The Scottish independence debate just got interesting

The Scottish independence debate just got interesting. Not over the future of North Sea oil or nuclear submarine bases, but on the dull matter of monetary policy.

In September, Scotland holds a referendum on whether to remain part of the United Kingdom or go solo. So far, many people just assumed that a 'Yes' vote would be crazy. Scotland already has devolved government, with its own Parliament in Edinburgh deciding matters such as health, education and welfare policy. Scotland has more than its share of MPs in the UK Parliament in London, who even get to vote on exclusively English matters. It also enjoys a higher share of UK public spending. Devolved powers and English subsidies...seems like paradise.

The polls reflected the strength of this 'No' case – but things are narrowing. The Scottish nationalist leader Alex Salmond is a wily politician. His party won a majority in the Scottish Parliament despite an electoral system designed to keep them out. He tells Scots not to throw away their one chance of doing something extraordinary. He affirms Scotland's proven ability to run its own affairs. And he makes the point that an independent Scotland would never have to endure a Conservative government ever again.

By contrast the 'No' campaign looks unambitious and condescending, suggesting that Scots aren't up to governing themselves. And the Conservatives, mostly pro-union, have such a polluted brand in Scotland that they kept quiet rather than adding weight to the 'No' lobby.

Brave, then, for Conservative Chancellor of the Exchequer to enter the fray, saying that an independent Scotland would not be allowed to keep the pound sterling. Nonsense of course: only draconian laws preventing cross-border sterling business could stop that. And with so much cross-border trade, forcing Scotland into a new currency helps neither country – though that is what Osborne is trying to imply.

The reality is that the Scots could use the pound (or for that matter the dollar, euro or yen) but would have no say in the currency's management. But Osborne insists that the Bank of England would set interest rates and create money according to the needs England, Wales and Northern Ireland – not some foreign country called Scotland. Again, that is over-egging it: with so much cross-border trade, the Bank would have to take account of conditions in Scotland when setting its policy.

So the Scots would be like Ecuador, Panama or El Salvador, who use the dollar but who have no voice in US Federal Reserve policy. And just as they have no hope of the Fed bailing them out in a crisis, Scotland cannot expect any Bank bailouts either. That sounds bleak until you remember that Panama's banks are some of the world's soundest. They have to have big reserves precisely because there are no bailouts. So that might even make Scottish banks more attractive in these uncertain times.

Up to a point. The Scottish banks, or government, would still have to create a financial buffer big enough to ensure that Scotland's financial sector can keep standing without Bank of England support. It is a big ask: the Royal Bank of Scotland alone would need billions of new capital to let go of the Bank of England. Where does the money come from? The worry is that Scotland's huge financial sector would up sticks and head south, where it could still cling to nurse. And that anyone left behind would have to offer investors sky-high interest rates to reflect their risky go-it-along policy – which they would in turn have to pass on to borrowers, like people with mortgages.

The wily Salmond will have some answer, of course. The pity is that we have not had this rather critical debate until now. It would certainly have made the whole campaign a lot more interesting.

Does the NYT actually read its own editorials?

The New York Times is complaining bitterly that the workers at the VW plant in Tennessee didn't do what the NYT think that the auto workers should have done. That is, they voted not to have a union to represent them:

The “I am satisfied with my pay” rationale for voting no is also problematic. Why are VW workers in Chattanooga satisfied with making less than unionized Volkswagen workers in some other countries? Do they work less or contribute less to bottom line? Are they less skilled or less reliable?

By voting no, workers in Chattanooga very likely not only limited their own pay raises, but probably those of their relatives, friends and neighbors. That’s because the higher pay that generally results from collective bargaining at a major employer tends to influence the pay scales at nearby employers, even if those other workplaces are not unionized.

Please note that I've not edited or elided here: these really are the two paragraphs as they first laid them out. And it's things like this that make me wonder whether the people who write these editorials ever bother to read them. For they've used two entirely contradictory arguments about what explains wage rates, one after the other.

That first argument is that workers in different places should be paid according to the productivity of their labour. Doesn't matter what local wage rates are, if you're adding $x to the value of a car then your wage should be $y.

The second argument is very different: it is stating that if local wages are higher in general then your wages, in that locality, will be higher. If car workers in Tennessee are being paid more money then the people who flip hamburgers in Tennessee will also be paid more. Not that there will be any change in the value the flippers are adding, no change in their productivity, just that because local wages are higher then all local wages will be higher.

And that's why those two views conflict. Either wages are determined by productivity, not location, or they're determined by location not productivity. Trying to claim both in the same piece is just a bit much for me.

As it happens it is the second argument that is correct. Wages are determined by the best available alternative job for that skill set in that location. Someone able to make cars productively somewhere there are no cars to make won't get a carmakers' wage. But if carmarkers' wages are high then yes, given that being a carmaker is an alternative to flipping burgers then where there are high carmakers' wages then burger flippers' wages might well rise. Location, not productivity, is the key.

What makes it all so annoying is that one of the very best explanations of all of this is by Paul Krugman. Who is, perceptive readers will note, the economic columnist writer for, umm, the New York Times. You think they'd give a shout out down the corridor or  something when composing these editorials, wouldn't you?

So how's this Bolivarian Chavismo working out then?

It has to be said that this Bolivarian Chavismo, socialism with a Venezuelan face, really isn't working out all that well. A few months back we had the absolutely absurd story that people were using high tech gadetry like smartphone apps just to work out which shop had toilet paper in stock. Things are going downhill from there:

At least three airlines have grounded flights to and from Venezuela so far this year, in part because the nation's government owed the carriers $3.3 billion in foreign exchange they need to pay operating costs. ........Carmakers are also in trouble. Toyota Motor Corp. is halting production in Venezuela, while Ford Motor Co. is reducing output. A mere 722 vehicles were sold in a country of almost 29 million people last month. Trade group Cavenez reckons this amounts to an 87 percent drop in sales in one year. Ford’s chief financial officer, Robert Shanks, understated the problem when he told Bloomberg last week that “price controls and a very limited and uneven supply of foreign currency to support production, have affected output adversely.” So adversely that Chrysler, Ford and General Motors produced no vehicles in Venezuela last month. Business isn't much better for newspapers. In the last six months 12 papers have shut and more than a dozen might cease publication if the government doesn’t sell the newspapers enough foreign exchange to pay for imported paper. .......A greenback in the black market now goes for 84.2 bolivars, or 13 times the official rate. ......With the highest inflation on earth, rampant violence, declining oil output and a hobbled private sector, Venezuela seems instead to be on a sustainable path to economic ruin.

I'm not sure that anyone would have the chutzpah to claim that that is all a mark of success.

The basic problem was an old one that confronts socialists. Desiring to reduce inequality might be something that I'm not very concerned with but it's a legitimate view to hold. Desiring to improve the position of the poor is one that I do agree with. But either of these things cannot be done by screwing with the market. For doing that is going to, inevitably, lead to the results above.

As I mentioned a couple of days back if you institute price controls then if you set them high, over the market clearing price, then you'll get a surfeit of whatever it is that you've just controlled the price of. If you set it below that market clearing price then you'll suffer a dearth. And if you set it at the market clearing price then why on earth are you bothering to control prices?

There is just no way out of this problem.

Unless, of course, you don't screw with the market as your method of increasing the incomes of the poor or of reducing inequality. And the most obvious method of doing that is to tax and then redistribute that money to said poor. Obviously this can be overdone but it is indeed what every country currently does do and they all manage to keep airlines flying, toilet paper on the shelves and the exchange rate within sight of the official numbers.

That, according to what they said at least, they wanted to move Venezuela a little in the direction of Sweden's icy social democracy isn't something we should condemn them for. For being complete fools about how they went about doing so perhaps is.

In which I fully support Natalie Bennett of the Green Party of England and Wales

I should, I suppose, support Natalie Bennett of the Green Party of England and Wales, given that I publicly supported her at the time of her election. But I do have a feeling that this support she's about to get from me will not be quite so welcome.

She's come out in an official party document demanding that everyone who rejects the science of climate change be fired from government: apparently elected or unelected.

Ms Bennett said: "We need the whole government behind this. This is an emergency situation we're facing now. We need to take action. We need everyone signed up behind that." Pressed on the issue, she agreed that even the chief veterinary officer should be removed if he didn't sign up to the view on climate change also taken by the Green Party. A policy document released by the party said: "Get rid of any cabinet ministers or senior governmental advisors who refuse to accept the scientific consensus on climate change or who won't take the risks to the UK seriously." Ms Bennett added: "It's an insult to flood victims that we have an Environment Secretary (Owen Paterson) who is a denier of the reality of climate change and we also can't have anyone in the cabinet who is denying the realities that we're facing with climate change." She said her party took the consensus view shared by many other organisation including the Intergovernmental Panel on Climate Change.

This is, of course, a betrayal of all that is holy about democracy and so we'll not be having with that. However, let us just put that to one side for a moment and think through, properly, what is the accepted science of climate change.

We can start with the SRES: these are the economic assumptions that go in at the beginning of the process. How many people will there be, at what level of wealth, using what technologies: these estimates produce the emissions numbers that then do into the climate models from which everything else is derived. We have four families of such scenarios and they run A1, A2, B1, B2. A largely stands for a capitalist economy red in tooth and claw, B for something more akin to a caring sharing social democracy. 1 means a more globalised economy than the one we have now, 2 means a more balkanised one, one more autarkic than at present.

In terms of human flourishing, the wealth of people in the future (and do recall that wealth is not simply more things or more consumerism, it is an expansion of the possibilities available to people),  then as we would expect the capitalist bit produces better results. But what's even more interesting is that a more globalised result produces better results than a more autarkic one. In fact, even in terms of emissions the globalised (whether capitalist or social democratic) families produce fewer emissions than the autarkic ones. Thus we can see that the science of climate change insists that we must increase, not decrease, globalisation.

This is not, to put it mildly, something that Ms. Bennett believes nor the Green Party of England and Wales. But under this stricture proposed by those very people we will simply have to fire from government everyone who opposes greater globalisation. Sad but there it is, we do have a planet to save after all.

We can go further as well. As My Lord Stern has pointed out (and as have eminences like Richard Tol, William Nordhaus, Greg Mankiw and, in fact, just about every economist who has bothered to look at the issue) the correct solution to the results that come from the IPCC is a carbon tax. Of some $80 per tonne CO2-e in fact according to Stern. And it's well known that UK emissions are around 500 million tonnes. And also that we already pay some swingeing amount of such Pigou Taxes: the fuel duty escalator alone now makes petrol a good 15p per litre more expensive than it should be under such a tax regime. And there are other such taxes that we pay, so much so that we are already, we lucky people here in the UK, paying a carbon tax sufficient to meet Lord Stern's target (which is, it should be noted, rather higher than what all the other economists recommend: we're not stinting ourselves in our approach to climate change).

We don't quite pay it on all the right things as yet, this is true, but the total amount being paid is about right. We just need to shift some of the taxation off some products and on to others. Less on petrol and more on cowshit for example.

That is, according to the standard and accepted science of climate change we here in the UK have already done damn near everything we need to do to beat it.

This, in turn, means that we now have to fire everyone who disagrees with this application of that accepted science. Which means we get to fire Ed Davey for suggesting more windmills for example. We don't need any other schemes, plans, subsidies, technological boosts nor regulations. As Stern and all the others state once we've got that appropriate carbon tax in place then we're done, problem solved. We just then sit back and allow the market to churn through the various options now that we've corrected the price system for externalities.

All of which I think is rather wonderful. Given that the Green Party is very much against globalisation then their demand is that no member of the party can ever be employed in a senior political or civil service role. For globalisation is a cure as the settled science of climate change insists. Indeed, it's one of the basic assumptions that go into the original models. And we also get to fire everyone who comes up with any scheme for regulation or subsidy, given that these are all contra-indicated by the accepted solution of the carbon tax. And finally, do note that we're already paying enough in green taxes, we've only got to tweak, in a minor manner, what we're paying them on in order to have completely solved the problem. And, as Ms. Bennett states, we now have to go and fire absolutely everyone who disagrees.

Which, given that I seem to be the only person who has actually read all of this guff, understood the implications of it and managed to piece it together makes me Prime Minister, doesn't it? Or Grand High Panjandrum or something? I seem to have convinced Matt Ridley of this over the years so perhaps he could handle the Lords for my new government.

So when do I get to meet the Queen?

Price fixing doesn't work Part XVII

Thailand is finding out, in a most painful manner, what happens to those who try to fix prices:

Thailand, once the world’s biggest exporter, is short of funds to help growers under Prime Minister Yingluck Shinawatra’s 2011 program to buy the crop at above-market rates. After the government built record stockpiles big enough to meet about a third of global import demand, exports and prices have dropped, farmers aren’t being paid, and the program is the target of anti-corruption probes. Political unrest may contribute to slower growth in Southeast Asia’s second-largest economy.

In order to curry favour with the rice farmers who compose a substantial part of the electorate prices were fixed and fixed high. The inevitable thus happens, magically more is produced than anyone wants to consume and here at least it is looking like the government will go bust over it. "Produced" is of course a flexible word: there are long running reports of rice being smuggled over the Burmese border to take advantage of those high Thai prices.

This really should not be a surprise to anyone. For prices are information, they're information about how many people want to consume how much of what and similarly about who is willing to produce. Changing the prices will change those desires and thus kick the system out of sync.

And it really is always the same: Thai rice, the world's supply of tin back in the 70s, the EU food mountains and wine lakes, Red Ed's idea to subsidise wind and solar power prices. If you set the price high then there will be a glut on the market that someone, somewhere, is going to have to buy at those high prices in order to maintain those high prices. That is, as we all know, the poor bloody taxpayer. If you set the price too low as with Venezuelan toilet paper or Red Ed's idea to freeze power prices then the good in question becomes in dearth. More people want to consume it than there is supply for them to consume.

And if, of course, you manage to set prices where supply does indeed meet demand then why the heck are you wasting your time setting prices? The market will achieve that for you without your lifting a finger.

The error really does come from failing to realise that prices are not something for us to manipulate, they're information that we need to process.

Markets do set rates: A reply to Julien Noizet

Financial analyst and blogger Julien Noizet has replied to my article on mortgage rates on his blog. It is a good piece, worth reading, but I still think I am right. It is perhaps true that Noizet is right too, because my claim was really very modest: in total, mortgage interest rates do not mechanically vary with the Bank of England's base rate; we can show this because the spread between them and the base rate varies extremely widely; and since we have very strong independent reasons to expect that market forces largely drive rate moves, that should be our back-up explanation. The implication of this I was interested in was that this meant a hike in Bank Rate wouldn't necessarily drive effective rates up to a point that would substantially increase the cost of servicing a mortgage and hence compress the demand for (London) housing.

Even if the first graph in Noizet's blog post did appear to support his narrative that effective market rates follow Bank Rate moves, I'm not sure why these disaggregated numbers matter given that the spread between overall effective rates on both new and existing mortgages varied so widely. If it turns out that specific mortgage types varied closely with Bank Rate but the overall picture did not, then markets still control effective rates, they just do it via a changing composition of mortgages, not by changing the rates on particular products. The effect is the same—and it is the effect we see in the Bank's main series for effective rates secured on dwellings. But the graph, to me, looks a lot like mine, despite the effect of new reporting standards: mortgage rates are about a percentage point from the base rate until 2008, then they don't fall nearly as far as the base rate in 2008 and they stay that way until today. If other Bank schemes, like Funding for Lending or quantitative easing were overwhelming the market then we'd expect the spread to be lower than usual, not much higher.

His second big point, that the spread between the Bank Rate and the rates banks charged on markets couldn't narrow any further 2009 onwards perplexes me. On the one hand, it is effectively an illustration of my general principle that markets set rates—rates are being determined by banks' considerations about their bottom line, not Bank Rate moves. On the other hand, it seems internally inconsistent. If banks make money (i.e. the money they need to cover the fixed costs Julien mentions) on the spread between Bank Rate and mortgage rates (i.e. if Bank Rate is important in determining rates, rather than market moves) then the absolute levels of the numbers is irrelevant. It's the spread that counts. But the whole point of my post is demonstrating that the spread changes very widely, and none of Julien's evidence seems to me to contradict that claim. Indeed, Noizet's very very good posts on MMT, which stress how deposit rates are much more important as a funding cost than discount rates for private banks, seem at odds with what he's written in this post. And supporting this story is the fact that the spread between rates on deposits (both time and sight) and mortgages changes much less widely. If we roughly and readily average time and sight on the one side and average existing and new mortgages on the other, the spread goes no higher than 2.3 percentage points and no lower than 1.48.

In general with the post I don't feel I understand the mechanisms Noizet is relying on, perhaps I'm misunderstanding him, but the implications of his claims regularly seem to contradict our basic models of markets. For example, he says that a rate rise would lead banks to try and rebuild their margins and profitability. But I can't see any reason why banks wouldn't always be doing that. The mortgage market is fairly competitive, at least measured by the numbers of packages on offer and the relatively small differences between their prices. I don't think Julien has presented any mechanism to suggest why banks would suddenly want to maximise profit after a rate rise but wouldn't beforehand—or why they'd suddenly be able to ignore their competitors but couldn't beforehand. It's possible there is one, but I can't see that he's explained it. Overall I suspect I've missed something crucial, so I welcome any more comments Julien has on the issue.

Interest rates are set in the market place

The London housing market is booming. According to Nationwide, prices rose 14.9% over 2013. According to Halifax, they climbed 9.4%. According to the Land Registry they were up 11.2%. The Office for National Statistics hasn't quite got data for the whole year yet, but their numbers show prices up 11.6% in London in the 12 months to November 2013. No doubt Rightmove, LSL, Hometrack and all of the many other indices echo this finding. While we at the ASI have pointed out how the government has jacked up demand with the Help to Buy scheme (some have quipped it might more accurately be termed "Help to Sell") the Bank of England and Treasury have dialled down the housing element of the Funding for Lending Scheme in response to worries about a bubble and unaffordability.

But however much these schemes are artificially adding to demand, it is certainly clear that London houses—a desirable place for natives and people across the world to live—face a huge demand and are in limited supply. Since this is clear, I have been loath to call the situation a "bubble"—a bubble seems bound to pop, but tight supply and ample demand suggests a situation where prices will remain high (see an excellent post from my colleague Sam for more detail). However, it was recently pointed out to me that since a high fraction of UK mortgages track the Bank of England's base rate, a jump in rates, something we'd expect as soon as UK economic growth is back on track, could make mortgages much less affordable, clamping down on the demand for housing.

This didn't chime with my instincts—it would be extremely costly for lenders to vary mortgage rates with Bank Rate so exactly while giving few benefits to consumers—so I set out to check the Bank of England's data to see if it was in fact the case. What I found was illuminating: despite the prevalence of tracker mortgages the spread between the average rate on both new and existing mortgage loans and Bank Rate varies drastically. For example, it was almost one percentage point in January 2004, fell to 0.5pp by July, rose to around 0.6pp where it stayed until July 2006 when it crashed to nearly zero in a year, before rising to 1pp in October 2008 and then almost 3.5pp in April 2009. Since then it has steadily trended down to around 2.5pp. There are lots of interesting and obvious stories to tell here, hearkening back to my piece about the confusion between interest rates as a stance of monetary policy and interest rates as the actual cost of borrowing firms and consumers face, but what is clear is that tracker mortgages be damned, interest rates are set in the marketplace.

What this means is that the fact the Bank's base rate will almost certainly be hiked in the next couple of years if economic growth continues at its current healthy pace is not a reason to worry that London's housing bubble will pop. Indeed, the only way London house prices are likely to drop from their current stratospheric levels is if we get a good honest bit of planning deregulation. Moving the green belt out just one mile would allow us to build one million houses, after all. And it could add percentage points of pure supply-side driven growth to GDP and living standards.

So here's another lefty myth taking a pummelling

I thought that this was an interesting little snippet of news:

World food prices fell in January to a 19-month low, as costs for everything from sugar to grains slid amid ample global supplies, the United Nations’ Food & Agriculture Organization said. An index of 55 food items dropped to 203.4 points last month from 206.2 in December, the Rome-based FAO wrote in an online report today. The index is down 4.5 percent from a year earlier and is at the lowest level since June 2012.

This is excellent news of course for it means that we're all richer. However, it does rather beat up one of the myths that those on the left have been promulgating over recent years. Here's the absurd grotesques over at the World Development Movement on the subject:

Banks are earning huge profits from betting on food prices in unregulated financial markets. This creates instability and pushes up global food prices, leaving millions going hungry and facing deeper poverty. In January 2014, after four years of our campaign, the EU agreed to introduce new rules to prevent hedge funds and investment banks from driving up food prices.

Do note that those new rules aren't actually in effect yet, let alone resonsible for the falls in food prices.

The WDM's basic claim was that the more speculation there is in futures markets then the higher prices will go. As anyone with any knowledge at all of markets has pointed out, futures markets can only affect spot prices if stocks are rising. When food prices were indeed rising we did see an increase in futures speculation, indeed we did. However, we did not see an increase in stocks: therefore it cannot have been the futures pricing that was driving the spot prices.

We've also not seen a fall in the amount of money being used to speculate in food prices: nor a reduction in the number of trades. But we are indeed seeing food prices fall.

At the end of which there's really nothing left of the case that financial speculation in futures markets increases spot food prices, is there?

No doubt they'll think up some other phantastical claim soon enough though.

Just why are we ruled by these people?

The 2020 Conservatives group used Laura Sandys MP to write a report on how we should all reuse stuff much more so that we're a much richer nation. And my question to that group is why?

Why did you have written and then release a report that shows your misunderstandings of how the economy works? Wouldn't it have been better to write one on a subject you do understand?

I managed to get hold of a copy (it's not on the 'net as far as I can see) and it's somewhat painful to read. There's the pretty much standard now view that we're all about to run out of minerals, an obvious fallacy if there ever was one. This leads to the insistence that we must all recycle more and this will make us richer:

The UK spends £1 billion a year in landfill costs just to dispose of plastics, wood, textiles and food - and in the process destroys these valuable commodities41. If a landfill ban was introduced just on these products and materials, £1 billion worth of costs would be avoided and a further “£2.5 billion [of] value” would be recovered42

Those two references, 41 and 42, are to something from the Green Alliance....where Mariana Mazzucato is a trustee which isn't all that comforting. But the obvious point here isn't tackled: if all this value is currently being dumped into holes in the ground why isn't anyone trying to make money out of it? We've been running scrap and rag and bone operations for many centuries in this country already and if there really was £3.5 billion of free money available then someone would be doing it and providing themselves with hot and cold running Bentleys.

That they're not shows that there's something wrong with this basic calculation: sure, landfill might cost £1 billion (much of that being the Landfill Tax) and OK, I'm willing to believe that the materials, when processed, could be worth £2.5 billion. But the reason it's not being done is obviously that the process of not landfilling the materials and processing them instead costs more than £3.5 billion. There's also an estimate that such recycling would lead to 300,000 new jobs. Given that the pay cannot be greater than the value being created that would imply wages of £12,000 for each of them even if we believe their number for said value created. We're really going to make the country richer by creating jobs at about half of median wage? It seems unlikely, doesn't it?

But there's a part that provides me with little hope:

For those of us who come from a business background, it is always surprising that government rarely considers the profitability of the UK economy. Currently the vast majority of political discourse and macroeconomic analysis centres on GDP, but a business would never focus on the top line and ignore the bottom line – businesses focus on profit rather than turnover for good reason. In the commercial world and across the economy ‘margin’ and ‘profitability’ are given equal consideration to ‘sales’, yet this is not reflected in public policy discourse.

As UK policymakers do not currently focus on profitability, there are few policies in place that truly support margin enhancement. This is illustrated by the fact that there is no mention of the words ‘profit’ or ‘profitability’ in BIS’ Business Plan4.

I had hoped that this was simply clumsy phrasing but the same point is made in interviews about this plan:

The modernisers also call for a rethink away from what Sandys calls the "British Leyland" mentality, which says that the strength of an economy is measured solely by Gross Domestic Product (GDP) – the size of an economy. "We are going to have to look at what we are really achieving and not what I call British Leyland metrics," Sandys said. "British Leyland produced a lot of cars. It had a lot of GDP. Nobody wanted the cars but nobody seemed to care.

Oh dear. Ms. Sandys seems to believe that GDP measures the turnover in the economy. Erm, no: it measures the value added in the economy. The clearest expression of this is when we look at it from the income approach: what everybody earns, wages, salaries and profits, equals (with a couple of minor adjustments) GDP. It simply is not true to say that GDP is composed of, nor measured by, the turnover of companies. BL's contribution to GDP was the wages it paid to its workers minus the losses that it made: something which could conceivably have meant that BL actually reduced GDP given the scale of its losses at times.

Now I'm perfectly happy for people to come up with proposals to make things work a little better. But I would hope that those doing so demonstrate that they understand how things currently do work. And equating turnover to GDP is a signal that they very much don't here.

And then there's the part that near kills all hope:

Why do we only think of labour productivity?

For the obvious reason that labour productivity is what determines what it is possible to pay labour. And our aim in this whole economy thing is to maximise the living standards of the people which is why we concentrate on raising labour productivity so that people can earn more and thus have more nice things.

Please note that this isn't an ideological or political assault here. It's a commentary on the point that the people presuming to tell us how the country should be run don't have a firm grasp on that real world they want to direct. Which isn't likely to lead to a decent outcome really.

Apparently the UK is in the grip of a house price fairy

I'm afraid that I rather spluttered into my fry up this morning reading this piece of absurdity in The Guardian:

Cable calls for a new house-building programme, but in truth this is a nonsense when the market dictates prices, and always will. You can build 300,000 new homes a year, as the Lib Dems want, but you can't stop those homes putting on value to a point where the people for whom they were built can't afford them.

I'm sorry, what? Does Melissa Kite think that the market is some sort of pricing fairy that decides that house prices are always going to be high?

As opposed to "the market" being the balance of supply and demand for goods and services? So that if we increase the supply while demand stays static then we expect prices to fall?

Good grief: housing completions are running at around 120,000 a year at present. If we were to have 300,000 a year then prices may or may not be lower or higher than they are now: that depends upon a host of other factors like interest rates, real wages, immigration levels and so on. But if 300,000 houses were indeed being completed each year then they would most certainly lower than if only 120,000 were a year.

The real absurdity here is that Kite is, as many lefties do, reifying "the market" in a manner that we free marketeers know we shouldn't. It's not something separate from the interactions of the rest of us: it is the interactions of us all. And that means that if supply rises then prices will, ceteris paribus, fall. And thus, if you want to lower house prices one should try to build more houses.

Or, as I've pointed out passim ad nauseam, given that the most expensive part of a house anywhere anyone wants to live is the chitty granting permission to build a house there one should issue more such chitties.