No wonder housing in London is so expensive

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

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

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

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

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

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

How to make East Africa poorer: ban imports

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

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

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

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

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

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

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

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

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

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

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

Can National Pay Bargaining in the NHS Kill?

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

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

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

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

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

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

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

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

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

New paper: Evolution not revolution

The ASI has a new paper out today from our Brexit unit, written by Brexit unit head Roland Smith, aka "White Wednesday". In this paper he makes a positive case for Brexit—based on Britain's liberal tradition and how it clashes with the EU—and explains why, if we leave, the EEA is the only attractive option. We should aim for 'evolution, not revolution'.

Read the paper online here.

Download the paper here.

On the EU and mobile roaming charges

We've been barraged in recent days with the propaganda about how the European Union has reduced mobile roaming charges for us all. This, obviously (and one minister has expressly stated this) is meant to be taken as evidence of how wonderful it is to be a member of the European Union. Perish the thought that it might be just propaganda to sway the upcoming vote.

Roaming charges across the European Union has been capped, meaning UK consumers can expect to spend much less when using their mobile phones in mainland Europe.

“Roughly a million Brits stay the night in Europe every day, and they spend around £350m a year on roaming charges,” said Ed Vaizey, the minister for the digital economy.

“So by realising these changes, we’re going to save British consumers millions of pounds a year.”

And yet that's not in fact the whole and absolute truth. Here is that truth, an examination of roaming charges by the international body that actually deals with such things, the ITU.

Countries that are not in the EU have managed to reduce or eliminate such charges. Further, countries that make no determination on such matters have companies within them that do eliminate roaming charges and other that do not. That is, consumer choice is increased by not regulating.

For of course, the elimination of roaming charges means that companies are likely to tweak their solely domestic charges to compensate. And those who would gain from the lower prices of solely domestic patterns of use will now not benefit. We would thus regard this regulation of the market as being a cost to consumers, not a benefit.

But the rather more important point is that just because something is coming from the EU does not mean that it is necessary to have the EU to gain that thing. Sr. Barroso has told us that the point and purpose of the EU is to stop Germany invading France. Again. The invasion hasn't happened, this is true, and the EU exists. But we're deeply, deeply, unconvinced that the EU is the reason the invasion hasn't happened.

So it is with much of what is claimed as being benefits of the EU. The argument is not and should not be whether these are nice things to have. It's whether it is necessary to be in the EU to get them.

Quite so, let's blow up the Town and Country Planning Acts

It's interesting to see someone getting the analysis correct and then the conclusion entirely wrong. So it is with this piece about housing and the planning system:

There were two periods in the 20th century when housing supply did a reasonable job of meeting housing demand and need. The first was between the wars, when cities expanded horizontally into the suburban development of green fields and, assisted by government incentives, builders could offer affordable homeownership to people on middle-to-low incomes. The second was in the decades after the second world war, when publicly funded council housing accounted for roughly half of all homes built.

The first was largely ended by the nationwide introduction of green belts from the 1940s onwards, the second by Margaret Thatcher’s termination of local authorities’ power to build housing. 

We're happy enough with that as a pencil sketch of the situation, yes. Where we disagree is here, in the solution:

This sluggishness is despite successive governments’ attempts to liberalise the restrictive planning that they say is to blame for poor supply. Short of a return to a 1930s free-for-all, and possibly not even then, the evidence seems conclusive that the market will not on its own provide.

Why not return to that free for all, that free market, to allow the market to solve the problem?

It is now a reasonable question whether well-planned development in the nation’s green belt should always and in all circumstances be ruled out, but no one in their right minds wants to return to the land-eating, unsustainable sprawl of the 1930s.

Yes, we do want to return to that. We can solve the British housing problem at a stroke. Just blow up, repeal in their entirety, the Town and Country Planning Acts. Job done.

Our problems are caused by the current regulation of who may build what where. 
The solution to our problems is thus to change who may build what and where. and given that the only time that market did solve this problem it was by being allowed to build where people actually wanted to live then that should be the system we return to. Other countries have much this system and do not have problems with their housing. So, we should too.

The government is killing 80,000 people a year apparently

And it's all because of austerity, privatisation and the distressing lack of Environmental Health Officers. No, really, that is the claim:

Thousands of people are dying each year because of the government’s failure to tackle food poisoning, health and safety breaches and pollution, a thinktank is warning.

A new report from the Centre for Crime and Justice Studies (CCJS) claims that lax regulation and weak enforcement are failing to hold businesses in check and are tantamount to state-facilitated “social murder”.

The report, by Professor Steve Tombs, head of social policy and criminology at the Open University, claims that some 29,000 deaths in the UK are attributable toairborne pollution alone. A further 50,000 people die as a result of injuries or health problems originating in the workplace. Each year food poisoning results in 20,000 people being hospitalised and 500 deaths.

The report itself is here. There's ever so slightly a logical problem with the claim though. Let us assume that the evidence presented to us is correct. There are fewer inspections being carried out by those Local Authority employed EHOs. There is also that number of deaths from those causes. This is the result of Tory austerity and Yah! Boo! How Terrible!

However, the important thing we need to consider is whether this change in the regulatory regime is leading to more deaths from these causes or fewer. It is possible that having more private sector inspectors, more industry involvement and less LA, is improving the system, not making it worse. We don't say it is doing so you understand, only that it is at least potentially feasible. Just as the case being made, that less LA involvement is making the system worse is feasible. But that is the case that needs to be studied. Is the new system increasing or reducing the number of people dying from these causes? 

We don't know and on a Sunday morning we're not inclined to go look it all up. Which is why we would rather hope that a report trying to make the case one way or the other would provide some evidence. Which this report does not. It doesn't even begin to discuss the subject. It simply states that there's less LA and EHO involvement and also that this number of people are dying. There isn't even a start to an examination of whether those numbers of deaths are rising or falling.

The paper thus fails the most basic logical test of its own assertions. We're not very interested (not unless we're the union that EHOs belong to) in how many EHOs there are: we're interested in how good the regulatory regime is. Which is the one thing not considered in the slightest here.

Seriously, measuring the effectiveness of regulation by the number of bureaucrats employed to regulate isn't the way to do it. Must try harder, F - is your grade, see me after class.

The appalling effects of the buy to let boom

We have to admit that we think that this is a bit of a strange thing to be complaining about:

Buy-to-let landlords blamed for decline in DIY among under-30s

Figures suggesting spending on DIY among ‘generation rent’ has fallen by third since 1996 coincide with report showing age of first-time buyers still rising

We could understand that a retailer of materials used to do the DIY might complain a bit and the providers of the same materials to the professionals celebrate a tad, but we're really rather struggling to see the wider significance of this.

Credit card provider MBNA said spending by the under-30s on DIY had fallen by a third since the mid-90s. It blamed the rise of buy-to-let landlords.

We can understand why buy to let landlords might be the cause of this but again are struggling to see where the blame is, or how any blame is justified.

Mark Elliott, of MBNA, said: “Generation rent is usually barred from making home improvements by clauses in their tenancy agreements. Although [overall] DIY spending has grown by 42% in real terms since 1996, an increase in the proportion of people renting in the UK could impact the sector’s growth in the future.”

Landlords are required to let their properties in a lettable condition. That is, not requiring the tenants to start grouting the bathroom. Thus the rise in rental properties leads to a fall in the number of people having to grout their bathrooms. Yes, we get the picture, the chain of logic. But why is this a bad thing?

That cars are more reliable these days and thus we spend fewer rainy afternoons hitting them with hammers is a good thing. That supermarkets present food in easier to cook versions saves us time in the kitchen, a good thing. That landlords provide property that doesn't require we mash our thumbs to make it habitable is a good thing, no? 

But that really does seem to be what they're complaining about. Buy to let produces habitable dwellings: we must complain about this.

People don't get it on CEO pay

Recently I debated executive pay on Twitter with the FT's Kadhim Shubber, The Times's Daniel Finkelstein and others. I had written a letter to The Times arguing that according to a preponderance of evidence, CEOs are actually worth their huge salaries. Indeed, they probably create, and sometimes destroy, firm value worth orders of magnitude more than they are paid.

I used the example of Thomas Cook boss Harriet Green, whose £3m salary was dwarfed by the £400m wiped off the market capitalisation of her firm when she left. Shubber argued she was a bad example, because her departure was accompanied by worse forecasts that also hurt the firm. This is probably fair—perhaps the portion of the loss down to Green herself was small enough that she really wasn't worth it, though I doubt it.

But Shubber went on to argue that it was bad in general to use share price movements as evidence of executive performance, because departures are associated with uncertainty. It is true that investors are likely to value firms lower if the variance of their expected returns—the spread of possible profits and losses—is higher, even if the average returns expected are the same. This is rational given risk averse preferences. But there are a few reasons why this probably isn't the only, or even the main, factor driving the equity movements we see when bosses move.

Firstly, it has a hard time accounting for cases when shock CEO deaths or departures raise the stock price. When poor Steve Ballmer announced his resignation as Microsoft chief the company instantly got around 7.5%—or billions of dollars—more valuable. The stock price rose 39% in the year following. Sometimes executives are having a huge impact, but a negative one. Despite the uncertainty, markets rise.

Secondly, it's not just the stock price that reacts. When there is a shock death of a CEO, or even of a member of a CEO's family, this hurts profitability, investment and sales growth, particularly if the boss is relatively long-tenured, or if the family death is their spouse or child (not so much if it's their mother-in-law).

Thirdly, it's not just death or departure that hurts or improves prices. CEO hospitalisation dramatically hurts firm outcomes, particularly if the executive is young, highly educated, and if the firm is in a rapidly growing business environment—exactly when CEO influence would be expected to matter the most. Similarly, when the boss has more invested in the firm, or when they are measured as putting in more effort, the firm does much, much better. And when firm control is "inherited"—when CEOs dictate the choice of successor to a relative or friend, firms do substantially worse. All of this points to CEOs mattering a lot.

If this is all true, Shubber asks, then why has CEO pay risen so much over past decades. For a while, we only had hypotheses, suggesting that firms were growing ever larger in size, wider in scope, and more complex and globalised in organisation, making the decisions at the top ever more important. But a recent swathe of papers seem to confirm our intuitions and guesses: 1. CEO deaths, always a cost to firms, have become ever more costly recently; 2. bigger firms have always had more expensive CEOs; merely applying this relationship to the growth in firm size 1980-2003 is enough to explain the average pay rise for bosses.

Boards may use rules of thumb to decide on executive pay, but the reason these rules (and the firms using them) survive, is because they are adaptive for firms; they are good ways of setting pay. Small differences at the top end of talent make large differences for firm bottom lines, especially nowadays. Firms lose a lot when their star performers go, and when they don't bid for the best possible boss. People just don't get it: CEOs really matter!

Why are people complaining about what we positively want to happen?

There's a value to things like brands. Obviously, because we will buy things adorned with brands that we know, recognise and trust. Therefore they are valuable to their owners and they strive mightily to protect that value by making sure that the brand and products adorned with it can be trusted. This thus is a very odd complaint:

Doctors warn of big tobacco firms entering e-cigarette market

Royal College of Physicians report says companies may seek to rehabilitate ‘pariah industry’

Well, yes, the replacement of a product that please people but kills them with something that pleases them but does not kill them would appear to us to be a pretty good method of rehabilitation.

But there's a larger point here too. We positively desire those large companies, with their brand names to protect, to be in this market. For their own self-policing will lead to consumer protection. We would illustrate this with reference to the heroin market.

Imagine that we all did the sensible thing and just legalised the stuff. No, not just decriminalised it, made it simply legal. there would then be companies using those standard branding techniques (there are already illegal dealers who do this on a modest scale) to reassure users. Of the purity, dose size, absence of talcum powder ans so on in the formulations. For example, the biggest cause of opiate overdoses in the US these days seems to be the cutting of heroin in fentanyl, another opiate. One with a very much smaller margin between bliss and death unfortunately. A known and legal brand would not survive such cutting and contamination: thus a known and legal brand would not allow it to happen.

And so it is and will be in the vaping market. The economics do not change because of the legal status. Large companies moving into the market with their brands to protect will lead to greater consumer protection over quality issues. That's what brands are, what brands do.

We don't want to be concerned about the giants moving into this territory, we want to encourage them.