Tuesday, 9 June 2009

If only we could have an expenses scandal every month

The expenses crisis had at least one thing going for it. It was a wonderful distraction for voters.

Ironically, the political paralysis in Westminster also diverted the attention of policy makers away from the economy. In May, there were no ostentatious innovations, sudden policy shifts or grand economic ideas. Naturally, for the first time since the crisis began, the economy showed some tentative signs of stabilizing. The service sector enjoyed a modest degree of growth, while sterling appreciated.

There is a lesson here, but it isn’t one that policy makers are inclined to study. It is that a market economy has powerful regenerative powers. Leave it alone, and the private sector will fix itself. Allow prices to adjust, and the market will ensure full employment and rising incomes. In contrast, government intervention always makes things worse.

The tragedy of the UK economy is that it is overwhelmed by the worst sort of government intervention. New Labour aren't interested the traditional objectives of government intervention, such as saving industry and creating jobs. New Labour’s purpose is to protect and control the most distorted market of all – housing. Its chosen instruments of intervention is a colossal bailout of the financial sector, coupled with a recklessly large fiscal deficit.

The property market is riddled with distortions. On the supply side, there is massive state intervention via local authority planning restrictions. A person may own a property, but they can not dispose of it as they please. They can not knock it down and rebuild it. They can not change its purpose. At every stage, the dead hand of the state restricts and prevents private individuals controlling their private property.

On the demand side, the cost of buying a house is also determined by the state via the interest rate. The cost of a house depends on the cost of servicing the debt used to purchase it - the mortgage interest rate. That price is governed by the Bank of England, who openly admit to trying to manage asset values, particularly housing, to regulate overall aggregate demand in the economy. Again, it is state intervention of the worst sort.

Over the last thirty years, the distortions in the housing market have grown like a cancer. Today, governments aren’t concerned about unemployment, inflation, the balance of payments, or the size of the government debt stock. The only objective of policy is the expansion of credit, designed to inflate house prices.

It is madness, of course, but UK policy makers, regardless of party, are not willing to acknowledge this insanity. That is why today the UK economy has near zero interest rates, a central bank printing around 10 percent of GDP in cash, and a government running a 12 percent of GDP fiscal deficit.

However, yesterday, the UK economy received the best piece of news in years. It was that Gordon Brown was going to continue as PM. If we are in luck, he will be a lame duck PM, unable to introduce any further interventionist policies. He might leave the economy alone to sort itself out.

Nevertheless, the economy will continue to struggle in the face of the legacy of irresponsible monetary and fiscal policies that Brown introduced when he still controlled his party. But if we are really lucky, his New Labour enemies will continue fighting for the leadership all the way to the next election. In fact, the continuing and outrageous venality of our politicians is the only hope for our economy.

If only the expenses scandal could continue forever.

22 comments:

Roy said...

Be careful for what you wish for; the expense scandal could last until autumn.

DBC Reed said...

If Brown had n't done some fairly massive intervention in nationalising banks we would n't have any economy to speak of now.And this was n't post-war Keynesianism; this was clause 4nationalising commercial banks which not even Attlee considered.
I don't know why there's this fascination with pure market forces.(I used to be involved in a world of phonograph enthusiasts who used to obsess about purely non-electronic reproduction of sound with metal or thorn needles and gramophone horns 2ft six in diameter and 4ft off the ground.Magnificent but pointless as they allowed themselves electronic turntables).
Doubtless when they abolished Schedule A of Income tax on house values,people saw this as a victory
for market force economics.(The abolition of Resale Price Maintenance at the same time was hailed as economic freedom.It has put thousands of shops out of business and has recently been re-legalised in the USA) Two enhancers of market forces that totally screwed up the economy.
People say: use market forces for providing houses with LVT.But LVT is a huge intervention in market freedoms (as would Schedule A appear NOW).
Surely there are market interventions that enhance freedoms.
Gesell thought that left to itself the market economy would from time time seize up: capitalists would lay up money on deposit; landowners would bank land waiting for its price to go up;only labour could n't afford to do nothing : they would starve.A lot of the features of the Gesellian economic standstill are evident now.

Tim M. said...

"[T]he economy will continue to struggle in the face of the legacy of irresponsible monetary and fiscal policies that Brown introduced when he still controlled his party."

This is true of course, but also a bit intellectually lazy, I feel. Sadly it seems to reflect lot of the public discourse in this country.

Almost everyone acts as if there was actually a meaningful policy alternative in the UK. I don't recall this to be the case. Neither the LibDems nor the Conservatives would have done anything significantly different. Sure, a bit more of this here and a bit less of that there, but other than that it would have been the exact same story. Today we make fun of Brown claiming to have put an end to boom and bust, but the truth is that the entire country backed this narrative of the superiority of the Anglo-Saxon economy and financial system, both the elite and the 'common people'.

And they still do. It's just all those bad Labour policies. The UK doesn't have to change. A new government can fix this.

Good luck!

(Highly recommended reading: http://cynicuseconomicus.blogspot.com/2008/06/funny-view-of-wealth.html)

Anonymous said...

"There is a lesson here, but it isn’t one that policy makers are inclined to study. It is that a market economy has powerful regenerative powers. Leave it alone, and the private sector will fix itself."

But it is not one Brown is disposed to learn, his current mantra when he scratches around for something else than "Getting on with the job"* is, "The party opposite would have done nothing, wheras I have saved the world".

* The job in hand is destroying the economy and blasting civil society to smithereens.

Roy Davis said...

Surely the biggest long-term danger of maintaining the current inflated house prices is the restrictions it places on the control of interest rates?

A small change in the interest rate with a small amount of debt means a smaller change in repayments. A small change in the interest rate with a large amount of debt means a large change in repayments.

Somehow, I don't see wages doubling over the next 5-10 years in order to accommodate the interest rate changes that will be required to control the economy. Maintaining the near-zero rate of interest is unsustainable and so is maintaining the current flow of credit (pre 2007 levels at least).

electro-kevin said...

Bang on the money, Alice.

Don't forget to include mass immigration as one of the main distorting factors.

Anonymous said...

This truely is the worst financial blog I have ever read. Bitter, cynical, poorly informed and offering zero alternatives. It's like it is written by a 5 year old.

Every day I come on to see what kind of crazy spin Alice can put on the next set of figures she finds, while somehow blaming the British government for a world economic crisis.

Few emerge from this mess with distinction, but few deserve the vitriol spewed on this vile blog everyday.

Sackerson said...

Another NL troll, above?

Mark Wadsworth said...

Another excellent rant!

DBC, LVT is not anti-free market. Free market says "price rationing is the best form of rationing". Free market says "taxes on incomes and production damage the economy", but taxes have got to come from somewhere.

Tim M "Neither the LibDems nor the Conservatives would have done anything significantly different."

Exactly, that was the point of an earlier post here - they are all the same - all the parties care about is keeping house prices rising, which is impossible of course.

fajensen said...

@A.C. Every day I come on to see what kind of crazy spin

Maybe you could also hammer your toes every morning - then complain about your self-inflicted misery on YouToob. That might cheer other people up.

electro-kevin said...

In theory I am glad of the 'distortions' on the supply side. It's about the only thing keeping a brake on population in an island with limited space and resources. Britain is also a beautiful place - still; mass construction around towns and villages is spoiling it.

In reality I am disturbed by the way in which housing resources are distributed in Britain. The big problem is that wastrels are encouraged to breed whilst the productive are disincentivised - hence Britain is being turned into a nation of savages.

Regardless of the limitations on housing stock we still have over-population - combine this with the lack of opportunity to make money from a real economy, and the ruination of pensions, then it is hardly surprising that many people resort to property speculation to secure their futures instead. Much of this rental accommodation going to house welfare dependants.

I've a feeling I know who that might be at 05.44. This can't be the worst financial blog they've ever read. And no-one's blaming Nu Labour for the world economic crisis - just our lack of preparedness for it.

The consensus among pundits, and now voters alike, is that this is the worst Prime Minister we have ever had (in my view that award goes to Tony Blair) So what planet are you on, A nony mouse ?

A reinflation of the housing bubble is reckless, dishonest and harmful to us. Sooner or later more virile economies will find out that we are nothing but huff and puff.

Frankly a bit of austerity would do our ailing country the world of good.

Anonymous said...

Riding in a taxi through London the other day, and I looked out the window with my cynical Rob Loweish North American eyes. And what did I see? A very shabby city, grey and ugly, a population of out-of-shape, ugly people wandering around in ill-fitting track suits (where is Britain's fabbled cool fashionistas?), many looking like their days are spent doing drug deals. Sees no Green Shoots, and leaves.

roym said...

"At every stage, the dead hand of the state restricts and prevents private individuals controlling their private property."

a bit over the top this. planning has been opened up an awful lot more than before. just check the planning portal for england. its idiot proof. that being said, a lot of regs are needed to protect penny pinching idiots from themselves when they hire the cheapest bodgit and leggit builder!

Ida's Idioms said...

"Australia's Prime Minister, Kevin Rudd reckons his wife looks "terrific" but is not impressed with photographers who took pictures of her at the gym."
http://www.news.com.au/couriermail/story/0,23739,25609369-953,00.html

The cashier said...

Anon 05.44: Don't forget to collect your full refund as you leave.

DBC Reed said...

@mark wadsworth
It is not only the supply of land
extremists want to leave to market forces (including the freedom to do nothing with it while it appreciates in value);it is also the supply of money and credit which they think is none of the government's business.Just look at this useless definition of inflation by that high priest of the Austrian cult Ludwig von Mises:
"Inflation ..means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits to check"
So all increases in the money supply are inflationary!

QG said...

@DBC Reed

"extremists want to leave to market forces (including the freedom to do nothing with it while it appreciates in value)"

I thought that the whole point of LVT was to take away the incentive to hold land for speculative purposes? I recall Fred Harriosn complaining that during the property boom, British building companies had little incentive to innovate or compete in the activity of building things because most of their profits came from land bank values.

"all increases in the money supply are inflationary!"

Mises isn't the only one to point this out:

"Inflation is always and everywhere a monetary phenomenon."

- Milton Friedman

Anonymous said...

"Ironically, the political paralysis in Westminster also diverted the attention of policy makers away from the economy. In May, there were no ostentatious innovations, sudden policy shifts or grand economic ideas. Naturally, for the first time since the crisis began, the economy showed some tentative signs of stabilizing. The service sector enjoyed a modest degree of growth, while sterling appreciated."

Alice, you're talking twaddle and you know it. The reason the economy is starting to recover is precisely because of the intervention by the Government and the MPC. Last September RPI inflation hit 5%. At the time, bank rate was also 5% and you urged the MPC to raise rates. Double-digit inflation was just round the corner, or so you warned. Fortunately, the MPC ignored your advice and slashed bank rate to its present rate of 0.5%. We are now beginning to see the economy respond to these low rates (and we haven't seen a glimmer of the inflation you promised).

It's entirely possible that the recession (the worst since the 1930s according to virtually all commentators) is already over in Britain. May's Purchasing Manager's Index showed a third consecutive month of improvement, and as Alice herself says, the service sector is already growing. I suspect it will be touch and go whether the recession ends this quarter, but if not, it will certainly end in Q3 2009.

Again, as Alice says, the pound is also rising. Again, I suspect it's due to Britain coming out of recession ahead of most of the rest of Europe and the USA. It looks to me that the market is expecting the emergency interest rate regime to be lifted earlier in Britain than the rest of the G7. Finally take a look at the stock markets. They've been rising fast for around two months with a rise of 30% fairly typical for most major markets. The crisis is over and the markets know it.

In short, faced with potentially the deepest recession since the 1930s policy makers around the globe, from Governments of all colours and persuasions have intervened on an unprecedented scale. They didn't leave it to the market, and thank God, they didn't let the banks go bust.


Young Mark


P.S. I don't mean to be excessively rude, but I once commented that your blog was vastly superior and more entertaining than the drivel one reads in the mainstream press. Just nine months later and you could pass for a professional journalist. Your latest effort can be summarised as "The economy is recovering but this is due anything and anyone but the Government". Over the next few months we'll be seeing this argument repeated over and again in the pages of the Daily Telegraph. Maybe you should offer them your services.

DBC Reed said...

@QG
I think you misunderstand me.Market forces can suggest that the landowner banks his land and waits for things to improve.The intervention of LVT makes this next to impossible.Market forces could be such that the capitalist decides not to invest but to sit on his money till things look better.Market freedoms allow him/her to do so.Keynesian inflation would make it very difficult: Gesellian stamp scrip would make it impossible but is itself too complicated.
All I was trying to suggest is that
market forces do not always conduce to economic activity. I would have thought the present situation where the banks are intent on self-preservation and are not lending while the developers are hunkering down on their land banks is a case in point.Market forces allow the owners of land and money to do what they want,including nothing: only labour can't sit the down-turn out.
Although I am critical of the market-forces-always-bring-increased-economic-activity argument I would not go as far as Young Mark above who seems to be repeating Government propaganda in a tick-box manner.Alice is certainly right to suggest that Government will start another housing bubble to get re-elected.
When it suggests increasing the credit supply but blocking it going into the majority homeowners' house prices by LVT,the Guv will deserve to be taken more seriously.

sobers said...

@YoungMark:

The economy MAY be showing signs of recovering, but is it any wonder? You've got the govt shovelling money into it like its going out of fashion, the BoE printing it to buy the debt so caused, the £ dropping by 25% on the exchanges and oil dropping from $150/barrel to a low of $30/barrel. Thats a massive fiscal boost to the economy. It would be worrying in the extreme if all that hadn't had some positve effect.

But is it sustainable? The BoE can't print money forever (and must remove that cash from the economy at some point) and the govt will run into a massive funding crisis at some point in the next 2 years (whoever wins the next election). Oil is already on the upward march again.

We are currently in the eye of the storm. The first peak was last Oct when the banking crisis hit. The govt assumed the banks liabilities to shore up the system. Just because its calm now, doesn't mean the worst is over. We still have to PAY for all those liabilities, its just now they have been spread over the entire nation via govt debt.

Sooner or later the funding crisis will hit. That will be as bad if not worse than the banking crisis, because there is no-one big enough to bail us out. The IMF doesn't have the cash. The only solution will be emergency cuts in cash public spending and immediate tax rises to attempt to stabilise the budget deficit. That will not be pretty.

You can pretend that Gordo has saved us all (world included) but in fact the day of reckoning for our debt bubble boom is yet to come.

electro-kevin said...
This comment has been removed by the author.
APL said...

DBC REED: "Alice is certainly right to suggest that Government will start another housing bubble to get re-elected."

I think you missed a critical word there:

".. will try to start .."

They haven't a cats chance in Hell of succeeding.

There may be another housing bubble, but not inside the next ten years.