Umm, no Dean, not really

Dean Baker, one of the few lefty economists I have much time for (no, really, some of his stuff is excellent. Like pointing out that the collapse of the housing boom in the US would have led to recession whatever happened to the banks, $7, $8 trillion of wealth disappearing will have that effect) I\’m afraid hasn\’t quite realised that the UK is actually rather different than the US.

This drive to austerity comes at a time when the short-term rate set by the Bank of England is 0.5% and the rate on 10-year bonds is just 3.0%. The timing is also perfectly wrong in that most of the UK\’s major trading partners are also suffering from weak economies and therefore unlikely to provide strong export markets. Nor are they likely to tolerate a substantial devaluation of the pound against their currency.

For example, we\’ve already had a substantial devaluation of the pound. Some 25% if memory serves me right.

It is really difficult to come up with an economic theory as to how the UK austerity drive even could work in principle. The UK, like the US, had enormous overbuilding of residential housing as a result of its housing bubble.

No, we didn\’t. We had a price bubble, certainly, but that didn\’t, probably as a result of our planning system, lead to a huge overbuild. Now I\’m willing to be corrected on these figures but I\’m pretty sure that new housing starts and completions is still below new household formation, as it has been for most of the last couple of decades.

The only part of the housing market that was overbuilt was flats, again as a result of that very planning system.

There are not many instances of countries adopting the sort of polices that the British government is now embracing, but the examples we have are not encouraging. For example, we have Herbert Hoover\’s efforts to balance the budget in 1932 and Franklin Roosevelt\’s drive in 1937. Both resulted in a considerable worsening of the economy. Of course, the UK had its own experiments with austerity in the middle of the Great Depression, which also did not turn out well for fans of economic growth and full employment.

And another difference about the US and UK experiences. The UK had a very different indeed experience of the 1920s and 30s. As can be seen here. (You might have to fiddle a bit to get the relevant years.)

The UK, like the US, had a big and bad recession after the end of WWI. Then growth resumed and UK had another stutter in 1925. We went back on the gold standard at the pre-war rate (bad, bad, Winston Churchill). Then we had a horror in 1931….and then we came off the gold standard and devalued. About 25% I think it was. As you can see from the GDP figures the UK economy then grew through the rest of the 1930s.

The sort of policies the UK is adopting….cut the deficit, devalue the currency, ….are exactly and precisely what did help the UK out of the Great Depression. It worked last time, why not this time?

I don\’t say it will mind, I\’m not a macro-economist. But when using the UK as a model, as a little brother for the likely course of the US economy, it\’s worth looking back into history and seeing what did in fact happen last time around. And the thing is, the UK experience of the Great Depression was very different indeed than the US one. UK real GDP in 1934 was above that in 1929. We may be similar but we\’re still different.

8 thoughts on “Umm, no Dean, not really”

  1. Keynesians often bring up the supposed balanced-budget efforts of FDR in 1937 as an excuse for why their hero’s policies failed to revive the US economy; unemployment was consistently in the teens throughout that decade in America. On that basis alone, it is arguable that the New Deal was an abject failure. The US did not really recover until after WW2.

    A relevant example here is what happened in the US in 1920-21; the country went through a sharp recession, soon recovered, and was booming soon after. There was no fiscal stimulus effort of any kind. A big problem in the 1930s, however, was that Roosevelt and his Brains Trust insisted in putting a floor under wages and introducing minimum wages and the rest. Such measures prevented the market from clearing.

    Roosevelt’s reputation as a great domestic politician is almost entirely unfounded. It is interesting to speculate what would have happened had there been no war.

  2. Hi Tim,

    we’ll get to test this one, but on a point of history, the UK did adopt austerity in 1931, cutting spending and raising taxes. We can argue whether this austerity or the return to gold (both bad in my book) was the bigger factor in the downturn, but Churchill did also go in for deficit cutting.

  3. As was pointed out by Jim Claydon of the Royal Town Planning Institute in June 2007 ,it wasn’t planners that restricted supply during the worst of the bubble but landowners and developers who wanted to keep prices up.
    “All landowners including housebuilders maintain land values by managing supply.It is not in their interests to release large quantities of land because this deflates its value.”
    Conversely there was a great deal of cheap land during the 1930’s and this played its part (as did low interest rates post-dropping Gold Standard) in a huge building private-sector boom round major cities ,nearly all for owner-occupiers which had n’t been the previous pattern.Between 1933 and 1939 three million houses were built, so if you could get a job in one of the new electrical industries,you could move to work in London which you can’t do now.Also then (in the 30’s there was a useful world market based on Imperial Preference which must have been of some advantage or else Roosevelt would n’t have been so keen to do it down even befor the US was in the War).
    Of course the solution to developers not releasing land is LVT but Johnathan Pearce goes doolally at the mere mention of it.

  4. DBC, the Green Belt arrived after WW2; there was some planning in the 1930s, but nothing like what happens now. The land market in the 1930s was also depressed because of the depression in agriculture after WW1 (my great grandfather was able to buy land in Norfolk around the turn of the century for almost nothing).

    There is no way that landowners can “hoard” land and keep it off a market forever. You would need to define “hoarding” to give it some objective meaning. Does it mean that any owner of a resource “hoards” it if he or she won’t sell it at a price that is deemed “fair”? I think you should be clearer on what you mean, since otherwise, the term is little more than a form of abuse.

    Even if landowner A “hoards” land as you might argue, his rival will make a profit by undercutting him by selling his land for a slightly cheaper price. Hoarding of scarce resources in a monopolistic sense rarely works: even most cartels collapse because it is always in the interests of one member to break free and sell a resource for a cheaper price. Hence why OPEC could not make price quotas stick during the 1990s, etc. Land “hoarding” is only really able to be sustained for long thanks to things such as planning laws and the like.

  5. I should add that “hoarding” of the sort that DBC and fellow land-tax enthusiasts condemn is much harder to achieve in a world if you don’t have absurdly low interest rates set by state-run central banks. It is far easier for a speculator, for example, to borrow money to buy land on spec. if the interest rate is almost zero, as it is now.

  6. @JP
    You start off by saying that land hoarding (not a word I used in my e-mail by the way)”rarely works”,then that land speculation depends on low interest rates (although high interest rates would have the same effect as LVT) .
    If land tends to be sold for immediate or prompt use without possible “hoarding”then how come the price of a residential plot under someone’s house is so inflated at circa 100k? How come nobody in the near perfect uncartelised housing market breaks ranks and starts an avalanche of cheap house sales ,the way you say hoarding always breaks down? Fact is with no carrying charge, land, which cannot deteriorate in value and does not need maintenance in its supply like oil ,can just sit there going up in value or maintaining its value.
    You make think its perfectly reasonable for a young British citizen to pay 100k for the physical right of residence in the GB up front and as a near lifelong drain on his/her disposable income. I do not. Your defence of land price inflation is ludicrous .

  7. I am not defending land price inflation; where have I done that?

    The reason why no-one has “broken ranks” to sell land for prices much cheaper than the prevailing rate is because very low interest rates, and planning restrictions on supply of developed land, mean that it is unlikely that any would-be housebuilder could do so.

    I notice that you have not dealt with my point about how land was far less restricted and regulated prior to the Town and Country planning acts enacted in the 1940s. You simply posited, as a fact, that land was much cheaper in the 30s or whenever, which is fair enough: but you have not said why it was cheaper. We did not have land value taxes before the Second World War. As I said, the reason for land prices being so cheap has more to do with the prevailing economic conditions of the time, such as the depressed state of agriculture.

    You say land can “sit there” maintaining its value. Not true: if demand for land were to fall for any reason, as it has sometimes done in certain places in the past, its price will drop. Agricultural land prices fell in the immediate post-war period, then rose quite fast when the Common Agricultural Policy came in (which I oppose, being a good free trader), and so on.

  8. As it says in a few simple words : why has n’t anybody in the paralysed residential sector started to “clear the market” by dropping house prices (the obvious way to shift them).It is nothing to do with planning permissions; existing houses already have them.Anyway there are enough extant planning permissions on vacant land in the SE to keep the developers working at full tilt for six years should they choose to do so.
    You are grasping at straws to defend the land-price inflation status quo whether you deny it or not: every freeborn Englishman (and anybody else who wants to long-term residence) has to pay 100k for the land to live on, even more in London where it became too expensive to live for ordinary working people without inherited wealth .And people like you call this freedom in a free market!

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