Are economists as dopey as they seem?

One of my grand kids is studying economics at the University and, to help him with an essay on current macroeconomic policy in Australia, he asked me three rather pertinent questions..

1. If there is an inflation problem which is overwhelmingly supply-side driven, as we now seem to have in Australia, and if everyone expects a significant slow-down in domestic demand in the year or two ahead, why are the Reserve Bank and the Government responding (or planning to respond) with demand-deflation policies? That is not what my textbooks tell me is the right response.

2. I notice that rents are soaring and that is one of the reasons why the RBA felt it needed to act to curb the housing boom – but it seems to be having perverse results. The sharp rise in mortgage lending rates is causing a slump in new dwelling approvals and commencements that is, the supply side problem (inadequate accommodation to house our rapidly rising population) will be worsened in the year ahead. Wont this simply accentuate the rent inflation problem and what will the Bank do next?

3. Federal and State governments are expressing concern about the prospective erosion of revenue from the asset market decline, the slow down in retail and housing and a possible rise in unemployment. Their official response has been to try to make up for the expected revenue loss in the year ahead by blocking or deferring many worthwhile spending proposals (as a spokesperson from the Brumby Government put it). In aggregste, wont this just accentuate the risk of an economic slow down and wont this have adverse secondary effects on government revenue? What will they do next? My textbook tells me this is exactly why the Great Depression occurred in 1929.

I gave him the usual economic bullshit distinguishing between short term and long term, between “micro” and “macro” effects and why it might be better to tolerate a little unemployment in order to avoid blowing out inflation expectations and starting a wage-price cycle. I added that macro policy is an imperfect science and that sometimes policy advisers get things wrong.

But I was far from convinced I gave him a good anwer. Perhaps smarter economists can help me out.

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Kevin Rennie
13 years ago

Is it just the ones in the media who are dopey? We’ve been in real recession for months if you were to believe the commentators. It’s just the real hard data, the evidence such as US growth and employment figures.
Economists who use economic terms as throw away lines don’t deserve the money someone is paying them to make these erroneous statements.

observa
observa
13 years ago

“If there is an inflation problem which is overwhelmingly supply-side driven..”

Well we Austrian adherents would beg to differ right there and argue it’s largely a monetary expansion problem from which Central bankers and govts can no longer run and hide. The predicament we now find ourselves in is described quite succinctly here
http://brookesnews.com/080505debt.html
and as pointed out previously here too-
http://www.atimes.com/atimes/Global_Economy/JE02Dj05.html
Basically money matters and the deliberate and sustained debasement of currency, has real effects long term, creating malinvestments which will take equal amounts of time and energy to unwind. You only have to look at the size of successive Federal Budget monetary surpluses(and no doubt Swan’s current one too) to recognise that dilemma now. They’re not backed by any real savings out of production (ie real commodities like gold or perhaps oil in storage) and as a consequence Treasury, Finance and the Reserve would all be telling Swan what will happen if he attempts to spend it in the real economy. The best thing he can do is burn them and if he wants to reallocate spending, tax and reallocate that real production. That’s the hard part now that everywhere the Central banks’ dishonest Ponzi scheme is patently obvious. Of course Swan could always continue down the Mugabe road and keep cranking the printing presses, but he knows that won’t buy himuch of a reprieve. Welcome to real savings and investment now in order to increase living standards in future. Real taxing if he wants to reallocate spending too.

JC
JC
13 years ago

Fred:

Just explain to him that the problems we may be experiencing now are the result of past policy blunders by the RBA for keeping rates far too low for too long in the earlier part of the decade.

Explain to him the interest rate targeting based on the CPI is beginning to fall apart and that we may need a new monetary order over the next decade as this one isn’t working.

Explain to him that rent rises are not necessarily an inflationary signal as it could also be the price mechanism doing its work to attract new supply.

Tell all this and he ought to do fine.

observa
observa
13 years ago

“I added that macro policy is an imperfect science and that sometimes policy advisers get things wrong.”
You should have added that not only is it an imperfect science, but an impossibly presumptuous one, to ever think that public servants could regularly determine the real price at which real savers need to charge real investors for their forgone consumption. I guess just like stopped clocks, they could get the time right to the second, twice every 24 hours.

observa
observa
13 years ago

Yes JC, wouldn’t we Austrian fans all love an uncensored FOI transcript from our new open Govt, outlining word for word what Treasury, Finance and the Reseve’s advice to Swan was, as to why he can’t spend all that lovely money surplus right now.

Sinclair Davidson
13 years ago

Don Harding has a crack at answering Q1 in the Australian.

James Farrell
James Farrell
13 years ago

While we’re waiting for someone smart to show up, here are my thoughts.

I tried to answer Question 1 in a pretty lengthy post a few weeks ago. Ask your grandson to draw an AS-AD diagram, with the two short run schedules intersecting on the vertical long-run supply schedule. Then move the long-run schedule to the left, ask him what will happen, and what the appropriate policy response is.

With Question 2 everything depends on what we mean by housing boom. If the relative price of accommodation is rising on account of microeconomic fundamentals — the income-elastic demand for accommodation and the absolute scarcity of land — then it’s just a fact of life. On the other hand, if easy credit has caused a bubble in real estate or assets generally, this needs to be burst sooner rather than later, even if some new fixed capital expenditure is delayed a little as a result.

As for Question 3, I think it’s clear that we’re living in age of surplus fetish, and rational arguments are doomed to be drowned out by fatuous slogans until the obsession dies.

SLloyd
SLloyd
13 years ago

Observa, the problem with Austrian School economics is it rejects out of hand the need to back their claims with data and scientific analysis. Apparently all this stuff is just self evident and doesn’t require any. :rolleyes:

observa
observa
13 years ago

I put it to you St Loyd, and I’d bet London to a brick that all Treasury, Finance and the Reserve’s advice to Swan now is not to spend the ‘funny money’ surplus he has at hand right now and the future estimated surplus which he will announce next week. That’s because it’s not real savings but monopoly money backed by nothing of any real value. That’s the Austrian line and they’re all singing it now as Swan’s rhetoric attests and any MSM’s FOI request to verify it would be laughed out of Canberra, as well as any direct question to Swan to verify, ducked and dodged. If you believe those overfed suits in the Reserve can set a market economy’s risk premium to forgo current consumption, why aren’t the banks listening to these gurus anymore? They got away with rolling the printing presses for a decade or more, simply because of changed demographics that staved off the inevitable consequences of what they were doing. When they rolled the printing presses in the early 70s, a young demographic inflated prices with it immediately. This time round, that same demographic used it to try and build wealth for their retirement, inflating asset prices until the music stopped and there wasn’t enough chairs (real goods)to go round. That’s why they’re hell bent on buying commodities or access to commodity streams in future right now. That is if they can beat the Chinese SWFs, etc to them. The world is fast waking up to CB’s international ponzi scheme and their funny money. They can’t turn it into real commodities (ie commodity money) fast enough now.

observa
observa
13 years ago

Some interesting micro data on housing here http://www.news.com.au/business/money/story/0,25479,23633229-5013951,00.html
Progressive income tax coupled with capital gains relief for the family home might well be drawing increasingly scarce building capacity toward the top end of the market.

Tel
Tel
13 years ago

Steve Keen pops up on TV now and then. He pointed out (2) some time ago (on SBS news I think) by saying that there was a positive feedback loop:

* RBA lifts interest rates in order to control inflation.

* Rising interest rates push up margin at which people can afford to borrow to buy a house.

* Some are be kicked out of the house that they had bought on credit while others are unable to buy the house they were intending to buy

* Either way, the rental market sees a surge of more buyers and thus rental prices go up.

* Rising rents go into the RBA “basket of goods” calculation of inflation and the loop is complete.

Eventually the rising rents will trigger more investment, but that takes a long time in the housing market. Anyone familiar with positive feedback knows that it gets out of control much faster than you can react to it. The main factor slowing down the overreaction is that the RBA was limiting itself to no more than a quarter percent at each step and they were going nice and slow with the steps. This just says to me that they really didn’t know what value interest rates should be but they knew that if they kept pushing it up then something would happen.

My feeling is that for a small country like Australia, we should just use the currency value to set the interest rate. Make a three monthly average of our currency against our major trading partners then if we find ourselves trending downwards then nudge the interest rate up a bit, if we are trending upwards then nudge the interest rates down a bit. Don’t try to track all the currency jumps (they are too fast) just react gently and keep the dollar in a predictable ballpark. Admittedly, this depends on the majority of other currencies being stable.

Mark Hill
13 years ago

A fixed currency is not a good option for a small, open economy with moderate level of trade interdependence and high levels of financial flows.

By the way, the differentials between interest rates globally determines currency values in the short run. Basically you want us to lose independence of monetary policy.

This describes the situation in Panama where there is no central bank at all but banks operate in commerce freely (before you’ve contended that banks create inflation) :

http://mises.org/story/2533

This of course is different to your idea. Your idea is like a crawling peg. Can you explain why it would last longer than the EMS?

A surge of buyers of rental accomodation adds how many houses to the stock of housing? This does what to owner occupied housing?

I’d say you don’t know from the information you have. The result would be ambiguous at best.

You should look at the supply side and supply constraints. This is why houses are expensive. James Farrell is only half right – these facts of life are exaggerated by Government policy.

CPI isn’t perfect, but it captures opportunity costs. A brick can only be produced at the cost of forgoing the production of something else.

But Fred is right and you are partly right too: you cannot tackle supply side problems with macroeconomic policy. Inflation should have been taken more seriously, with more long term view. Sometimes a spike in CPI should be ignored, even if we should have a lower long term target and more stability in cash rates.

Tel
Tel
13 years ago

I’m not promoting a fixed currency. All the day to day jitters of a floating currency would still occur, the official interest rates would only change by a small step every 3 months. Indeed, the floating currency would be used as an indicator as to which way interest rates should move (and at the end of the day, it would still require some human common sense rather than blind application of a formula).

All I’m suggesting is that interest rates should be used as a tool to maintain reasonable long-term (year to year) stability between our currency and our top trading partners. If our trading partners start diverging from each other then we try to balance that divergence to minimise the shock in any particular direction. The idea in general is to provide a moderately stable and predictable environment for business to work in, not to actually peg the currency at any particular value.

The Panama situation seems a bit too dependent on the US dollar, let’s see how they hold up now the USD is taking a steady downward slide. I guess they are flexible enough to just slip across to an alternative defacto standard (probably Euros, and I suppose their local market can make that decision). When a bank goes under in Panama, all the people putting money into that bank lose their savings so in effect they are all shareholders (even if not treated as such), I wonder how much say they get in the bank’s investment policies (or even how much visibility they are offered). Sounds like a con-man’s paradise.

A surge of buyers of rental accommodation adds how many houses to the stock of housing? This does what to owner occupied housing?

In the short term, the stock of available housing simply does not change. If owner occupiers see falling prices for the sale of a house (due to the glut of forced mortgage sales) plus rising prices for rents then they will hold tight. Those who are in rent, and have the spare money, and get temped by falling land prices will try to become owner occupiers… but this takes time, and many people can’t manage the jump so the number of owner occupiers will (slowly) increase.

You would think that the banks getting repossession of a property would turn it around and put it onto the rental market as quick as possible (even make an offer to rent to the previous owner) but banks seem only geared up for property sale, and any sale is a slow sale. Even at auction you need at least six weeks of inspections followed by six weeks of settlement. There’s probably a niche for a company buying these properties right now and managing them for rent to sell at a profit later when prices rise again — but you can’t build a company like this in an afternoon, and you would need investment in a time of high interest and a very fickle stock market. Lots of properties get passed in at auction because the owners are unwilling to take the loss, so they simply refuse to sell until the market gets better. Houses are sitting empty after going through several failed auction attempts (I bought one recently, and I’m watching out of interest to see how long a few of the others that I didn’t buy will sit around). Is this “rational economic man”? Probably not, but there’s this belief that property can’t go backwards.

In the supply side of housing I’m not really an expert, but Australia does have lots of available land… I’ve seen google maps and I’ve taken some long drives, this is a big country. We have artificially high standards for housing because councils insist in creating huge numbers of regulations. There’s also strict regulations about who is allowed to build, who can do the wiring, who can do the gas, etc.

The regulations do produce better houses but they also drive up supply side costs. I guess that if you really let the free market take hold then you would get out of town slum-grade housing that at least would give people a cheap fallback and soak up the market shocks. On the other hand, there’s a lot of opposition to allowing that sort of thing. In earlier centuries it used to be common to have worker’s cottages nearby any luxury mansion because the mansion owners actually needed workers. These days we have one whole suburb of mansions and far away another suburb of workers to service the rich, there’s something inorganic about that design which bothers me but it does seem to be what most people want.

NPOV
NPOV
13 years ago

That would be an interesting opinion poll – would you rather

a) allow the development of very-low-quality housing to solve Australia’s housing problems

b) pay more taxes to ensure more money is available for suppling quality housing to the bottom end of the market

Having been in many countries where the former is common, I know which way I’d be voting. A country with slums doesn’t deserve to call itself wealthy.

Mark Hill
13 years ago

NPOV,

Taxes are part of the reason why houses don’t get built, and people can’t afford to buy homes and struggle with their rents.

There are a few ways slums develop: no property rights so owners don’t waste money on houses that can get arbitrarily knocked down, general poverty that restricts purchasing power, poorly maintained Government “projects” or a lack of incentive through institutional factors to redevelop land.

Increasing the supply of land or reducing taxes doesn’t create slums.

Tel,

It sounds like a crawling peg to me. Such monetary systems are vulnerable to arbitrage. I don’t know how you would stop this. Exchnage rates are dependent on differntials so you would be vulnerable to beggar thy neighbour policies as well. If the US dollar dropped 50% on a trade weigthed index, we would have to have a monetary contraction in proportion to this and our level of trade. In this respect, like a fixed rate or a peg, we lose monetary policy independence. Virtually all importers or exporters can hedge against currency prices and a global market means that as long as monetary policy is austere, there will always be cheaper competitors to buy goods from if another currency appreciates too much. The Panamanians don’t actually rely on the US dollar, they rely on dollarisation. Their market determines what currency is used.

Deposit insurance is generally bad. Australia has less than the United States and has had less catastrophic failures – none since Federation. The savings and loans crisis is blamed mostly on deposit insurances, as is the failure of the Japanese banks. Note Panama’s growth rates well above global and OECD benchmarks – closer to Chinese growth rates in the last two decades. You cannot sustain growth like this with fraud and cheating. Such a liberalised, unbacked banking system creates incentives for stricter lending practices and oversight.

The answer to what happens is not much – we agree. Not much because the supply side is impotent. There too is a belief that property can’t go down – this is untrue. See the property prices during the great depression. It is rational though, people can only act on the information they have. Ignorance does not mean you are irrational. No one can possibly be fully informed about all economic decisions they make.

You are right about the regulations. I can’t see a free market building slums because of competition and the fact that most slums in Australia are or were at one time, housing commission homes. We have strong property rights so there is the problem of never building anything adequete because it can get knocked down tomorrow like much of South America. You would only build slums if you wanted to go broke in a free market for housing. Buyers could look elsewhere and the demolition costs would take away from your sale price and others could easily build something better over the top of it.

NPOV
NPOV
13 years ago

“Increasing the supply of land or reducing taxes doesnt create slums.”

Where did I say it does? Tel was talking about loosening regulations that control housing quality. Undoubtedly without such regulations much cheaper housing could be built..

In all serious I do actual agree that many regulations make housing unnecessarily expensive, especially those that restrict the natural tendency of cities to develop higher population densities. But there’s no excuse for allowing the development of unsafe, unsightly, low quality housing in a country like Australia.

JC
JC
13 years ago

Tel says:

My feeling is that for a small country like Australia, we should just use the currency value to set the interest rate. Make a three monthly average of our currency against our major trading partners then if we find ourselves trending downwards then nudge the interest rate up a bit, if we are trending upwards then nudge the interest rates down a bit. Dont try to track all the currency jumps (they are too fast) just react gently and keep the dollar in a predictable ballpark. Admittedly, this depends on the majority of other currencies being stable.

Yea, we could that that, Tel, but people would make a fortune through arbitrage. You would find that interest rates would become very volatile.

I actually think we should be headed towards a world currency at some some stage over the next 50 years.

NPOV
NPOV
13 years ago

How realistic do you think that would be without world government – something I though libertarians were generally opposed to?

JC
JC
13 years ago

We had a world currency before at times. It was called the gold standard and individual currencies were basically a different measure of gold.

I don’t think we will ever see gold as a currency again.

However it doesn’t mean we can’t eventually move toward an international currency and it wouldn’t necessarily have to breach libertarian values. You don’t require a world government to have a global currency unit.

I would prefer to see private currencies develop, but it doesn’t look as though it would be probable.

Mark Hill
13 years ago

“b) pay more taxes to ensure more money is available for suppling quality housing to the bottom end of the market”

“Increasing the supply of land or reducing taxes doesnt create slums.”

“Where did I say it does?”

Just there at b), implictly. Futhermore it is not a good policy to socialise production. If the poor cannot afford housing, give them direct transfers.

Caracas does not have slums because of less building regulations. Caracas has low quality housing because it takes forever to get building approval and title of property is ambiguous. If you can’t get approval and what you build can get knocked down arbitrarily, you are not going to sink $100- k $200 k of material and labour (as it would cost in Australia) into it. Investments require certainty of current and future expected conditions. They will never get FDI in construction until investors can have certainty over 25-30 years.

That’s if they can afford the same amount of inputs and local labour. Never also forget the general level of poverty. You can’t make Somaliland or Guam a beacon of development without years of growth and investment.

NPOV
NPOV
13 years ago

“Futhermore it is not a good policy to socialise production”

Says who. We socialise the production of many things. Socialised production of housing works is pretty common in most wealthy countries.

I’m not implying that the main reason for slums in Caracas is less building regulations – though undoubtedly if it did have regulations such as we take for granted here, the government would have little choice but to put enormous amounts of money towards better housing. However for all Chavez’s talk about socialism, there seems to be a fairly limited amount of it actually going on, compared to most developed nations.

FWIW, the GDP per capita in Venezuela is $7200 USD, which if the Australian economy has been growing at about 2.5% per year, is about what our GDP per capita was 60 or so years ago, in 1947. We did not have that sort of poverty in 1947.

NPOV
NPOV
13 years ago

I’d also say that “socialising production” can mean many things. If it means government departments sitting around and designing housing commission flats, then I’d tend to agree we can do better than that. But if it means setting aside an amount of funding raised from general revenue to subsidise the production of housing for those that can’t afford it, I don’t see a problem. You can argue that it’s better to give such people the cash directly, but there will always be a segment of the population who don’t manage money well, and throwing money at them is inevitably less helpful than ensuring that the services they need – education, health, housing, transport, are supplied inexpensively.

Mark Hill
13 years ago

“Says who. We socialise the production of many things. Socialised production of housing works is pretty common in most wealthy countries.”

No. It is a bad idea. Why not socialise food?

It is ironic that you complain about slums but want more of the form of housing which sees the most social problems and lack of maitenance.

Arrow and Debreu found a result of general equilibrium modelling, the most efficient form of Government intervention was indirect flat taxes and lump sum direct cash trasnfers. This is basically a corollary of the second theorem of welfare economics.

Such a policy isn’t perfect. But all others are second best.

“We did not have that sort of poverty in 1947.”

But the situation with their housing is unique, we’ve had Torrens title since the 1880s, they have never had clear property rights over their title, even with a similar income they have a lower standard of living. This is because we never had such an environment which was so unfriendly to housing development in 1947.

“But if it means setting aside an amount of funding raised from general revenue to subsidise the production of housing for those that cant afford it, I dont see a problem.”

Just give them cash. People who can’t manage money well will still not manage money well with less income. This isn’t a reason to disadvantage everyone else.

NPOV
NPOV
13 years ago

Because the free market in food production generally works well, although it’s still heavily regulated and subsidisied – no doubt Milton Friedman would consider it “socialised” by his standards.

You honestly think that if we dismantled all government-funded and provided services (including education and health) and simply gave people the equivalent in cash that a) it would ultimately cost less overall and b) it would produce desirable social outcomes for our most disadvantaged?

If so, I admire your faith in humanity. Sadly, I can’t see the slightest bit of evidence that it’s well founded.

Mark Hill
13 years ago

Yes it is to a degree. But look at the reforms to the NZ farming industry – the doom and gloom prognosticators were dead wrong. They are more productive than ever.

The evidence is the second theorem of welfare economics.

Your counter argument is that expect frail humanity to elect a Government of humans without the same flaws. They can’t do it on their own but they can elect someone else to do it and do it well. You don’t see a problem with this reasoning?

Many people put up similar arguments against free enterprise and strong civil liberties. They think people can’t act in their own interests within rules but they can do so in electing a Government who will rule in their best interests. No explanation is given about the political system, median voters and the amazing gift of rationality given to electors, the process and the same politicans drawn from the apparently very unintelligent pool of society.

How will the politicians and boffins have the information to make the right decisions? No one has the right information to make the correct decisions for themselves 100% of the time, so how do they know about everyone else? Information has a cost. Perfect information has infinite costs. A conditional welfare system which would benefit a small proportion of welfare recipients would have very high costs for the small benefit. Perhaps it would have a net cost alone ( I suspect it would be less attractive than direct transfers either way).

Conditional welfare is less utilitarian, serves the good of less people and is a second best alternative. Can you think of a conditional welfare system that is so well designed that the inflexibility it has will mean the small benefits it has to a few outweigh the advantages to others who get genuinely alleviated of poverty through the transfer payments in a more productive econonomy and who are ore upwardly mobile?

You would need perfect information for such a marginal benefit. Unfortunately, conditionality of welfare plays into the envious motives people have for calling for welfare reform. It doesn’t help overall. The only real problem would be churn of a totally unrestricted welfare system.

Both a) and b) are answered in the affirmative. Go through the metrics, the result is the same.

Socialism is inefficient, price controls create shortages and conditional welfare is inflexible and requires perfect information to be administered in such a way it would have benefits.

A compromise could be made, voluntary conditional welfare which you can get off if you get someone like a trustee to sign off that you don’t need it.

Patrick
Patrick
13 years ago

NPOV, I’m curious, are you aware of any examples of successful socialised production of housing?

NPOV
NPOV
13 years ago

Mark – yes, I can just see Kevin Rudd feeding his dole cheque into pokies machines week after week, or Julia Gillard using hers to feed her heroin habit.

Patrick, rather depends what you mean by “successful” and “socialised production”, doesn’t it? But given pretty much every developed nation in the word provides some form of public housing to its citizens, and has done for a good part of a century now, I’m not sure how you can argue that it’s generally unsuccessful.

Tel
Tel
13 years ago

Here’s a concrete example of the sort of thing I was talking about regarding regulations.

I asked an electrician to fix a power point in my house. He says that legally he can’t do any work without putting in an RCD, that means replacing the front board but the 50 year old wiring (with rubbery insulation) in this house is incompatible with an RCD so once he replaces the front board, nothing will work until all the old wiring is pulled out and replaced with modern wiring. Minimum cost for any electrical work whatsoever is around $5k and what I get for that is pretty much what I already had.

Of course it’s for my own good, I love being told how to look after myself. Actually, regulations are good when they keep other people in line, shit when they cost me money :-)

Sure I agree that new wires would be better than old wires. If I had a choice in the matter I would be doing the wiring replacement in sections to spread the cost and put the RCD in as a final step. After all, it has sat here and worked for a lot of years already, it probably will work for a few more years too. The regulations don’t want to give me the chance to manage the cost so basically all I can do is nothing until the $5k is available and I have extension cables over the floor in the meantime because some of the power points simply don’t work at all.

I’ve lived in the Sydney rental market long enough (and plenty of friends still renting) to know that owners of rental houses do not spend a red cent that they don’t absolutely have to. This belief that ownership automatically creates an incentive to invest has plenty of counter-examples if you want to actually visit a few rental properties and talk to the people who live there. For owner-occupiers it’s a different story, they are much more likely to invest fixing the things that directly annoy them. Lack of regulations would certainly create slums and they would all be rental.

But the situation with their housing is unique, weve had Torrens title since the 1880s, they have never had clear property rights over their title, even with a similar income they have a lower standard of living. This is because we never had such an environment which was so unfriendly to housing development in 1947.

The Australian housing market has historically had a large degree of central planning, and still whole suburbs are centrally planned today. You can pretend that it is private because it is done by a development corporation but government is heavily involved and there are only a small number of highly regulated development corporations actually operating. Every detail, down to the types of trees, spacing between footpath and road, size and shape of blocks — all centrally planned.

NPOV
NPOV
13 years ago

I’d certainly agree that the regulation over electrical work in Australia is overkill, and almost certainly leads to people leaving things that really need fixing but are too expensive and/or complicated to do so. I’m fairly sure other countries don’t have such draconian rules. I would’ve thought the easiest approach was to make sure that all dangerous electric wiring was only accessible via use of a tool that only registered electricians could legally obtain, then accept that registered electricians know what they’re doing and leave them to their own devices. Of course a few will inevitable fall into the hands of non-electricians but it should be enough to stop most of the idiots who think they can work out how to rewire their houses on their own.

Mark Hill
13 years ago

“Patrick, rather depends what you mean by successful and socialised production, doesnt it?”

I guess that depends on what your definition of “it” is. (Or do I mean what “is” is?)

Tel – if you think the regulation is overkill, then how will removing it create “slums”?

I would also speak to another electrician.

It is very simple how it won’t work – if landlords never maintained their property, then owner occupiers could sell and build a new house for themselves at with arbitrage. Builders and developers would earn higher economic profits. Landlords would be gifting their competitors, basically.

I do presuppose that you can freely buy land and develop it. Perhaps an unrealistic assumption in Australia.

Patrick
Patrick
13 years ago

Im not sure how you can argue that its generally unsuccessful.

What if I argued that it is generally associated with class segregation, crime, poor educational outcomes, and so on? Doesn’t sound like success to me.

FDB
FDB
13 years ago

Patrick – people have a roof over their heads.

Success!

NPOV
NPOV
13 years ago

Patrick, association is not causation. The alternative may well be far worse.
As I undersand it, half of Hong Kong’s population lives in public housing, and while HK definitely has problems with poverty that don’t exist here, it certainly doesn’t affect 50% of the population.

Patrick
Patrick
13 years ago

No-one in HK owns their house, AFAIK – but it is gross distortion of the debate to refer to Li Ka-Ching’s $45m dollar capital value lease as public housing (as gross as my use of that example, in fact).

Basically HK doesn’t count because I don’t understand there to be any freehold on the island – much like the feudal system where people could only have interests and tenancies of various kinds over land since the fee simple was in the King.

If the highest you can put it is that ‘The alternative may well be far worse,’ well, fine. I can hardly dispute that (within the bounds of rationality)! But I insist that you accept that the alternative may well be far better.

NPOV
NPOV
13 years ago

No-one in HK owns their own land. Very people have “houses” as such, but many own their own apartments or units.

Much of the housing in HK is, AFAIK, public housing just as council flats are here.

And absolutely I accept that many alternatives to publicly provided housing may be far better. But what such alternatives are you putting forth, and what evidence is there that they can actually help alleviate the problems of class segregration, crime etc. etc.?

Tel
Tel
13 years ago

Tel – if you think the regulation is overkill, then how will removing it create slums?

I didn’t say it was overkill, merely that I personally don’t like facing the costs of it when they come out of my pocket, and that these type of regulations do push up the supply side costs for everyone. Getting rid of the regulations would lower costs and also lower quality at the same time (although removing regulations would also increase diversity). I’ve already paid for my house. From here on in, I make a profit when prices rise, so in the bigger picture supply side costs are my retirement fund. Yay supply side costs (except for when I have to pay).

One man’s “slum” is another man’s paradise, there’s no universal standard for these things. The slanty shanty stack built on a hill in South America pictured above is built from good bricks and sawn timber. In Africa they build with rusty sheet iron and randomly shaped pieces of tree (and you can still find huts in outback Australia built the same way, some with residents). Australian city standards could drop a long long way and still be ahead of nearly the entire world. Having said that, clearly there are a significant number of Australians who believe that building standards SHOULD be kept high.

There’s no universal measure of quality housing either: one owner might decide that they want vast amounts of lighting and completely ignore load limits on their electrical circuits. Their house is a fire hazard but it looks awesome at Christmas time. Another owner might eschew electricity and build their walls from rammed earth a metre thick, with a fearsome black coal furnace in the kitchen, while yet another owner would have no house at all, finding it preferable to live in a large garage at the back of the property with a large front yard full of motor vehicles in various states of repair (he sleeps on what was once the back seat of a Holden). Which house is higher “quality” than the other? None of them are acceptable under any suburban council that I know. Australians might tolerate diversity in their food but they sure don’t appreciate diversity in their housing.

Mark, I rented in an inner city terrace for a lot of years when rents were relatively cheap compared to the cost of buying (more than 30 years rent was the price of a house). The front of the house was crumbling to the point where my wife reached in and pulled a brick right out of the wall and waved it at the owner during an inspection visit. The owner calmly leaned over to peer through the hole in the wall and said, “This is double brick, you have another wall under that one.”

You say, “if landlords never maintained their property” and I say there’s no “if”, the observable fact is that they don’t.

From the owner’s point of view, that property is rental property and the value of the rent is determined by the position and by the size, not by the condition of the building. Fixing those bricks would have cost him money but had no effect on the return. Since I was living in a house that was completely beyond my means to purchase, that segment of the rental market remains unaffected by owner occupiers.

I don’t follow your mechanism about how landlords can subsidise their competitors by NOT spending money. After all, at the end of the day the landlord still owns their property, and they still get an income off that property so they certainly will not go broke. Most likely if a time ever comes when that property is sold, it will go to a developer to be razed flat and converted into a shopping center and/or office tower. The developer only measures the land, bricks are for bulldozers.

PS: I am getting a few competitive quotes, but there’s no (legal) way around the regulation, all the old wiring has to be replaced at my cost, I can only delay the inevitable by doing nothing.

NPOV
NPOV
13 years ago

Tel, interestingly enough I’d say Australian housing is far more diverse than in many parts of the world. Been to New England? Virtually every house is identical. I’m not sure how many support regulation purely because they want houses to all look the same.

The barrios of Caracas, which I’ve witnessed with my own eyes, are a safety nightmare. Something like 30,000 were killed in mudslide not that long ago, because the houses have no foundations at all. If Chavez really cared about the poor, he’d insist of regulations that ensured such houses were built properly, and provide the money to do so.

NPOV
NPOV
13 years ago

Having said that, government is generally so corrupt in that country that merely legislating such regulations is probably pointless. Indeed it wouldn’t surprise me in the least if such houses were illegal.

Tel
Tel
13 years ago

The barrios of Caracas, which Ive witnessed with my own eyes, are a safety nightmare. Something like 30,000 were killed in mudslide …

Plenty were killed in Japan during the Kobe earthquake when buildings fell down, and they do have strict building codes and were built by private companies not government welfare. Corruption and sly trading ensured that many of those codes were not followed.

Patrick
Patrick
13 years ago

If Chavez really cared about the poor, hed insist of regulations that ensured such houses were built properly, and provide the money to do so.

Except he can only get the money to do so by stealing it (literally), so that’s an obstacle – is it worth stealing to build a house today for you to starve in tomorrow? I’d rather go cold now and have a reasonable shot at a future in which I can go to the shop and buy dinner!

Tel
Tel
13 years ago

Yea, we could that that, Tel, but people would make a fortune through arbitrage. You would find that interest rates would become very volatile.

Presumably the people making a fortune would be transferring wealth from some other people who are losing a fortune (after all, the money must come from somewhere and everyone can’t make a fortune). They can’t collect on any government money, because I provide no mechanism for government to make any currency trades. Given that all the currency traders in the market have equal rights to buy and sell with the party of their choice at a mutually agreeable price, what conditions would select the winners from the losers? Let’s presume for a moment that we all believe that the principle of market equilibrium does function as advertised, why would it not function under my proposal?

Even if we are unwilling to accept that a market equilibrium can ever be reached, why does my system make the currency market substantially more unfair than our present-day situation?

I’m perfectly happy with a hard limit on the rate of change for RBA interest rates. I would say that every three months they could make a maximum shift of half a percent either direction, with the normal case being a quarter percent every three months. We are talking about LONG TERM stability as the target here, so forcing a slow rate of change is desirable.

Tel
Tel
13 years ago

Arrow and Debreu found a result of general equilibrium modelling, the most efficient form of Government intervention was indirect flat taxes and lump sum direct cash trasnfers. This is basically a corollary of the second theorem of welfare economics.

Such a policy isnt perfect. But all others are second best.

My feeling is that government should supply basic necessities on a non-financial per-person ration system. For example, you should be able to get one pair of government-issue boots every six months. You have to turn up in person at a depot to pick them up and they biometric scan you on the spot. If you have already picked up a pair in the last six months they politely tell you to come back later. The government-issue boots would be completely utilitarian, cheaply made, designed to last through exactly seven months of hard work and the only people barefoot would be that way by their own choice. Government would be able to put the boot manufacture up for private tender and offer three different brands of utilitarian boot, the suppliers get paid (not much) in proportion to the number of their brand boots that people want (in order to ensure a minimum standard), and the usual anti-monopoly rules would apply (suppliers can’t buy each other’s shares for example).

Same system for government overalls and government meals, you could get two meals a day, from a choice of three kitchens, none of which are much good, but good enough to get you through a days work. Thus, no one goes hungry unless by choice. This provides both a safety net and a minimum standard for all private services. If you run a restaurant and you can’t make better than a government-issue meal then you picked the wrong trade… go back and try again.

Needless to say, this system would not supply anything remotely like a luxury good, because the objective is keeping people alive and working and still leaving some market open to private enterprise.

By the way, it’s so cool the way Einstein and Newton had theories, but economists get to have theorems. I’m so good I’m even humble too :-)

NPOV
NPOV
13 years ago

Patrick, if Venezuela is about as wealthy as Australia was 60 or 70 years ago, I don’t see why it should require “stealing” to ensure that enough money is spent to give its poorest citizens the same standard of living Australia’s poorest had that long ago. Unfortunately Chavez seems to be so ideologically opposed to capitalism that he’s squandering various opportunities for Venezuela to dramatically improve its wealth.

Tel, an earthquake is surely more difficult to withstand than a mudslide. And it was “only” 6000 people killed, out of an affected population of over a million. The mudslide in Venezueula pretty much wiped out everything and everybody in the area (it left 85,000 homeless on top of the 30,000 killed). Today, they’re still building shanty towns there, and its bound to happen again.

Patrick
Patrick
13 years ago

Um, because the country’s productive capacity is disintegrating and existing revenues are being squandered on patronage? So his only way of raising more money is to appropriate it from eg foreign companies and farmers (thus accelerating the disintegration).

Mark Hill
13 years ago

“Having said that, clearly there are a significant number of Australians who believe that building standards SHOULD be kept high.”

I think these people are well intentioned but probably wrong. The general level of prosperity determines housing conditions for most people and insurance can impose a more flexible system of standards and code. Having standards isn’t necessarily a bad idea – but their inflexibility and the possibility of rent seeking can make them burdensome. Insurance mandated standards would be flexible and be less subject to rent seeking and require more effort to be circumvented. We already have insurance – let it take the dominant role.

NPOV – You want regulation but admit that corruption is a problem. They can never be assured of a good legal system and certainty in land simply because of the inadequecy and complexity of legal title there. There is simply no incentive to build anything worthwhile as it may get knocked down tomorrow. No investor wants to touch that let alone an owner occupier. This lack of property rights is a problem all through South America.

“Even if we are unwilling to accept that a market equilibrium can ever be reached, why does my system make the currency market substantially more unfair than our present-day situation?”

You need to look at the EMS crawling band. If you want this to go to equilibrium (and it will, financial markets are very efficient) but you want the Government have set prices or quantities on the exchange rate? The central bank will effectively be giving seingorage to currency traders when other currencies move.

Slow change in monetary policy is achievable without such drastic measures. You only need to make the long term inflation target lower and more important.

Tel – people need more than boots, overalls and Governemnt run kitchens. No one in Australia is starving. The welfare system can be improved. How will supplying three goods through tender help when welfare recipients are already to free to spend their incomes on anything they require in a global market? We would have an abundance of cheap food and clothing & footwear if we dumped tariffs on agriculture and textiles, clothing and footwear. You’re suggesting something close to industry policy which can have the same results as a tariff or a quota.

People on welfare need more than these items and everyone else doesn’t need them.

NPOV
NPOV
13 years ago

Patrick, as you say, “the country’s productive capacity is disintegrating and existing revenues are being squandered on patronage”: surely that’s the first thing be addressed. Although actually its GDP seems to be all over the place, falling about 18% back in 2003 and now rising at over 8%. And officially only 12% of its citizens live below the poverty line, which doesn’t say much for the offical collection of stats in that country.

Tel
Tel
13 years ago

You need to look at the EMS crawling band. If you want this to go to equilibrium (and it will, financial markets are very efficient) but you want the Government have set prices or quantities on the exchange rate? The central bank will effectively be giving seingorage to currency traders when other currencies move.

I’ve said it many times but I’ll say it once again, I made no provision for the central bank to participate in the currency trade so it simply cannot give money. The only proposal I made is that the central bank adjust interest rates by a different target function. How does the money leave the central bank and get to the currency traders?

Mark Hill
13 years ago

If the Government can’t trade or supply money, then how does it target at all?

You’re right, more stability can be achieved by a different targeting regime.

You need to elaborate your model more with an example.

Tel
Tel
13 years ago

people need more than boots, overalls and Governemnt run kitchens.

Yes they do, these were merely examples to illustrate the basic concept of non-financial direct welfare, not intended to be an exhaustive list. You can re-apply the general principle to various other items until you have a reasonable package for people at the bottom of the social ladder, but typing the complete inventory would make my fingers tired.

No one in Australia is starving.

A group calling themselves “foodbank” take grocery items that are below par and not profitable for sale (they are sponsored by a large number of the major grocery labels) and they redistribute this to smaller charity groups who in turn get it into the community (direct non-financial welfare). I don’t know what selection criteria they employ for distribution. The Foodbank website does not contain many details, maybe some of the information is considered sensitive. The Kellogs website claims:

Foodbank aims to ensure that surplus food, donated by the food and grocery industry, is made accessible to welfare agencies for distribution to people in need.

Foodbanks across Australia provide food to over 1500 welfare agencies. Last year Foodbank distributed 10 million kgs of food, which fed 30 000 people a day thats 12 million meals a year!

Kellogg is committed to assisting Foodbank and last year donated over 100 tonnes of cereal and convenience food to Foodbank.

By my count 12M meals is 16k people eating two meals a day who presumably would go hungry without this support. It might be providing one meal a day for 32k people and they catch up the rest themselves. At any rate, more Australians than you think depend on direct food handouts. Yes, Foodbank is a private NFP with donations coming from both government and industry.

As an aside, I’ll just take this opportunity to say how very bad the official federal budget web page is. Never have I seen a breakdown so badly presented with payable and receivable arbitrarily mixed, zig-zag jumps between the delta figures (change since last year) and the actual figures, no consistent topical layout and impossible to cross total anything anywhere to reconcile against anything.

Here’s the only bit I found useful: http://www.budget.gov.au//2008-09/content/overview/html/overview_40.htm

So the federal government (somewhere this figure popped up, can’t find it now) provides direct financial welfare to 1 in 10 Australians or 2M people. That costs $100G (from the above budget pie which averages down to $50k per person (roughly the average wage). I have no idea exactly where the $100G goes, the budget is too confusingly laid out, hopefully some of that money does get to the people on welfare, and hopefully they spend it on something useful… still there are tens of thousands of people needing food handouts.

Let’s presume that the Foodbank meals have a market value of $15 each, then 12M meals would be equivalent to $180M and that probably helps approx 16k people, averaging down to $11k per person in equivalent value. However, Foodbank’s total actual cost is far less than the $180M market equivalent. That’s because it uses material that was going the be thrown away anyhow and the big grocery chains know that they are pushing their unsalable stock down into the lower echelons of the community such that it does not deplete their regular market (people at this level don’t have much money to spend at the supermarket). Also Foodbank depends on existing charities to do the final stage of distribution (so there are heaps of hidden costs of labour in there, I accept that).

These are all rough calculations, but it looks to me like Foodbank comes out looking highly efficient. Finish up with a quote from their website:

There are many reasons for waste in even the most efficiently run organisation: changed labelling regulations, end of season excess stock, production line changeover items, out-dated competition packaging, discontinued products, as well as the merest label or weight inaccuracies which render a product legally unsaleable. Tonnes of cans or packets are disposed of every week. The main recipient of these products is landfill !

Mark Hill
13 years ago

You’re 100% right, non financial, direct welfare works great and the private sector does it very well:

Plug libertarian article:

http://alsblog.wordpress.com/2008/07/11/generous-americans/