This article highlights the clear divide between those who believe governments solve problems through the allocation of (taxpayer) resources, and those who believe governments do NOT know how to allocate resources efficiently. Consider the discussion around the terms used, and then think about HS2 - which is going to require a special levy on those businesses that will supposedly benefit from the new rail line.
Blog resource for 6th Form, with contributions from teachers and students.
Tuesday 20 April 2021
What about an “industrial strategy”?
Freedom beats state subsidy
There is a “hot new idea bouncing around the corridors of power”, say Matthew Mitchell and Adam Thierer. Depending on whether it hails from the political left or the right, it comes under different names – industrial policy, economic nationalism, green new deals. But the underlying idea is the same: the state selectively discriminates in favour of some industries or firms with the idea of creating national champions that will become global leaders and create jobs. The trouble is, this idea is not new. And whenever it’s been tried before, the results have not been good.
PICKING LOSERS
Consider, for example, the US state of Wisconsin’s efforts to woo technology group Foxconn. In the summer of 2017, in exchange for up to $3.6bn in direct payments and other privileges, Foxconn promised to make a $10bn, 13,000-employee investment. This is not now going to happen. “But even under the original terms, the deal was bad.”
Boosters were looking forward to a $62.4bn return over 15 years due to multiplier effects as state spending boosts growth. That healthy rate of return, though, depended on some “heroic assumptions”. Costs were ignored, including the higher taxes needed to fund the subsidy and the unseen costs of wasted resources that could have been invested elsewhere. And it was simply assumed that the subsidy would make all the difference (in fact, subsidies are rarely the decisive factor when firms make investment decisions, and were probably not in this case either). At the national level, “past fiascos present a similar story”.
There is a better way. The global dominance of the US tech giants was not created by industrial policy. True, the state was involved in “laying the early groundwork” for what became the internet. But the reason digital innovation “exploded” in the mid-1990s had nothing to do with “grandiose industrial planning”. Instead, the US followed Friedrich Hayek – it created an environment conducive to economic growth. Innovation and growth was allowed to flourish without state interference or discriminatory taxes, and with dispute resolution left to voluntary bodies and the courts. The result was that many US tech firms became household names. This approach seems less exciting to politicians as it’s harder for them to take credit for successes. But the more “boring” option “reaps bigger long-term rewards”. Forget picking winners: it’s “generalised economic freedom” that delivers the goods.
Monday 19 April 2021
House building and oligopoly - a new report
Time for the big builders to lose their plots
As the ranks of “generation rent” swell it is vital we overcome the powerful vested interests responsible for this housebuilding gridlock
The news is dominated by Covid-19 – and plans to lift lockdown. Northern Ireland and the Westminster lobbying scandal – plus Prince Philip’s funeral, of course – are also rightly generating reams of coverage.
Yet away from the bulletins, perennial policy issues remain unresolved, blighting the lives of millions. Perhaps the most pressing is housing.
The UK has a chronic housing shortage. We need around 250,000 new homes each year to meet population growth and household formation. Housebuilding hasn’t reached that level since the late 1970s.
The shortage of homes to both buy and rent means adults aged 25-45 now spend more on housing and are more likely to rent than any generation since the 1930s – as sky-high prices deny home ownership. And over the last decade, a dearth of social housing has seen overcrowding and homelessness escalate among low-income families.
Lockdown has highlighted the gulf between the comfortably housed and those in cramped conditions. An ongoing stamp duty holiday and now vaccine rollout has meanwhile sparked a buying frenzy, fuelling house prices even more – with the average home now costing eight times the average annual wage, double the long-term earnings multiple. And localities with a high share of sub-standard housing have seen far more Covid deaths.
As the ranks of “generation rent” swell, Boris Johnson often says he wants to “fix housing” – given the Conservatives’ long-term reliance on owner-occupying voters. Better social housing provision would also be popular in “red wall” Northern and Midlands seats the Tories hope to retain.
Last August, the Government proposed a “radical planning shake-up”, with ministers claiming “a lack of land with planning permissions” explains why we’ve built two to three million too few homes since the turn of the century. That’s nonsense, as this column has previously argued.
Four-fifths of residential planning applications are now accepted and permissions for over a million homes remain unused. The real problem is ever-lengthening delays between permissions being granted and homes being built.
That’s because the big, powerful developers who hoover up most permissions are staging a deliberate building go-slow. They make higher profits overall by producing fewer homes so prices keep rising. Unless ministers tackle this massive market failure, the lack of competition within a housebuilding sector dominated by a few large players, our chronic housing shortage will remain – as I detailed in my book Home Truths.
As such, I welcome a new study by Alex Morton, a former Downing Street adviser and noted housing policy specialist. His report “The Housing Guarantee” was published last week by the Centre for Policy Studies – arguably Westminster’s most influential thinktank, boasting senior staff who helped write last year’s Conservative election manifesto.
Planning reforms, resulting in councils granting more permissions, “haven’t fixed the problem of insufficient housing supply …. a decline in new homes that reaches back to the 1960s,” writes Morton. “The assumption was new permissions would axiomatically be turned into homes,” he observes. Yet despite various recent reforms that have seen permissions “soar” – from under 200,000 in 2010 to over 350,000 in 2019 – the number of homes built each year “has risen much more slowly”.
The problem, says Morton, is that planning permissions are “a one-way gift which boosts the value of the land from say £20,000 a hectare to £2-£3 million, in return for no obligation to do anything beyond breaking ground”. As a result, “housebuilding is largely in the hands of a few large builders and a cottage industry of land promoters, pushing up the value of land with permissions and meaning permissions don’t necessarily translate into homes”.
So the current system “incentivises large house builders to acquire and control land”, says Morton, with the six largest now holding over a million plots, 90pc controlled by the biggest three. No wonder a recent House of Lords report concluded our housebuilding industry “now has all the characteristics of an oligopoly”.
The big players’ grip has tightened significantly in recent years as once ubiquitous small and medium-sized enterprises (SMEs) have been wiped out. Countless such firms, which build-out quickly to aid cashflow, helping to keep the industry competitive, perished when their bank finance was withdrawn during the 2008 financial crisis. In the late 1980s, firms building fewer than 100 homes each year accounted for two-fifths of all new supply, reports Morton. Now it’s just one-tenth.
“The current major housebuilder model traps us in a slow build-out system,” concludes this CPS report. The Government’s proposed planning reforms – which include “planning zones” to reduce uncertainty – “have many positive elements”, says Morton. “But they don’t tackle the issue of ensuring supply by reforming how planning permissions operate.”
Morton wants “delivery contracts” so permissions come with legal obligations to build out within a certain timeframe – or the original applicant gives up land to other builders at a pre-set price. “This would force the existing model of housebuilding to focus more on delivery, not land speculation,” he says.
Councils should be set targets relating to houses actually built, not just making land available. And some public sector acreage should be sold off to SMEs, “at a pre-set price”, also with delivery targets, “to help level the playing field between smaller firms and large”.
This is an important report, in which a genuine government insider puts forward some radical ideas – many of which I proposed in Home Truths. But it doesn’t go far enough.
What’s needed is a reversal of the 1961 Land Compensation Act, so when land gets planning permission and valuations surge, often several-hundred-fold, this massive “planning uplift” is shared with local authorities – an idea backed by successive Parliamentary inquiries. That would dampen land speculation, making building plots – and ultimately housing – more affordable. It would also fund new infrastructure as new housing appears, revolutionising the local politics of planning.
On top of that, a full Competition and Market Authority inquiry is now vital. Powerful vested interests benefit mightily from this high-price-low-build gridlock. They make big political donations to protect the status quo.
But the harsh reality – hinted at in this CPS report, but not spelt out – is that our housebuilding industry is denying millions of hard-working people the chance to rent or buy a reasonably priced home. It’s time to shake it up.
Freeports, infrastructure, regeneration - all this and more
‘Blue wall’ mayor bids to create a super-port
Tees Valley mayor Ben Houchen aims to absorb PD Ports' vast Teesport container gateway into the freeport zone
The Tees Valley mayor Ben Houchen is in talks with ministers and Middle East investors over a deal to create a new super-port and “level up” Britain’s former industrial heartlands.
Teesside is already set to become the largest freeport in the UK, after winning the new tax-friendly status to encourage investment and jobs in March’s Budget.
Some 4,500 acres of land including the former SSI steelworks is now owned by the South Tees Development Corporation (STDC) chaired by Mr Houchen, representing the biggest regeneration project in the UK.
But the mayor, who is seeking re-election next month, is now mulling an audacious takeover of PD Ports, currently owned by Canadian fund giant Brookfield. Mr Houchen aims to absorb PD Ports’ vast Teesport container gateway into the freeport zone and spur further investment.
Mr Houchen - a key ally of Boris Johnson in the so-called “blue wall” that helped deliver his resounding General Election victory - is understood to be in early talks with Downing Street and the new Office for Investment headed by Lord Grimstone over the possibility of buying PD Ports, whose major asset is the Teesport facility.
The move could be backed by Abu Dhabi based sovereign wealth fund Mubadala, which last month agreed a joint investment deal with the UK government which could see up to £5bn spent on life sciences, technology, clean energy and infrastructure over the next five years.
The senior source said: “One of the projects that we’re working on with Number 10 and Mubadala is the acquisition of PD Ports, and then to bring PD Ports into the wider ownership of Teesworks [the STDC] with various private partners, and then to turn the whole 4,500 acre site into a world-leading fully automated freeport with another £1-1.5bn worth of investment - to turn it into a brand new inward trade port into the UK.
“Bringing all of this together, it would probably make this the most advanced port in the UK with the investment from the Middle East.”
If realised, Mr Houchen’s ambitions would dwarf his previous £40m deal to take the region’s airport to public ownership - a key pledge when he was first elected in 2017 - after it was threatened with closure. Houchen said at the time that “international investment doesn’t arrive on a bus”.
PD Ports’ main asset is the Teesport site, which employs 700 people and handled 28m tonnes of goods last year. But it is surrounded by the STDC land with just a single point of access, a risk to the business as the wider regeneration project gathers pace and construction work begins elsewhere on the vast site.
Insiders said the access issue is hampering Brookfield’s efforts to dispose of the company after putting PD Ports up for sale last year with a rumoured £1.2bn price tag through investment bank RBC.
Several buyers are understood have looked over the business but are unwilling to proceed without a second access to the port. “They can’t sell the business before this issue is resolved,” the source said.
The problem has gained added urgency as US conglomerate GE Renewable Energy has committed to a major new manufacturing facility building giant blades for wind turbines, which should create 2000 jobs.
“There is one road in and out of the port but if we build a massive shed for GE there is no prospect of getting a second access,” the source said. The STDC has recently taken PD Ports to court to establish that the company only has one legal access.
The Department for International Trade refused to comment on “commercial transactions by independent parties”. Lord Grimstone, Brookfield and the STDC all declined to comment while Mubadala was approached for comment.
Sunday 11 April 2021
Perfect article for trade and development
Africa’s jobs dilemma
Economic development is a result of creating more productive jobs for an ever-increasing share of the workforce, says Dani Rodrik. In the past that has meant industrialisation. Many low-income countries in Africa and elsewhere still hope to walk this well-trodden path out of poverty. “Industrialisation and integration into global value chains are viewed as essential for achieving rapid economic growth… and creating a large number of jobs for Africa’s young population.”
There is, however, a problem. Even where “industrialisation is putting down deep roots”, few good jobs are being created. Ethiopia, for example, has built an export-oriented sector manufacturing clothes and shoes. Tanzania has a manufacturing base that serves domestic and regional markets. But the bulk of the increase in jobs is coming rather from small, informal enterprises. New research shows that in both Ethiopia and Tanzania larger firms are seeing big gains in productivity, but do not expand employment much, while small firms are absorbing labour but not seeing much in the way of productivity growth.
SMALL IS BEAUTIFUL
One feature of the larger manufacturing firms that may help account for this is that they are “excessively capital-intensive”. In low-income countries such as Ethiopia and Tanzania, workers are plentiful and capital (machinery and equipment) is scarce and hence expensive. You might think, then, that firms would be biased more toward labour-intensive techniques. We find the opposite. Why? Perhaps because the firms do not have much choice. Manufacturing technologies have become “progressively more capital- and skill-intensive over time” and technologies used in global value chains “appear to be particularly biased against unskilled labour”.
This leaves African economies “in a bind”. Their manufacturing firms can either become more productive and competitive, or they can generate more jobs. “Doing both at the same time seems very difficult, if not impossible.”
This dilemma is reminiscent of an old concern. Authors such as E. F. Schumacher, author of Small is Beautiful, worried in the 1970s that Western technologies favoured large-scale, capital-intensive plants ill-suited to conditions in poorer countries. Developments consigned Schumacher to the sidelines, but we may need to consider his ideas again and begin “a public debate about the direction of technological change” and the tools states have to “reorient it”.
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Biden's Amtrak Infrastructure Scam
TAGS Taxes and Spending
When he was in the US Senate, President Biden was famous for taking Amtrak home to Wilmington, Delaware, each night and he often was called “Amtrak Joe” for his enthusiasm about passenger rail. Indeed, people who live in the Northeast Corridor from Washington to Boston find rail travel—whether it be from Amtrak or other passenger lines—to be a regular part of life.
I include myself among people who enjoy traveling by rail, and to celebrate New Year’s Day 2020, my wife and I took the overnight train from Seattle to Sacramento and thoroughly enjoyed our trip. When we go to San Francisco, we usually take the Amtrak to and from Sacramento and find the trip to be comfortable and relaxing. We also used Amtrak to take us to Monterey and back on an overnight trip a couple of years ago and we’d do it again.
(I should add that we have not gone to San Francisco in nearly two years because that city is deteriorating under the weight of covid restrictions and the destructive ideologies that now undergird its governance. We have no intention of becoming yet another data point in San Francisco’s rise in street crime, and one can only visit Fisherman’s Wharf and eat sourdough bread so many times.)
My preferences for rail travel notwithstanding, I find the latest push by the Biden administration to expand and “revitalize” Amtrak to the tune of $80 billion to be amusing, alarming, and full of the same economic ignorance that Ludwig von Mises debunked in his work on socialism a century ago. It is yet another chapter of the lessons never learned that government and intellectual elites continue to foist upon us, instead asking us to believe that anything is possible, provided government throws enough money into the hopper.
When Paul Krugman recently declared the Biden “infrastructure bill” to be as “American as apple pie,” that should have been enough to discredit the entire piece of legislation, given Krugman’s lack of even basic economic analysis. (Krugman believes that an economy grows because people spend themselves into prosperity; enough said.) Like so many others who seem to be starry eyed at the prospect of spending $2 trillion on this and that, Krugman and other supporters of the Biden proposal assume that capital development is simply a matter of funding and that profits and losses—something that Mises noted was vital to economic calculation—simply are irrelevant in the development of an economy.
While there is much to criticize about the Biden proposal, I shall stick with Amtrak and the proposals that Amtrak has trotted out, as its supporters are excited at the prospect of this government corporation expanding its existing routes. From CNN:
The accompanying map shows proposed new routes from Nashville to Atlanta, Los Angeles to Las Vegas, Dallas to Houston, and Minneapolis to Duluth. Adding to the “new money solves every problem” mentality, CNN continues:
In other words, Biden wants trains to go faster, so they will go faster—except that track conditions (the Northeast Corridor is infamous for its numerous curves that force trains to slow down) might not allow that to happen. So, maybe they won’t go faster, since it might be too dangerous, but out of all that we still have faster trains because the president said so, and the mainstream media today—which journalist Matt Taibbi has likened to the old media of the Soviet Union—is not going to call the president’s hand on this nonsense.
Political, academic, and media elites typically portray the dearth of passenger rail and the issues involving Amtrak simply as a lack of funding. In the eyes of elites, Congress failed to “fully fund” Amtrak when it was created in 1971 and Congress continues to be stingy. If Congress would give Amtrak the money it needs, the nationalized rail service would flourish. If only …
The CNN article continues:
The key word in this section is “investments,” which is a false classification, as money spent on Amtrak is not an investment in any rational sense of the word. In fact, governments do not make economic investments, period, regardless of what politicians and the media may say. Ludwig von Mises explains the problem in Bureaucracy:
The champions of nationalized and municipalized enterprise are prone to answer this question in a rather naïve manner: the public enterprise's duty is to render useful services to the community. But the problem is not so simple as this. Every undertaking's sole task is to render useful services. But what does this term mean? Who is, in the case of public enterprise, to decide whether a service is useful? And much more important: How do we find out whether the services rendered are not too heavily paid for, i.e., whether the factors of production absorbed by their performance are not withdrawn from other lines of utilization in which they could render more valuable services?
While as a government corporation, Amtrak is supposed to seek profitability, that is a pipe dream, and under the current constraints, it always will need subsidies. If Biden’s new injection of money into Amtrak receives congressional approval, then after the new routes are added, the rail service will lose even more money. The proposed new routes are not investments, but rather added expenses, mere wealth transfers in which resources are moved from higher-valued purposes to lower-valued uses.
Take the proposed route from Nashville to Atlanta via Chattanooga. If one does not wish to drive, ground shuttle services are available, not to mention Megabus, which runs between the two cities, along with air travel. Both the shuttle services and Megabus are affordable, undercutting the argument that that Amtrak would fill a special “need” for transportation. Furthermore, these services (with the exception of airlines, which have become a ward of the state due to government covid-19 restrictions) exist because customers are willing to pay the full freight for them. Mises explains:
Amtrak does not have a cost-price structure that would be profitable, instead resorting to what only could be called cost-minus, in which passenger fares will never cover the costs of running a railroad, all the while politicians and media advocates lament the lack of nationwide passenger rail networks. Yet this hardly can be seen as an economic failure (or, in the words of mainstream economists, a market failure), especially since the freight rail system in this country is the best in the world. In other words, American railroads move freight across the country efficiently, economically, and profitably; the problem is moving people economically via rail over long distances in a way that is cost efficient. Sean Stein Smith and Peter C. Earle write:
Indeed, given that Amtrak is programmed to lose money, spending on the railroad is just that: spending. It is not an investment, since there is no way to be able to place a true economic value on its capital and its services and there can be no economic return on the capital that Amtrak purchases. Yes, because of scarcity and opportunity cost, one can place a price on, say, a new locomotive or a newly built passenger car, because external markets already exist for the factors of production that are used to make these things.
As Mises noted when he explained the concept of economic calculation, profit-seeking entrepreneurs move factors of production to their highest and most economical uses. Amtrak, on the other hand, is diverting useful factors of production from higher use values to lower-valued uses. To put it another way, Amtrak is destroying wealth.
This is not to say that Amtrak—or any other passenger rail service—does not provide any benefits to people. As I wrote at the beginning of this article, I enjoy riding the rails with my wife, just as I have enjoyed riding trains in Europe and when I go back to China to teach within the year, we will take advantage of the massive Chinese tax subsidies of passenger rail there as well. However, I’m also sure I would benefit from taxpayers providing me with free helicopter service, a free home, and free meals the rest of my life.
Even Paul Krugman might recognize that the items listed in the last sentence would not confer net benefits to society at large. Even if I were to declare all these things to be “public investments,” that would not change the fact that they were naked wealth transfers and that enough of them would ultimately drag down an entire society.
Economically speaking, however, there is no substantive difference between the “investments” taxpayers would shower upon me and the “investments” made in Amtrak. Both are based upon wealth transfers, end of story.
Contact William L. Anderson
William L. Anderson is a professor of economics at Frostburg State University in Frostburg, Maryland.