Economic Theory

Are politicians economically illiterate? Or do they deliberately ignore basic economics?

These past two weeks have been a grim time for economists.

From Transport for London’s decision to revoke Uber’s licence, to Jeremy Corbyn’s call for rent controls, culminating in Theresa May’s commitment to pump more money into the Help to Buy scheme, policymaking shows a continual disregard for basic economic principles.

Take housing. Britain has seen sharply rising house prices in recent decades, and now has among the highest prices per square metre worldwide. Demand has risen primarily due to higher incomes and population growth, but building has simply not kept pace.

The UK’s housing supply curve is very inelastic – the provision of new homes seems unresponsive to changes in demand.

This screams that we have a supply-side problem: our planning laws produce blockages and restrictions, resulting in incredibly small homes by international standards and houses not being built where they are wanted.

The solution seems obvious: a sea-change liberalisation in planning and density regulations so more houses are built, and new frameworks which relieve the tensions from the spillover effects of new developments.

So what do our wise leaders do?

The Prime Minister has chosen instead to increase demand-side subsidies by £10bn by expanding the Help to Buy scheme. Those lucky enough to participate will find houses more affordable, and overall building will rise a tad. But the main effect will simply be to lift prices further, to the benefit of existing property holders and the detriment of everyone else. In other words, exacerbating the existing problem.

Are Corbyn’s solutions any better? The Labour leader talks about supply, though inevitably thinks the answer is a new generation of council houses. But again he misses the key problem. If the government faces the same planning laws and local opposition to new developments as everyone else, chucking public money will do little good.

His solution would only work if councils could circumvent the rules and ride roughshod over opposition to ensure council houses get built. But if they have that power, why not change the rules for all tenure types?

Corbyn’s belief in the need for rent controls for private rented accommodation is further economic illiteracy.

The results through history have been clear, from Stockholm to Israel, San Francisco to Britain: holding rents below market rates means less rentable accommodation available in total, a decline in the quality of accommodation (and hence further regulation imposed to counteract it), and cronyism and corruption in the allocation of scarce properties.

That’s why 95 per cent of an IGM Chicago economists’ survey panel oppose rent controls – a rare consensus for economists. More benign short term “rent regulation” schemes can be dreamt up, of course, but these do nothing to solve to constrain the general upward trend in rent caused by restricted supply.

Bad economics is not confined to housing policy. As if Londoners’ cost of living problems were not challenging enough, mayor of London Sadiq Khan’s decision to revoke Uber’s licence will reduce choice and increase prices for consumers moving around the city.

Whatever one thinks of Uber’s compliance with Transport for London’s regulations, economists from the same IGM Survey overwhelmingly believe that ride sharing apps raise consumer welfare (98 per cent to two per cent agree to disagree), and that existing taxi regulations in major European cities work against the consumer interest (85 per cent to zero per cent, with 15 per cent uncertain).

The failure to consider the impact of the ban for customers demonstrates, yet again, a decision taken without economic analysis.

Why do politicians ignore basic economics like this? One might just suspect ignorance, but in the case of housing, the underlying problems are so widely acknowledged they are impossible to ignore.

This raises more unedifying prospects: either appeasing electoral interest groups plays a much bigger role in decision making than “doing the right thing”, or our current leaders are susceptible to cranks with bad ideas.

Maybe May favours demand rather than supply-side housing solutions because lots of current Conservative voters and MPs oppose green belt reform and own their own homes already, and so benefit from high prices.

Maybe Corbyn favours council house building because he wants a new generation of voters who owe fealty to government.

Maybe Khan was sanguine about revoking Uber’s ban because the left-wing unions dislike Uber’s business model and because Transport for London is beholden to the interests of the black cab trade.

In politics, one should always be careful about attributing motive. But absent coherent economic explanations for their decisions, we are merely left to speculate as to what exactly our leaders are thinking.


This article was first published in City AM

Ryan Bourne occupies the R. Evan Scharf Chair for the Public Understanding of Economics at Cato. He has written on a number of economic issues, including: fiscal policy, inequality, minimum wages and rent control. Before joining Cato, Bourne was Head of Public Policy at the Institute of Economic Affairs and Head of Economic Research at the Centre for Policy Studies (both in the UK).

3 thoughts on “Are politicians economically illiterate? Or do they deliberately ignore basic economics?”

  1. Posted 04/10/2017 at 18:48 | Permalink

    Please can this article be printed and handed out to every member of the Tory Party at the Conservative Party Conference! The housing crisis is a clear cut issue of supply and demand. Yet the supply side is largely ignored. The best we get is an arbitrary mention of the government building X number of houses by some randomly specified date in the future. In the place of sensible discussions on how to genuinely expand supply we are subjected to yet more counterproductive policies, which have the effect of pushing up demand. People wouldn’t need Help to Buy if more houses were built! Foreign investors wouldn’t buy up every property as soon as it came on the market if they weren’t getting inflated returns on their investments caused by under supply.

    Successive governments responses to the crisis would be laughable if the consequences weren’t so tragic. As Kristian Niemietz so excellently summarised in his paper The key to affordable housing the imbalance in property prices in the UK are responsible at least in part for a whole host of Britain’s social problems. The quote from Alexander Hilton that “people aren’t queuing up at food banks because of the cost of food, they’re queuing up because of the cost of housing” is particularly poignant.

    To add to the woes without radical action on house building we are on course for Britain’s first ever communist government complete with its own SA equivalent army of enforcers – Momentum. A group which has readily used violence and intimidation to crush dissent in the moderate wing of the Labour Party and now emboldened by the recent election is becoming ever more frenzied and aggressive. Corbyn and his stormtroopers can no longer be dismissed as a lunatic fringe. Their Marxist views, however economically illiterate, are gaining traction with an electorate who feel increasingly disenfranchised by a capitalist system where half (or more) of their pay check goes in rent and the chance of owning a home is now a pipedream.

    We really are now balanced on a knife edge if radical and immediate action is not taken to free up the planning system to unleash a wave of house building as a nation we are in for the absolute misery that always follows in Marxism’s wake.

  2. Posted 08/10/2017 at 04:21 | Permalink

    “Are politicians economically illiterate? Or do they deliberately ignore basic economics?” Can we add economists to that list?

    Take the housing crisis. Since 1983, 7 million new homes have been built, while the population has risen by 9 million. Resulting in more dwellings per capita, in every region than ever. The population of London fell to its lowest post WW2 level in 1991 and has only now recovered to its 1939 level of 8.6M. That makes it by far the biggest city in Europe, Berlin at 3.5M being the next most populous. For a whole host of reasons, including its size, it’s hardly a surprise that global demand for London/SE has completely distorted the picture for UK housing as a whole. Londons population has increased by nearly a third in a couple of decades, so blaming planning for its turn of fortunes seems far fetched to say the least. Quite the opposite in fact.

    It is more likely the UK has a chronic over supply of housing. 12 million bedrooms are over consumed in England and Wales by owner occupiers compared to those that rent on a pro rata basis(rental being a perfect market). Economists are quite rightly against rent controls are they act as an implicit state subsidy, leading to misallocation and over consumption of immovable property. Yet the same economists who blame the “housing crisis” on planning regulations then fail to apply the same logic to owner occupiers.

    If freeholders had to pay a LVT(set at the same rental level a tenant would pay) as compensation for their right to exclude others from valuable locations, their housing costs would double. That they do not means they are in receipt of an implicit state subsidy worth around £180bn each year, then capitalised into rental incomes and selling prices. Increasing their monetary value by an average of 200%. This then pushes up demand for housing, causing excessive vacancy, under occupation and the tendency for sprawl.

    Increasing the supply of housing in order to bring down prices may have a small short term effect, at a cost of adding to existing inefficiencies in the housing market. Over the long term this will do nothing to address affordability issues. If more people move to where demand is highest, agglomeration effects increase, as does demand and aggregate land values. All you accomplish is to move the margin of production and further increase prices. An easily observable fact by looking at the growth of urban populations around the World.

    It should be obvious that housing can only ever be optimally affordable(for typical households) and allocated when freeholders pay a 100% LVT. It is perhaps forgivable that the economically illiterate politician should fail to grasp that brute fact. Economists, less so.

  3. Posted 08/10/2017 at 14:13 | Permalink

    While I agree that Uber gave the London taxi industry a badly needed kick up the ar*e, they have had their licence revoked because they failed to report at least two sexual assault complaints to the police. Economics aside, every company should have to follow the laws in place, and in this case were morally bankrupt by not doing so.

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