Here's an interesting historical rewrite

We do note that there's often enough an attempt to rewrite history. Or, perhaps, to emphasise one aspect rather than another. The New York Times recently ran a piece insisting that communism had its good parts as women had more orgasms. Female sexual pleasure is indeed important but we're deeply unsure that it's a justification for the Holodomor.

Similarly there's been a long running insistence that Britain was at its best in 1976, for that's when we were most equal. Not a view that's likely to be shared by anyone who was there at that time nor was it sustainable as the subsequent years showed.

And then there're those who wish to trample over the basic facts, not just polish certain facets of reality:

For too long, people in social housing were forgotten and denigrated, and estates were left to disintegrate under the last Labour government and every Conservative government since the 1980s.

Well, no Ms. Foster, that isn't actually what happened, is it? As Polly tells us in the same newspaper:

Labour's extra spending went mostly on improving services – hiring doctors and nurses, more and better qualified teachers, rebuilding leaking schools and aged hospitals, free nurseries and 3,500 Sure Start centres. Too few homes were built, but 90% of social housing was brought up to "decent homes" standard, rescuing estates from chronic disrepair. 

As The Guardian itself insists, comment is free but facts are sacred. Not too much to ask that a publication lives up to its own tagline, is it? 

Why are houses in London so expensive?

Oxford Economics’s Ian Mulheirn writes that London’s housing market isn’t expensive because of a lack of building, and building more wouldn’t lower prices. I disagree. 

Claim one: housebuilding has outstripped household formation, so if anything we have a surplus of housing. 

Household formation is “endogenous” – it is determined, to some extent, by housing availability. My flatmate and I count as a single household, even though we might prefer, if we could afford it, to live separately. A young person who wants to leave home (creating a new household) may not be able to do so because it’s too expensive. A household might not be able to move to London at all if housing costs are too high.

What if we look at something other than households? This chart (hat tip to Daniel Farey-Jones for it) comes from the GLA’s excellent Housing In London report and shows that in the last two decades the number of jobs in London has grown by 40% and the number of people by 25%, but the number of homes by only 15%. (I suspect this figure is also partially endogenous – more people would live in London if it was cheaper to rent or buy.) People-per-dwelling in London has been rising since the mid-1990s and the share of 20-34 year olds living with their parents in London has risen from 17% in the late 1990s to 23% today.

So it looks as if there is something to this endogeneity point. Since the first half of Mulheirn’s argument rests on household numbers being independent of house numbers, I think it’s wrong. 

Claim two: house price rises cannot be blamed on insufficient supply because rents did not rise by anything like the same rate.

Here Mulheirn is on firmer ground. Because house prices reflect their value as an investment as well as their value as a place to live, simple supply and demand views may be misleading. Rents, which only reflect the value of somewhere as a place to live, are a better reflection of supply and demand dynamics than house prices. 

Low real interest rates are probably a better explanation for the recent rise in house prices than a sudden change to supply and demand fundamentals is. Ben Southwood explains why here, but basically if the expected return from other investments falls, the value of housing rises as it becomes a relatively more profitable investment. 

But there are two things to say about this. One, the fact that rents have not risen much in London since 2005 does not show that there is no shortage of houses in London. Rents may have been very expensive already back in 2005, and by international standards it certainly looks that way – London is one of the most expensive cities in the world as rents go. 

Mulheirn does not ask why housing is such an important investment good in the first place. We don’t expect the price of other durable goods like airplanes or cars to rise when interest rates fall, because the supply of those things is relatively elastic so if the demand for them goes up due to cheaper borrowing, people simply meet that demand by making more of them. “Investing” in a car doesn’t make sense unless that car cannot be easily made in the future – so classic cars, yes, but 2017 Toyotas, no.

Not so with houses. The supply of houses, like gold or fine art, has become so inelastic that houses now do have a huge investment element to them. You want somewhere secure to live permanently? Sorry, you have to also invest in a hugely valuable financial asset that might rise or fall by 10% in value in the space of a year, producing a deposit for that and paying the interest on a loan to cover the costs. 

This is why building more homes would cut prices, even though recent price rises may not be caused by a fall in building rates. The price of housing-as-investment is determined by two blades of the scissors – both interest rates and tenancy rules acting as one blade, and inelastic supply acting as the other. Let supply respond to demand and housing stops being a useful investment asset. 

In a footnote, Mulherin makes a third point: 

Incidentally, it’s pretty much impossible to make a case that purely regional supply shortages can explain a boom in national prices in the absence of a national supply shortage. If there’s no shortage nationally then any growing demand in London, say, must come at the expense of falling demand elsewhere leaving average prices unchanged.

This is a very weird point and is obviously wrong. We don’t have a fixed amount of money to spend on housing nationally – we can raise our earnings by moving to different places, and we can shift expenditure from other things to pay for more desirable housing. If housing supply was entirely fixed in London then any rise in wages here would result in a rise in rents paid, without any money being shifted away from elsewhere.

It's difficult to understand what model he's using in his head – what does he think would happen to prices if we allowed many more houses to be built? Where does he think house prices come from? It's not clear how his points join up in his own argument. For me, though I admire Mulheirn’s contrarianism, I don’t think the case is made. Building more houses is still the best way of cutting housing costs that we’ve got.

The IMF did not say that Britain should raise taxes

The International Monetary Fund has said that some countries have the room to raise taxes, at little cost to economic efficiency, in order to reduce inequality. Everyone and their grandmother is now shouting that Britain can raise taxes in that manner.

This is not what the IMF said. It is what the papers are saying though:

The International Monetary Fund has called for higher income taxes on the rich to help to balance budgets and arrest the political threats posed by inequality in a sharp break with its prevailing orthodoxy.

And:

Yet, in its latest fiscal monitor, that is precisely what the IMF has done. Not explicitly, of course. The report is careful not to say which countries should be thinking about raising the top rate of tax. Still less does it say that the right level should be the 50% proposed by Labour.

But that doesn’t really matter because what the IMF has done is provide some high-level support for Labour’s basic approach.

And:

Labour seized on the report, calling for higher taxes on the rich, citing the IMF’s intervention as evidence of the need for a fairer tax system.

And:

The pro-taxation stance in the fund’s bi-annual “Fiscal Monitor” was well received by Labour’s shadow chancellor, John McDonnell, however. “The IMF support the argument we made in the General Election for a fairer tax system,” he said.

He added that there was no evidence to support “those who scaremonger about the effects of making the rich pay fairer tax”.

The point being that this is not what the publication says, at all. What it does say is that, as we all know, there's a trade off between the damage done to economic efficiency by high taxation and the reduction of inequality by that tax and the subsequent spending. That's not exactly news. They then go on to explore where and when, in their opinion of course, the trade off in the loss of efficiency becomes too great for the value of the reduction in inequality.  

About which they say this:

Empirical evidence suggests that it may be possible to increase progressivity without adversely affecting economic growth, for instance, by raising marginal tax rates at the top in countries with relatively low rates and progressivity.

That is, places with low tax rates and little progressivity in their tax systems can raise those rates and progressivity - but only those currently at the low end. 

Which leaves us with the question, well, where is the UK? That's discussed on page 7. And the UK is slap bang in the middle of the countries studied. Both in how much inequality is reduced through the tax and spending system and also in how much of that is done by tax itself and alone. We're average, not low, that is. And thus the idea that we've the room to do more about inequality through higher taxes on the better off without damage to economic efficiency does not apply to us.

All of which usefully agrees with earlier findings from the same source. Our index for the inequality is the Gini and we can shift that by something in the range of 12 to 14 points without doing too much damage to that economic efficiency. More than that and we do indeed make us all poorer to no good end. The UK shifts the Gini by some 14 to 15 points by these calculations. We're doing about what we can without the damage becoming excessive already. 

The IMF said some people can further reduce inequality through their tax and spend systems. Accurate observation tells us that they've not said this about the UK. 

Ubers, not social ambulances for me please

The rather eerie Instagram post of Michael Fallon at Conservative Party Conference looks like my Dad, or even Grandpa has got hold of the Party’s account. Combine this with Robert Halfon’s suggestions on Monday of “social ambulances" and it looks like the Tories are having a midlife crisis. 

Here’s Halfon:

“But this is not just a ladder by itself, it’s a ladder that is grafted by government, it is a ladder that the people are brought to by government, it’s a ladder that has a social ambulance always there at the bottom, ready if people fall off. It’s a ladder that has hands around it, to help people every step of the way.”

Halfon is right that Tories need to do more to appeal to younger voters. However, free bus passes, fuel cards and free insurance for those on lower incomes really aren’t the way forward: it concedes Labour the argument. Why vote Tory if they're going to copy Labour policies on tuition fees, the public sector pay cap, and energy price caps anyway? Might as well go for the Real Red Thing! May and co. have also clearly been reading the same economics books as the Labour Party with their £10bn pledge for Help To Buy. 

So what should the Tories do to get the youth vote?

By youth vote I mean, graduates under 30. Yes, telling under 47s you voted Tory is like saying you killed their dog, but how to win back under 47s is another blog post. So, they could start by listening to the message of rising stars like Kemi Badenoch MP. Speaking the ASI on Tuesday, she made the case for free markets to a large crowd of young people. I implore you to watch her maiden speech where she reminded the Conservatives of their identity: defenders of liberty and free enterprise, and champions for a meritocratic society, aspiration and personal responsibility.  

My 3 suggestions...

Firstly, build on the Greenbelt & transform restrictive housing policies. It’s pretty simple economics: there’s a massive lack of housing supply in London, and there’s land we could build on but don’t because we think it’s sacred. It’s not. A considerable amount is made up of carparks, hardly Constable’s land. And if we built on just 3.7% of it, that would provide us with 1 million homes. Build out and up. 

This is really important for scooping up the youth vote: rents in London gorges on about 50% of young people’s disposable income in exchange for rabbit hutch in zone 4. And buying a house is simply not on the table: I would have to earn £200,000 in today’s money to reflect the proportion of income spent on mortgage payments comparatively to someone in the 1950s. 

Home ownership provides people security and used to be engraved into every Conservative manifesto. 

Secondly, embrace social liberalism: legalise cannabis, decriminalise prostitution and for God’s sake drop the xenophobia. Firstly let’s look at legalisation of cannabis. If you legalise it you can regulate it, rake in tax, reduce the figure of £10.7bn that’s currently spent on drug related incidences and lower gang crime. 

Decriminalisation of prostitution is the right way to tackle the injustice in this industry. My arguments for this echo my arguments for legalisation of cannabis. Decriminalising it allows you to regulate it, rake in tax, but most importantly provides sex workers with independence and liberty to work in safe environment: they can report violent customers and work with more than one person - this is currently not allowed, leaving sex workers more vulnerable to assault. 

My housemate Sarah, a staunch Labour voter, always refers to me as “nice Conservative”: I think this is mainly due the fact that she perceives me as socially liberal. And that data proves that Sarah is representative of the electorate. The Tory Party have a massive PR problem with potential metropolitan voters liking their economic policies but thinking they're nasty or racist. Introduce policies along these lines, and the electorate will see that Conservatives are the party that give you personal freedom and choice. 

Finally, back the likes of Uber and AirBnB. Voting Labour and using Uber is incredibly hypocritical. Unfortunately not everyone understands why this is hypocritical: if they did, perhaps they’d be a neoliberal. But the fact is not enough people made the connection with the fact that regressive and protectionist policies are hallmarks of the Labour Party. 

The Conservative Party took 3 days to respond to the Uber ruling, doing nothing to bolster this connection. Gig economy firms are the epitome of free enterprise: many Uber drivers who are accountants, shopkeepers, students etc use Uber as a second source of income, indicating the Uber workers are enterprising, opportunistic and aiming for maximum utility with their time. And the same goes to renters or homeowners who rent out their rooms on AirBnB whilst on holiday, they’re prepared to work outside their normal remit to earn that extra bit of money - just like Deliveroo drivers too.  

There are some people Tories may never be able to win, but it should be easy to win over success-driven and well-off young creatives and city workers. The Tories have got to get yuppies openly saying “Maybe the Tories aren’t that bad. They’re reason I can get home safely this evening and the reason I’ve got more disposable income is because I can rent my room out when I go home for the weekend.” 

In summary, the Conservatives need to return to its best instincts instead of dressing themselves in red clothing. With things like energy price caps, and more taxpayer funded social housing, they’re trying to be something they’re not - what’s next, rent controls? Instead of harping on about socialist Venezuela, a concept most people struggle to see the relevance with, the Conservatives should make a positive case that they are  the party of economic and personal liberty. Then and only then will they have a chance to ward off Corbyn and his band of merry pinkos. 
 

There's a lot of serendipity in an economy

David Byrne tells us of the existence of a cluster, a centre of excellence, out in the Pennsylvania Dutch (ie, Amish etc) farmlands. The cluster, the centre, for producing stage sets for arena touring musical shows. As he says, we might expect there to be some reason for this:

What I get from this story is that, for the most part, my assumed explanations as to why this music and tech complex sprouted and grew here, were wrong. Probably like most people I assumed there were practical and rational economic factors that explained why this and why here. A confluence of nearby interstate highways maybe, allowing easy access to markets and resources. Or maybe it was not even highways, but proximity to a sizable number of markets-—Philadelphia, Baltimore, DC, NJ, Cleveland, Pittsburgh and more. Maybe there was a university or some institution nearby that was turning out trained audio engineers—Lehigh University maybe?

Those factors (except the last one) did help the business flourish once it was established, but they don't explain why it started here.

That such a centre is likely to happen is obvious enough, clustering is a well known economic phenomenon. The industry is where the industry is and once it is if you want to be in it you'll go there. Sheffield and Rotherham are where you go in the UK with specialty metals, Stoke on Trent to be a pottery, The City for finance, elsewhere LA for movies, Nashville for turgid dirges and so on.

But as Byrne points out, they why of the specific place can be serendipitous. It was simply Frankie Valli's anger at being snubbed over the use of a sound system, the first people he could find to provide him with his own coming from this area. And that really was the start.

All of which is just another example of why that economic planning is so difficult. Because things really do just happen. Or, as we might put it, the economy is something emergent from those things which just happen rather than something we've guided into being.

How much do Uber drivers value flexibility?

Uber drivers often explain why they choose to drive for the company in terms of more flexible working arrangements. Last month, an independent poll revealed that 80% of Uber drivers in the UK would prefer to remain as contractors, but the unions campaigning to give these drivers worker status don’t seem to care about the views of the people they’re claiming to help.

In most U.S. cities, Uber’s ride-hailing model provides greater flexibility than traditional taxi models because (among other things) it doesn’t use a medallion system. Most taxi companies make money by renting medallions to drivers, who pay a daily or weekly fee for the right to drive. Instead, Uber charges a percentage commission on each journey, which means drivers who only want to do a few rides can do so without losing out. To assess how much drivers value the commission fee model over the medallion system, two MIT economists and an in-house economist from Uber offered 1,600 randomly selected Uber drivers in Boston the opportunity to lease a virtual medallion that eliminates Uber’s commission-fee. People might be sceptical of a working paper co-authored by an Uber economist, but their study was released on the reputable, non-partisan NBER last month. The other co-authors are also eminent, non-partisan economists.

The researchers offered Uber drivers a range of medallions at different prices, recording their opt-in rates and logging the amount they worked. Using this data, they were able to estimate how much these drivers prefer Uber’s commission model to a traditional taxi medallion system. This can be expressed in monetary terms as “compensating variation” (CV): how much money it would take for Uber drivers to be indifferent between the commission model and the taxi medallion system.

Using the most realistic estimates of wage gaps between Uber and taxi drivers, as well as medallion costs, the study finds that average CV is $437 per week. Boston’s Uber drivers place significant value on a more flexible commission model. For Uber drivers who don’t spend many hours working per week, this makes intuitive sense. The fixed cost of a medallion would outweigh the gains from driving fee-free. But even among drivers who would have expected to earn more per week with a medallion system, many did not opt to use it. This could be explained by a combination of loss aversion and risk aversion: the former being the idea that “the decision to buy a lease may be a gamble that drivers hate to lose” and the latter being drivers’ reluctance to gamble money upfront in exchange for uncertain gains during the week.

Although the study’s conclusions are more directly relevant to U.S. lawmakers, they are also a reminder to UK regulators that Uber’s more flexible working arrangements are highly valued by its drivers. They care about having greater freedom to choose their own hours: so much so that they are willing to trade off potentially higher earnings in order to preserve that freedom. The same is also true of Uber's customers, who benefit from the influx of supply during predictable peak hours that Uber's flexible surge-pricing model makes possible. If Uber loses its appeal against last year’s ruling that its UK drivers are workers rather than contractors, many of the benefits of flexibility will be lost.

We do think it's unkind of The Guardian to do this to Owen Jones

Owen Jones mounts that high horse to denounce the partiality of the British press:

Finally: there’s a debate about media bias. It’s becoming an unfortunate missed opportunity, though, because so far it’s only focusing on the leftwing blogs that have emerged in the past couple of years. Whatever the failings of, say, the Canary, it only gained traction because there is a substantial body of opinion in Britain which feels marginalised, unheard, and attacked by the broader media.

The reason for that is this. Britain’s press is not an impartial disseminator of news and information. It is, by and large, a highly sophisticated and aggressive form of political campaigning and lobbying. 

This is, apparently, a new finding. The thing is, on the very same day, over in the media pages of the same newspaper, Roy Greenslade (who knows quite a bit about this) tells us that: 

Sure, it was always the case with newspapers. No one reading newspapers down the years can have been in any doubt how their political stance has influenced their content. Our press has been proudly partisan. The result has been blatant bias. It is an understatement to call it spin. Heavily angled stories and headlines are the norm.

Comment articles merely underline the prejudice in the so-called “news” items. They are indistinguishable. Nor is there the slightest embarrassment about omission, about failing to inform readers about news that, for one reason or another, fails to fit the editorial agenda.

This is the way that it has been for years. Owen also makes this point:

The distinction between “news” and “opinion” throughout much of the British press is blurred. I write opinion, and it goes in the opinion section of this newspaper. The press abounds with writers who are just as opinionated as me, but their opinions go in the news section. I am a political activist, but so are they: they, too, use their “news” writing as a means to advance political aims and causes, even if they pretend otherwise.

Any impartial reading of The Guardian's environment pages will prove the veracity of that statement.

The point being that Owen really shouldn't be surprised about this at all. That very partiality is what he owes his own employment to after all. This is all worthy of a certain snigger of amusement of course, but there is indeed a solution:

A media so weighted in favour of the status quo makes progressive, campaigning journalism a necessity. Much of modern journalism exists – often aggressively so – to defend the way society is currently structured. And yet when what remains a small, marginalised counterweight emerges, to make the case for a different form of society, it is portrayed as a dangerous threat to journalism.

Yes, some leftwing blogs exhibit problematic approaches to journalism: but then there’s the likes of Novara which is at the cutting edge of new left ideas. But if the mainstream media catered more for views which challenge the existing order of things, a vacuum would not have been left to be filled. In this year’s election, four out of 10 voters just opted for a Labour party offering an unapologetically socialist platform. It is a travesty that the ideas represented by that manifesto remain fringe opinion in the British press. Our media has a straightforward choice. Cater for the growing demand for dissenting views – or be challenged by new media outlets that do.

That's rather the case we've been making for many decades now. The demand for something calls forth the supply of it in a market based system. If people want more left wing and campaigning journalism then presumably they'll be willing to pay for it and so it will indeed arrive as a result of that profit motive. That is, the very system Owen dislikes so much is the very one giving him what he wants, the desires of the populace reflected in what is offered to the populace.

Why change what works? 

No, socialism is still a really bad idea, even with a spine

The Guardian treats us to a long read about what socialism should be for the future. There's something of a pity to it as John Quiggin is usually better than this. The definition of neoliberalism wanders around too much, equating at times the US meaning (let's be good progressives but use markets to do so) to our own full on embrace of and cheerleading for markets and economic liberty globally.

The definition of socialism similarly changes, at some point meaning just a bit more redistribution, at others wholesale restructuring of everything. But there is still the one great glorious error:

A socialist program would allocate much less economic activity to big business, and more to other forms of organisation. In deciding what kind of economic activity belongs where, a range of considerations are relevant.

This is to be the Fat Controller with the economy (no, Quiggin has lost weight, this is not that insult). It is to think that we can allocate across the economy in this manner. And the truth is we cannot, which is the great failure of exactly this sort of socialist planning of it.

We can most certainly change the rules. We could make coops more privileged over more capitalist forms of organisation, certainly. We can change how much redistribution we do. Raise or lower tax levels, there are all sorts of things feasible. But allocation isn't one of them.

For people react to changes in those rules - that being a useful description of economics itself, how do people react to changes in incentives? One of the rather important points being that the reactions can be different from those envisaged. Making food nice and cheap by fiat doesn't lead to cheerful farmers delivering the stuff up, it leads to them not growing any. Allocating a sector to small business rather than large isn't going to work well. For there's clearly a good reason why it's being done on a large scale in the first place, isn't there? 

We've tested the idea of socialist planning and allocation to destruction, we generally refer to that experiment as the 20th century. There are still useful discussions to be had about making the world a better place but a return to that failed idea isn't one of them.

Are markets efficient?

Today is a very good excuse to post this video, which I also came upon today, posted on Twitter on the occasion of Richard Thaler winning the Nobel Prize in economics. Thaler and recent Nobelist Eugene Fama have a very pleasant, wide-ranging, and clear discussion about, and debate over, market efficiency.

This is also a good excuse to link to an essay on the history of the divergence between experimental and behavioural economics. The differences between the two might seem to be superficial, but they turn out to be fundamental.

To the late, great, Bob Bee

Robert Bee, 1925-2017

We were sad to hear of the death of Bob Bee, 92, former Chairman of the Adam
Smith Institute. He was a US citizen, but moved to London in 1978 to become
chairman of the London Interstate Bank. As a fervent supporter of liberty and free
markets, he joined the board of the Adam Smith Institute and soon became its
Chairman. He used his extensive City contacts to bring the ASI to the attention of
big names in business and industry, and encouraged them to participate in our
activities.

It was under his chairmanship that the ASI rose to prominence as a leading
exponent of the market oriented policies that ultimately unpicked the Keynesian
postwar consensus and lifted Britain out of the nightmare of rent controls and
nationalized industries.

Like others in the ASI, he had a mischievous sense of humour and was an
unfailing optimist and enthusiast, seeing problems as opportunities. It was only
gradually that we came to know that he had fought as a teenage GI in the Battle
of the Bulge, winning a bronze star.

His previous career had included a stint in the foreign service of the US Treasury,
and in Wells Fargo's International Division. Bob’s work in international finance
included posts in Ankara, Turkey, Bonn, Germany, and Karachi, Pakistan, where
he was Acting Director of the US Agency for International Development's
mission.

He took part enthusiastically in ASI activities, befriending its young staff. One of
their annual highlights was the dinner at his house, at which many different ice-
creams and sauces were served from a giant silver Indian dispenser originally
used for serving different spices. He accompanied ASI personnel to Downing
Street on several occasions as guests of the Prime Minister.

After he retired with wife, Dolores, to San Francisco, he continued his
association, and looked forward on regular visits to London to meeting the ASI's
youngsters over lunch. He told us many times how privileged he felt that he had
been able to play a role in events that shaped history. We in turn were privileged
to have known him and to have benefitted from the massive help and support he
gave.