure you'll agree, but if you bother to read the article you'll see Facebook's rules do nothing of the sort.

From the article:

"ProPublica, a US journalism website, shed further light yesterday on Facebook’s criteria for removing posts by revealing some of the slides used when training censors.

One slide shows three groups: female drivers, black children and white men and asks: “Which group is protected from hate speech?”

The correct answer, according to Facebook, is white men. That is because both race and gender are protected categories, while age and driving status are not."

This is of course an entirely sensible policy. It's not, as the headline suggests, carte blanche for bigots to spew abuse at black children and female drivers. The question is merely designed to work out if Facebook's moderators understand what is and what isn't a protected group.

If a racist were to post verbal abuse that explicitly singled out black children, then the post would almost certainly fall foul of Facebook's rules by attacking a group on a protected charecteristic - race. The same would be true of a sexist sending nasty abuse to female drivers, it'd be covered by the protected charecteristic - gender.

It isn't the first time The Times has gone after a tech company on spurious grounds. In the past I've noted how they attacked Airbnb over supposedly secretive lobbying tactics. Of course, Airbnb were doing nothing of the sort. They simply invited some Airbnb hosts to dinner in Notting Hill and canvassed their opinions about the services. It's hardly cash for questions.

The Times is usually an excellent paper. I read it cover to cover every day, especially enjoying columnists such as Matthew Parris, Viscount Ridley and Rachel Sylvester. But it’s also becoming worryingly anti-tech in its journalism.

Architect of prosperity

As President Xi visits Hong Kong on the 20th anniversary of the 1997 handover from the UK, he might do well to reflect on the name of Sir John Cowperthwaite and what this quiet British civil servant did to make the former colony so prosperous. Which was largely leave the people to their own devices.

After the turmoil of the second world war, Hong Kong was called ‘the barren island’. It had few natural resources, its trade and infrastructure had been ruined, its income was a third of Britain’s. Now it is a world trading hub, its airport handling 60m passengers a year, its skyline soaring ever higher, its goods going all over the world, its per capita income now 40% more than Britain’s.

Part of the reason for that is that the small cadre of civil servants, like Sir John, whose job it was to run Hong Kong, fixed on the objective of making it economically prosperous, and knew that the best way to do that was to do exactly the opposite of what the home country was doing—with its nationalisations, controls, economic planning, high taxes, trade barriers, deficit spending, and all the rest. The Hong Kong administrators by contrast rejected the idea of government planning and spending to invest, believing that entrepreneurs knew how and where to invest, and how to manage their businesses, better than any government officials. They kept the government’s books balanced for nearly every year; they resisted high taxes, believing that low taxes would encourage private investment and would expand the long-term tax base.

Cowperthwaite was the most important person behind these policies, as a new book by Neil Monnery, Architect of Prosperity, demonstrates. He ran the trade and industry department after the war then became financial secretary in Hong Kong—effectively the colony’s Chancellor—until he retired in 1971. 

One thing the book demonstrates is just how hard it is for any government body to prevent itself from interfering in an economy—with the inevitably counterproductive results. Sir John, it shows, fought off many such attempts. There is a story that the British government, then pursuing a full interventionist policy, sent a group of civil servants over to Hong Kong to ask Sir John why he was not keeping unemployment statistics, and to make him do just that. Sir John, goes the story, put them on the next plane back home, explaining that entrepreneurs know the precise state of the labour market from day to day, never mind quarter to quarter, and that if he kept unemployment statistics, people would want him to produce some counterproductive intervention to boost unemployment.

The story is not true, but it is not far from the truth. Cowperthwaite had to fight over and over to resist ‘enlightened’ interference with the Hong Kong people’s lives and businesses, and to maintain his doughty view that economic statistics were a double-edged sword and you should only collect the ones that are really essential.

It’s a fascinating story of a remarkable but quiet man, and the astonishing economic results of his benign policy. Perhaps it is a lesson not just for President Xi, but for us in the UK too, as we drift on doing so many of the wrong things that have made us 40% poorer than Hong Kong.

The book is available on Amazon here.

Perhaps we should admit it outright, we're just unpatriotic

According to Polly Toynbee we're unpatriotic:

Patriotism – pride in the country – is undermined by every failure in the public realm. Since 2010, this government and its coalition predecessor have followed an ideology of cuts, intent on reducing the state to a pitiful 36% of GDP, far below any equivalent EU country. Leadsom, hear this: shrinking the state is the opposite of patriotism – a betrayal of country and people.

The EU country which is perhaps most equivalent to us - we share language, the Common Law and an awful lot of often fractious history - is Ireland which has a smaller state than we do and is also about as rich (no, ignore GDP here, we must use GNP). Of the OECD countries Switzerland is richer, also has a smaller state. That's probably because of he postcode lottery that Polly so bitterly decries. The central state at Berne deals with the peace, easy taxes and tolerable justice bit, everything else is done by the cantons in myriad different manners.

So it's at least not obvious that shrinking the state is such a bad idea.

But then the idea that patriotism is defined by the size of the state in the first place is trivially stupid, isn't it? We're entirely fine with the idea that how well the place is governed can be related to how patriotic we all are, but the idea that the amount of money defines it is ludicrous.

But then, you know, Polly. She always has insisted that it's not how we spend the money that matters, it's feel the width, see how much we are.

Basic Income 101

The July 2017 edition of Reason magazine contains a fascinating article by Jesse Walker that provides a comprehensive history of Basic Income: from the concept’s murky beginnings in 1795 to contemporary experiments in unconditional transfers and similar initiatives by governments and NGOs around the world. The ASI has championed the (virtually identical) idea of a Negative Income Tax since the 1970s, and the number of supportive voices for such schemes has grown significantly in recent years.

European countries such as Finland and the Netherlands are in the early stages of basic income experiments, but the most dramatic tests of the concept are being conducted in the context of poverty alleviation in the developing world. In the piece, Walker raises the example of GiveDirectly:

“Having moved from conditional to conditionless cash payments, GiveDirectly's directors started thinking about taking another step and experimenting with a full-fledged basic income—not just payments to a village's neediest families, but a long-term income for everyone in town, one set high enough for people to live on it. Other aid groups had already conducted experiments along these lines in India and Namibia; the results appeared to be favorable, but these studies were too short-term to draw firm conclusions from them, and the Namibian experiment had the additional problem of not being randomized.”

Walker also highlights that despite reasonable dissent (and inevitable ‘anything but the outgroup’ opposition) from across the ideological spectrum, there are currently a wide range of political positions that include elements of support for basic income — something that has been the case for several decades:

“As in the 1960s, the interest is coming from many different directions. Center-left wonks perceive the basic income as a more market-friendly approach to welfare policy. Radicals hail it as an alternative to the "neoliberalism" they associate with those same wonks, imagining a day when work is detached from income and we live in a world of postscarcity abundance. Silicon Valley figures hope it will help us survive the upheaval to be unleashed when artificial intelligence wreaks havoc on labor markets. Libertarians see it as a way to simplify the welfare maze into a cheaper and less intrusive single program.”

If you’re looking for an engaging, accessible, and detailed introduction to the basic income “movement,” look no further than Walker’s essay.

Is austerity over?

Everyone is excited about the prospect of austerity ending. It’s understandable. The effects have been gruesome for lots of people and the politics of it are becoming quite difficult. In many respects it is a victim of its own success. It's only because we had austerity, cutting the deficit from 10% of GDP to 3% or so, that we can talk about ending it now. But it's quite likely premature:

1. The deficit is 2.5-3%, depending on what measure you use. Most of that is current expenditure, rather than investment. During the early years of austerity, lots of people said that the time to cut spending was when the country was growing – fix the roof while the sun is shining. Well, the sun is (sort of) shining now and they're against cutting spending now too. If something happens in the next few years – Brexit goes wrong, China has a downturn, the Eurozone collapses – we'll be in an even worse position than we were before 2008 and we'll have even more difficult cuts to implement. The low-hanging fruit have been picked!
2. Even though the deficit is fairly low now (compared to where we were in 2010, anyway), the debt-to-GDP ratio is 90%. Debt must be repaid, so borrowing is just deferred taxation, and is invisible to most voters. The danger is that people vote for spending rises that do not have commensurate tax rises now, and so vote for more spending/tax than they would if they felt the tax cost of the spending as well as the benefits. The higher taxes eventually needed to pay off the debt will be economically costly.
3. Raising taxes now to eliminate the deficit is legitimate and better than borrowing, but if you raise taxes that affect growth (eg, on investment) you may end up making us poorer – maybe much poorer, if the taxes are on investment – in the medium- and long-run. 
4. Government borrowing—outside of a period of mass unemployment—can only come out of activity elsewhere in the market. Empirical work bears this out too. You can’t employ people to build schools and also to build factories. Maybe Keynesians are right that this isn’t an issue when interest rates hit zero, but rates on gilts—not to mention every other market asset—have shown no sign of doing so.
5. The Tories are exaggerating the extent of the changes for PR reasons. They want to look like they're "learning from the result". But spending plans already had deficit only being closed in 2025 – back in 2010 it was supposed to be 2015, a date which was then pushed back repeatedly. The public sector pay freeze (which only allowed 1% pay rises per annum, effectively a real terms cut) was brought in in 2013 – it is not synonymous with ‘austerity’ and as long as things like the welfare cap remain in place it’s not at all accurate to say that austerity has ended.
6. Getting rid of the public sector pay cap might make sense for other reasons. When it was introduced, public sector pay was quite high compared to private sector equivalents. That’s changed, and (eg) recruiting nurses is becoming difficult. Just as any private firm should, when you can’t hire the workers you need, you need to offer higher wages.
7. The welfare cuts were balanced out by lots of folks getting jobs. Unemployment at 4.7% takes a lot of the sting out of welfare cuts (though the worst are yet to hit). Food banks are mostly used by people who haven't received their welfare (or wages) on time – that is, it’s a function of a badly run welfare system, not necessarily one that is giving out too little money. (Maybe it’s badly run because the system is underfunded.) The welfare cap of £20,000 per household (£23,000 for London) affects about 88,000 families, mostly large families and families with high housing benefit bills. Politics aside, this is probably going to hurt people more severely with less fiscal benefit than the public sector pay freeze – but this was the cap that both the Tories and Labour (according to its manifesto) are apparently in favour of keeping.
8. The cut in investment under austerity was bad, because projects with positive benefit-to-cost ratios that the private sector can’t carry out should go ahead as long as the government can borrow reasonably easily. If politics makes this impossible, the government should be trying to unlock some of the £2.5 trillion in pension funds for investment in infrastructure – it's more important to fix the rules than to borrow even more. But borrowing to fund current spending is the real problem, and it would probably be better if we only spoke in terms of that, and kept capital expenditure conceptually separate.
9. Austerity probably didn't hurt the recovery – the UK had fastest growth in G7 between 2010 and 2015, while implementing harshest or second harshest spending cuts (US was arguably harsher and also had strong growth). Since we have an inflation targeting central bank, the reduction in spending and hence the macroeconomic impact of the cuts was mostly offset by easier monetary policy.
10. If austerity really is politically impossible (ie, if they stick with it then Corbyn gets in), then the impetus for pro-growth policies is very high, because eliminating the deficit by means of growth now becomes the name of the game. For that, it’s all about housing, tax reform and infrastructure.

Is Amazon's takeover of Whole Foods anti-competitive? Probably not.

A few days ago, Amazon announced its plans to purchase the predominantly USA-based grocery retail chain Whole Foods for almost $14bn. Although both companies operate in many countries, the main competition issues (if any) are likely to arise in the US, were both companies have a non-negligible presence.

Indeed, this announcement has resulted in a number of people claiming that the proposed merger will be anti-competitive. Specifically, there are some claims that the merger would result in 1) bundling and foreclosure of rivals; and/or 2) predatory pricing. In short, the first theory of harm posits that Amazon would force customers that wanted to purchase its distribution (or other) services to also purchase from Whole Foods (or vice versa), while the second theory of harm suggests that the merged entity would price below cost in order to drive out rival grocery firms before increasing prices once those rivals exited.

Importantly, both of these theories of harm require that the merged entity have some form of "market power" (i.e. the ability to charge a price above the competitive level and to act independently of its rivals). Typically, this is most likely to occur when a firm has a share of sales in a particular market of over 40%. However, as a general point, these theories of harm gloss over the fact that Amazon and Whole Foods' shares in grocery sales are tiny - less than 5% combined in the US. As such, it is difficult to see how the combined entity can have any market power.  Clearly, the merged entity would not satisfy this for sales of groceries at the moment of the merger.

Bundling

However, others might argue that Amazon does have a sufficiently high share of sales of "online retail" to be classed as dominant. As such, they argue that Amazon could "leverage" its power in that area to grocery retail by bundling some of its services with those of its groceries. However, as the merged entity will be active at the retail level of groceries, it is not obvious exactly what other services offered by Amazon could be bundled with them - for the bundling strategy to work, consumers would still have to want at least one of the items in the bundle, and could continue to purchase them separately from Amazon or elsewhere anyway. Hence, there does not appear to be a viable mechanism through which this bundling theory of harm could occur.

Predatory Pricing

Moreover, for the predatory pricing theory of harm to be valid, there must be strong evidence that 1) the merged entity would price its groceries below some measure of cost that represents the extra cost that would be incurred by supplying one extra unit of output (usually measured as average variable cost of long-run average incremental cost); and 2) it would have an incentive to do so.

The first condition is notoriously difficult to prove - one first has to decide which costs should be included / excluded in the measure (which really isn't as easy as one would think - e.g. should advertising spend that applies to brand-related marketing, but isn't specifically related to groceries, be included), as well as deciding the relevant time-frame over which costs are assessed.

The second condition requires proving that the merged entity would become dominant (and therefore be able to recoup the losses it had made in pricing below cost) in the future. This is where the theory of harm becomes incredibly speculative - it assumes that sufficient sales would switch to the merged entity from rival grocery firms that the merged entity would be dominant. In other words, it assumes that pricing below cost would be sufficient in and of itself to persuade consumers to switch (regardless of e.g. quality of service provided) and that rival grocery firms would not respond in any way to the merged entity's actions. Clearly both of these assumptions are likely to be violated in practice and, as such, the predatory pricing theory of harm seems unlikely.

Summary

Given that the merged entity is unlikely to have the incentive or ability either to bundle its products together or recoup any losses made from pricing below costs, both of the theories of harm currently being bandied about are unlikely to be valid. As such, it is difficult to see how the cries that the proposed merger is anti-competitive are anything more than "a big firm is buying someone so they have to be stopped". That should not be a basis on which a merger can be prevented.