‘Who is in charge of bread supply in London?’

By skepticlawyer

Sometime before 1989, a Soviet official asked economist Paul Seabright who was in charge of London’s bread supply. Seabright gave him an answer that is comical but also true: ‘nobody’. The bread we eat turns up on our tables thanks to an incredible team effort (bakers, machinists, electricity suppliers, distributors etc etc). And even more incredibly, there is no-one in charge of that team.

It just happens.

Hold that thought in your head for a bit, and bear with me while I take a detour via some current (very popular) non market ideas about food distribution.

In the recent (and very stoushy) climate change threads on this blog, Legal Eagle flew the flag for equality in the face of other considerations that often engage those on the political left. In various comments, I pointed out that I was less concerned about equality: like many people on the libertarian right, given a choice between liberty and equality, I will often (but not always) sacrifice the latter value to the former.

This can seem callous to those who aren’t aware of the economic reasoning behind it, so I’ll explain.

Many of you will be familiar with John F Kennedy’s famous quip that a ‘a rising tide lifts all boats’. The tide, of course, is that of prosperity, something with which much modern politics is concerned, at least in liberal democracies, and also in the authoritarian capitalist states. Note, however, that Kennedy’s quip doesn’t suggest that the tide of prosperity will close the gap between the different boats. Indeed, it often doesn’t. It just means that, over time, everyone will be better off.

Because attempts to close the equality gap between boats have been so fraught (and often downright murderous), I am quite happy to live with this sort of inequality. There are rich people and there are poor people, but as long as the latter are getting better off over time, I’m not terribly concerned about what the rich people are doing.

I am concerned, however, if anyone (be they rich or poor) tries to tell me what I should be doing. This includes things that rich people like to force on others (everything from barriers to market entry to attempts to tell me what I should eat and how to raise my children) and poor people like to force on others (everything from telling me who I should employ in my firm to arguments against abortion). Of course — as Noel Pearson pointed out in the piece Legal Eagle quoted — there  are poor greenies. Of course there are also likely to be wealthy anti-abortionists and poor promoters of a ‘closed shop’. In my experience, however, the stereotypes have a fair degree of accuracy. Doctors and lawyers — these days — are much better at abusing their scarcity power and raising barriers to entry than trade unions. Poor people tend to be religious.

And rich people tend to be green.

There’s also a variety of inequality that even a right libertarian like me isn’t willing to tolerate. That’s a situation where poor people start to go backwards in absolute, not just relative terms. I don’t mind the rich getting a lot richer as long as the poor get a bit richer. I won’t wear the rich getting richer while the poor go backwards. And any time I see a policy that looks like it’s heading in that direction I will call it out, especially if the policy proposers engage in deliberate obfuscation of the fact that implementation will have that effect.

A current favoured hobby-horse of the rich and green is what is known around the traps as the ‘locavore’ or ‘local food’ movement. This crowd fail ECON101 on so many levels that I’ve often wanted to see them sliced and wrapped in plastic, but I’ve been sadly remiss in getting around to doing it myself. Fortunately, Virginia Postrel has done the job for me in an excellent piece for The Wall Street Journal.

Before moving on to Postrel’s piece, for those unfamiliar with this aspect of greenie-ism, I’d best provide a definition. According to G Feenstra and M Roosevelt, the local food movement is:

A collaborative effort to build more locally based, self-reliant food economies – one in which sustainable food production, processing, distribution, and consumption is integrated to enhance the economic, environmental and social health of a particular place” and is considered to be a part of the broader sustainability movement. “It is part of the concept of local purchasing and local economies, a preference to buy locally produced goods and services. Those who prefer to eat locally grown/produced food sometimes call themselves locavores or localvores.

In economic terms, the local food movement is an attack on two foundations of the modern, free-market economy (the one that’s been lifting everyone’s boats on a rising tide of prosperity for a long time now). Those two foundations are the division of labour and comparative advantage.

The effect of undermining those two foundations is — very simply — to make food more expensive, especially fruit and vegetables. People who advocate ‘local food’ consumption seldom admit this, but Postrel caught leading locavore Michael Pullan out doing just that:

Michael Pollan, the best-selling author of “The Omnivore’s Dilemma” and a leading advocate of buying locally grown food, recently upset many of his fans by daring to put numbers on his oft-repeated prescription to “pay more, eat less.” Eight dollars for a dozen eggs? $3.90 for a pound of peaches?

Those figures were way too specific and way, way too high to go unnoticed. The humanistic foe of industrialized eating suddenly sounded like a privileged elitist, and the local-food cause seemed insensitive to cash-strapped shoppers.

But Mr. Pollan was only being honest. Patronizing local farmers who produce in small batches tends to cost more. You may find some peak-season bargains at the farmers’ market, but there’s no such thing as a free locavore lunch. Getting fruits and vegetables only from local farms necessarily limits variety—few crops are available everywhere all the time—and it doesn’t come cheap. Economies of scale apply even to produce.

In other words, local food is for the rich. The poor are excluded from this particular market. Now, as mentioned above, I have no trouble with that. People can do what they like with their money, including spending a small fortune on food or bequeathing everything they own to a cats’ home. If the poor miss out, that’s unfortunate but not the end of the world. Even poor people in the industrialised world live like Roman emperors in days gone by, at least in terms of light, heating, warmth, diet, education and health care. They may miss out on a few orgies but that’s neither here nor there (I suppose that’s what ASBOs are for). The industrial revolution has made kings and princes of all of us. It’s when rich people’s personal preferences translate into policy proposals that we need to start doing some serious costing and honest accounting. Postrel continues:

The locavore ideal is a world without trade, not only beyond national borders but even from the next state: no Florida oranges in Colorado or California grapes in New Mexico, no Vidalia onions in New York or summer spinach in Georgia.

Fully realized, that ideal would eliminate one of the great culinary advances of the past half century. Unripe peaches notwithstanding, today’s supermarket produce departments are modern marvels. American grocery shoppers have choices that would have been unimaginable only a few decades ago. When I was growing up in the 1960s and 1970s, the only way to get fresh spinach or leaf lettuce was to plant a garden. Avocados were an exotic treat, asparagus came in a can, and pomegranates existed only in books.

Now my neighborhood supermarket sells five types of lettuce, plus spinach, endive, escarole, radicchio, frisée, rapini, three kinds of chard, mustard greens, dandelion greens and kale. That’s not including all the cabbages—or, of course, the prewashed salads in a bag that have particularly boosted fresh-spinach purchases. In this ordinary produce department, you can buy not only avocados, asparagus and pomegranates, but everything from purple baby cauliflowers to spiky kiwano melons that look like some kind of scary deep-sea creature. Need portobello mushrooms, Japanese eggplant or organic ginger at 2 a.m.? The store is open 24/7.

This cornucopia of choice and convenience is a tribute to logistical ingenuity and gains from trade, the very progress the local-food movement is sworn to overturn. For those of us blessed with a Mediterranean climate, giving up imports means higher prices. For everyone else, it means a far more limited diet.

I’ve picked on the local food movement in this piece, but it strikes me that many environmental proposals will have a similar effect: that is, they will make the poorest poorer in absolute, not just relative terms. I should also point out that it is relatively rare, these days, for a policy proposal to have that effect, even if only in the short run. The last time (in the UK at least) a policy proposal had the effect of undermining the steady rise in prosperity enjoyed by the poorest over the last 200 years was the Poll Tax.

I am old enough to remember the riots that convulsed Britain in the wake of that enactment, and because I’m a lawyer over here I happen to know that non-compliance was so great that the UK government was forced to abandon its attempts at enforcement. The legal system threatened to buckle under the weight of conscientious objections. It was living proof of Henry David Thoreau’s observation that if enough people disobeyed a law, then the government’s choice was either to change the law or put half the population in gaol.

The UK government changed the law.

Here is Postrel again:

The local-food movement’s ideological parochialism would be dangerous if it were somehow enacted into law. But as persuasion, it tends to focus on the positive: the delights of local peaches and fresh cider, not the imagined evils of Chilean blueberries and prepeeled baby carrots. In this regard, it resembles the English Arts and Crafts movement of the late 19th century. William Morris, who is remembered today more for his wallpaper and book designs than for his social theories, didn’t manage to overturn the industrial revolution. But he and his allies left a legacy of beautiful things. Pleasure is persuasive.

It is important, as Postrel notes, to pierce the veil of beauty and pleasure offered up by the Green movement, just as it is important to demand realistic projections of the effects of climate change. Professor Stephen Schneider’s comments about ‘runaway greenhouse’ in the Insight episode on which Legal Eagle appeared are instructive on this point. It is also vitally important not to allow the Greens to have too much control over the environmental policy agenda; although they’ve managed to skewer Penny Wong in the climate change portfolio, I’m glad for Australia’s sake that she’s been replaced by a sensible trade unionist like Greg Combet. They will find it much harder to shift him if policy proposals land on his desk showing that the people he used to represent will be poorer in absolute terms.

There’s another thing, too. Unlike many libertarians, I’m willing to admit that there is such a thing as market failure. I don’t think it’s very common, but it does exist. Free market food distribution, however, is so far from market failure as to be invisible from where I sit.

To the extent that food distribution is distorted, it is by agricultural tariffs and subsidies that lock many developing world producers out of global markets. I often buy Nigerian garlic at a local Afro-Caribbean ‘provisioner’. It is without exception better than the EU-grown garlic available in Sainsbury’s. The reason it is more expensive is because EU farmers are protected by tariffs and rewarded with subsidies. Strip away that protection and we’d all be able to enjoy inexpensive, high quality Nigerian garlic at competitive prices.

But it would come from Nigeria, not Spain or France.

I don’t want people who would put themselves in charge of London’s bread supply running the country. I think the dizzying answer to the Soviet official’s question — ‘nobody’ — is representative of the best in us, at least when it comes to feeding the poor.

43 Comments

  1. Posted October 1, 2010 at 4:45 am | Permalink

    [email protected] This post, by my favourite economic blogger, expresses nicely a lot of the measurement and analytical problems about income and wealth inequality.

    A period of rapid technological change also encourages increase in income inequality, as those with scarce new skills in demand gain an income premium. Again, not clear that that we should do much about the underlying driver.

    Also, an era of globalisation will increase income inequality, since those who profit from rising incomes outside one’s own country will also gain a disproportionate advantage. Since that same process has seen a massive drop in global poverty, also not clear that we should do much about the underlying driver.

    All things considered, it is more remarkable how little income equality has increased.

  2. Posted October 1, 2010 at 4:58 am | Permalink

    On inequality, in the UK, under which government did the very poorest do worse? The Conservative Government of 1979 – 1997 or the Blair Government of 1997 – 2008?

    Answer here. (How the overall comparison would do if you took the data up to 2010 is an interesting question.)

  3. Posted October 1, 2010 at 7:35 am | Permalink

    Favourite economic blogger, expresses nicely a lot of the measurement and analytical problems about income and wealth inequality.

    Shoot the messenger strategy. Yet time and again studies find rising inequality. Not particularly interested in general arguments addressing specific studies. Without a demonstrable connection between the two I cannot heed such analyses.

  4. mel
    Posted October 1, 2010 at 12:49 pm | Permalink

    The rising tides lifts all boats claim is not entirely true.

    If you live on a fixed income in a boom town like Perth, you can find yourself priced out of the rental market. When I was in Perth a couple of years back I recall reading about pensioners being forced to relocate to areas far removed from services because they could no longer afford the rent or because the landlord wanted to renovate the granny flat into something that would attract a high income renter.

  5. mel
    Posted October 1, 2010 at 1:02 pm | Permalink

    Another point, the game of capitalism is rigged in favour of the capitalist and against the ordinary worker in numerous ways.

    As an example, if a limited liability company goes bust the stock owners only lose their investment. Moreover, the liquidator will pay out creditors (other capitalists) before workers, who are at the bottom of the pile.

    I’m not arguing against LLCs, they are a necessary part of capitalism, but let’s not kid ourselves about the system not being rigged and therefore the reasonableness of income transfers from capital to labour.

  6. Posted October 1, 2010 at 1:25 pm | Permalink

    [email protected]

    If you live on a fixed income in a boom town like Perth, you can find yourself priced out of the rental market. When I was in Perth a couple of years back I recall reading about pensioners being forced to relocate to areas far removed from services because they could no longer afford the rent or because the landlord wanted to renovate the granny flat into something that would attract a high income renter.

    It is really pointless treating “capitalism” as an undifferentiated lump in such cases. Rising rental prices in metropolitan Australia flow directly from the government regulating land use. If housing supply could respond directly to housing demand, there would be much less of a problem. Instead, it is controlled by official discretions which, surprise, surprise, operate in favour of the politically connected – in this case, incumbent home owners.

    [email protected]

    Another point, the game of capitalism is rigged in favour of the capitalist and against the ordinary worker in numerous ways.

    The scarcer factor of production always has an advantage. When capital was not very important, so the land/population ratio was what mattered, landlords had lots of power. As capital became more important, landlords lost power.

    As capital becomes more plentiful, labour becomes relatively more scarce and so better rewarded. Capitalism produces the most prosperous and longest-lived workers because it is the best system for producing and using capital, thereby making labour comparatively scarce, so more valuable, so more prosperous.

    So, you “zero sum” “rigged” analysis (particularly “income transfers from capital to labour”) does not really work, certainly not as macro long-term analysis.

  7. desipis
    Posted October 1, 2010 at 1:56 pm | Permalink

    Rising rental prices in metropolitan Australia flow directly from the government regulating land use.

    The government regulates land use for a reason. That generally the free market would produce undesirable outcomes if land use was unregulated. It’s a complex issue and not caused (or solved) by any particular ideology.

    As capital becomes more plentiful, labour becomes relatively more scarce and so better rewarded.

    Unless the capital coordinates in ways that manipulate the market to sufficiently disadvantage labour.

  8. su
    Posted October 1, 2010 at 2:12 pm | Permalink

    If you live on a fixed income in a boom town like Perth, you can find yourself priced out of the rental market

    I think the drop in housing affordability is one of the reasons why even though the minimum wage has gone up in real terms, the poor are still getting poorer in Australia and this holds outside of the Major Metropolitans too. However it isn’t just housing, I found a receipt for a dental appointment I attended when I was 5 yrs old – a consult cost $4.68 which according to the RBA is $39.77 in today’s money. A consult costs upwards of twice that today. We were pretty close to the bottom of the pile when I was a kid but we attended doctors and dentists regularly. It is much, much, more difficult to pay for basic health care on a minimum wage today.

  9. Jacques Chester
    Posted October 1, 2010 at 2:28 pm | Permalink

    su;

    I don’t think you can lay the blame of costs arising with one of the most highly regulated and supply-controlled professions at the feet of the free market.

  10. Jacques Chester
    Posted October 1, 2010 at 2:31 pm | Permalink

    The government regulates land use for a reason. That generally the free market would produce undesirable outcomes if land use was unregulated.

    Yet the costs of the intervention are very high (housing bubbles, high rents and losses due to less-desirable uses of land) and very widely spread across the community. So long as land use does not cause truly nasty externalities (pollution, for instance), why regulate its use? Many of the world’s greatest cities grew with no such planning.

    My own opinion is that urban planning should get as far as laying out a grid and rights of way for public purposes and then pissing off and letting ordinary people and the businesses decide where they’re best suited.

  11. su
    Posted October 1, 2010 at 2:48 pm | Permalink

    I was blaming the dentists themselves rather than the free market but is it the case that dentistry is more regulated today than when it was affordable in the seventies? By supply side do you mean university places?

  12. conrad
    Posted October 1, 2010 at 3:56 pm | Permalink

    “I don’t think you can lay the blame of costs arising with one of the most highly regulated and supply-controlled professions at the feet of the free market.”

    I’m not sure that’s true of dentists Jacques — in fact I believe the group that all the dentists belong too actually told the government we need more dentists etc. in a way that the AMA never does. My guess is that su is correct — it’s probably exceptionally expensive to train dentists (clinical placements, staff you can’t afford to pay, infrastructure etc.), and so my guess is that the lack of supply is probably thanks to government rules on universities and not the dentists creating an AMA style mafia.

  13. mel
    Posted October 1, 2010 at 5:10 pm | Permalink

    #105 – Not even in the right ball park, Lorenzo.

    Re Melbourne:

    “As at June 2007 there was an estimated lot construction potential in metropolitan Melbourne of approximately 239,000 lots – Melbourne’s growth area municipalities have a potential supply of approximately 168,000 broadhectare lots of which 46% (77,000) are currently zoned for residential development purposes. ”

    http://www.dpcd.vic.gov.au/home/publications-and-research/urban-and-regional-research/housing-and-residential-land/metropolitan-residential-land-and-dwelling-supply

    It is well reported that developers bank land and release it on a slow drip feed to ensure scarcity is maintained. Developers are holding onto land that they have no intention of developing for many years, as per the above link.

    We also have a fair idea what unregulated urban development is like because we have plenty of historical examples as well as more contemporaneous developing world examples, none of which are particularly pleasant.

    Having said that heritage and preservation regs shit me, but no government could ditch them entirely and stay in office.

  14. Posted October 1, 2010 at 5:13 pm | Permalink

    Another point, the game of capitalism is rigged in favour of the capitalist and against the ordinary worker in numerous ways.

    As a friend of mine recently said, “The purpose of government is to keep the rich rich and stop the poor killing them.”

  15. mel
    Posted October 1, 2010 at 5:14 pm | Permalink

    Jacques:

    “My own opinion is that urban planning should get as far as laying out a grid and rights of way for public purposes and then pissing off and letting ordinary people and the businesses decide where they’re best suited.”

    Right, so you’d be happy if I built an offal processing plant next to your house, thereby reducing its value overnight by 50%.

    It ain’t that easy.

  16. Posted October 1, 2010 at 5:21 pm | Permalink

    It ain’t that easy.

    I live on the Gold Coast where the council was quite happy to let developers have their way. The place is a mess and the transport issues can never be solved because no-one ever bothered to plan ahead for population increases. The problem is not unique to the Gold Coast.

    I have never been able to understand the theoretic underpinnings for the assertion that if you just let people “do their thing” all will work out wonderfully well.

  17. desipis
    Posted October 1, 2010 at 8:38 pm | Permalink

    I have never been able to understand the theoretic underpinnings for the assertion that if you just let people “do their thing” all will work out wonderfully well.

    I guess it’s like religious practices or traditions in general. They seem to have worked in the past and have some semblance of truth in them but there’s a lack of complete understanding of why they work. It all ends up leading to an assumption of universal truth.

  18. Posted October 2, 2010 at 12:32 am | Permalink

    Since Lorenzo is probably out of a Friday evening, I’ll just link to one of his posts on housing policy and why he argues the way he does:

    http://lorenzo-thinkingoutaloud.blogspot.com/2010/05/housing-price-madness-of-restrictive.html

    He has written widely on the topic; relevant posts are available here:

    http://lorenzo-thinkingoutaloud.blogspot.com/search/label/housing

  19. Posted October 2, 2010 at 4:44 am | Permalink

    [email protected]

    It is well reported that developers bank land and release it on a slow drip feed to ensure scarcity is maintained. Developers are holding onto land that they have no intention of developing for many years, as per the above link.

    Sigh. Let us concentrate on that term “land release”. Why do you think developers can do that? Because “land release” exists in the first place. Regulation directs them to which land they can buy to get such a “lock”. Really, I do know what I am talking about.

    M@@114 The common law was coping with intra-property effects long before we picked up stupid and destructive British post-war land control rules. Texas manages to have perfectly functional large cities with no zoning laws at all. Developers offer covenants, which the courts uphold, so you get competition in local rules.

    [email protected]

    I live on the Gold Coast where the council was quite happy to let developers have their way. The place is a mess and the transport issues can never be solved because no-one ever bothered to plan ahead for population increases. The problem is not unique to the Gold Coast.

    If you think the Gold Coast is a case of “let her rip” free market land use, then you have not studied the relevant regulatory structure.

    There is of course bad urban planning. Urban planning that concentrates, for example, on all the games of “regulatory approval” and not on intelligent provision of infrastructure. Developers LOVE land use regulation, because it gives them a nice easy target to manipulate, and raises entry costs, reducing competition.

    Apart from anything else, why do you think local government is the most corruption-ridden government? All those nice juicy regulatory discretions.

    Sydney and Melbourne have some of the most expensive housing in the Anglosphere: our housing prices have reached madness levels precisely because people have been sold the idea that the country in the developed world with the lowest population density somehow needs its land use “managed” by oh-so-wise officials.

    On bushfire risks, for example, since local council planners will only approve what they are comfortable with (basically, brick veneer), attempts to experiment with housing design to make them more bushfire resistant are stymied.

  20. Posted October 2, 2010 at 4:47 am | Permalink

    People, one of the basic things to get your analytical head around is that bad or destructive regulation, or simply the downsides of regulation, ALWAYS show up in market effects. So one cannot just infer from those market effects that it is “a problem of the free market”. One has to go back to the regulatory structure and consider its implications.

  21. Posted October 2, 2010 at 7:06 am | Permalink

    [email protected]

    Lorenzo (and elsewhere, repeatedly, SL) make a good point about bad regulation, but I’d include in that things like the housing bonus.

    I remember The Age reporting that when they’ve been introduced in recent years, average auction prices increased the very next Saturday by the size of the new bonus and then some – so, as cash was not being paid, the bonus actually made housing more unaffordable.

    Lorenzo is spot on about the Oz housing bubble. But it’s a politically expedient bubble. A housing bubble (once home “ownership”, even with negative equity gets above a particular frequency) makes people feel wealthier even if there is no actual improvement in amenity, and political parties in power /love/ that idea.

    Mind you, McMansions with ballooning per-capita floorspace have a bit to do with the problem to, as does negative gearing.

    Mind you, the Geoffrey-Rush-keep-Camberwell-exactly-the-same movement, and others like it, movements loved by many in the latte set, are doing /just/ as much damage.

    There are probably a bucket load of parallels between food and housing mismanagement… And I bet you could include pathologies of plenty: diabetes 2 and mcmansion suburbs with no libraries, schools or shops within walking distance being examples.

    For housing (getting on my rock-proof asbestos suit) a per-capita-cap on floor space, at say average levels of 50s/60s/70s seems a way of limiting demand and lowering prices that cannot be labelled cruel except to land developers and corrupt/lazy politicians at every level.

  22. Posted October 2, 2010 at 7:40 am | Permalink

    [email protected] You won’t get any argument from me about the stupidity of using taxpayer money to fuel demand in a supply-constrained market.

    And yes, the regulation is driven by political expedience. As John Howard used to grin and say (until some of the realities seeped in) “no one has ever complained to me about increases in the value of their house”. To his credit, Peter Costello was one of the first pollies to start suggesting something might be amiss. (But see previous comment about using taxpayer money to raise demand in a supply-constrained market.)

    For those interested, a useful economic history of the (fairly disreputable) history of zoning the US is here also available via Google Documents. The author has a free copy of an earlier draft via his university homepage. He suggests insurance as an alternate solution to the noxious-neighbours-reducing-home-value problem.

  23. Posted October 2, 2010 at 8:01 am | Permalink

    For a left-libertarian philosopher who has posted recently on the wrongs of inequality, see here.

  24. desipis
    Posted October 2, 2010 at 8:17 am | Permalink

    People, one of the basic things to get your analytical head around is that bad or destructive regulation, or simply the downsides of regulation, ALWAYS show up in market effects.

    I guess it comes down to whether its bad regulation relative to some imaginary ideal outcome, or bad relative to the outcomes of an unregulated market.

  25. mel
    Posted October 2, 2010 at 12:17 pm | Permalink

    Lorenzo:

    “Sigh. Let us concentrate on that term “land release”. Why do you think developers can do that? Because “land release” exists in the first place. Regulation directs them to which land they can buy to get such a “lock”. Really, I do know what I am talking about.”

    Sigh. A developer can’t simply buy farmer Magoo’s paddock and put houses on it far from roads, schools, power, sewerage etc.. Obviously the Government has to establish growth corridors.

    Melbourne has something like 17 year worth undeveloped urban land at the moment. That is more than enough. What is probably needed is a big new tax on banked land.

    Lorenzo:

    “People, one of the basic things to get your analytical head around is that bad or destructive regulation, or simply the downsides of regulation, ALWAYS show up in market effects.”

    Obviously dude, but the idea that having no regulations at all is a quick fix is fanciful as well as ahistorical.

    We need regulations, they should be as few and as simple as possible and they should use market mechanisms as appropriate.

  26. Posted October 2, 2010 at 3:10 pm | Permalink

    If you think the Gold Coast is a case of “let her rip” free market land use, then you have not studied the relevant regulatory structure.

    I’ve worked with property developers on the Gold Coast. They have advised me that land banking is a common practice, pointing me to large tracts of land that are banked. Land banking makes perfect business sense, a way of maximising profits by keeping up demand. So from a libertarian perspective land banking should be a good thing.

    Of course the regulatory structure has problems. So does modern medicine but I’m not about to throw the baby out with the bathwater.

    Libertarians perform a valuable service in pointing out the dangers of regulation but look foolish when they extend to this argument to a generalised attack on regulation. Essentially that is the same logic those in alternative medicine use to attack conventional medicine .

  27. Posted October 3, 2010 at 5:06 am | Permalink

    [email protected] Why don’t you read the posts of mine SL directed you to? In particular, this one and this one. No, government does not have to designate “growth corridors” by controlling whether land can be used for housing or not, as both Texas and Germany demonstrate. Provision of infrastructure does not require such zoning. It merely requires that governments respond to where growth is happening.

    One of the many aspects which drive up the price of Oz housing is the effective elimination of the previous possibility of buying and building of unserviced blocks. That allowed people to enter the housing market more cheaply.

    The requirement now that the cost of infrastructure be effectively bad upfront is even more stupid, as infrastructure is the sort of thing that SHOULD be paid over time, since future users benefit from it. It is all about raising barriers to market entry, thereby advantaging incumbents.

    I repeat, in a land-plentiful country such as Australia, “land banking” on the scale you point to is a product of regulation.

    [email protected] and [email protected]: An attack on land use regulation as official discretions controlling market entry is not an attack on all law: there are no anarchocapitalists here, that I am aware of. It is particularly not when I can point to jurisdictions which do not control land use in that way and are perfectly functional (e.g. Texas and Germany). Indeed, their housing markets are far more functional than ours (Australia’s, Britain’s, California’s etc), that is the point.

  28. Posted October 3, 2010 at 5:07 am | Permalink

    [email protected] Or bad compared to other markets one can point to, which the relevant posts of mine do.

  29. mel
    Posted October 6, 2010 at 11:35 am | Permalink

    Lorenzo, your articles are uninteresting and rather lazy.

    House prices are a product of many things and in Australia negative gearing is one of the big ones that your articles overlook. Something like 40% of home loans now go to speculators for God’s sake, thanks to neg gearing.

    “I repeat, in a land-plentiful country such as Australia, “land banking” on the scale you point to is a product of regulation.”

    And it could be easily solved by taxing banked land so that land banking becomes an expensive proposition.

  30. mel
    Posted October 6, 2010 at 11:42 am | Permalink

    Lorenzo , you prize goose, I also found this after one minute’s googling:

    “A serious problem is that Germany’s population has been shrinking since 2002, by an average of 50,000 persons per year. Also the population is getting older, and the ageing trend will continue till 2030. Retired people on shrinking pensions are not likely to buy new houses, or move to better flats.”

    Also this:

    “After Germany’s re-unification in 1990, the Neue Bundesländer (New Federal Countries) and East Berlin saw much new residential building. A major incentive was tax write-offs for the construction of large-scale rental dwellings. Completions rose from 257,000 units in 1990, to an average of 500,000 units between 1995 and 2000.”

    So the population of Germany is old and shrinking and moving into nursing homes at the same time as the government has fueled a massive increase in unit construction with tax write-offs. No wonder house prices are so fecking low!!

    http://www.globalpropertyguide.com/Europe/Germany/Price-History

    Sorry mate, but you are now in my “not to be taken seriously” book.

  31. JC
    Posted October 6, 2010 at 12:27 pm | Permalink

    House prices are a product of many things and in Australia negative gearing is one of the big ones that your articles overlook. Something like 40% of home loans now go to speculators for God’s sake, thanks to neg gearing.

    Mel..negative gearing increases the supply of housing not reduce it. Please

  32. mel
    Posted October 6, 2010 at 12:53 pm | Permalink

    “Mel..negative gearing increases the supply of housing not reduce it. Please”

    Not by 40%, or even half that much. Therefore it drives up prices.

  33. Posted October 6, 2010 at 12:53 pm | Permalink

    [email protected]: Since I was looking at German and British patterns OVER SEVERAL DECADES, population trends over the past 8 years are hardly of much moment. Also, if you had read what I wrote, you will note that I pointed out that housing prices (as measured by ratio of median house price to median household income) in the US were not at all correlated with population growth. In particular, Texas has higher rates of population growth than Australia, has a higher proportion of its population in its 5 largest metro areas, higher average incomes and housing prices which a third to a half that of metropolitan Australia’s (by the same measure of prices as that above). It is also rather smaller than Australia — so should be “easier” for land banking. That does not happen, since people can build just about anywhere, so any developer who tried it would simply be “outflanked”. Hence my point about regulation and land-banking.

    Please try and get your head around what I am actually saying.

    As for housing prices being “product of many things”: no, like other prices, they are a product of supply and demand. If you restrict supply and pump up demand, prices will go up.

    This is, after all, your claim about land banking. (Which, as it happens, is sort of what happened in Ireland — a much smaller country one, might note, with highly concentrated landownership.)

    [email protected] Negative gearing may encourage investment in housing, but does not, of itself, increase the supply of housing in total (since it does not change the effect of official discretions) — though it may increase the stock of housing available for rent, so creating some downward pressure on rents.

  34. Posted October 6, 2010 at 12:54 pm | Permalink

    [email protected] Negative gearing reduces the cost of supplying rental properties, to just clarify my last point.

  35. Posted October 6, 2010 at 1:17 pm | Permalink

    Mel: if developers are “landbanking” in the way you suggest, then it is action in restraint of trade and one can sic the Trades Practices Act and the ICCC on to them.

    BTW I agree with taxing the unimproved value of land, but it would be a very clumsy way of stopping land-banking, giving how high the rates would have to be to work, other folk own land and trying to define land-banking for some specific tax would be a fascinating exercise. Simpler to adopt the Texan/German system.

  36. JC
    Posted October 6, 2010 at 2:29 pm | Permalink

    Mel

    Two extensive research reports by two I-banks found there were two issues.

    supply of land is restricted and that our population growth the highest rate in the western world has contributed to the shortage.

    If you think they are wrong you can have their research which is around 40 pages long and explain where you think they are wrong.

    Both argue that there isn’t a bubble at all and the price rise is due to those two factors.

    Lorenzo..

    Negative gearing increase housing stock. Yield factor is the primary driver in terms of the stock owned for rental or ownership. negative gearing cannot cause a rise in price.

  37. mel
    Posted October 6, 2010 at 3:21 pm | Permalink

    JC-

    Why waste our time by referring to two banks you refuse to identify and a report you don’t link to?

    Look, you are Australia’s least competent economics commentator by a country mile. Remember how you said we weren’t going to have a GFC when even Mr Magoo had sufficient vision to withdraw his money from US subprime related financial products.

    But seriously, if you think buying second houses (95% of neg geared lending) increased housing stock in equal measure that’s fine.

    Presumably you also think every second hand car purchase causes a new car to materialise from the ether.

  38. JC
    Posted October 6, 2010 at 3:50 pm | Permalink

    I can’t link them because they’re behind a firewall, Mel. However if you want them just holler and I would be happy to send them to you some time..

    The two I-banks were Credit Suisse and Morgan Stanely.

    Thanks for the compliment Mel. We get some predictions right and some wrong.

    I really don’t know how else it can be explained to you but negative gearing does NOT restrict supply: in fact it increases it and yield would ultimately determine where it’s distributed … either to the owner or rental market.

    If you’re analogizing the example of the second hand car market to the real estate market you’re simply wrong again.

    But let me help you….If you had said we imported second hand cars then of course the supply of cars would increase and affect the demand supply curve. The difference is that new housing is created

    Mel, try and behave yourself on this exalted site and stop it with the snarks as it’s not in keeping with what the gals want to create.

  39. mel
    Posted October 6, 2010 at 4:18 pm | Permalink

    This economist and most others I’ve read disagree- http://www.unconventionaleconomist.com/2010/06/negative-gearing-exposed.html

    I have no interest in what wingnut economists have to say.

  40. JC
    Posted October 6, 2010 at 5:41 pm | Permalink

    I have no interest in what wingnut economists have to say.

    Mel, this is a perfect illustration how you get into trouble and the historical fact that when you do you go nutzoid and get extremely bitter.

    You post a link to the Economist and mention other economists presumably Keynesian zombies like Bernie Keen and then say:

    “I have no interest in what wingnut economists have to say”.

    Do you see now how you always end up in the same cul de sac of “unreason”.

    …..and by the way, yes I am aware of the Economist’s position regarding our stretched PE in the real estate market.

    Getting back to the original issue, which is that the reason we have high prices is a little more complex than they seem and negative gearing is not one of them.

    Negative gearing creates supply, not the opposite.

  41. Posted October 6, 2010 at 6:00 pm | Permalink

    JC & Mel: whatever the ins and outs about negative gearing, it cannot raise the price unless supply is blocked from responding to the increased demand. You could pile as much negative gearing as you like into Germany or Texas, it would not raise prices since supply would simply respond.

  42. JC
    Posted October 6, 2010 at 6:35 pm | Permalink

    Lorenzo:

    Can I ask why you’re directing that to me and the Melster?

    Have I suggested anything of the sort?

  43. Posted October 7, 2010 at 4:01 am | Permalink

    JC: No, but I was suggesting a point that gets beyond where you two were arguing back to the wider issue.

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