Uncharted Territory

October 28, 2010

Whining Wind Turbine Nimbys Winning

Filed under: Energy, Global warming, Localism, Politics, Wind — Tim Joslin @ 7:48 pm

I was disapppointed, but not surprised, to read in this morning’s Independent of the UK’s failure to build onshore wind turbines.

As I was saying yesterday in the context of housing:

“The first failing [of our political system] is a confusion: are we making policy on the basis of reason or emotion?”

A corollary to this is that we have great difficulty balancing decision-making processes between local influence – self-centred and emotional – and national influence – dispassionate and reasoned.

I heard on the radio today how a family had been displaced by the Three Gorges Dam in China.  One of them said something along the lines of: “It might be bad for my family, but it’s good for the wider Chinese family”.  Maybe it’s a cultural difference, maybe it just reflects the different situations in China and the UK, but you’d never hear that here.

The Coalition government supports “localism” – it seems to be one of the philosophical threads that bind the Lib Dems to the Tories.  In fact, this bizarre idea has become so influential that even the Labour Party pays lip-service to it, even though the roots of localism lie partly in opposition to Labour’s statism.

To my mind “localism” is nothing more than window-dressing for a good old-fashioned land-grab.  Property-owners wishing to extend their influence beyond the boundaries of their own estates have been egged on by opportunistic politicians – mainly the Tory and LibDem parties during their period of opposition at a national level.

Now, any and every planning proposal faces vociferous objection.  Take Frank Lampard’s basement, for example.  This is not a planning issue as such.  The neighbours should have no say at all.  When completed it will not affect them one iota.  As long as Frank abides by relevant building regulations designed to prevent subsidence, noise, pollution and so on, he should simply be allowed to get on with it.  There are no reasonable grounds for neighbours to object on.  One worry they have is traffic associated with the building works, which they describe as “disruption”.  Well, sorry, that’s what the road’s for.  And it doesn’t belong to you, it belongs to all of us.  Rights to use it are subject to rules that apply to everyone.  We don’t go about our daily business at the whim of those who happen to live on our route.

One effect of localism will be with us for some time.  Unlike in several other European countries, we’ve failed to develop an onshore wind energy industry, despite excellent resources.  Nimbys must take most of the blame. Even if local decision-makers had the best will in the world (rather a big if), they are simply not in a position to weigh the general benefits of wind turbines against local impacts.  That’s what we have a government for.  As the Chinese well understand, but we seem to have forgotten.

The result of this short-sightedness will be more expensive electricity.  Offshore wind costs around twice as much as onshore.  And we’re unnecessarily spending huge sums on a dribble of solar PV.  (Btw, is it just me, or is everyone getting deluged with Google ads from PV system installers?  Must be a lot of profit to be made, methinks!).

Not only that, British wind energy technology companies have been disadvantaged and that’s carrying over into offshore wind.

Given the crippling economic costs to the nation of the current massive undersupply of housing and infrastructure of various kinds, including wind turbines, you’d think politicians would spend a lot of time thinking very carefully about how to organise the planning process so as to balance the national (or regional or even less local) interest will the local interest.  Indeed, Labour made some attempts, but these are already being reined back, as the Indy describes:

“The situation is typified by instances such as those in North Yorkshire, where local politicians recently vetoed plans to build seven turbines in the face of official advice that they should go-ahead [sic] after a concerted local campaign.

Permission for the windfarm was later granted on appeal to the Planning Inspectorate but Maurice Cann, head of planning at Hambleton District Council, said that might not happen under the Government’s new localism plans.

‘The court of public opinion plays a big role here,’ he said. ‘I can see the situation getting worse. Some of these structures are 125 metres high and have a huge visual impact. It does not surprise me at all that so many applications are getting rejected.

‘With the Government’s agenda to give a stronger voice to local politicians this is only going to become more of an issue.’

Local councils are to get more power to make planning decisions in their areas and the Planning Inspectorate, which has given the go-ahead to a number of wind farm projects turned down by local planning authorities, will no longer have this power.

It now takes on average nearly two years from the point of application for windfarms to be approved by local councils and even then up to three-quarters will be unsuccessful, according to the report by RenewableUK, which represents the windfarm industry.”  [my stress throughout excerpt]

It seems strangely appropriate to suggest we’re going to Hell in a handcart!

October 27, 2010

The Benefits of Being Ugly

Filed under: Economics, Housing market, Markets, Minimum wage, Public spending, Regulation — Tim Joslin @ 8:19 pm

I’ve just watched today’s Prime Minister’s Questions (PMQs) on iPlayer (warning: programme will probably not remain permanently available), because it’s simply not clear what aspects of the Coalition government’s benefits cuts programme Labour opposes.  It was ugly: the problem is Ed Miliband didn’t stick to the point.  There is a chink in Cameron’s armour, but Miliband missed it.  If he’d thought through his position rather better you feel he could have skewered the bastard.

The point is, if you watch the Guardian’s PMQ clip, Miliband appears to be latching onto the vindictive proposal to reduce Housing Benefit (HB) by 10% after someone has been on Jobseeker’s Allowance (JSA) for a year.

I’d thought Chris Bryant had been off-message when he took on Clegg over the £400/week limit on HB, which could force people out of central London.  Clegg did that old trick of ignoring what was asked and taking offence at the manner, suggesting Bryant had dissed those “ethnically cleansed” around the world.  Bryant said “sociologically cleansed” so Clegg was just being a prick.  I don’t like to use bad language on this blog, but I’m making an exception for the Deputy PM.  Anyway, back to the story.  Unfortunately, in PMQs, Miliband let Cameron talk about the £400/pw limit rather than the 10% reduction.

Labour is defending the indefensible in opposing the £400 limit and should be supporting it.  The 10% cut is a different matter altogether.

It’s depressing to see Labour in complete disarray in the face of the Tory onslaught.  All we’re seeing is uncoordinated rearguard action.  Ed won’t last long if they carry on like this.

The point is there are different motivations for different aspects of the welfare reforms.  Some measures are to restore fairness and others to reduce the overall cost.  There is an element of financial sleight of hand.  But there is also an attempt to punish the unemployed, and that is simply out of order.  Ugly, Cameron, ugly.  With around 1.5m on JSA already and with 500,000 civil service job losses to come, as well as transfers from disability and incapacity benefit, there are bound to be some people who don’t find work within a year.  Sure, some of these will be people who tried less hard than those who found work, but the point is not everyone will find work, even if all applied the highest standard of diligence in looking for a job.

So what are the main changes and their rationale?  Which should Labour oppose?

1. Reassessing disability and incapacity benefit claims

Labour was doing this anyway.  The Tories are not outflanking Labour though are giving the impression of doing so.  To be honest, both parties are cynically preserving votes, since there’s actually no reason why you need more money if you’re disabled.  The benefit should be the same as JSA, unless extra funds are needed to overcome specific disabilities. I caught a Radio 5 phone-in this morning and none of the callers fell into such a category.  RSI (“carpal tunnel syndrome”), chronic migraines and depression are unpleasant conditions, but do not in themselves result in expense.  The point is that paying more money gives people an incentive to label themselves as ill, which is in neither the public nor, arguably, their own interest.

2. Limits on the maximum HB that can be claimed

This depends on the number of bedrooms you’re assessed as needing.  The maximum (for 4 bedrooms) is £400/pw (the other limits are “£340 for a three-bedroom property, £290 for two bedrooms and £250 for a one-bedroom property”).  This is more than many working people can afford, so there is overwhelming public support for the limit for the unemployed.  And the Tories are milking it.

But employed people can also claim HB.  The answer to the case of the caretaker cited by Polly Toynbee is to demand a higher minimum wage in London (see my previous post), not to oppose the HB limits.  As I said, Labour is in disarray.

There are serious questions to be asked, too. And Labour isn’t asking them.  People on high rents are going to run out of money very quickly.  Is the government saying, for example, that if someone is made unemployed and they happen to be renting somewhere for more than the limit they’re entitled to – not difficult in London – or have two bedrooms when they’re only entitled to one, that they have to move immediately, or at least before any savings or redundancy payment run out?  The additional disruption is hardly conducive to rapidly finding new employment, is it?

3. An increase in rents for new social housing tenancies to 80% of the market rate.

Judging by Toynbee’s comments, Labour seems to have missed the point of this.  The idea is to raise money for new-build social housing.  The idea is that providers will be able to borrow against the increased revenue stream.  (Most of the rent at present goes on repairs).  HB will have to be higher to fund the higher rents, so all that’s really happening is the cost of new social housing is being amortised – rather like the much-derided Public Finance Initiative (PFI) Labour used to get hospitals built.

4. Paying HB only for rents up to the 30th percentile for the area rather than the median.

It’s crazy that it was the median in the first place.  Over time, this must simply push up rents in general, since with HB-funded demand, any properties offered up to the median price will be let quickly (so no incentive to mark them down), whereas those marketed at an above-median price might find a tenant before they have to be marked down.  The median will steadily increase even if supply and demand are balanced.  It’s possible even the 30th percentile might not be enough to prevent this effect (since properties private tenants would pay less than the 30th percentile rate for will let to HB tenants at the 30th percentile rate).

5. And then there’s the 10% HB punishment if you don’t find a job in a year.

This makes absolutely no sense to me.  HB is supposed to be a payment in kind.  It’s to pay the rent.  If it’s reduced, then something’s got to give.  And apparently there’s more: I start to appreciate Polly Toynbee’s indignation:

“But that’s not all. The sum paid towards the rent will fall every year, in perpetuity: it will no longer rise as average local rents rise but will be pegged to the consumer price index. If that had happened in the last decade most people would have been priced out: rents rose by 70%, but the CPI only rose 20%.

Now add in something more sinister. Council tax benefit, worth an average £16 a week, is to be cut by 10% and then handed over to each local authority to decide how much benefit to offer: if some councils want to push poor people out, they can pay virtually nothing to their residents.”

This makes no sense.  I can understand the idea that you’ve got no job, the state covers your main outgoings (rent, Council Tax) and gives you £65/wk to manage the rest on.  But £65 seems pretty much a bare minimum for food, heating, clothing and so on.  Playing games beyond this point is simply vindictive.  To see someone of Cameron’s privileged background doing so is, frankly, a rather disgusting sight.

So, Ed, you need to inject some clarity into Labour’s position.   You’re going to have to give up some ground.  Most of what the Coalition is doing makes sense.  But punishing the unemployed doesn’t.

And come up with some alternatives.  A higher minimum wage to increase the incentive to work.  And a higher minimum wage in expensive areas, such as central London than elsewhere.

Most of all, please, please read the blogs and stop defending Housing Benefit of more than £400/wk!

Housing Horror

Over the last few decades, here in the UK, we’ve become very good at pointing to apparent failure.  Often despite considerable objective evidence to the contrary.  Apparently we’re no longer any good at making things (compared to Germany and China, maybe, but not to most other countries), our armed forces are puny (compared to the US, maybe…), our energy supply is insecure, our public services are falling apart, the English Premier League is in a mess…  Such angst is spreading elsewhere in the West, but somehow you rarely hear fundamental criticism of our political and economic system.  You’d think the political process was merely flawed, a little unfair in places, perhaps, a little too tolerant of peccadilloes by the powerful, but basically sound, and very difficult to improve.  Despite considerable objective evidence to the contrary.

We’re just now quite rightly much vexed over the issue of housing (warning, link is to page of all 865 comments, and counting).

The issue, in a nutshell, is the extent to which the state should pay to provide some people with a standard of housing higher than they can afford on the open market.  The 1997-2010 Labour government (supported by at least the non-Tory controlled local councils, who have executive powers in area of housing), was quite enthusiastic about doing so, though in the main merely continued existing policies.  As time has gone on, though, the provision of housing to some by the state has been a factor in driving those not eligible for, or simply not claiming, state support, into less desirable – smaller, and often, crucially, less conveniently located – accommodation.  It should be noted that Labour’s attempts to increase the supply of housing over recent years has been effectively stymied by nimby campaigns, if not supported, then at least not effectively challenged by foot-dragging Liberal and Conservative local councils.  Despite guilt all round, the new Coalition government has decided to address the problem, in part, I suggest, as part of their strategy of blaming everything on Labour.   And in that regard, housing is pretty much an open goal.

As the debate continues, we see not one but two failings of our political system in stark relief.

The first failing is a confusion: are we making policy on the basis of reason or emotion?  Let’s take people who aren’t working for whatever reason (unemployed, incapacitated or retired).  Now, I’m not even going to argue this on the basis of rights.  It simply makes no sense, as hundreds of bloggers have pointed out (to massive approval, judging by “Recommendation” statistics), for workers to commute in every day from the outskirts of conurbations such as London, whilst people who don’t actually need to live there are paid to do so by the state.  Why, oh, why does Labour defend the indefensible? (Link to where Polly Toynbee explains the Coalition’s inhuman proposals – remember we’re essentially taking about a zero-sum game, here: what we give to one household, we deny to another).

But – there’s always a “but” – there are “priority cases” as a Councillor Timothy Coleridge (Tory, Kensington and Chelsea) explained on Radio 4 this morning trying to “soften” the policy.  There’ll be a “transition fund”, we were told.  He seemed to be particularly sympathetic to the elderly.  So it seems we’re going to make value judgements.

It might be worth digressing at this point to note that gerrymandering is a factor, because of first-past-the-post local elections.  Politicians want to keep their voters in their constituency and move the opposition’s out!  I suspect the Tories see the elderly vote as key to their next few terms in office, so I was immediately suspicious of Councillor Coleridge.  Any “prioritisation” must surely be done according to an objective, nationally applicable set of criteria.  Trouble is, value judgements are why we’re here in the first place.

If the policy is to minimise the fiscal cost of housing benefit, and optimise the use of housing, then that’s what we must do.

Here’s a case of the same sort of thinking, from a letter to the Guardian, by an Ann Tobin:

“The house was lovely, built to Labour’s postwar housing standards (later abandoned by the Tories). Us kids grew up and moved on and my parents stayed there until my mother died in 1998, 50 years after they had moved in. My father died three years before her. Yes, the house was too big for her, but she liked to invite her children, grandchildren and great-grandchildren to stay.” [my stress]

This partly explains how we’ve reached the present situation.  This identifiable individual (Ann Tobin’s mum) “liked” her big house, provided by the state.  Meanwhile, there is a waiting list of millions of families for such houses.  Maybe, because Ann Tobin’s mum was allowed to keep a house she liked, a family with a couple of school-age kids spent years moving about between emergency B&B accommodation to temporary lodgings.  Maybe that family would have “liked” a house of their own.  Because Ann Tobin’s mother has been allowed to stay in a family house, another family that can’t be precisely identified is living in poor or insecure accommodation.  This is crazy.  Housing supply is limited (though could be improved).  Why is it so difficult for people to understand that because of that limitation one decision impacts on others?  In areas with a limited supply of housing, its allocation is a zero-sum game.  You can’t give some people a place they’d “like” without denying others the same thing.

To my mind what we’re witnessing is the complete failure of post-war housing policy in the UK.  Council housing, for example, makes no sense.  It locks in housing allocation at one moment in time, making no allowance for the changing world we live in. Or the changing size of individual families for that matter.

This brings me on to the second failing of the political system.  Politicians see direct action by the state as the only way to achieve anything.  So we’re told we have to build more social housing.  Wrong.  We simply have to build more housing, period.  100,000 private homes will house 100,000 households just as well as 100,000 social homes will.  100,000 fewer households will be waiting for housing in either case.

And in actual fact, over the last decade or so, demands for social housing have actually reduced the total provision of housing.  Why?  Because the main way social housing has been provided has been through Section 106 agreements with housing developers.  In this daft system, housing developers have been given planning permission in return for including schools, hospitals or social housing in their schemes.  And you thought schools, hospitals and social housing all came out of the health, education and housing budgets?  This tax on developers, or first-time buyers, however you want to look at it, has the effect of reducing housing provision.  At a given house-price level, building houses is less profitable than otherwise would be the case, so fewer invest in that activity than in other opportunities.  Fewer houses get built, house prices rise, and more prospective purchasers find themselves on social-housing waiting lists.  Section 106 agreements to provide more social housing because it’ll be needed are, in aggregate, self-fulfilling!

I can’t even bring myself to discuss how shared equity schemes and other devices to subsidise house purchases simply push up the general price in the market.

The solution seems to me blindingly obvious, so I’m going to cut to the chase (a phrase, incidentally, that grated when used by Bob Hoskins in Made in Dagenham, since it wasn’t in general usage in 1968 when the film was set – I remember first hearing it in 1994).

We’ve simply got to manage the relationship between wages, at the low end, and house prices so that working people can afford to house themselves and their families.  The implication is that there needs to be a higher minimum wage in areas where housing is expensive.  It is simple exploitation to be paying the national minimum wage in central London, because there are only a limited number of possible outcomes.  Either workers commute in which case they spend more time and money than if they were working near their home; or living-standards drop and people end up sleeping in shifts; or benefits are necessary to top-up earnings, subsidising employers and consumers in expensive areas.  Ideally, employers would have to pay more in expensive areas, but the labour market is, has been for some time, and will be for some time, a buyers’ market.  Indeed it is government policy to force people to take any job they can get.

What a mess! State provision of housing has led to a situation where the minimum wage is nowhere near a “living” wage.  Perhaps that’s a bit strong: rather, state provision of housing and other benefits has provided a safety-valve so that pay has been allowed to become gradually lower and lower relative to socially accepted minimum living standards.

Maybe some blame should be apportioned, in order to unravel some of the mystery how we arrived in this absurd situation.

First, there are those, almost all in the Labour Party, but not all of the Labour Party, who believe it is right that the state provides housing and benefits on the basis of need.  “Capitalism” is so “unfair” that the state must step in.  As I’ve mentioned this policy has failed.

Second, there are those in all three parties who take a position I would characterise as “hand-wringing liberals” who make no attempt to analyse the problem and produce a complete policy.  They just want to address the problems of those with whom they empathise.  The trouble is, as I’ve also already said, with limited supply, allocating a house to Mr Jones simply moves Mr Smith onto the waiting list.  As a rationalist this is the position I detest most of all.  Government has a duty to find as solution for everyone, not self-righteously apply sticking-plaster where they most easily can.

Third, there are those in all three parties – since many of the individuals concerned have a vested interest in the form of their own properties – who explicitly or tacitly believe the natural order of things is for people like themselves to own their own homes, ever-rising in value, and that there must necessarily be “the poor” who don’t deserve or are incapable of having the same thing.  Explicitly in the case of some Conservatives… heeeere’s Boris!:

“Better a stagnant housing market, [those arguing for an end to housing speculation] will say, than another great boom and another great bust. Which is all very well, in theory.

In practice, it looks as if flattening off the housing market is both risky in the short term, and unachievable in the long term. The sad truth is that it is still psychologically essential to the British middle classes to have a sense that our principal asset is gently appreciating in value, or at least that it will over the long term.”

Stark-staring bonkers, of course.

Houses simply can’t appreciate in value indefinitely compared to other goods and services.  The world doesn’t work like that.  Eventually house price rises will become self-defeating: even if they don’t stimulate more new-build supply (because of self-interested nimbyism); or inflation, causing interest-rate and hence mortgage increases; they’ll eventually act as such a drag on the economy that activity moves elsewhere – abroad, most likely – and housing demand and prices fall.

Those who buy into the view that the increasing value of their home represents a permanent increase in wealth support the ongoing British class division implicitly.  What they refuse to countenance is entirely feasible: it is possible for everyone in work to own their own home, or rent at a market rate, if they prefer the flexibility they gain that way.

So the three stooges are “Old Labour” socialists, who don’t believe markets can ever be fair; bleeding heart, sawdust-headed “Liberals”; and divided nation, blue-blood-is-just-better “Conservatives”.

It doesn’t have to be this way.  Instead of accepting capitalism as it is (“Conservative”), or rejecting it (“Old Labour”), or ooh, poor little kitten! (“Liberal”), we can make capitalism fairer.  A much higher minimum wage, relative to local house prices, would solve many of the problems that are causing such angst.

 

October 22, 2010

FIT Farmers

Filed under: Energy policy, Feed-in tariffs, Global warming — Tim Joslin @ 12:02 pm

There was an informative article about FITs for solar PV by Leo Hickman in today’s G2.  It turns out – surprise, surprise – that the FIT scheme has flushed out those subsidy-meisters, our friendly farmers.

The idea was to subsidise solar PV on peoples’ roofs, for reasons that anyway make no sense, as I’ve noted several times before.

However you cut it, the maths shows the scheme pays for itself within a decade at most and then provides an astonishing income for another 15 years – maybe £600K pa for a £4m upfront capital outlay!  Indexed at RPI!!

A commenter on Hickman’s blog claims that Spain had promised FIT recipients €126bn before it reneged on its commitments.

This week’s Comprehensive Spending Review seems to have only reaffirmed that the scheme will be reviewed in 2013.  It seems to me we could have incurred a significant liability by then.  According to the DECC paperwork, there is a limit (5MW, hardly “micro”-generation) only to the size of individual FIT installations, not the total of installations.

The area covered by the Wheal Jane scheme Hickman describes is only 5 acres, about 2 hectares.  There must be scope for thousands of such schemes in the country.  One thousand schemes would cover 2000 hectares, that is, only 20km2, i.e. virtually nothing compared to the available area, in fact around 1/10000th or 0.01% of it, that of Great Britain being in excess of 200,000km2.

The subsidy for Wheal Jane alone is around £500K/yr (based on 29.3p/kWh compared to a wholesale price for other electricity of 4-5p/kWh).  1,000 similar schemes or the equivalent would cost £500m/yr, so we’re talking serious money.

1000 similar schemes would have a similar capacity (around a GW) to a large gas or coal or a typical nuclear power-station, but would operate at only around 20% efficiency, rather than, say, 90%.   So we’d have to pay a total subsidy of over £2bn/yr to Wheal Jane type schemes to provide a power-station’s worth of electricity.

The calculation of the cost of the subsidy isn’t greatly affected by the efficiency of the Wheal Jane scheme (since the price paid for the electricity is virtually all subsidy), but it might be worth pointing out that the subsidy level was based on depoying solar PV panels on roofs of normal housing.  Domestic FIT electricity generators get around 45p/kWh for selling electricity to the grid – approx. 40p/kWh subsidy – whereas the farmers get 29.3p/kWh – approx. 25p/kWh subsidy.

I wonder if the difference is enough, because, frankly, deploying solar PV in a field makes much more sense (but not as much sense as something cheaper, such as solar thermal power generation or wind turbines in the same locale).  First, it’s possible to track the sun, increasing the efficiency of the installation significantly compared to a roof which faces only in one direction, which is most likely due south and has a fixed rather than variable elevation.  This alone probably must surely almost double the amount of electricity a fixed area of panel can generate (since the orientation of a fixed panel will almost never be perpendicular to the direction of sunlight, whereas that of a moving panel can be most of the time, that is, except when the sun is low in the sky, when sun-tracking panels in a field would shade each other).  Second, the installation and maintenance costs per unit are far lower in a field than on domestic roofs when scaffolding or other equipment will likely be necessary for safe access.  Third, economies of scale reduce all costs dramatically: no need to travel between installations of separate panels; there can be a permanent maintenance presence on site; the purchase price for the panels is likely to be a lot lower.

I strongly suspect that the lower tariff for large-scale solar PV installations isn’t low enough, even compared to the FIT for domestic solar PV electricity generation.

FITs for farmers is a scandalous subsidy we’ll be paying through our electricity bills for decades.

October 18, 2010

Boris the Builder

Filed under: Economics, Housing market, Minimum wage — Tim Joslin @ 1:15 pm

When our civilisation finally collapses, and becomes of interest only to historians, explanations will be sought.  How did we throw it all away?  Many will argue that one of the main causes was a collective failure to regulate individual greed in one way in particular.  In the housing market.

This is what the Mayor of London has to say in this morning’s Telegraph:

“Recent pronouncements from the Coalition Government have suggested a new doctrine: that house prices should be flat, or flattish, while earnings rise to meet them.”

Makes sense.

“In other words, the British middle classes are being asked to wean themselves off house price inflation, and become more continental, with a higher proportion of rentals.”

An increase in renting compared to owner occupation is rather a non sequitur, but I’m still with you so far, Boris.

“And a lot of people will say amen to that. Why do we pump all this money into unresponsive bricks and mortar, when we could be investing our capital in stocks and shares and thereby in the flesh-and-blood businesses that add to the GNP of Britain? They will point out – entirely correctly, that this national addiction to house price inflation has bred a kind of financial illiteracy, an apathy about any other investment except the roof over our heads.

And they will point out that it was the house price bubble – the demented practice of giving vast mortgages to people with no incomes and no assets – that led to the crash. Better a stagnant housing market, they will say, than another great boom and another great bust.”

Still with you.  Though not sure about this use of the word “stagnant”.  The reason house sales are sluggish at the moment is that prices are too high.  Mortgages are more difficult to get and higher deposits are demanded, so obviously the same amount of activity will require a lower price level.

“Which is all very well, in theory.”

Uh, oh!  Where’s Boris going with this?

“In practice, it looks as if flattening off the housing market is both risky in the short term, and unachievable in the long term. The sad truth is that it is still psychologically essential to the British middle classes to have a sense that our principal asset is gently appreciating in value, or at least that it will over the long term.”

Unbelievable!

Even the most elementary reasoning shows house prices can’t rise faster than everything else indefinitely.  If they did, other things – food, energy, manufactures and so on – would eventually cost virtually nothing in comparison to house prices.

And more to the point, house prices can’t rise faster than labour indefinitely, otherwise everyone who doesn’t own a house would have to emigrate.

Unless…

Ah, Boris has a solution: build more “affordable houses”: Here’s his argument:

“…the best way to help those millions in search of an affordable home is not to try vainly to ensure that the present stock of housing becomes more affordable – ie falls in value – but to increase the supply of affordable homes.”

All very Alice in Wonderland.  Readers unfamiliar with the UK housing market may need some translation assistance.  “Affordable homes”, as used at the end, is a euphemism, spin for “social housing”.  The first use of “affordable home” is in standard English.  From now on, I’ll write “affordable home”, “affordable housing” in quotes when it means social housing and affordable, home and housing without quotes when the words mean what they say.

Let’s dispose of the argument against all this based on principle.  Boris clearly believes in a two-tier society.  A class of which I guess he is a member, who own their own property – appreciating in value forever – and another class who are housed at the whim of the state.  Hint: make sure you’re a “key-worker” or have lots of kids.  Kind of a socialised Upstairs, Downstairs, with a bit of hand-wringing charity thrown in.  I simply don’t agree with this worldview.

But let’s move on to the sheer incoherence of Boris’s proposition, though perhaps I should note at this point that Boris is guilty only of voicing the consensus view shared by virtually all UK politicians, even if a few pay lip-service to the rational and correct argument that the relation between house prices and wages needs to be restored.  Some even realise that it’s best to do this with a bit of general inflation rather than by house-price falls.

First, just because homes are rented for less than the market rate doesn’t mean they’re worth less than others.  They could be rented out for more privately.*  More to the point, the money to have them built must come somewhere.  The land has to be bought.  OK, the state can give planning permission on land it owns, but this is just chucking money away, since they could simply have sold the land off to a private developer.

Second, providing social housing will reduce demand for private housing.  The increased provision of houses would lower prices anyway.  So Boris’s plan won’t even succeed in holding up house prices.  So as far as the Upstairs are concerned, building “affordable homes” is just as bad as building private housing! Of course, social housing is less efficient for several reasons, not least because people won’t move for work, because they’ll lose their home and may not get another or at least have a long wait.  The state should just get out of the way and make it cheaper to build private housing by stopping demanding all kinds of goodies (including “affordable homes”) in return for planning permission (usually under Section 106 agreements).

Third, where do ever-rising house-prices lead us?  Well, unless the salary structure of the economy changes, there will eventually be no buyers.  Possible the wealthy will buy to let as they did up to the crunch in 2007, but that makes no sense, since the tenants won’t be able to afford the rent plus a profit for the landlord and letting agent, since if they could they’d be able to get a mortgage!   So eventually we’ll simply run out of buyers.  Prices will simply have to drop to an affordable level, since otherwise properties will simply sit in estate agents windows.

No, Boris.  You’re not a dumb blond even if you do mumble and bumble in a ditzy manner.  Thatcher was right on housing.  The answer is to make just about everyone part of the property owning class (or at least renting by choice rather than necessity).  And for that to happen house prices must be kept down to a reasonable multiple of the lowest salaries.  Say three times.

————

* Notwithstanding the revelations in a DWP report, also featured in today’s Torygraph.  As there is insufficient “affordable housing” the state often simply has to pay private-sector rents.  Except that apparently the system is so inefficient that landlords can get more rent for social tenants that for private ones!  Though working people on low incomes end up in poorer accommodation than the state would provide:

” ‘[Low income working] Households with children aged under 16 do appear to be worse off in terms of the property size that they occupy and the rates they would be entitled to if they were eligible for housing benefit,’ the study said.”

You couldn’t make it up.

Politicians of all stripes have created this mess.  Sorting it out requires a step back.  The basic principles need to be laid down.  Starting with fairness.

October 1, 2010

Dissecting a Wolf, a Bean and a Vulcan

Filed under: Credit crisis, Economics, Inequality, Inflation, Public borrowing, Public spending — Tim Joslin @ 8:04 pm

I see John Redwood was up bright and early this morning, blogging away.  At 6:34am he posted that:

“…the [cuts] strategy has worked, bringing interest rates on government borrowing down and seeing off a possible Greek or Irish style borrowing crisis.”

Well, maybe.  But there’s an alternative explanation which would chill the former Minister’s blue blood.  I would have thought traders would pay a lot of attention to the interest rate desired by a central bank able to use QE to drive down yields to whatever level it desires.  FT Alphaville suggests that the Fed, at least, might decide to simply target long-term interest rates rather than apply a specific amount of QE.  Not a market to short just now, I would have thought.  Much safer to bully the Portuguese.

For the record, I can’t help a nasty feeling about all this QE.  The danger is letting inflation catch up with us.  A bit of inflation right now would be a jolly good way to get rid of all that negative equity.  But if inflation expectations sneak up on us the Old Lady would be compelled to sell off her QE bonds at a loss to soak up excess cash.  And it would suddenly make new government debt rather expensive.

Still, there don’t seem to be any better ideas out there.  And the clear and present danger, as pointed out by Posen, does seem to be a Japanese style “lost decade”.

But it was what the Vulcan did next that really amused me.  He was on the Today programme this morning absolutely fulminating that the Deputy Governor of the Bank of England, Charlie Bean, had suggested that if savers spent some of their money it might benefit the economy.   Redwood apparently believes that: “We are all collectively embarked on cutting the mortgage and putting some more money into savings and pensions.”  Yes, “all”.  How does that work, John?  Where does this money come from?  The same magical mystery place as bank interest apparently, since the former stalking horse also lectures us that: “Consumers might spend more if they got a better return on their savings and had more savings income” and that: “As house prices fall, people become more alarmed by the level of the mortgage.”

Um, doesn’t one person’s savings income come from another person’s mortgage interest payment?  And won’t house prices fall even further and people become even more alarmed if their monthly mortgage payments rise?

What on Earth does the Member for Wokingham think the economy is?  Maybe on Vulcan there are some different principles, but in this part of the Milky Way it’s generally considered that the more money circulates in return for goods and services, the healthier the economy is.  Yes, John, money has to circulate.  We can’t all stuff our mattresses with it.

Another getting their knickers in a twist over all this is our old friend Martin Wolf over at the FT.  If he feels the Coalition’s cuts agenda is dangerous I suggest we listen.  And this morning Wolf’s teeth were dripping the blood of the IMF, who (much to the delight of Grant “Anyone for Rugger?” Schapps on Question Time yesterday evening) have dared to endorse the new government’s spending plans.

Personally I think there’s a good chance the whole cuts debate is redundant as – just like in a household – it’s not always that easy to cut back on your spending.

But what really surprised me this week was a rare slip by Wolf.  He wrote that:

“The [policy strategy] of slashing the fiscal deficit while the private sector tries to slash its debt suffers from a fallacy of composition: it is impossible for all sectors of the economy [i.e. the public and private sectors] to spend less than income at the same time.”

This is simply incorrect. There is no “fallacy of composition”. The creditors are all private sector, so it is entirely possible for both public and private sector debts to be paid down simultaneously. It’s not the balance between the sectors that matters; it’s what happens within the private sector that’s important. Simply put, to decrease total debt, there needs to be an increase in financial equality (though not necessarily in living standards, since public spending reductions affect the rich financially and the poor non-financially).

Strangely, whilst my first contribution to the debate appeared immediately, my second comment which began by succinctly pointing out Wolf’s error failed to appear on the FT for a couple of days (then appeared twice).  I have little tolerance for this sort of thing.  It seems to me that the mainstream media who have coopted much of the blogosphere debate have a responsibility to allow debate to actually proceed and make sure their technology works reliably.  I was going to have a good whinge.  Now I suppose I’ll have to give the FT the benefit of the doubt.  Must have been a glitch.

There’s a really big issue here, though.

It’s becoming more and more apparent that the big picture is that inequality is more than just bad for us Spirit(Level)ually – it’s also bad for the economy.  Robert Reich has apparently explained this in Aftershock which I was just about to order when I realised I had his Supercapitalism on my shelf.  Unread.  Not any more though, so I’m off to see who can rush me Aftershock (2-3 weeks say Amazon, tsk).

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