One Sided Economics Fun

Tim W falls into the trap of making up his mind and then selectively applying economic theories to justify his position. See if you can spot the figure which he deliberately omits:

Imagine, just as an example, that we replaced all [Housing Benefit] with social housing...

We can either subsidise private rents by £21 billion via HB or we can subsidise social rents by £21 billion by not charging market rents. Either way, it’s still £700 per taxpayer: yes, in one people have to cough up, in the other they’re just made poorer without realising it but the economic cost is the same. As are the people who have to carry that economic cost.

It might be true that social housing is in some manner “better” than subsidising private housing. I don’t happen to think so but you might, fair enough. But I have a very strong feeling that much of the support for social housing comes from some weird belief that it is either free or cheaper. Which it simply ain’t."

Correct! You've spotted it. Well done! Notional cost accounting is just like ordinary financial accounting - for every debit there is a credit. He mentions the notional cost (which he refers to as economic cost) of allowing people to occupy social housing at below market rents but he misses off the notional income.
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In case you didn't spot it, allow me to give a simple example:

Mr A and Mr B both have sons who attend the local university. Mr A's house is small, and Son A has noisy younger brothers and sisters, so Mr A (being a generous soul) pays £90 a week rent for Son A to live elsewhere (but Son A has to pay his share of the bills of £10 a week). Mr B's house is big and Son B stays at home in a room which Mr B could sub-let for £100, but Mr B (also being a generous soul) allows his son to stay there for £10 a week, enough to cover his share of the bills.

Mr A has a cash cost of £90. This is analogous to the Housing Benefit paid to 'private' landlords.

Mr B has no cash cost (quite clearly) but he has a notional cost of £90 (the rent he forgoes by undercharging his son rent or not chucking him out and sub-letting for £100 - which is clearly also an 'economic subsidy' to Son A) but Mr B also has the notional income, which he chooses in this example to spend on his son. This is analogous to having social tenants who pay little or no net rent.

To finish off the analogy, imagine that Mr A bumps into a builder who can do a sound-insulated loft conversion for £15,000 which will add £20,000 to the value of Mr A's house and in which Son A would be happy to live. Mr A could save himself the actual cash cost of £90 and allow his son to stay living at home for £10 a week bills. This is akin to allowing more social housing to be built (taking Mr A as taxpayer and local council rolled into one).
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And here's the long explanation:

1. Let's ignore the two-thirds of Housing Benefit that is paid to local councils or Housing Associations (social housing) - because that is a completely made up figure; it is merely a transfer between government departments (the DWP's expense is the local council's income) and does not cost the taxpayer one red cent, neither in cash terms nor in notional terms.

2. The actual cash cost of providing social housing is quite low and is largely covered by the rents that some social tenants pay; the notional interest cost of the bricks and mortar is covered by the notional capital gains on the finished buildings; and the council can get land at very low cost (it does not have to pay for planning permission as it can give itself planning for free).

3. Let us instead focus on the one third of HB that is paid to 'private' landlords. If the income taxpayer has to pay 'private' landlords £7 billion to house people, that is a real cash cost of £7 billion. What if councils built enough housing for all these people for low net rents instead? It would save £7 billion cash expenditure a year, which could be passed on the income taxpayer as a tax cut (or spent more sensibly, whatever). I don't think that Tim W disputes this.

4. And let us imagine that the market rents for this social housing would be £8 billion, but the tenants can only afford to pay £1 billion (enough to cover cash running costs). The council could demand £8 billion and allow another branch of government, the DWP to pay £7 billion in HB - but to simplify the model even more, we'll assume that councils just charge people what they can afford to cut down on paperwork and hassle.

5. For simplicity's sake, we will also assume that social housing belongs to the taxpayer, but is administered by local councils. So the council is letting out your property for less than market rent, and Tim W says that there is a notional loss to the owner and an economic subsidy to the tenant. Which there is. And the value of that economic subsidy to the tenant is worth £7 billion; and so has an economic cost of £7 billion to the taxpayer; absolutely no dispute there either.

6. But... for every notional expense there is some notional income. And that notional income is the £7 billion that the taxpayer is 'earning' from the social housing and 'giving back' to the tenants. Of course in cash terms he is neither earning it nor giving it back, that is why we refer to this as 'notional income' and 'notional costs'.

7. So with social housing, the taxpayer (as ultimate landlord) has notional income of £7 billion and a notional expense of £7 billion; the net notional cost is in fact zero, which conveniently is exactly the same as the actual cash cost. But... with HB payments to 'private' landlords the taxpayer has a cash expense of £7 billion and no corresponding rental income (neither cash rental income nor notional rental income to pay it.
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Anybody who disputes that social housing is better value for the income tax payer than HB for 'private' landlords is merely putting blind politics above the interests of the income taxpayer; whereas I would put always the interests of the income taxpayer above politics. In fact, looking after the interests of the income taxpayer IS my politics, to the extent I have any at all. Which is one of the reasons that I virulently oppose the payment of HB to private landlords and support the construction of more social housing generally.

And anybody who thinks it's a good idea to sell off council housing at undervalue and then rent it back from 'private' landlords for above market value wants his or her head examining.
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To respond to the inevitable dumb ass comments:

1. Yes, I know that social housing is full of single mums and Somali asylum seekers. Completely separate topics. In the first example, let's imagine that Sons A and B are the 'deserving poor' to whom Mr A and Mr B have some moral or political obligation.

2. Of course councils should charge open market value for the more desirable social housing and relegate lower income people to the less nice stuff. But with an increase in the amount of social housing and hence lower rents in the private sector, rents at the margin will fall dramatically, so even the lowest income will be able to afford market rents.

3. Yes, I am a land value taxer. The state is best funded by maximising its income from rents or ground rents; the best form of rationing is price rationing and people ought to pay for what they get (see 2). Land Value Tax is in and of itself good for the income taxpayer as it allows taxes on incomes and production to be reduced.

Here endeth.