Bubbles and balloons

Quite a few people criticised the title of my last post — There was no British housing bubble — on the basis that, even if there was no overconstruction of housing (and thus no Austrian-style distortion in the structure of production), there was a bubble in the sense that prices rose rapidly, and so on.

But is this right? I suppose it depends on what you mean by a 'bubble'. As far as I can tell, there are at least three different meanings of the word 'bubble':

1. A speculative bubble, like the Beanie Baby craze. As Arnold Kling put it recently, "If investors who are buying the asset have estimates of the discounted present value of the income from that asset that imply a negative real return, then it is a bubble."
2. An Austrian-style bubble that distorts the real economy by incentivising production in an area where much of the demand is illusory (typically created by credit expansion, according to the Austrians).
3. A government-created rise in price above 'real' (or endogenous) factors.

Take the third kind of bubble, which I think is what we are currently seeing in the British housing market. A ban on the construction of new houses would cause the price of housing to rise significantly, for instance (and this isn't a million miles away from current government policy). Though the government policy is probably very harmful, given that it exists it is perfectly rational for markets to drive the price up, and that price should stay up for as long as the political factors dictate. The policy might be crazy, but the market's reaction isn't.

Let's take a look at historical UK house prices (in real terms).

Clearly, prices were above trend in the 2000s and then fell after 2008, but compared to the early 1990s prices are still extremely high. I'm willing to believe that quite a bit of that rise was a type-1 or type-2 bubble, but unless you think we're still in the midst of that kind of bubble (which could pop at any time), it's not the whole story and doesn't even seem to be most of the story. (As some commenters have pointed out, some aspects of this price increase were likely attributable to foolish financial wizardry, probably driven by regulation.)

More likely, that rise in house prices since the 1990s, since it is still high, is a type-3 bubble — a sensible reaction by markets to foolish government policies constraining the construction of new homes. I can't explain why this rise only took place in the 1990s (population growth and decreases in household sizes may explain this, but I don't know), but unless you're saying that right now markets are wrong and you know better, that rise doesn't seem like the sort of unsustainable bubble that leads to sudden crashes.

Type-3 bubbles are different to type-1 and -2 bubbles in that they do not run the risk of sudden crashes. A type-3 bubble is created by government fiat and it can only be undone by government fiat. This difference is sufficiently great that I suggest a new term for type-3 bubbles: "balloons". A term like that might communicate the fact that prices have been blown up by human agency and, unlike bubbles, require an active popping or disinflating before they go away.

Politics is so nasty because we're all speaking different languages

If you’re frustrated by how vicious and pointless politics is, a brief Kindle single by Arnold Kling may offer some insight. “The Three Languages of Politics” (£1.34, US link) dissects one of the main problems with politics: that progressives, conservatives and libertarians are all speaking different languages that rarely overlap and cause us to misunderstand and vilify our opponents.

The three languages are based on three different ways of thinking about problems. Progressives, says Kling, see political problems as being conflicts between oppressors and the oppressed; conservatives as between barbarism and civilization; libertarians as between coercion and freedom. These ideologies cannot be boiled down to these three things, but the rhetoric used by their adherents often can be.

As a libertarian I often find discussions with non-libertarians frustrating because they don’t even seem to care about the stuff that matters to me. (I’m told the feeling is mutual.) On drugs, for instance, conservatives seem not to care at all about the fact that people are put into jail for what they do in the privacy of their own home, and progressives often only seem to object to the harm caused by anti-drug laws, not to the very fact that these invasive laws exist at all.

Of course this is frustrating and it is tempting to say that these people are coercive authoritarians – just as a progressive might say that I am a defender of oppressive businesses when I advocate for looser business regulation, or a conservative would say that I want to let British society unravel by letting more people immigrate to the UK. Maybe they have a point, maybe not. We’re speaking different languages without realising it.

The phenomenon of ‘motivated reasoning’ doesn’t help. The more informed a person is, the more closed-minded they are. If your web of belief about politics is well-developed, you will have stronger prior reasons to dismiss new information that contradicts what you already know. We are much quicker to question the methodology of a study whose conclusions we dislike than one we like.

And politics is usually about tribes, too. Even if you aren’t a member of a political party, you probably know people you consider to be on your side in politics, particularly if you are immersed in politics in your job or an extracurricular hobby. Much, even most, political discourse can be seen not as an effort to change the minds of your opponents (or your allies), but as a way of developing your status in your tribe.

All of these factors contribute to a poisonous political environment that rewards tribal point scoring above all else. Disagreement is never comes from honest error, but from malice or stupidity. Arnold Kling’s “The Three Languages of Politics” is a wise, insightful deconstruction of the hatefulness of political discourse. It is a classic. Everyone who talks about politics should read it.