The government finally decides to do something about housebuilding

Not that the government has decided to do the right thing about housebuilding of course, that would be far too much to hope for. But they are doing something:

Ministers want to break the stranglehold on the country’s building industry, with eight developers responsible for more than half of the homes built every year. Under the plan, the Government will arrange for planning permission to be granted at five areas in England and then offer the sites to developers. The sites, which comprise 13,000 homes, will be offered in parcels of 500 homes each to smaller house builders.

We do not believe the idea that the housebuilders are trying to maximise profits by dribbling housing out onto the market at all. We think they're being entirely rational in keeping a stock of perhaps 6 years of housing plots simply because it takes 6 years to move currently unplanned land along to something that has been built upon. Just as we rather expect a coffee shop that gets weekly deliveries of beans to hold a week's stock of beans, one enjoying daily deliveries to keep only a day or so's stock. To us therefore the answer has always been blow up the planning system so as to allow more building.

But let's say that you do believe the landbanking story (although your believing it will put you in company with Polly Toynbee, not somewhere an economic rationalist ever wants to be intellectually). So, if you think there's a cartel monstrously and outrageously hoarding building sites, your response would be to create more building sites of course. Which is what is being done. But instead of creating enough for 10% or so of current new build you would instead, well, you'd blow up the planning system and make absolutely sure that there were many potential building sites, wouldn't you?

You would so expand supply that there could be absolutely no chance of cartel, monopolistic or oligopolistic behaviour. We would return to the planning system of the 1930s. Which was, actually, the last time the private building industry produced the sort of volume of new build we think the country needs and or desires. And which also, as matter of simple historical fact, dragged the country up out of those Depression doldrums.

Hmm, more housing, cheaper housing, an economic boom from the building of it all and we get to kill off a pernicious bureaucracy to boot. All sounds most wonderful: and all we have to do to achieve it is carry out that most enjoyable task of killing off that pernicious bureaucracy. As we've said around here before often enough, repeal the Town and Country Planning Act and she'll be right. And as we also like to emphasise around here, the solution to troubles that government is trying to deal with is often to stop government doing the damn fool things it is already doing, nothing else.

And to complete the trifecta, as we also like to note, it's surprising how often stopping government from doing something is the correct solution to our woes.

The law can be a funny thing

This is a fun little case, rather appropriate for today given last night's excesses. Yet there's something profoundly wrong about the final dispensation:

Drink driving charges against an American woman have been dismissed based on an unusual defence: her body is a brewery. The woman was arrested while driving with a blood-alcohol level more than four times the legal limit in New York state. She then discovered she had a rare condition called "auto-brewery syndrome", in which her digestive system converts ordinary food into alcohol, according to her lawyer, Joseph Marusak.

We are aware that this can indeed happen.

The rare condition, also known as gut fermentation syndrome, was first documented in the 1970s in Japan, and medical and legal experts in the US say it is being used more frequently in drink driving cases.

We're even aware that that first known case concerned an American man in Japan and boy, didn't he have a hard time proving it.

During the long wait for a diagnosis appointment, Mr Marusak arranged to have nurses monitor his client for a day to document she drank no alcohol, and to take several blood samples for testing. "At the end of the day, she had a blood-alcohol content of .36 without drinking any alcoholic beverages," he said. He added the woman also bought a Breathalyser and blew into it every night for 18 days, registering around .20 every time.

Clearly, this is not the woman's fault so yes, we entirely agree with the idea that all charges should be dismissed. We are rather in favour of the idea of mens rea after all. However, this to us seems entirely wrong:

The woman is now free to drive without restrictions

Because we don't in fact have laws against drinking before you drive. This is not some puritan (however often people seem keen to take it in that direction) restriction of the joys of booze. This is law against driving while drunk, on the very sensible Millian grounds that in doing so you are a danger to others. And it doesn't matter how one becomes drunk, one is still that danger.

So the correct answer here is that, without fault of course there should be no punishment. But if ingesting carbohydrates is going to get someone pissed (which is the specific problem here) then someone to whom this happens should not drive: because they're pissed.

Someone could have gone blind from indulging too much in teenage manipulation, they could have gone blind as a result of unsuccessfully defusing a terrorist bomb and saving many lives in doing so. We still don't let them drive: because they're blind. They why is not the point, the danger is.

Business rates: not such a good tax after all

Taxes, eh? Just when you think you’ve found a good one, it lets you down. We usually think of business rates as some of the least bad taxes we’ve got, because to a large extent they’re like land value taxes. Land value taxes are far from perfect but they do less harm than most taxes. For a start, they tend to fall on landowners, rather than land occupiers, because the supply is fixed. Tim Worstall explains this here, and the empirical evidence is quite strong that a £1 rise in rates leads to a nearly-commensurate fall in rents over the long term.

They’re also less distortionary. A good rule of thumb is that if you tax something, you get less of it, which is why taxes on capital are such a bad idea. But since there’s a fixed supply of land, taxing the value of land doesn’t get you less of anything. Nice one.

Unfortunately this might not be how business rates really work, because they tax the value of property rather than land. To a large extent this is a tax on land and that’s all fine and dandy, but you’ll notice that a five star hotel costs more to stay in than the Bates Motel next door, even though the land they’re built on is worth the same. This is because the actual bricks and mortar on top of that land have different values too.

The British Property Federation (and chums) have a new report out today which points out that this might be a serious flaw in business rates. They argue that most landowners have other investments too, and will shift their money from property to those investments when business rates rise:

A rise in business rates will reduce the rents that a landlord is able to achieve and therefore reduce the potential level of new real estate investments by a sum equal to the value of the tax burden transferred from occupiers to landlords business rates … If a proportion of business rate increases are capitalised into lower rents, then there is a likelihood that this will impact on the level of new funded commercial development.

That’s an important point – I’m not sure about the numbers they use, which suggest an extremely high elasticity of investment that I don’t think is justifiable, but it’s still an important point.

Just as important: the less frequently revaluations are done, the more uncertainty there is in the system. Uncertainty is a deadweight loss – it destroys wealth and makes everyone worse off. As we’ve pointed out, it’s not difficult to estimate property values on a rolling basis.

What’s really interesting about this report is not just what it’s saying but who’s saying it. Most industry bodies are woeful on business rates – they wrongly assume that the incidence is on firms because they’re the guys writing the cheques. For the BPF to come out and reject this – and do so with reference to most of the existing academic literature, no less – is very encouraging. But they do have a point about the investment effect.

So, must we throw business rates on the scrapheap too? It depends on the elasticity of investment – how much less money goes on property investment when rents fall after rates rise. And the way to fix things is quite simple: tax the value of the land, not the property that’s built on it.

Stop delaying and expand Heathrow!

To say that rising tensions between Zac Goldsmith and David Cameron could result in a “bust-up” is to exaggerate – I can hardly imagine the London mayoral candidate channeling Eric Joyce and head-butting the Prime Minister – but it’s certainly giving both parties a headache. Earlier this week, Goldsmith announced that it would be an “enormous betrayal” were Cameron to back the expansion of Heathrow airport. The Prime Minister, meanwhile, is dragging his feet in making a final decision between Heathrow and Gatwick. He’s blaming the need for more “confidence building” about the environmental impact of a new runway; really, he wants to remove the issue from next May’s mayoral elections.

The expansion debate is one that has been going on for longer than Goldsmith has been alive. An early plan to expand Heathrow north of the Bath Road was abandoned in 1953; no new full-length runway has been laid down in the South East of England since the 1940s. For years, we’ve been told that Cameron has reached the moment when he must take a decision, but all he’s done is kick the can further along the runway. So what’s another delay, you might ask.

The problem, as William Hague pointed out on Tuesday, is that the longer this debate goes on, the harder it becomes to decide, in an area where the population grows every year. The situation worsens when you consider how painfully slowly UK infrastructure projects get finished. Plans for a railway linking Paddington station to the City of London and the docks were approved by Parliament in the 1880s; Crossrail will only be fully completed in 2019.

Politicians may want to bury their heads in the sand, but Heathrow expansion is inevitable. Boris Island is too expensive; Gatwick is unlikely to provide much of the type of capacity which is most urgently needed: long-haul destination markets. A bigger Heathrow will not inflict noise nuisance on more people than the airport does today, and the people affected would be far better compensated. The Northwest Runway scheme at Heathrow, favoured by the Airports Commission, is technically feasible and does not involve massive, untested infrastructure.

The Confederation of British Industry said on Tuesday that delaying a decision on airport expansion could cost the economy more than £5bn. Personally, I’m with the 31% of MPs who want expansion at both Heathrow and Gatwick. But given that the London airport capacity problem has perplexed successive governments for over half a century, I’d settle just for action on Heathrow.

Housing benefit is broken—abolish it

I argue that housing benefit is a terrible part of the welfare system and that it ought to be scrapped on CapX.

Now the government has U-turned on plans to abolish tax credits, it should look at housing benefit for welfare savings—most housing benefit is a transfer to landlords and the remainder is an inefficient and distortionary intervention. It should abolish the £26bn system and use the money to fund tax cuts for low earners and a shallower Universal Credit withdrawal curve. Paradoxically, housing benefit is one of the causes of our housing crisis, rather than a solution.

There are numerous ways of compensating low earners in better ways: for example it would cost about £14bn to raise the threshold at which workers start paying National Insurance Contributions to the full-time minimum wage level (£251.25 a week or around £13,000 a year). We could also make the rate at which Universal Credit is withdrawn less steep, or beef up tax credits. Any of these would strengthen work incentives and efficiency, and enhance the progressivity of the overall tax and benefits system, relative to the current regime.

Read the whole thing.

Ronald Coase on how to solve the housing problem

Via Paul Walker, an interesting piece discussing how to apply the insights of Ronald Coase to sorting out the British housing problem:

As Pennington explains, Coase rejects this model. For him the costs are reciprocal – there are two sides each of whom is potentially imposing costs on the other. One wants to build houses, the other to preserve space. To the extent that one side gets its way the other suffers a loss. What we actually have is not an externality or pollution but a conflict over how to use land.

For Coase the solution was to assign a property right to one of the two sides and then allow a process of bargaining to take place. If the first group have the right then those who do not want development would have to pay them not to do it. If the second, then the developers (and ultimately the buyers) have to pay for the right to develop. Crucially it does not matter which of these two we go for: in either case we will end up with the outcome that maximises total welfare so long as the bargaining process itself is not too costly.

We have no doubt this would work and that should be good enough as a solution. However, while it would work we're really not convinced that it is the correct solution. For what it is saying is that those who wish to prevent building upon land that they do not own have some form of right to say or insist so. That's why they might be due some compensation from those who do build. And we rather reject that basic contention.

Property ownership does mean that one should be able to dispose of the property as one wishes. Consistent with this is that other people do not have the right to impose their views upon you of how you should dispose of that property. Thus we're uncomfortable with the idea of creating a right which can then be subject to such Coasean bargaining.

Far better, we think, to return to our basic idea. Simply blow up the Town and Country Planning Acts in their entirety. Yesterday, for preference.

Ten initiatives to help young people: 8. Help with work-elated transport costs

The cost of travel to and from work falls particularly hard on young people because it often constitutes a higher proportion of their wages than it does for more established people.  The cost can run into thousands of pounds a year,.  Although young people (16-25) with railcards can qualify for one-third reductions on travel, these are only for off-peak travel, which is no use to people travelling to and from work at peak hours. It would help many young people if the cost of journeying to and from work were treated as a legitimate business expense and could be deducted from taxable income.  The proposal is that for those under 25, the ones who qualify for a young person's railcard, they would be allowed the cost of their commuting to and from work as a tax-deductible expense.  This would, of course, mean that the Treasury would receive less tax money from them.  But there would be gains, too, in that it would make work more attractive and would result in more young people in work and off benefits.  Furthermore, the increased spending power this would give some young people would increase the other taxes they paid to HMRC.

Someone in London starting out on perhaps £13,000 a year might currently spend almost £2,500 on an annual season ticket for London's Underground zones 1-6.  If this were tax deductible, it would take them below the threshold and out of income tax altogether.  Given the government's current commitment to raising the starting threshold of income tax to the level of the minimum wage, this would be of help to even more people in the future.

What is true for travel to and from work in London is true for other cities, albeit often on a smaller scale.  Living in city centres tends to be more expensive than living on the outskirts.  Young people are caught between the high rents of central accommodation and the high travel costs incurred by living further out.  Although yearly season tickets can reduce the cost somewhat, many young people simply cannot afford the capital outlay it would take to buy one, and have to settle for monthly or even weekly tickets.  Making commuting costs tax-deductible for people aged under 25 would be of immediate and practical help.

Wisdom on housing and land from across The Pond

It's a sad commentary on contemporary British politics that it would be almost impossible to even imagine an even vaguely lefty economic adviser making the following statement:

In today’s remarks, I will focus on how excessive or unnecessary land use or zoning regulations have consequences that go beyond the housing market to impede mobility and thus contribute to rising inequality and declining productivity growth.

While land use regulations sometimes serve reasonable and legitimate purposes, they can also give extranormal returns to entrenched interests at the expense of everyone else. As such, land use regulations are an example of a broader range of situations that may give rise to economic rents. By this I do not mean the check you write to your landlord every month, but a situation in which any factor of production—in this case, land—is paid more than is needed to put it in production.

Further:

I want to be clear from the outset, some land use regulations can be beneficial to communities and the overall economy. There can be compelling environmental reasons in some localities to limit high-density or multi-use development. Similarly, health and safety concerns—such as an area’s air traffic patterns, viability of its water supply, or its geologic stability—may merit height and lot size restrictions. But in other cases, zoning regulations and other local barriers to housing development allow a small number of individuals to capture the economic benefits of living in a community, thus limiting diversity and mobility. The artificial upward pressure that zoning places on house prices—primarily by functioning as a supply constraint—also may undermine the market forces that would otherwise determine how much housing to build, where to build, and what type to build, leading to a mismatch between the types of housing that households want, what they can afford, and what is available to buy or rent.

The tradeoffs inherent in land use regulations are well known and have been of concern to policymakers and academics for decades, since at least 1961, when Jane Jacobs wrote The Death and Life of Great American Cities. In it, she argued that limits on density and mixed-use development, as well as an imbalance between preservation and new construction, can reduce housing affordability, socioeconomic diversity, and economic activity.

That's all from Jason Furman, currently chair of the Council of Economic Advisers to that well known right winger, President Obama. If only any single one of Jeremy Corbyn's advisers, heck, if just one of two of those somewhat to the left of us were this clear on the cause of our basic housing problems then we'd be able to solve them by next Tuesday afternoon.

We simply place too many restrictions on who may build what, where. To solve the problem we thus have to remove some to all of those restrictions. And that really is it.

Why is the government even involved in this decision?

Whether, where and if on the subject of new runway capacity in the SE has been an argument rumbling along for the entire lifetime of our latest intern here at the ASI. It's entirely possible that the shouting match will continue to rumble along until his scheduled retirement date if the past is a useful guide to the future. And Jeremy Warner manages to get close to what we think is the correct answer:

This is simply to approve new airport capacity at both Heathrow and Gatwick, and possibly Stansted as well, and let the markets decide which to back. Whatever the outcome, they are more likely to get it right than the politicians and the civil servants.

The only reason we don't say it is the correct and complete answer is because Warner is betraying his less than total and complete belief in markets. Something which we agree we are rather absolutist about, the joys of markets and their outcomes, but then there's no shame in being absolutist when you are in fact correct.

And the point here is not that markets are just more likely to get something right than politicians and bureaucrats. It is that the market outcome is the correct outcome, by definition. The market simply being a reification of the voluntary interactions of the some 65 million people in the country, said voluntary interactions obviously being all of us having our little vote on the outcome we desire. And thus the outcome from those voluntary interactions is the correct outcome, whatever that result is. If it's no new runways, three or more of them (why not expand Basildon to take 737s and A320s?) or any other possible permutation of the numbers, just letting everyone get on with it is in fact the correct answer as, by definition, that's what will produce the correct result.

How do we get the adults into government?

We are ever so slightly worried by this announcement:

The government is proposing a national minimum bedroom size as part of a drive to stop landlords carving up houses into ever smaller rooms to maximise rental income.

Bedrooms in houses of multiple occupation would have to be a minimum of 6.5 sq m (70 sq ft), and landords letting rooms smaller than that would be guilty of a criminal offence.

The proposal was sparked by an outcry over “rabbit hutch properties”, many costing as much as £1,000 a month, as landlords cash in on the booming housing market, particularly in London.

Lots of people wish to live in parts of the country where there are not many bedrooms. Therefore people are living in small bedrooms rather than large ones: that's just what happens. If there's a shortage of food then people eat smaller meals, if the pub runs out of beer then everyone drinks shorts. Shortages lead to smaller measures.

Government would not ban the consumption of gin if beer were to go short, government would not ban smaller plates if food were to be short, so quite why government thinks that the banning of small bedrooms is going to increase the supply of bedrooms is unknown to us.

All we're really left with is wondering how we might manage to get adults into government. You know, the people capable of doing that mature, joined up, thinking stuff?

Sadly, we're not even sure where you'd send the postcard if you did have an idea about it.