Road privatisation long overdue
The Adam Smith Institute has been advocating the privatisation of Britain's roads since the 1980s. Today's announcement on allowing private firms to run roads is a welcome piece of news, and Tom Clougherty, our Executive Director, gave the following reaction:
"The government is right that we need more investment in the UK's road network and right that this investment cannot realistically come from public resources. If we're going to give Britain the infrastructure it needs for stronger economic growth and a better quality of life, we need to get the private sector involved.
"Paying private contractors to manage and maintain existing highways makes a lot of sense, and is something that has been done successfully around the world. But the really exciting prospect is that private firms will be able to build new road capacity and charge drivers to use it. Introducing the profit motive in this fashion – and thereby drawing infrastructure investment to where it is really needed – is the surest way to ease congestion and speed up travel times on some of the UK's most important routes.
“Of course, the devil is in the detail, and we can't look at this policy in isolation. Motorists are feeling the pinch as it is, so any widespread shift towards toll charging should be accompanied by cuts in fuel and vehicle duties. Secondly, the successful implementation of this idea requires that we dramatically speed-up Britain's notoriously bureaucratic planning system. Without that, we are bound to see vital infrastructure projects strangled at birth.”
Government infrastructure spending won't stimulate growth
Next week the Chancellor will deliver a much-anticipated budget. With calls for tax cuts, tax rises and regulatory reform, the line between politics and economics will be a difficult one to tread. However, many commentators and politicians seem to be in agreement on one thing: that ‘infrastructure investment’ would be a boost to the economy, reinvigorating the construction sector and adding to the nation's productivity. Hence we have projects such as HS2 and £6 billion announced in the last year’s autumn statement for roads and other rail projects. These measures are supposed to create jobs in the short- and the long-term whilst bringing the country's transport infrastructure into the 21st century. In the US, too, President Obama has been keen to point to ‘shovel ready jobs’ available through government infrastructure spending.
We should all be worried when politicians start spouting platitudes about the highly unrealistic benefits of these projects. The great myth of the success Roosevelt’s New Deal no doubt lingers in the minds of policy makers. But the truth about government infrastructure is wildly different from the conventional wisdom.
It is a fallacy to believe that the government can allocate resources effectively to meet future economic needs, instead of entrepreneurs. What advocates of state infrastructure spending fail to grasp is that government cannot suddenly acquire the knowledge as to which parts of the UK’s infrastructure either needs repair, replacement or, indeed, which new projects should be undertaken. The economy is dynamic and never static. The government cannot predict what it will look like in 30 years time, whether there will be an increase of manufacturing jobs in the northeast or high tech in the midlands. This is simply not possible to anticipate into the next twenty or thirty years.
The argument commonly made for infrastructure spending is that it will have a kind of Keynesian multiplier effect. Private construction firms will be employed, idle resources will be put to use and money will start to circulate through the economy as people spend their newly earned wages. But this, again, is untrue. Government infrastructure drains the economy of resources and, even in the short term, stops resources from being used elsewhere. These decisions are difficult even for the private sector, which relies on price signals. Sometimes the private sector fails, sometimes it succeeds, but because it is the investor's money that is on the line it has a reason to act rationally. Government lacks the information to act wisely, and the incentives to act prudently.
In Japan, large government infrastructure projects have failed to lift the country out if its low growth high debt slump. In the UK, many cities have built tramlines, which have almost universally turned out to be loss makers and failed to promote growth.
Entrepreneurs, not state bureaucrats, will be best to judge whether a particular project is worth the risk. The history of white elephant infrastructure projects is one that seems to repeat itself with each new administration. Let us hope that the politicians fail to match their rhetoric with our money.
The Coalition’s new home loan scheme: just a carrot for floating voters?
Taxpayers will guarantee deposits for new houses up to £500,000 under the government's New Buy Guarantee scheme. Many buyers find it difficult to raise 20% (or more) deposits and this scheme will allow them to buy houses with as little as 5% deposit.
Home ownership is certainly a plus for society as a whole – it gives people a stake which encourages responsibility. It is also a form of saving, which reduces the risk of ending up on welfare; and it builds up a lever to finance future entrepreneurship (most entrepreneurs self-finance their venture). Home ownership is in decline and is becoming increasingly difficult for first-time buyers.
So is this New Buy Guarantee scheme the right way to encourage home ownership? I don’t think so, for a number of reasons:
1. Taxpayers will be forced to take the risk for people who may not be able to repay their mortgage. Arguably, requiring a 20% deposit is a pretty good indicator as to whether a buyer risks defaulting. Why should people who are prudent with their money have to pay for risks taken by others?
2. Mortgages to uncreditworthy borrowers triggered the crash of 2008. In America, Freddie Mac and Fannie Mae were set up to expand the mortgage market: they bought mortgages from lenders which allowed the lenders to issue new mortgages. Freddie and Fannie were implicitly guaranteed by the government and thus the taxpayer. George Bush Sr and Bill Clinton forced Freddie and Fannie to take on ever greater shares of mortgages to the poor, thereby encouraging banks to give mortgages to uncreditworthy borrowers. This was the root cause of the crash. Who receives a mortgage should be the private sector’s responsibility (for both profit and loss); not the state’s.
3. It is true that it is more difficult than ever for first-time buyers to get onto the housing ladder. But this scheme is not limited to first-time buyers. Claiming that its aim it to help first-time buyers is misleading.
4. Whose fault is it that first-time buyers find it so difficult to raise a deposit? The government’s. Inflation has been pushed up by quantitative easing and artificially low interest rates, which make saving unattractive and raises the price of housing. (It is naïve to suggest that the Bank of England is independent in this matter.)
5. Property prices have shot up through a shortage in housing supply. Planning regulations create a stranglehold on new developments.
6. The measure is specifically aimed at the construction industry. There is a whiff of “picking winners” to this. The market is much better placed to allocate its resources as to maximise return and growth. Governments tend to pick losers because they lack the information dispersed among millions of individuals in the market – Hayek’s “knowledge problem”.
For politicians, schemes like this are love at first sight. They allow them to claim credit for “results” they can boast about come polling day. An ordinary tax cut won't convince specific categories of floating voters such as first-time buyers to vote for them. The figure of 50,000 jobs has already been plucked out of thin air. No doubt this new scheme will allow politicians to claim credit for any uplift in the construction industry, irrespective of whether it's related to this scheme or not.
There is a better solution:
- Reduce taxes to make it easier for people to save so they can take care of themselves – including saving for a mortgage.
- Extend the stamp duty holiday for first time buyers. It runs out on 24th March.
- End the artificially low interest rates and stop money printing to encourage saving, reduce inflation, and reduce asset bubbles.
- Continue the reform of planning law to make house building easier. [ed — see our recent paper Planning in a Free Society for ideas] Take some of the heat off by introducing private compensation legislation to operate between developers and individual neighbours to compensate them for loss to their property’s value resulting from development.
How Nimbyism hurts taxpayers and the environment
If you want an example of how anti-development councillors are harming the public, look no further than Basingstoke. There, contrary to the wishes of the Coalition government, the council seems determined to prevent any significant house building at all.
For those utterly hostile to new housing that might sound OK, until you realise the massive waste of local taxpayers’ money this has involved.
Back in 1995, the council bought a 2000-acre plot of land at Manydown for the purpose of building new houses for £10 million. It paid a premium for the land because it was land destined for development – previously farmland with little in the way of natural interest.
Now the council has decided that it won’t allow any development on Manydown at all, and is proposing – ludicrously – to force any new housing into the Loddon Valley. This is a place designated as a “Site of Importance for Nature Conservation” and which is protected by the Convention on Biological Diversity. The council’s position is ridiculous, like proposing that coal-fire power stations be built in the Lake District or that we demolish Stonehenge.
So why is it taking this position? Well, two of the councillors living near Manydown are being the most vocal in their campaign against development. Perhaps they are worried that they will lose their seats. If so, it’s a pity, because development done right can actually improve local areas, bringing prettier neighbourhoods and better amenities.
Only bombing would be worse than rent control
The political battle over the welfare bill has led some people to propose rent controls as a solution to rising rents in Britain’s cities (especially London). Rent control, though, is probably the most unambiguously awful policy ever to be tried in modern western democracy. In theory and practice it is a disaster, choking off the supply of new rentable homes and grinding the quality of existing rented accommodation.
The theory is simple enough. Putting a price ceiling on any product below the market rate causes shortages: demand outstrips supply. Walter Block has a typically superb article in the Library of Economics and Liberty’s Online Encyclopedia of Economics on this:
One effect of government oversight is to retard investment in residential rental units. Imagine that you have five million dollars to invest and can place the funds in any industry you wish. In most businesses, governments will place only limited controls and taxes on your enterprise. But if you entrust your money to rental housing, you must pass one additional hurdle: the rent-control authority, with its hearings, red tape, and rent ceilings. Under these conditions is it any wonder that you are less likely to build or purchase rental housing?
This line of reasoning holds not just for you, but for everyone else as well. As a result, the quantity of apartments for rent will be far smaller than otherwise. And not so amazingly, the preceding analysis holds true not only for the case where rent controls are in place, but even where they are only threatened. The mere anticipation of controls is enough to have a chilling effect on such investment.
Block points out that the very whisper of rent controls can be harmful – if there’s a danger that your investment might be subject to punative state-imposed price ceilings, it’s probably better to play it safe and build something else.
Not only does rent control stop new construction, but by putting a stranglehold on supply it destroys neighbourhoods. Real-life experience with rent control has been predictably awful, with entire neighbourhoods in New York City becoming decayed and abandoned. Because demand outstrips supply, there is little incentive for landlords to keep their properties in a decent state, especially in poor parts of town:
Paul Niebanck found that 29 percent of rent-controlled housing in the United States was deteriorated, but only 8 percent of the uncontrolled units were in such a state of disrepair. Joel Brenner and Herbert Franklin cited similar statistics for England and France.
Block quotes Gunner Myrdal, an architect of Sweden’s welfare state who was given the Nobel Prize in economics as the left-wing balance to his co-winner FA Hayek:
Myrdal stated, “Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.”3 His fellow Swedish economist (and socialist) Assar Lindbeck asserted, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”
Rent control would be worse than the status quo, but there are some things the government could do to make things better. Capping (or abolishing) housing benefit would reduce some of the upward pressure on demand, but the best thing would be to allow the supply of new places to live to grow. Britain’s planning laws are choking the construction of new homes, particularly low-rent ones. Why? As Mark Pennington has pointed out, planning laws give undue power to articulate middle classes, who can use it to block “undesirable” low-income housing developments in their areas. Reforming this system, so that it’s easier to build new homes of any type, would be a good step.
The grinding, anti-poor, primitive socialism that is rent control would be a catastrophe for the urban poor. Everybody should recognize this. No less than the Foreign Minister of the Socialist Republic of Vietnam spoke about rent controls in 1989:
Mr. Thach admitted that controls ... had artificially encouraged demand and discouraged supply.... House rents had ... been kept low ... so all the houses in Hanoi had fallen into disrepair, said Mr. Thach.
"The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy."
The runaway train
I’m currently reading The Declaration of Independents, by Reason magazine’s Matt Welch and Nick Gillespie. It’s a good read with a compelling central thesis, and I’ll write a proper review once I’ve finished it. But for now, here’s one passage that leapt out at me.
[T]he tragedy of trains, whether ‘heavy’ or ‘light’, regular or high-speed, is that they drive politicians and otherwise sensible citizens totally off the rails when it comes to reality.
Hmm…
Consider the characterstic case of Cincinnati, Ohio… In 2010, Cincinatti faced a $50 million budget deficit… The incumbent state chief executive, Democrat Ted Strickland had… spent a lot of money – all he could put his hands on, in fact, plus billions more in borrowed cash – but all he had to show for it was the nation’s seventh-highest state-and-local-combined tax and the second-worst job-loss numbers in the country…
Sound familiar?
Given this shrinking pool of other people’s money, what were Cincinnati’s leaders up to? … Were they figuring out how to cut the sorts of taxes and red tape that might, at least on the margins, make their burg a slightly more attractive place to do business?
Anyone see where this is going?
Of course not. They were talking about going even deeper into debt to finance a train.
Ah, got it.
The disaster that is HS2
Following the announcement on High Speed Rail, Sam Bowman, Head of Research, has given the following reaction:
"There are big questions remaining about the viability of HS2, and in all likelihood it will become a major burden on public finances in the years to come. Past experience in Britain and elsewhere suggests that governments tend to wildly overestimate the demand for high-speed rail, and it is telling that there are only two high-speed lines in the world that do not rely on a taxpayer subsidy. Britain's past experience with high-speed rail, the line connecting London St Pancras to the Channel Tunnel, was a disaster – it sold for less than half of its construction cost and passenger numbers were less than a third of the projected number.
"The potential for overspending, too, is worrying. A tunnel in transport minister Cheryl Gillan MP's constituency will add £500m to the £32bn bill – at £190,000 per yard, or £5,300 inch, it raises the possibility of massive extra spending to keep key MPs happy. At £32bn, the project is enormously expensive and its first stage will reduce the journey time from London to Birmingham by twenty minutes. It is staggering that the government is prepared to use so much taxpayers' money for such a risky, costly project which will almost certainly require a significant long-term subsidy to remain operational."
Our report released last year 'High Speed Fail' pointed out the many flaws in the HS2 plans. Its key arguments are detailed below, but you can read the full report here.
The facts on HS2:
- HS2 will be an expensive taxpayer-funded project – the first phase to Birmingham will cost £17bn, with completion of HS2 to Leeds and Manchester bringing this to £30bn and the planned eventual extension to Scotland bringing the total to £50bn. The HS2 project will therefore cost taxpayers approximately £1,500 per household.
- HS2 is extremely expensive even for high-speed rail: its cost is equivalent to £130m per mile and is a staggering four times the cost of the average European high speed rail line.
- Around the world, all but two high-speed rail lines depend on government subsidies for their ongoing operation. The TGV in France has caused SNCF’s debt to rise to c£25billion. The World Bank warned in 2010 of the debt created by high speed rail systems talking of the ‘near certainty of copious and continuing budget support for the (high speed rail) debt’.
- The potential for going far above the £4bn “optimism premium” set aside for overspending is high, especially in light of current inflation. Public pressure for more tunnels (which cost much more per km to build) through environmentally sensitive areas such as the Chilterns will push up construction costs, as has been demonstrated by the £5,300/yard tunnel expected to be approved to win the support of Cheryl Gillan MP for the project.
- Predictions of passenger numbers and demand for High Speed 2 may also be overambitious. This would have huge repercussions for HS2’s profitability. Britain's previous experience with high speed rail – the HS1 line between London St Pancras and the Channel Tunnel – proved far less popular than its promoters had predicted, with actual passenger take-up coming to one-third of the predicted amount.
- HS1 cost £5.7bn but raised only £2.1bn when sold off, raising the possibility that HS2 may also incur a significant loss upon completion. If HS2's sale made the same magnitude of loss as HS1, it would mean a loss to the taxpayer of nearly £20bn.
- The outstanding questions about HS2's profitability make it appear extremely likely that the project will require a significant ongoing taxpayer subsidy upon completion and may well make a loss upon its sale. The promise of slightly faster journeys to Birmingham, Manchester and Leeds do not warrant this risk-taking with taxpayers' money.
The draft National Planning Policy Framework: Hold course; then go further
The government’s proposals to reform Britain’s planning laws have been a welcome island of deregulation in a sea of disappointment.
Both coalition partners went into the 2010 election promising a bonfire of regulation; they created a Reducing Regulation Cabinet Committee and a system of deregulation called “One in, One out”, which has been running since 1 October 2010, yet by February 2011 the Better Regulation minister was admitting in the Commons that not much had actually happened.
But the Draft National Planning Policy Framework is genuinely a step in the right direction. It reduces planning policy from an eye-watering 1,000 pages to a perfectly accessible 65 pages. This is no small matter: irrespective of the content of any regulatory framework, a thousand pages is beyond the ability of anybody to read, comprehend and apply, unless they are a professional with the time and resources to devote to the task. 52 pages, by comparison, is easily managed by an amateur who needs to understand what the national planning rules are – which includes very large numbers of people, including very possibly you, if you or one of your neighbours decides they want to build an extension or develop a piece of land.
Predictably, therefore, it has been met by howls of terror from the usual suspects. Members of parliament’s Communities and Local Government Committee have called on the government to remove the proposed presumption in favour of sustainable development, even though this is in fact already enshrined in existing planning guidelines.
The National Trust persuaded 230,000 people to sign a petition which read
"I believe that the planning system should balance future prosperity with the needs of people and places - therefore I support the National Trust's calls on the Government to stop and rethink its planning reforms."
This is wrong. Both prosperity and places are subsets of “the needs of people”; people need both prosperity, and places to live and work. And while the National Trust may “believe that the town and country planning system, as a whole, has served the country well”, this flies in the face of all the evidence.
Sadly, the government has shown a remarkable propensity to U-turn. On issues including forestry privatisation, dedicated funding for school sports, the health and social care bill and increasing the sentence discount for guilty pleas, it has almost appeared as though Messers Cameron and Clegg have been turning using the hand-break.
In fact, they should go further. While the Draft National Planning Policy Framework is mercifully brief, it fails to address the real problems resulting from our socialist planning system: the impossibility that planners can gather and process the necessary information, which is dispersed among the population and entirely subjective; the skewed incentives that encourage planners to empire-build and elected representatives to serve existing and localised interests rather than future and more diffuse ones; and the fact that there is no mechanism for compensating those negatively affected by development, which means that NIMBYism is not only commonplace but is entirely rational.
Rather than revising the National Planning Policy Framework, the Government needs to revoke the Town and Country Planning Acts, denationalise development rights and create a system whereby individuals are able to trade the bundles of property rights that they hold, including both rights to develop and rights to enjoy amenity. This would encourage the efficient use of land, compensate those impacted by negative externalities, and enable society to properly determine which sites should be protected and which should be developed.
It would be a radical reform, but if this government really wants to reduce regulatory burdens, stimulate business, build more houses and improve the lot of the poorest in our society, it may very well be the most effective reform it could make. And in these straightened times, it would cost virtually nothing.
HS2 may be heading for the siding
The recently announced postponement of a decision on the controversial HS2 project, ostensibly on environmental grounds, raises various questions. The Government claims to have found a spare c£500 million, which would enable additional tunnelling to be built in the Chiltern Hills area, where opposition to HS2 is particularly strong. To be fair, £500 million of additional investment – when compared with the £45.5 billion invested in the Royal Bank of Scotland – may not seem a vast amount.
However, as the ASI’s recent publication High Speed Fail pointed out, the financial case for HS2 is already very weak, even before further tunnelling expenditure. Put simply, the numbers do not ‘stack up’. Indeed, assuming that HS2 eventually reaches Scotland, over £50 billion will have been spent. Given that the recent Autumn Statement revealed that the UK’s already horrendous public debt – now close to £1 trillion – continues to rise well ahead of expectations, the case for pushing HS2 into the siding gets stronger.
After all, like virtually all high-speed lines, HS2 will probably be loss-making, even with the pay-as-you-go funding model proposed by the Department of Transport. Between now and mid-January, expect the Treasury to crawl over the numbers, especially those relating to the capital cost and the projected size of the fare-box once Phase 1, between London Euston and the West Midlands, is operational. By Treasury standards, the projected Benefit Cost Ratio (BCR), which was sharply downgraded earlier this year to just 2x (including wider economic impacts), is very modest.
There is, though, considerable momentum behind the HS2 project, especially from those believing – rather optimistically - that it will sharply narrow the north/south divide. Of course, there is no certainty that the Government’s decision next month on HS2 will be final. The focus, though, will be on the financial analysis within the Treasury who will be very hard-pushed to claim the numbers really do ‘stack up’.
High speed fail: Assessing the case for HS2
Today we release our new report on High Speed 2, High speed fail: Assessing the case for High Speed 2. The report examines the case for the HS2 project and finds that in almost every case the evidence is highly doubtful about whether it would be worth the money. Put together, the doubts and unanswered questions around HS2's viability mean that the case really isn't persuasive enough for the government to go ahead with it.
The first leg of the project, between London and Birmingham, will cost at least £17bn – and up to £50bn if the whole project between London and Scotland goes ahead. We think that this is a low-ball estimate, given the very high inflation rate we are experiencing and public pressure for more tunnels to avoid despoiling natural landscapes.
Previous experiences with high speed rail in the UK should make even the most enthusiastic supporter of HS2 think twice. High Speed 1, which links London St Pancras station with the Channel tunnel, cost £5.7bn but only sold for £2.1bn. Projections by the promoters of HS1 overestimated the number of passengers by three times the actual figure. Passenger predictions are notoriously difficult – they cannot take account of what measures competitors will take. If the reality for HS2 was anything like these figures, it would create a fiscal catastrophe for the government.
Internationally, there are only two high speed rail lines in the world that do not rely on taxpayer subsidies to remain operational. (They are Paris-Lyon and Tokyo-Osaka, for the trainspotters out there!) The company that operates TGV in France is €25bn in debt. China, long used by advocates of HS2 as an example of a country doing high speed rail properly, has had a disastrous experience with train crashes.
The supposed environmental benefits are extremely weak too, mostly resting on the idea that fewer people will choose to fly to Scotland once a high speed rail link is operational. Even if this were true – and, again, it is undermined by previous experiences with high speed rail passenger estimates – it would not take effect for at least thirty years. Nobody in 1980 could predict travel patterns in 2011; why does anybody today think they know what the world will be like in 2041? In the meantime, the 30 minute travel reduction between London and Birmingham is unlikely to change much.
In short, the case for HS2 is remarkably weak. The government should scrap it and save taxpayers from having to cough up for it.
