George Monbiot really is a national treasure, isn't he?

If it weren't for the fact that The Guardian is where we send our national treasures to fossilise already we'd have to send George Monbiot there tout sweet. For he's now come up with an argument so absurd that nothing other than the journalistic equivalent of a peerage, that home at Comment is Free, could possibly be appropriate:

Planning laws inhibit prosperity. That's what we're told by almost everyone. Those long and tortuous negotiations over what should be built where are a brake on progress. All the major parties and most of the media believe that we would be better off with less regulation, less discussion and more speed. Try telling that to the people of Spain and Ireland. Town planning in those countries amounts to shaking a giant dustbin over the land. Houses are littered randomly across landscapes of tremendous beauty, and are so disaggregated that they're almost impossible to provide with public services. The result, of course, is a great advance in human welfare. Oh, wait a moment. No, it's economic collapse followed by mass unemployment. Spain and Ireland removed the brakes on progress and the car rolled over a precipice. Their barely regulated planning systems permitted the creation of property bubbles that trashed the economy along with the land.

No, really, we've not made this up. That really is what he said. That the absence of strict planning regimes creates housing bubbles. That free supply of land to build upon increases the price of housing.

This is, of course, a confusion of the difference between correlation and causation. It's true that the two countries had liberal planning systems (the Spanish one driven more by bribery than the law but still) and it's also true that the two had housing booms and subsequent busts. But the causation is not between those two things: rather, it's to their joint membership of the euro. Both economies were doing well while that of Germany was not. And within the eurozone interest rates were set to benefit the German economy, not the booming periphery. Thus rates were far too low for the broader economic conditions in Ireland and Spain: thus an asset bubble.

It was free money that drive those booms, not free planning permissions.

Is Uber worth $18bn?

James Ball, at The Guardian, thinks that Uber's implicit $18bn valuation is "a nadir in tech insanity". His case is that tech firms are overvalued because although investors know this, they always assume there are other "suckers" they can palm their securities off on. That is, they think the other guys are "behavioural" (falling prey to the sorts of biases detailed in behavioural economics and behavioural finance) but they themselves are rational. Ball is responsible for some very good and important work, but I think this particular piece would benefit from the application of some financial economics.

It's always possible that prices are irrational. And because we can never test investors risk preference separately from the efficient markets hypothesis (the idea that markets accurately reflect preferences and expected outcomes) it's very hard to work out if prices are off, or just incorporating some other factor (usually risk). This is called the joint hypothesis problem. But when there are two alternatives, there is a reason economists put rational expectations in their models—it's a simpler, better explanation. Finding truly suggestive evidence of irrational price bubbles is the sort of thing that wins you a Nobel Prize not something that a casual onlooker could easily and confidently observe.

Ball might say that even if irrational pricing is rare because of the strong incentives against it in a normal market, there have certainly been episodes of it in the past. Quoting J.M. Keynes, he might say "markets can remain irrational much longer than you or I can remain liquid". He might point to the 1999-2000 peak of what's commonly described as the "dot com bubble". But I urge Ball to consider a point raised in this email exchange between Ivo Welch and Eugene Fama:

How many Microsofts among Internet firms would it have taken to justify the high prices of 1999-2000?  I think there were reasonable beliefs at the time that the internet would revolutionize business and there would be many Microsoft-like success stories based on first-mover advantages in different industries.

Loughran and Ritter (2002, Why has IPO pricing changed over time) report that during 1999-2000 there are 803 IPOs with an average market cap of $1.46bn (Table 1).  576 of the IPOs are tech and internet-related (Table 2). I infer that their total market cap is about $840 billion, or about twice Microsoft's valuation at that time.  Given expectations at that time about high tech and the business revolution to be generated by the internet, is it unreasonable that the equivalent of two Microsofts would eventually emerge from the tech and internet-related IPOs?

Has not the second wave of cyber firm success (Facebook, Google, arguably Apple) been even more impressive than the first wave? It may well be only 25% or 10% likely that Uber turns out to be one of these behemoth firms, through network effects, first mover advantages, name-recognition or whatever—but even if the chance is small the potential rewards are huge.

But Ball may point out that even if this is true, in the (putatively) 90% likely scenario, of Uber being a failure, then all this capital is being wasted. It could be put in the projects he prefers: "green energy, modern manufacturing, or even staid-but-solid sectors like retail". Even if rational expectations—the idea outcomes do not differ systematically (i.e. predictably) from predictions—and the efficient markets hypothesis are not violated, and risk-adjusted expected (private) returns are equal across industries, it might be that social returns from these staid-but-solid sectors are higher—after all, lots of capital is being apparently wasted when so much goes to Uber.

This does not obtain—from the prospects of society, Uber could deliver huge welfare gains. If it does turn out that Uber has enough in the way of network effects to generate returns justifying its price tag (or more) then it would have to create lots of value, by saving taxi-consumers serious money. If they are using less resources to create the same amount of goods, then they are making society better off. Since society is big and diversified, it can afford to be relatively risk neutral (at least compared to an individual), and take even 9-1 punts on the chance that one memorable, semi-established network might be a particularly good way of running a taxi market.

Why Labour's rent controls will do more harm than good

Now that we have more detail, Labour’s new ‘rent control’ policy is not quite as bad as I'd initially feared. Instead of the old school price ceilings that destroyed parts of New York City, Labour are proposing ‘second-generation rent controls’, which limit the ability of landlords to renegotiate rents during tenancies, and ‘make three-year tenancies the norm’.

The real-world effects of this are likely to be that expected rent increases over the three-year lease will be priced in to the starting rent, so it’s unlikely to actually make anyone better off unless there’s an unexpected increase in rents. If rents fall below expectations, this would hurt tenants.

Since landlords are bound within tenancy agreements, rises in rents are likely to be sharper than they currently are for new tenants. This means that housing mobility is likely to be reduced – tenants locked in to a relatively low rent will find it more costly than they otherwise would to move. This is very important: it looks as if lowered housing mobility causes higher unemployment, because people are less able to move to find new jobs.

Rent controls of any kind are likely to decrease the supply and quality of available housing. ‘Second-generation’ controls are less tight and so less harmful than classical rent controls, but as Hopi Sen has pointed out, the German experience does not seem encouraging. There, rents have risen far more quickly over the past decade than they have in Britain, as new construction has slowed.

There is also evidence to suggest that second-generation rent controls have a similarly negative impact on housing quality as classical rent controls. A 1985 study by the Richmond Fed found that controlled housing units were 7.1% lower in quality in 1974, and 13.5% lower in 1977, pointing to a cumulative negative effect. If classical rent controls are only worse than bombing, second-generation controls may be close to petty vandalism.

One interesting aspect of this announcement is that it may affect supply now, as would-be investors in new housing are discouraged by the prospect of stricter controls on their investment. If the measures are actually brought in – crossing the rent control Rubicon – an expectation of tighter controls may reduce supply even more.

It’s not clear what mechanism Labour is proposing to make three-year tenancies ‘the norm’, but it’s hard to imagine any effective measure that would not end up hurting tenants who want shorter leases. This probably means young people.

As we say virtually every day, the best way to reduce the cost of housing is to build more. Labour’s proposals seem counter-productive, but they’re nothing compared to the harm caused by the planning system.

We recently learned that more of Surrey is covered by golf courses than by houses. Rolling the green belt out even a bit – by, say, a mile outside London – would create space for hundreds of thousands of new homes, relieving pressure on existing housing stock, reducing rents and – a nice bonus – creating lots of jobs and adding a few percentage points on to GDP growth. We can dream.

Letter to The Times: Justifications for HS2 have failed to convince

Dr Madsen Pirie and Dr Eamonn Butler, President and Director of the Adam Smith Institute, co-signed a letter to the Times, calling for "a comprehensive review of the UK’s transport priorities, and where, if at all, HS2 fits with this." 

"Sir, There are few more iconic images of the recent storms and the flooding which devastated so many thousands of lives than the Great Western Line at Dawlish collapsing into the sea, cutting off the main rail route to the South West of England.

"This underlines the stark choice in determining priorities for investment in Britain’s transport network — between investment in increasing resilience, developing regional transport connections and relieving the plight of the thousands forced to stand on trains each day, or ploughing ahead with a London-centric high-speed line with a dreadful business case which connects just four cities.

"Successive justifications for HS2 have failed to convince, so its supporters are asserting that the West Coast Mainline is full to capacity and HS2 is needed to relieve it. Yet Network Rail’s latest figures show that intercity trains are running at just 52 per cent full into Euston station at peak times, and that Euston is one of London’s least busy termini.

"With the Treasury predicting that HS2 will cost £73 billion — £1,500 for each adult in Britain — as well as causing huge environmental damage, it is clear that the time has come for a comprehensive review of the UK’s transport priorities, and where, if at all, HS2 fits with this."

Hilary Wharf, HS2 Action Alliance; 
Baroness Bakewell; 
Natalie Bennett, Green Party; 
Sir Keith Bright, ex London Regional Transport; 
Dr Eamonn Butler, Adam Smith Institute; 
Nigel Farage, UKIP; 
Sir Christopher Foster, Network Rail; 
Jonathan Isaby, TaxPayers’ Alliance; 
Denise Jeffery, Wakefield Council; 
India Knight; 
Ruth Lea, Arbuthnot Banking Group; 
Dr Madsen Pirie, Adam Smith Institute; 
Mary Portas; 
John Prideaux, Intercity and British Rail; 
Roger Salmon, ex Rail Franchising; 
Alexei Sayle; 
Chris Stokes; ex Strategic Rail Authority; 
Martin Tett, Bucks County Council; 
Sir Andrew Watson, CPRE Warks; 
Sir Barney White-Spunner, Countryside Alliance; 
Baroness Wilkins; 
Paul Wilkinson, The Wildlife Trust

You've got to understand a problem before you can try and solve it

We've yet another dodgy report from yet another dodgy think tank being written up today. You know it's dodgy when the writye ups, to create the narrative, arrive before the full paper can be checked to see what they're really saying. But here's part of the report:

While most people will live to state pension age and beyond, a large proportion are unlikely to get there in good health, especially in more disadvantaged parts of the UK – places like inner city Glasgow, where the healthy life expectancy is just 46.7 years – close to 20 years lower than the national average of 65.

No, that's not really true.

The difference in disability-free life expectancy between women born in the most and least deprived areas was 11.6 years in 2001-04. By 2007-10 it had increased to 13.4.

And that's absolutely not true. The problem, here is that no one is understanding what these numbers are, how they're collected, and they are thus using them in highly inappropriate manners.

Lifespan, healthy lifespan, these are not the numbers from people born in certain locations. Nor of people in certain income bands, social classes or anything else. They are collated from the places and ages at which people die. It's vital to understand this difference.

As an example, consider two people who live at some point in their lives in those inner-city areas of Glasgow. One is born there, joins the Army, retires to Eastbourne and dies at 90. The other is born in Eastbourne, drifts along, gets tied into drug addiction and dies at 40 in some squat in Glasgow with a needle in his arm.

That first person, given that we count these things as where people die, leads to the average age at death in Eastbourne rising: that second, for the same reason, lowers that average age at death in Glasgow. But clearly and obviously neither of them have anythiing at all to do with the average age of death in their birth places. And yes, people do indeed move around: and one of the greatest prompters of people moving is a change in their economic circumstances. So, therefore, a goodly part of what we're seeing here when poor areas have lower lifespans than rich ones is not that living in a poor area kills you but that people self-select into poor or rich areas based upon their wealth.

Another way of approaching the same point is to consider the mistake that Michael Marmot has been making for decades. There is most certainly a link between economic inequality and health inequality. Living in a disease ridden slum will indeed make you more susceptible to said diseases. However, there's also an obvious link between health inequality and economic inequality. One acquaintance was hit with a series of severe illnesses in his mid-40s. Sufficiently bad that he entirely dropped out of the workforce for four years. All terrible of course: but his subsequent economic inequality was a result of his initial health inequality, not the other way around.

If we start to assume that this lifespan inequality is a direct and sole result of economic inequality then we're going to get any plans to solve it all entirely wrong. It's vital that we also accept that health inequality happens, as does movement of the population, and that both of these will lead to the economic inequality that we see.

Motorways, pubs and nannies

A new pub has opened in Beaconsfield, Buckinghamshire. That's news in itself, given that around 1200 pubs closed down last year, thanks (or no thanks) to the weight of retail and employment regulation that makes pubs so darn expensive to run.

But the Hope & Champion is of doubt interest, because it is in the Extra Motorway Service Area at Junction 2 of the M40. So the people who go there are almost certain to get there by car. So naturally there have been plenty of critics complaining that this initiative sends out all the wrong signals about drinking and driving.

Well, pubs in the UK are licensed, precisely because we know the potential problems that can go with alcohol consumption. But the fact is that the local police did not object to the licence, nor did the local authority. And the local paper is giving the new pub splash coverage. So local people don't think there's a problem here.

The real problem is the message that the critics send out, yet again – that the political class in Britain thinks the adult population of their country are completely incapable of making their own choices, and that their lives have to be micro-managed for them. This pub, like most others these days, is basically a restaurant that also serves alcohol. It opens at four in the morning and starts selling alcohol at nine - though apart from one stalwart getting stuck into a pint for the cameras, most people there this morning were getting stuck into nothing more life-threatening than a Full English Breakfast. And if a group of people want to stop off the M40 for lunch or dinner, why should the passengers be denied the pleasure of a small sherry just so that drivers are 'kept away from temptation'?

Weatherspoons, the pub owners, are a responsible chain. Their menus carry Drink Aware slogans and information. Their staff do not serve people who have already had enough. People know that there are legal limits on drinking and driving - and they know that even drinking below the legal limit can slow down your reactions. So most drivers who visit the pub, alone or with a group, would probably not have alcohol anyway, and their passengers would probably not want them to.

So as the police and local authority figure, there's no problem. The only problem is all those people who deem it their business to treat us like children.

Planning and living costs

Interesting piece in newgeography.com about Britain's antiquated planning policies. Public opinion on them seems to be changing, driven largely by rising price houses. People figure that maybe it's time to build more houses. That was, of course, the conclusion reached by Kate Barker's study on housing a decade or more ago.

And planning restrictions impose other costs too. Not just our homes but our shops and other facilities become more squashed and crowded, and food and other essentials become more expensive – planning rules mean they have to be transported long distances, and planning delays put up suppliers' costs.

And yet, says the American author, England and Wales are less crowded than Ohio, with its rolling hills and famland. Only 9.6% of England and Wales is urban, compared to 10.8% of Ohio.

An average house in the UK cost about three times the median income in the 1990s. In the London green belt it is now seven times that. Our houses are now 30% smaller than they were in the 1920s, before the planning laws; with the obvious exception of Hong Kong, our new homes are some of the smallest in the world - 'rabbit hutch homes' as Communities Secretary Eric Pickles described them. It is indeed time to have this debate.

Blame the planning system for flood damage

Much of the coverage over recent winter flooding in the UK has focussed on immediate issues. The Prime Minister was given a grilling in Yalding over failures to restore power supplies. This neatly demonstrates our loss of the principle of subsidiarity - the PM is not, and should not, be responsible for power supplies, they are both beneath and outside his purview. If we expect our politicians to control such matters, they will, invariably with unintended and deleterious consequences. Such is the creeping collectivism evident in our society, it is no wonder we have such an over-mighty state.

Some debate has centred around whether flood defences are sufficient or whether future funding will be reduce - much of this is simply political point-scoring. Again, there is the question of whether the state should be responsible for such issues - if we worry about the state delivering insufficient supply, surely this is an argument for private supply? Further, how can we discern whether the state is, actually, over-supplying flood defences? Without a price mechanism in operation, there is no means to tell.

Subsequently, the debate seems to have shifted over to whether the floods are related to climate change. Without adopting any stance on climate change, it is 'bad science' to link such particular weather event to the phenomenon. Environment Secretary Owen Patterson has been castigated by the left-wing press for 'climate scepticism' - in reality his position of moderate, evidence-based scepticism (in the philosophical sense) seems far more reasonable than the PM's comments.

In reality, the floods demonstrate something quite different - the failure of planning policy. The problems have been caused not by the flooding itself, which is actually pretty common in winter, but increased levels of building in floodplains leading to - surprise, surprise - increased flooding. To quote the Chair of the Flood Protection Association '“It is absolutely barking mad to build on a flood plain when there are so many other places that could be built on.”

Why, therefore, is development taking place in such unsuitable locations? Step forward our old nemesis Planning Policy. Instead of allowing a sensible, functional market in land planning, which would factor in such costs and mitigate against such illogical development. Instead, the bureaucratic and public choice factors inherent in collectivised control of land use lead to such suboptimal outcomes - not only do we have grossly insufficient new housing we also have it poorly situated. Moreover, such policy further imposes costs - flooded voters demand flood defences, funded out of additional the tax system and with all the deadweight costs associated with bureaucratic management. This is a typical feature of most interventions - they create additional costs and unintended consequences.

What this does tell us about climate change is that government policy is a poor way to deal with its effects, but also may well worsen them. Central planning creates suboptimal choices and inflexibility. Dynamic phenomena such as environmental demand adaptability, entrepreurialism and efficient allocation of resources. Political and bureaucratic choices offer none of these. 

Perhaps we don't want a crash social housing building program

Yes, we know, there's somewhat a shortage of housing in the UK, that's what makes it so darn expensive. But it could be that we still really don't want to have that government led emergency social housing building program that so many are calling for. Over and above the fact that simply issuing more planning chitties is the answer, there's also the point that perhaps we just don't actually have the material to build houses with:

Brick stocks in the UK have reached the lowest level on record as merger mania grips the sector.

Stockpiles of the vital building blocks dipped to 323m at the end of October, down almost a third from 500m in 2012, after stocks of more than 1bn were recorded in 2009, according to monthly reports from the Department for Business Innovation and Skills, and the Office for National Statistics.

Apparently every brick that will be made in the next three months has already been sold.

Of course, there's also another way of looking at these numbers. If the building supply industry is operating at full capacity then that must mean that there's rather a lot of building going on. If that's true then whatever it was that we needed to do in order to solve the housing problem has already been done.

Might even be the effects of the government insisting on issuing lots more planning chitties over the past couple of years, eh?

Why India desperately needs the supermarkets

The Economist carries a story showing why India desperately needs the supermarkets. The example is all about a staple of Indian cooking, the red onion:

The journey of an onion from Mr Devkar’s field to the end customer in Mumbai takes only a few days but is enough to make you weep. There are some underlying reasons why prices have risen—higher rural wages have pushed up farmers’ costs. But the system is horribly fiddly. Farms are tiny with no economies of scale. The supply chain involves up to five middlemen. The onion is loaded, sorted or repacked at least four times. Wastage rates, either from damage or weight loss as onions dry out, are a third or more. Because India has no modern food-processing industry, low-quality onions that could be turned into paste or sauces are thrown away. Retail prices are about double what farmers receive, although the lack of any standard grading of size or quality makes comparisons hard. The system is volatile as well as inefficient. Traders who buy onions from farmers may hoard them, but for the supply chain as a whole far too little inventory is stored. As a result small variations in demand and supply are amplified and cause violent swings in price. In the first week of December 2013 prices fell again. It is easy to see how heavy investment by supermarket chains and big food-producers—whether Indian or foreign—could make a difference. They would cut out layers from the supply chain, build modern storage facilities and probably prod farmers to consolidate their plots.

The impoprtance of this story is not limited to India either. Here in the UK we hjave the usual suspects shouting about supermarkets and how they destroy the high street. But that's not actually the importance of the system at all. Whether the goods are sold from two 500 sq yeard shops or one 1,000 doesn't particularly matter. It's the entire logistics chain behind the system that does.

We also get told stories about the pernicious effects of how much food we waste as consumers: sometimes we're told that this is because the supermarkets make it too cheap for us to buy. But the other side of the absence of them and their logistics chains is that wastage described above. Indeed, other reports have put the amount of food that rots in inefficient supply systems in poor countries at 50% or more of all food grown.

We have and India needs the supermarkets not because of the shops but because of all the things they do to get the food into the shops.