Archive for July, 2011

Broad-based home ownership is a disaster

July 30, 2011 1 comment

For reasons that have never really been clear to me, governments seem to love promoting home ownership. The utterly monstrous mortgage interest tax deduction was thankfully abolished in the UK in 2000, although the capital gains tax relief on primary residences unfortunately remains.


One of the many problems with broad-based home ownership is that it creates a broad constituency of voters who want house prices to rise. This is at odds with the simple observation that high prices are almost universally a BAD thing. At any given level of nominal income, if the prices of things we want to buy are higher, then we are worse off in real terms. More expensive houses means we can afford less housing. The desire of homeowners to have increasing house prices leads to a fallacy of composition; it is individually rational for any individual homeowner to vote for policies that increase house prices, however it leads to the collectively irrational outcome that we can all afford less housing.


What kind of policies lead to higher house prices? Well, anything that restricts the supply of housing, or increases the demand for housing relative to other goods and services. It’s the former that are extremely dangerous, and the latter leads to more people having an incentive to vote for the former. Combine this with NIMBY-ist attitudes towards development, the unpopularity of property developers and the completely mistaken belief that the UK’s ridiculous planning permission policies are against developer’s interests (hint: property development would be a lot less profitable if relationships with local planners and knowledge of the process didn’t create such high barriers to entry) and you have a recipe for fewer homes and higher prices.


Just one of the many reasons to build more skyscrapers.

Categories: Policy

The world as a whole cannot save for retirement

July 30, 2011 2 comments

People sometimes seem to talk about ‘saving’ or ‘indebtedness’ as if somehow people from the past or future could make a claim on things produced in the present. The world as a whole (a ‘closed economy’ in econ-speak) cannot be ‘lent’ money from future generations to create more goods and services, because goods and services are made in the present, with materials available in the present, manipulated by people actually working in the present. Debt (for example) redistributes claims to real resources amongst presently existing people, not between presently existing people and future people.

This has important implications, as the flipside of debt ‘taking’ from future generations is that by saving, future generations could ‘take’ from the present. Thinking about economic problems in terms of money or other financial assets can often obscure our thinking about what’s going on with the actual production and distribution of, you know, actual stuff. Once we think about things being made and sold/provided, the problem of the world getting older becomes incredibly clear.

Simply put, if our ability to make stuff is a function of how many people are making stuff, then as the ratio of people making stuff to people wanting stuff declines, in order to maintain the same distribution of consumption between makers of stuff and wanters who aren’t makers, then a greater proportion of what the former make must be consumed by the latter.

This will be a problem.

Bryan Caplan’s argument for pacifism

July 20, 2011 8 comments

It’s been a while since an argument has made me think as much as Bryan Caplan’s many iterations of his argument for pacifism. The argument goes something like this

  1. The short-run costs of war are very high
  2. The long-run benefits of war are highly uncertain
  3. For a war to be morally justified, its long-run benefits have to be substantially larger than its short-run costs

First of all, the third premise is ambiguous as it stands. I assume that the ‘long-run benefits’ Bryan refers to in the third premise are not the actual but rather expected benefits. Indeed, otherwise his conclusion would not be action-guiding as the whole point is we are highly uncertain over what the long-run benefits actually would be and whether or not they would be substantial. The conclusion would instead read ‘it is highly uncertain whether or not we should go to war’.

Recast, the argument reads

A) The short run costs are very high

B) The long-run benefits of war are highly uncertain

C) For a war to be morally justified, the expected long-run benefits have to be substantially larger than its short-run costs

Hmm, I’m still not happy with the third premise due to the ambiguity of ‘expected’. For example, if there is a coin toss where I get £10 if it’s heads and have to pay £10 if it’s tails the expected value is zero. The most basic concept of expected value is a function of the value of all the possible outcomes multiplied by probabilities of each of those outcomes occurring. In the case of war, this is not a useful idea of expected value, not just due to the problem of assigning probabilities but that the logical space of possible outcomes is indefinable*. Expected value is a very handy concept where you have games with defined rules, but it leaves us high and dry when trying to address most really difficult real-world problems.

Maybe I’ll think of some way to further refine C) to make it less problematic, but I’m sceptical because I believe this is a particular instance of a very general issue with consequentialist/cost-benefit type moral theorizing: namely, that in conditions of Knightian uncertainty it appears impossible for there to be a fact of the matter about what we ought to do. My argument for this is very simple

  1. In order for there to be a fact of the matter about what we ought to do, it has to in some way be discoverable (basically a restatement of the ought-implies-can principle)
  2. In cases where one of the significant consequences is subject to Knightian uncertainty, there is no way to discover any fact of the matter about what we ought to do

Of course, if you add in a Taleb-like premise 3)

  1. Every moral decision incorporates Knightian uncertainty as to what the (eventual) significant consequences of any decision will be

Then we are led to a most unhappy conclusion

  1. There is no fact of the matter as to how we should decide moral cases

Back at university, I used to call this the ‘moral paralysis of consequentialism’ – that if what you are genuinely trying to do when making a moral decision is to in some way facilitate the best future outcomes, there is no way of deciding what to do.

I’ve been thinking about this problem for about three years now and I haven’t made any significant progress since I wrote my first undergraduate essay on the subject. Sorry.

Final point, I would be very interested to hear what Bryan has to say about taking strong preventative action against climate-change. And, for that matter, Pascal’s wager. If there is some kind of consistent general decision principle underlying his third premise, discussion of those cases should illuminate greatly.

*Unless you take the possible outcomes to simply be all logically possible outcomes, but I think it’s safe to say this wouldn’t get us anywhere

A short open letter to my environmentalist friends

July 18, 2011 1 comment

Dear all,

I really, really want there to be a carbon tax. Even if I am not 100% convinced by the science (seriously, if there is an explanation out here for why on the famous Al Gore chart temperature changes precede CO2 level changes, I really want to hear it), the risk of my amateur scepticism being mistaken means I am right behind you on the carbon front. And hey, if it turns out we were wrong, we can always get rid of the tax. It might even have the benefit of spurring investment in technologies which save energy, which would also be pretty awesome.

But here’s the thing, I don’t share most of the other political sensibilities of those who consider themselves environmentalists. I have no desire to see the size of the state expand, although any disagreements I have had always seemed to be in good faith. But good faith is not the political norm, and people who think a lot of things that I do about the state are suspicious of you. Some people think (largely unreflectively) that environmentalism is a cover for your socialist conspiracy or something, or more mild cases of just not trusting you or speaking your language.

So, here’s my very simply suggestion: come out strongly for a revenue-neutral carbon tax. In fact, if you really want to get it done, have it offset by corporation, income or capital gains tax cuts (my people love that shit).

The environment should not be an ideological issue, and it really is within your power to prevent it from being so. There isn’t a necessary connection between environmentalism and any ideological commitment, and you have the ability to demonstrate it. I’m not claiming that implementing a revenue-neutral carbon tax is the optimal action to take,  but that its serious entertainment by the environmentalist movement could facilitate a serious step forward in the dialogue across the political spectrum on this issue.

What do you say?

Your evil capitalist buddy,


Monetary policy and progressive politics

July 18, 2011 1 comment

There’s a kind of mini-spat going on at the moment between Matt Yglesias, a liberal blogger who emphasises the importance of monetary policy from a progressive perspective and Henry Farrell and Doug Henwood at the other end arguing that the correct progressive response to the recession is more government spending and reforms which tilt bargaining power away from capital and back towards labour.

Now, for the record I am 100% in agreement with Yglesias on this point. In particular, I also agree with pretty much everything in this Will Wilkinson post. What I’d like to add to their responses is that it is impossible to have a coherent view of government policy, and in particular the appropriate fiscal response to a recession, without having a view as to what monetary policy ought to be conducted by the central bank. For example, if a central bank is doing inflation targeting properly, then government spending (at least at the margin) is going to have a negligible impact on overall economic activity.  For by hypothesis, if the central bank is aiming for 3% inflation, and has taken steps sufficient to generate 3% expected inflation, any additional fiscal stimulus by the government would just be offset monetarily by the central bank in order to maintain that expectation*.

Farrell objects to this kind of ‘neoliberal’ master-plan on how to combat recessions on a number of unconvincing bases (read Wilkinson in particular), but for me the problem is that there isn’t any account in there of what the central bank should do. As inflation is largely a product of expectations, it is prudent for the central bank to have some kind of official policy – which in the era of mature market economies has usually been either a) maintaining an exchange rate (see China, People’s Bank of) or b) explicit or implicit inflation targeting, with maybe a smattering of c) steady growth of the money supply. All of these policies have implications for the ability of the government to influence the economy through fiscal stimulus. A) usually fails eventually, or the costs of it vastly outweigh the benefits (see Euro, the).  C) has traditionally been the preferred position of the right, and while it would ironically be more accommodating of opportunities for fiscal stimulus there would still be effects through changes to the velocity of circulation. And besides, I just don’t see any liberals coming out for old-school monetarism.

Whether you have a fiat or a commodity based currency, you have to have a view on monetary policy. There is no escaping it, and it matters a lot. If you think we should go back to the gold standard, you therefore think that the government should fix the price of gold (why the right-wing of the Republican party is just so keen for the government to fix the price of a commodity I will never understand). At the moment the central bank effectively fixes the price of a certain type of credit, with the price determined by its conduciveness to fulfilling a policy goal. If you don’t think the central bank should inflation-target, you had better have a better idea of what it should do.

Monetary policy really isn’t a threat to progressive or conservative politics – it says nothing about what the size of the state should be, but simply that in what are probably the optimal monetary policy regimes the government can’t affect GDP through aggregate demand. In fact, given how cheap it is for the US government to borrow right it is almost silly not to invest in all the capital maintenance in infrastructure that needs to take place. Plus it would bring back some construction jobs. Not only is good monetary policy not a threat to progressives, it advances the progressive goal of tipping the balance of power back towards labour by helping achieve full employment.

So come on people way to the left of people like me, there’s plenty of room for people to support sensible monetary policy whilst having diverse ideological commitments in other respects.

So let’s all get together give monetary policy some love. Somehow ‘you shall not crucify mankind on a cross of gold‘ had a better ring to it, but the principle was by and large the same.

*Of course, in the ideal world the central bank wouldjust target 5% NGDP growth. But hey, I’d definitely take 2-3% inflation which the US Fed woefully failed to produce in market expectations