Thursday, 6 September 2012

A plan for growth (in your back garden)

The government's plan for growth now appears to be centred on home extensions. Invest in RSJs now. The announced easing of planning restrictions will cover business premises too, and will also allow builders to sidestep the affordable homes quota currently needed to secure planning permission for large housing schemes. There will also be more money to help first-time buyers, and a further £40bn for "shovel-ready" infrastructure projects. This is pitiful. The extra infrastructure money is in the form of guarantees, not cash (so it doesn't count as public debt), and the FirstBuy scheme largesse (actually loans) will help only 16,500 buyers (there are usually 1 to 1.5 million house sales per year, with 869,000 in 2011).

Longer-term infrastructure projects, such as HS2 or more airport runways, won't have an impact till well beyond 2020. Even a commitment to other major projects that could start soon, such as fibre to the home and upgrading sewers, would have only a weak effect on growth over the next 5 years. It is a popular myth that infrastructure projects provide growth themselves, as opposed to providing the base for future growth. The experience of the public works programmes in the USA in the 1930s is illustrative. Despite a huge investment in both short (WPA) and long-term (PWA) projects, the immediate impact was palliative at best, shown by the recession that resulted after the premature scaling back of investment in 1937. The real benefit was that the WPA schemes tided workers over till the rearmament boom in the late 30s created new jobs, while the big PWA schemes (roads, schools, dams and bridges) provided the world-class infrastructure that underpinned the US boom in the 40s and 50s.

The other major pillar of the government's strategy is to allow the Bank of England to continue with quantitative easing (QE). There is every reason to believe that this was the right monetary policy intervention in 2009, when it put a floor under the crash by repairing bank liquidity, but the evidence is mounting that it is ineffective at stimulating growth (because businesses are reluctant to borrow and the banks are reluctant to lend), which makes Mervyn King look increasingly like a "one club golfer". What QE has done is protect the value of specific asset classes, notably property and shares. While the BoE claim this is to everyone's indirect benefit, it is clearly biased in favour of those who already own those classes of asset, while it is punishing savers and new pensioners buying annuities

QE is pretty much the only club available to Mervyn King because the traditional lever, the interest rate, is currently stuck to the floor. It cannot go any lower to stimulate borrowing and investment. If monetary policy is ineffective, then focus should turn to fiscal policy (i.e. tax and spend), which is the central argument of Keynsians like Paul Krugman, but the government is hemmed in by their demonisation of debt (whose defeat is the core rationale for the coalition) and the popular unpalatability of further tax cuts for the self-proclaimed wealth creators. This is why so much angry energy on the right has turned to supply side reform, notably slaying the dragon of regulation around hiring and firing. Unhelpfully, the free-market World Economic Forum (the Davos crowd) has just issued a report ranking the UK as highly competitive and singling out its flexible labour market for particular praise.

The Tory strategy for growth, insofar as they can be said to have one, appears to be based on looser employment law, easier planning permission, fewer graduates, lack of credit (though combined with cheap money), minimal government pump-priming, and financial services still preferred to manufacturing. You can therefore see why a free-for-all in home extensions looks attractive. It has the merit of appealing to their core constituency (home owners with cash to spare or access to credit), it can have a near-immediate impact, it doesn't obviously benefit bankers, and it isn't premised on a fantasy.

Unfortunately, the results will will be minimal in terms of GDP growth, and may even be counter-productive. There are some home-owners who may now decide to extend rather than move, which means the rate of churn in housing stock might decrease. This will serve to keep prices up, which will please asset owners but won't help first-time buyers. Most businesses are not champing at the bit to expand their premises because they face a lack of demand. A change in the planning regs will only embolden the already confident. Those businesses struggling to get loans won't be any better off either, though presumably the banks may look more kindly on builders who specialise in extensions and loft conversions (so happy days for some).

A more courageous short-term strategy would, I'd suggest, do three things. First, introduce a land value tax. This would penalise builders who have banked land (waiting for higher prices) and so stimulate housing. It would also be a far more effective wealth tax than a "mansion tax" or a one-off Clegg-style levy. Second, introduce higher tax rates for financial businesses and speculative activities (i.e. a Tobin tax and more), to encourage investment into other sectors. Third, reduce VAT. The more money we put into the pockets of the less well-off, the better the multiplier effect will be on the general economy. This could be a fiscally neutral strategy.

A more courageous medium-term (5-10 year) strategy would include the likes of a basic income (so people were emboldened to start businesses), an education and qualifications system geared to developing potential and social mobility, the abolition of UK tax havens (including the introduction of a general avoidance principle), and a massive council house building programme to overcome engineered scarcity and so start to push down property prices (which we all know has to happen sooner or later). But that would require a change of government, not to mention a revolution within the Labour party.


  1. I agree with a large council housing programme. Get's people working,provides some housing, doesn't lead to house price falls (FWIW, I believe it would be good if prices had fallen, but the actual falling causes problems).

    But a bit wide ranging? Nothing I'd really disagree with, but can you cover everything on one post? You've left out the vital question of Bould and the three clean sheets.

  2. Council house building should lead to (gradual) house price falls. Since the 1970s, council-owned rented accomodation has been reframed as houses for the poor, i.e. those who could not afford to buy, and thus dumping-grounds for "problem" families. The original intention, fulfilled to some degree in the 50s and 60s, was for council housing to be open to all walks of life, from dockers to doctors.

    A council house building programme should revert to this original goal, rather than focus on "social housing" (i.e. low-quality flats). One practical way of doing this would be to build on small plots and brownfield sites in towns, rather than build more estates out-of-town.

    The key is to introduce enough affordable housing onto the market to attract the demand that is currently channelled into the private rented sector. This would take the air out of the buy-to-let bubble and would also force down the price of private new-builds. To avoid developers banking the land, we'd need the LVT in tandem with this.

    I doubt prices in the SE would fall in nominal tersm even with a big council programme, but they should stagnate and thus lead to falls in real terms over a couple of decades. We actually need general inflation to be ahead of house prices for a long time, which means people treating property as a commodity (like rent)rather than a speculative asset once more. If after 25 years of mortagage payments you found your property was worth 80% of what you'd paid in total, that should be cause for celebration. You've had a quarter of a century of use value and can recoup most of your outlay. Imagine getting that sort of deal on a car.

    I'm sceptical that the 3 clean-sheets can be wholly attributed to Bould's influence, though I'm sure he is doing a grand job. I think we've been fortunate in facing unadventurous or inept opposition to date. Montpellier and Man City away will be a sterner test.