Opinion: Building an economic recovery

Two issues on which there appears to be virtual universal consensus across the political spectrum are  the pressing need to address the UK‘s housing problems and the economic benefits of a rejuvenated construction sector. The lack of adequate affordable and social housing has been a major weakness of the UK economy and social fabric for many years.

This problem has manifested itself in seriously overpriced housing costs relative to incomes, soaring housing benefit expenditures, uncompetitive labour costs and inter-generational inequity.

The Centreforum report Delivering growth while reducing deficits – lessons from the 1930s  highlights the major part that house building played in the economic recovery.

The report says:

The ‘cheap money’ policy put in place in 1932 provided an important offset to the deflationary impact of fiscal consolidation that had led to the double-dip recession of that year. A major way in which this stimulated the economy was through its favourable impact on housebuilding in an economy without strict planning rules; the private sector built 293000 houses in the year to March 1935.

…There is an alternative to.. continuing with the present policy of quantitative easing. Even though interest rates cannot be further reduced, monetary stimulus can be delivered by modifying the current inflation-targeting framework under which the Monetary Policy Committee operates.

A close approximation to the successful 1930s policy would be to commit to a price-level target which might entail an average rate of inflation of about 4 per cent for three years. Crucially, this would have to be clear and credible so that the inflation was fully anticipated by the public and it would work by reducing the real interest rate.

If the lessons of the 1930s were fully taken on board, a complementary policy would be implemented to liberalize planning rules and encourage private housebuilding.”

The problem with this policy prescription is that it has the potential not only to raise CPI inflationary expectations but to also reignite house price inflation, worsening the structural problems in the housing market. House price inflation could only be contained if increases in housing supply could outstrip pent-up demand, which it never has since 1947. Increased housing costs would rack-up the pressure that higher CPI inflation puts on real incomes and further exacerbate the burgeoning inequality gaps that have been a feature of the past three decades.

I would argue for direct state intervention to tackle the housing crisis and kick start economic growth. Instead of using the assets of the post office pension fund to repay existing debt, we could use these funds (and the proceeds of the sale of Northern Rock) to capitalise a National Housing Corporation. With a 30 billion capital base a further 70 billion in bonds might be leveraged in from the private sector (pension funds, insurance companies, the big housing companies, sovereign wealth funds etc) A 100 billion construction fund for affordable and social housing together with a liberalised planning regime, would be a massive impetus to growth in the economy and set us on a path to tackling two of the countries most persistent social problems – unemployment and affordable housing.

* Joe Bourke is an accountant and university lecturer, Chair of ALTER, and Chair of Hounslow Liberal Democrats.

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  • JustAnotherVoter 28th Mar '12 - 3:10pm

    “Increased housing costs would rack-up the pressure that higher CPI inflation puts on real incomes and further exacerbate the burgeoning inequality gaps that have been a feature of the past three decades.”

    No, that’s mostly wrong.

    1) A higher inflation target (or price level target) does not necessarily imply greater pressure on real incomes. The UK had 3-4% nominal wage growth for many, many years under the 2% inflation target. We should be able to sustain 5-6% nominal wage growth under a 4% inflation target. Regardless of demand policy, pressure on real incomes currently comes from supply-side shocks and unemployment. But that should ease, and would ease faster with faster demand growth.

    2) There has not been a “burgeoning” of post-tax inequality in recent decades, thanks to our progressive tax system.

    3) If the planning system is sufficiently liberalised, and there is real demand for new housing outstripping supply, then why do you want to throw £30bn of taxpayer’s money at the problem as well? There is no market failure in UK housing, just a failure of decades upon decade of failed state planning. Let’s learn from that failure.

  • JustAnotherVoter

    1) Nominal wage growth has been lagging inflation since 2009. With wage growth of 1.4% in 2010 against inflation of circa 5%, there has been a fall of 3.5% in real incomes. This guardian article on the ONS report UK household earnings gives a good flavour of the household sectors worst affected.

    It seems unlikely, with public sector pay freezes in place and relatively high unemployment that pressure on real incomes will ease any time soon or that cost-push inflationary pressures will develop. However, a policy of deliberatly targeting a higher inflation rate (or price level target) may bring cost-push inflation on. High levels of inflation create economic instability and can act to depress demand in the same way as tax increases do.

    2) This report Income inequalities from the poverty site highlights “The gini coefficient measure of overall income inequality (based on disposable incomes) in the United Kingdom is now higher than at any previous time in the last thirty years.”

    3) I would disagree that there is no market failure in UK Housing. With average house prices in London exceeding £350,000, average house prices in the South-West at 14 times average earnings and housing benefit payments exceeding 21.5 billion, we are seeing a failure of the market to meet the basic human need for shelter and a huge state subsidy to annual housing costs.

    Tim Leunig has presented a good overview of the situation together with some original policy proposals in the Centre Forum report Community Land Auctions where his assessment that we need to build something in the order of 400,000 homes a year for a decade to meet current needs.

    The reports focus on the economics of housebuiding show the difficulties in delivery affordable housing in the private sector.

    By redirecting state assets (that will not affect the defect reduction plan) to investment in development land and raising private finance for building costs, we are able to mitigate this market failure. New housing developments would be comprised of shared-equity and affordable rent properties. Once complete and sold/let they can be transferred to Housing associations or REIT’s with the government retaining ownership of the land until such time as shared equity owners/renters are able to buy-out the freehold.

  • Andrew Suffield 28th Mar '12 - 5:48pm

    Of course, the problem is that not only is there near-unanimous agreement that we need to build more houses, but there is also near-unanimous agreement that we should not build them in that place.

  • Richard Dean 28th Mar '12 - 5:55pm

    I am skeptical that housing is the answer. as outlined in my response to https://www.libdemvoice.org/opinion-a-note-to-my-successor-part1-27792.html . Essentially 70% or so of households now own their own home, whereas it was 30% in nthe 1930’s. And UK perosnal debt is now about £1.5 trilion, with average household debt is £56k, mostly mortgage, so even though people might desire new houses, arranging finance for them would just increase debt levels?

    I am a simple person with a simple logic: To get jobs, we need products to create, which will need buyers. The buyers are the people with money, so the products need to be things they want. Perhaps a toll road would be a suitable product? Or an HS rail network, or a new airport, or a fast broadband system, or a high-tech assembly line, or a low-tech one? I am simply not convinced that houses are the right product.

  • Andrew,

    The National Planning framework published yesterday gives Local Authorities a period of 12 months to get their local plans in place. There is a presumption in favour of sustainable development, priority for development is given to previously developed land and a five year housing supply of land is required..

    I am assuming it is going to be more difficult for residents and local authorities to block sustainable planning applications.

    On incentives, the Centre Forum concludes that “Community land auctions are a viable alternative to the current planning system. They create an incentive for communities to support development by ensuring that a larger proportion of the gain from reallocating land from agricultural or industrial use to residential use is retained by the community that grants permission for the development.
    We cannot be sure how many communities will respond to this new incentive or to what extent. The only way to find out, ultimately, is to pilot the scheme, preferably by making it permissive. This would allow those local authorities that believe that it is the right way forward to try it out for real

  • Richard,

    Owner occupation has been in decline since 2005 after reaching a peak of 70.9% in 2003. Only 10% of all owner occupiers are under the age of 35 but more than half of all private renters are in this age group. The proportion of households living in their own homes fell in 2010-11 to 66% (14.45 million), from 67% in 2009-10.

    For a different view on household personal debt – See Stephanie Flanders article on a speech by MPC member and former Goldman economist, Matthew Broadbent The truth about UK debt

    As regards Job creation, the housing development scheme meets two needs – First, the urgent and practical need to provide viable accomodation for large numbers of people and second as a £100 billion spending stimulus into the economy. The stimulus element, as in the 1930’s, is an effort to raise demand and set loose the ‘Animal Spirits’ that drive entrepreneurial investment in the economy.

  • JustAnotherVoter 28th Mar '12 - 8:14pm

    It is absurd to look at the gini graph (graph 6) and pretend there is “burgeoning” inequality. The graph is basically flat, 1990 to 2005. Indeed, graph 1 gives a clearer pictures about how the inequality “story” is completely over-sold; inequality across the second to ninth decile actually narrowed over decade to ’08/09. The only abnormal moves in real income are at the very top and at the very bottom. Real household incomes have grown very strongly across the board for everybody else. Yes, let us try to “do something” about the bottom decile, but let’s accurately portray what the statistics actually say.

    “we are seeing a failure of the market to meet the basic human need for shelter and a huge state subsidy to annual housing costs.”

    Oh, please. This is just laughable. You have never sat in a council planning meeting if you think there is market failure here rather than a planning failure. The planning system across the country is owned and run by NIMBYs.

  • Richard Dean 28th Mar '12 - 8:23pm


    I guess you have identified a group with money and desire – under 35’s? If so, then let’s go for housing. Good market analysis and it gives clues on what types of housing are needed too. Between 20 and 25 probably accounts for about 20% of the poulation, so I guess they are the majorityof the 34% of the population who rent. But I remain susupicious, Does all of this group really have the money or prospects? Why don’t private builders sell to them?

    Perhaps planning laws is a reason? People object to plans in oart because some types of new development reduce the value of existing properties. Which makes it problematic.

    Stephanie’s piece is certainly interesting. Her Chart 6 shows that UK household debt in 2012 is about 150% of disposable income, and gross assets are about three times that. This suggests to me that a large proportion of assets are the houses, so perhaps we should be careful not to alter the market and planning laws so much that those existing properties lose too much value. Or then again, perhaps we should?

  • It is always great to see CentreForum’s reports discussed – and Nick’s paper is one of the most important ones we have published this year. Let me clarify a few things.

    1) Surprise inflation cuts living standards, as wage rises fall behind inflation. Preannounced inflation does not, as firms can increase wages in the knowledge that they can increase prices. So there is no reason to think that 4% inflation – announced in advance will “put pressure on real wage or inequality”. Indeed, it should reduce inequality if it lowers unemployment, since unemployment definitely raises inequality.

    2) Pre-announced inflation, allied to reforms to the planning system, will not lead to real house price inflation. Instead it is our best chance to get (low) nominal houses price growth (avoids negative equity, etc) but falling real house prices (increases affordability). This also answers Richard’s concern about falling house prices. We don’t want house prices to fall in nominal terms, we probably do want them to fall in real terms, and we absolutely want them to fall relative to incomes.

    3) We absolutely must use the post office pension money to repay debt. Remember that the state took on the assets and the liabilities of the post office pension fund. Since we have to pay the pensions, we can’t treat the money as a windfall to be spent on anything we like. Paying down debt is sensible.

    4) There are lots of people under 40 who would like to buy for the first time. But there are also lots of people aged 30-50 who would like to buy a bigger house, and there are probably quite a lot of affluent people who would be tempted to buy a second home if they were cheaper. If we can build enough new houses in areas of high demand so that prices moderate in real terms then there will be no difficulty selling them.

    5) Building 100k new houses raises employment directly by about 350k (BIS construction value/employment series). So raising house building from 100k to 385k creates about 1m jobs – mostly for relatively low skilled males, who currently have high unemployment rates.

    A combination of a higher inflation target, negative real interest rates, and community land auctions remains our best option for recovery.

  • A National Housing Corporation to build houses where no one wants to buy them, or everyone wants to block them. What could go wrong?

    It occurs to me that anyone who hears that an affordable housing development is being planned will interpret it to mean “instant slum”. There would probably be less NIMBYism for expensive houses which might make for wealthier neighbours, less stressed council services, and higher house prices in the immediate neighbourhood. If the problem is NIMBYs, it is probably wise to start thinking about the sort of things that people DO want in their backyard.

    Local shops/ newsagents etc, perhaps.

  • Richard Dean 28th Mar '12 - 11:01pm


    You are using inflation as a trick to reduce homeowners’ real assets. Will homeowners not fight back? How will savers be affected? The original plan was for social housing but you are now looking at second homes for the rich. So the poor stay unhoused? The plan requires balancing relative rates of wage inflation, non-house price inflation, and house price changes, as well as careful control over planning system changes – over all of which you have imperfect control.

    Is your planrealistic? How will you not end up with 385k unsold homes, a catastrophic drop in householder assets values, and a mortgage and banking crisis?

  • Richard: Not at all. 385k is a prudent guess of how many we can sell each year for a decade given that we create 225k households even with rising prices, and that we have created houses at a far lower rate in recent years. We don’t build 385k overnight , we build roughly 1k a day. So if developers struggle to sell the first k, they won’t build the next. So long as there is competition in the market, and land is readily available at sensible prices, then you can build and sell and make a profit selling houses in the south for roughly the price of building them in the North. At those prices people will buy them.

    Excepting second homes – which would be a tiny proportion of the 385k – it doesn’t matter that much what you build. If you build lots of detached houses, people will trade up from semis, freeing people to trade up from terraced, leaving them for people from flats, leaving them available for relatively poorer FTBs. Or you can build starter homes. So long as there are more houses, more people will be housed.

    Of course some people won’t like it if their houses don’t rise in value dramatically over the next few years. But what is the alternative to that? Ever worsening affordability? I am on the side of the poor, and if that means my house stops rising in value in real terms, then so be it. Remember that a valuable house is pretty pointless unless you plan to trade down – which few people do. Housing wealth is useful to your kids – but it is more useful to them to be able to get somewhere now!

  • Richard Dean 29th Mar '12 - 1:07am


    Thanks for your clarifications, I wonder what the phrase “prudent guess” signifies? Wishful thinking? Research?

    Surely it does matter what you build? Don’t you want a relation between house value and householder income? I’m not sure why, but I think it’s in the Centreforum document or in Joe Bourke’s postings.

    Joe expects “Animal Spirits” to be released by the building programme. How do these spirits operate? What moves them? How we can control them? Are they really so timid that they can’t see the same opportunity as you, now?

  • Richard Dean 29th Mar '12 - 1:36am

    Tim, Apologies for the “Tom” typo. Those animal spirits will presumably be going after the money that people have been paid for creating the things and doing the work needed to construct the houses? But none of that money is available, because it’s been spent by the people who bought the houses. They spent it buying the houses.

    Put another way, where is the multiplier, the spark that ignites the recovery? What was it in the 1930’s, and will it be the same today? Re-armament started around 1935, so there must have been talk of it for a couple of years previously, and that talk could have certainly got the animals buzzing confidently before 1935. But what now?

  • Richard
    Research of course – NHPAU, Barker review, Bramley/Mean/Muellbauer etc.
    There is no need for animal spirits if affordability improves – just like in the 1930s
    There is no opportunity until planning is reformed.

  • Richard Dean 29th Mar '12 - 2:12pm

    Tim. That’s good to know. In Spain, the unemployment rate is 25% and there is a general strike today, with damaging protests in Madrid and elsewhere (http://www.guardian.co.uk/business/2012/mar/29/eurozone-crisis-spanish-general-strike). There are houses for sale everywhere, no buyers, many mortgage defaults, and even whole towns that were built recently and stand empty. I hope your plans inspire investor confidence and don’t lead us that way!

  • JustAnotherVoter,

    UK income inequality increased by 32% between 1960 and 2005. The growth in inequality in the last 30 years has been driven by the top 1% of wage earners. Inequality is a relative measure of disparity across the income range. Quite naturally the emphasis is on the lower and upper ranges.

    The UK and the US are at the top end of the tables of income inequality for developed countries, while Japan and the Scandinavian countries tend to be at the low end. As for the consequences of such wide disparities, you can do no better than a review of the website compiled by the authors of ‘The Spirit Level ‘ The Equality Trust

    Housing subsidies include not only housing benefit but also the mark-ups developers need to put on the market price of housing to fund the affordable housing element of new developments. In my view, with house prices at unsustainable multiples of income, market failure in the UK housing market is self-evident. While planning restrictions and land prices are a key element, the market failure cannot be laid solely at the door of the planning framework. There are many factors influencing the market.

    In my local area we currently have a developer seeking planning permission for a 315 unit residential development on an industrial site. Residents are objecting to the planning consent on the basis of the planned density and the impact of 1000 new neighbours on local school and G.P. services, parking, traffic congestion and the already over burdened Victorian sewage system.

    The residents recognize there is an urgent need for good quality, affordable family-sized homes in the town – yet only 26% of the units meet these criteria. The remainder of the development is aimed at attracting young urban professionals.

    This is a classic case of the need for town planners to resolve the conflicting needs of a developers desire to maximize yield from the site with the legitimate needs and concerns of existing residents. The principal enabler is the local council as the provider of the infrastructure and facilities required to make the development sustainable.

    Despite all the rhetoric around planning law, it is a matter of record that 86% of all major and minor planning applications are granted. Over 50% of major applications are decided in 13 weeks and over 90% within one year. The new National Planning Framework includes a presumption in favour of development and perhaps this will aid in both speeding up the process further and making more land available for development.

  • Tim,

    I found both the papers by Professor Crafts and yourself easily understandable, very informative and well argued.

    I will respond to your points in three separate comments.

    1) I do have reservations about the impact of ‘Pre-announced inflation’ Professor Crafts in his report says “In principle, the central bank can stimulate the economy by holding its interest rate down while encouraging people to expect inflation. Indeed, this is the classic recipe for escaping the so-called ‘liquidity trap’, much discussed in the context of Japan’s ‘lost decade’ of the 1990s. Reductions in the real interest rate sustained over a period of time have the potential to act as an expansionary policy so monetary policy is not impotent after all even when interest rates hit the zero lower bound.”

    He seems to be relying on the ‘hot potato effect’ associated with hyperinflation to induce nominal wage increases and hence price increases, reductions in the savings rate to spur consumer spending and release of corporate sector surpluses towards productive investment.

    The whole concept of inflation expectations is based on the primacy of the ‘Rational Expectations’ hypotheses over adaptive expectations. This is why Professor Crafts stresses the importance of credibility on the part of the government in committing to an inflation or price level target.

    Behavioural economists have shown that the expected behaviour of individuals does not translate to the behaviour of large groups in the economy. What we observe in periods of economic expansion is ‘irrational exuberance’ and herd behaviour. During downturns or periods of slow growth we see the propensity to hoard and are confronted with the paradox of thrift.

    Over the past three years, official and independent forecasts have projected inflation well in excess of the 2% target rate. We have not seem the effects that Professor Crafts expects, rather we have seen nominal wage growth well below the rate of inflation and a decline in real incomes. Professor Crafts puts this down to the fact that the BofE has signaled its determination to return inflation to its target rate.

    Whatever way you look at it, price level targeting is advocating wage-push inflation. The experience of the 1970’s shows how difficult it is to control inflation once it is let loose. Attempts to control prices and wages with a social compact proved ineffective and ultimately it was only the hiking of interest rates to a crushing levels in the early eighties (inducing a recession and 3.3 million unemployed) that brought an end to the hyperinflation.

    The economy remains in a fragile condition, having experienced a financial crisis, 25% currency devaluation and with £300 billion of quantative easing in the system, Why take a risk on setting off an inflationary spiral when we have the safer and more direct option of a fiscal stimulus, accompanied by the liberalized planning regime your refer to in point 2) of your comments above.?

  • Tim,

    2) In 2008 , Alan Duncan, the then conservative shadow home secretary, had this to say:

    “ The government is going to steal £22 billion of pension assets, dump the liability as a mortgage on future generations and dress it up as the salvation of the Royal Mail. Their plan to steal the pension assets to help reduce the borrowing figures while taking out a massive mortgage to cover post office pension liabilities for 50 years, is nothing more than a massive accounting scam. Not only will the plan pile debt on debt for families and business, but it will completely remove the Royal Mail’s commercial incentive to modernize and reduce the deficit. This dangerous plan must be resisted.”

    Now, I can understand why, having gone from opposition to government, the conservative party have had a Damascene conversion, but the points raised by Duncan remain valid.

    The post office pension fund consists of some £28 billion in assets and estimated future liabilities of £37 billion. The fund deficit of £9 billion has to be funded by the government.

    Dumping the assets into the black hole that is the national debt will save a few hundred million in annual interest costs, but does nothing to reduce the structural deficit and leaves the £37 billion tab for pension costs to be picked up by future taxpayers.

    As an alternative, investing the assets of the pension fund in development land offers up the opportunity of securing development gains to offset the pension fund deficit of £9 billion.

    As shared-equity homeowners and tenants of affordable rent homes seek to buy-out the freehold of their properties over the next 50 years, the funds can be returned to the pension fund to meet the ongoing liabilities.

    This alternative treatment has the added social benefits of facilitating the establishment of a national housing corporation and providing a direct boost to economic recovery.

  • Tim,

    On your final two comments:

    4) There are as you say, lots of people under 40, who would dearly like to buy their first home. The establishment of a national housing corporation could facilitate the introduction of long term fixed rate mortgages to the UK. This is a financial product that is sorely needed to deal with the volatility of interest rates for homeowners in the UK. It is only a national housing agency that is capable of structuring this kind of mortgage finance.

    5) Building the homes needs a range of public and private solutions:

    · Private sector housing aided by Community Land Auctions.
    · Shared equity and affordable tenancies enabled by a National Housing Corporation.
    · Social housing delivered by Housing Associations and Local Authorities.
    · New public housing built from the proceeds of right to buy sales on public land.

  • LondonLiberal 29th Mar '12 - 6:07pm

    A good and thought-provoking article. Thanks, Joe. One comment – you seem to (partly) blame the planning regime for an under supply of housing. Of course, the post-1947 planning regime has delivered 380,000 homes in one year (1968) and barely 100,000 homes in another (2011). The big difference between the two was of course the large role of state housing and the relative ease of credit availability in 1968 compared to a lot less of both last year. So I’d be careful about jumping on the developers’ bandwagon that ‘it’s all about planning’ when in fact the planning system is no more restrictive today than it was in 1968 when we did actually meet our housing needs.

  • Joe – Inflation of 4% or 5% is not the 1970s. We had it in the 1950s, and it was not the end of the world, and did not accelerate.
    Taking a liability of £37bn and assets of £28bn which you use to pay off £28bn of debt gives you a net increase in the debt of £9bn. Duncan was right to warn that this is not costless, but the govt de facto had it anyway, since it underwrites the posties pension scheme. We have crystalised a debt we already had. There is no reason to think that shared ownership housing will yield a higher return than paying off debt.
    4 – possibly.
    5 – if we have enough market housing we would not need shared ownership housing as almost everyone in regular full time work could afford to buy (monthly payments <£100 a week for a house, less for a flat). At that point a number of people in social housing/shared ownership will move into market housing, freeing up existing SH units which can be used for those in need. Building SH costs a lot of money even if we sometimes pretend it doesn't.

    London Lib – the planning system got a lot more restrictive when Chris Patten deleted the line that said price rises were evidence of need. That is why have seen big price rises – they were not possible before.

  • Richard Dean 29th Mar '12 - 9:21pm

    Tim, Joe,

    Does the plan depend on the construction being undertaken by UK companies? With £100 billion available, this could be a magnet for European competitors. and others even, both for bulding materials and for construction managemetnt and working teams. With that money available, it would be worth a company investing in housing kits, in which an entire house is made off-site and simply assembled on-site, on a simple slab foundation.

    I can also imagine workers coming in from other parts of the EU, competing successfuly against UK workers as they do now, and re-patriating their earnings, resulting in the UK exporting much of the “stimulus”. Experience in the 2nd world can also be instructive. In Trinidad not long ago, a huge scandal arose because several billion dollars worth of construction was awarded to a Chinese company who employed exactly zero locals in the works!

    Of course these issues will arise for almost any kind of proposals, including the present plans for HS2, Thames airport, toll roads, etc. Do we not need a pan European plan, not just a UK one?

  • London Liberal,

    Good point. Shows what can be achieved when the political will is there, even if a lot of it was Harold Wilson’s tower blocks.

  • Tim,

    thanks for the feedback. I think the community auction paper is a valuable addition to the research in this area, building on the Barker Review.

    If we get the kind of outcomes you expect from the initiative, we will have to put a statue of you in Parliament square.

  • Richard,

    Housebuilding tends to be domestic companies. There probably would be a good number of EU workers attracted by a building boom, but the majority of their earnings are still spent in the local economy. If the Germans did something similar, there would likely be a good number of British workers going over there, as they did in the eighties.

    Housing kits is not a bad idea. I think Bevan used prefabricated homes after the war and the Japanese use a lot of prefabricated housing kit designed for small spaces.

  • Richard Dean 29th Mar '12 - 11:01pm

    I think what happened in the Trinidad case was that the Chinese company set up camps for the Chinese workforce that they brought over. The workers were paid in China and given small allowances to spend in Trinidad. In the case of a French, Spanish, Greek,or Latvian firm there might also be an extra cost advantage in making the kit parts in those countries and shipping them to the UK. Entrepreneurs can be very creative once there is a lot of money on offer!

  • I don’t think we are short of housing in the UK. Very few people do not have a roof over their head at night. The main “housing problem” is that large numbers of people are renting when they would rather be able to buy. It strikes me that the best solution is to introduce schemes that make it easier for tenants to buy the homes they currently live in. There are lots of methods that might help this: more availability of lower cost mortgages, limits on the number of homes a landlord can buy, “right-to-buy” schemes” and (most of all) higher salaries and more secure employment. Building new homes that will often be added to landlords portfolio’s seems to be a poor solution to the problem.

  • Bill le Breton 30th Mar '12 - 7:18am

    Joe, sorry to come in late as usual: you ask above, ‘Why take a risk on setting off an inflationary spiral when we have the safer and more direct option of a fiscal stimulus’.
    Because as presently constituted and ‘directed’ the MPC will tighten monetary policy to neutralize the effects of that stimulus.
    Wage cost inflation increases NGDP. As I understand it, the Market Monetarists argue that with a policy commitment to a level of NGDP growth, a breach of that target would lead to a tightening of monetary policy and the potential for a major increase in business costs, a reduction in aggregate demand and a threat to employment levels.
    It is argued that under such a regime expectation of those consequences of wage cost inflation determines behaviour.
    It requires articulate and visionary political leadership.
    However, when such a regime is in place, the initial stimulus can indeed come from different sources or different combinations of sources: government spending and tax cuts – on the fiscal side – or monetary policies such as QE at the zero bound and ROI when the economy has begun to move.
    That would be a political judgment. It would focus debate. The Liberal Democrat answer would be clearly differentiated from that of Labour and the Conservatives. It could indeed be the subject of consultation with Conference.
    How do we know what level NGDP is at any given time? That is where the market in Market Monetarist comes in. By creating a futures market in inflation indexed bonds (in effect NGDP futures) the sum of market behaviour gives the best indication of current NGDP growth.
    Tim has surely set out above the attractions and the good sense of creating inflationary expectations. A NGDP level targeting regime provides the accelerator, break and speedo for the initiative.
    (it doesn’t have to be red hot for the hot potatoes effect to affect behaviour.)

  • Richard Dean 30th Mar '12 - 12:26pm

    @BIll le Breton. Is the any chance that you might kindly explain what you write in terms that ordinary people can understand? Even ones who are a bit slow, like me? If a policy can’t be explained to a supporter, how can we expect an electorate to take it seriously?

  • Ed Sheperd,

    I think you are right to point out that building new homes is only part of the solution. However, a big part (I would argue the main part) of making it easier for tenants to buy the homes the homes they live in, lies in addressing the high cost of housing. That can only effectively be done, by increasing the supply.

    I would argue that establishing and funding a National Housing Corporation is the quickest and most cost effective means of doing so. I disagree with Tim Leunig that monetary stimulus (with its potentially high unknown costs) or sole focus on private sector building will produce the optimum cost/benefit outcome. I do, however, agree with Tim on the outcomes we should be aiming for:

    “If we have enough market housing …almost everyone in regular full time work could afford to buy (monthly payments <£100 a week for a house, less for a flat). At that point a number of people in social housing/shared ownership will move into market housing, freeing up existing SH units which can be used for those in need.”

    As regards very few people not having a roof over their head at night, I would point you to the website of the charity Shelter and note “You don’t have to be living on the street to be homeless. You may be legally classed as homeless if you are sleeping on a friend’s sofa, staying in a hostel, suffering from overcrowding, or other bad conditions.”

  • Richard Dean 30th Mar '12 - 7:20pm

    Are mortgage payments of less than £100 a week realistic? Average rents in the UK seem to be about three times this at present (http://www.rentright.co.uk/00_00_00_00_00_rrpi.aspx). Would there be other consequences?

  • Bill,

    Thanks for your comments.

    While there are similarities, there are also significant differences between price level/inflation targeting and nominal GDP targeting. With NGDP, as you have indicated, the initial stimulus can come from different sources and it encompasses a wider range of solution. To do justice to the topic, it deseves to be debated in its own right. I would note however, that the Chancellor/Treasury can set the terms of the mandate that the BofE and MPC must follow.

    II have restricted this comment to price level/inflation targeting and Professor Craft’s paper.

    Professor Crafts in his conclusion, writes:
    “If economic recovery falters in 2012, [as it is about to] it may be necessary to go beyond further quantitative easing as practised hitherto. It is important to recognize that at that point there would be an alternative to fiscal stimulus, which might be preferable given the weak state of public finances. The key requirement would be to reduce real interest rates by raising inflationary expectations.
    At that point, inflation targeting as currently practised in the UK would no longer be appropriate. A possible reform would be to adopt a price level target which commits the MPC to increase the price level by a significant amount, say 15 per cent, over four years. In the 1930s, the Treasury succeeded in developing a clear and credible policy to raise prices. It may be necessary to adopt a similar strategy in the near future.”

    In the early 1930’s prices had fallen from there 1929 levels, while nominal wages remained generally sticky. The government understood the detrimental effect of falling prices on production and employment and was keen to reverse the trend. Then as now, interest rates were reduced to historically low levels, the government had a large debt overhang from the Great War and a currency devaluation had been effected. In the 1930s, stimulus meant monetary stimulus, which depreciated the currency and made its products cheaper in export markets. Other nations attempted to counter this by imposing trade barriers. Today, besides monetary stimulus, we have the tools of fiscal stimulus that boosts both domestic demand and international trade. Although Keynes was by this time an influential economic commentator, particularly with respect to the abandonment of the gold standard and the impact on the international economy of war reparations on Germany, Keynesian orthodoxy was not yet mainstream opinion.

    There are key differences in the economy of today and that of the 1930’s. Then the economy had not suffered a banking crisis. Tariffs were imposed on imports to control the balance of payments. Sterling was still the principal reserve currency and Great Britain could effectively lock out international competitors from or control the terms of trade within the Sterling bloc.

    Mass unemployment in the North meant money wages did not keep pace with inflation, reducing real wages and boosting profits Unemployment benefits were slashed to balance the budget. Food prices were falling in this period. Domestic coal was the principal source of energy and heating. Consumer credit was not a significant element of growth in consumption. All of these factors meant Inflation did not spiral out of control.

    Business investment responded to lower interest rates and bank lending was largely maintained. House-building was not constrained by restrictive planning rules, lack of credit or a private sector debt overhang from a preceding overheated economy.

    Past experience tells us that while it is not difficult to induce wage push inflation, it is much more difficult to reign it in once an inflationary spiral starts (as Anthony Barber found out in the 1970’s). It is not solely manipulation of the sterling money supply that impacts domestic inflation but also the policy of the US Federal reserve (and other Central Banks) and its impact on world commodity prices. High Inflation causes speculative buying and a misallocation of resources, generating waste and undermining real economic growth. Inflation particularly erodes the purchasing power of pensioners and low-income earners. The ability of the BoE or treasury to fine tune a monetary stimulus to pruduce a desired rate of domestic inflation is highly suspect. As Professor Crafts himself notes, stable inflation during the Great Moderation may have been as much down to good luck [and the deflationary impact of cheap imports from China] as efforts on the part of Central Banks to calibrate short and longterm interest rates.

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