Hurray! Another little pet theory borne out in practice.

As I have been saying for a while, e.g. here:

... what [quantitative easing] boils down to is commercial banks and government departments shuffling numbers on bits of paper (or on computer screens) around between themselves with little or no impact on the wider economy.

From today's FT*:

Key measures of money supply and bank lending both fell in October, raising further questions about the effectiveness of the Bank of England’s £200bn programme to pump cash into the economy.

Money supply as measured by M4 “broad” money excluding distortions from the financial sector fell 0.7 per cent in the month and by 5.3 per cent over the last three months annualised, figures from the Bank showed... The figures also showed that M4 lending excluding the effect of securitisations and financial sector distortions fell at a 3.4 per cent annualised pace in the three months to October compared with an average of about 10 per cent annual growth in the decade leading up to the crisis.

The weakness of money supply and credit is a sign that banks are reluctant to lend and consumers and businesses are holding off spending and borrowing, and underlies fears that deflationary pressures still haunt the UK economy...

Via HPC.

Reader's letter of the day

From today's FT:

Sir, Yugo Kovach (Letters, December 5) rightly points out that state subsidies for mortgage interest amount to preferential treatment for homeowners at the expense of equally cash-strapped tenant neighbours.

This government preference is nothing new: it goes back at least as far as the "right to buy" council housing and has been maintained throughout the New Labour period so that today we are witnessing the unsurprising consequences of a housing policy (not to speak of an economy) fixated on home "ownership" and mortgage debt at any cost.

One little-discussed aspect of all this means the misfortunes of Mr and Mrs Prudence may not end where Mr Kovach left them. When Mr Prudence lost his job and the couple moved to a lower-rent property, their new buy-to-let landlord, Mr Hazard, engaged in extensive vetting of his prospective tenants and their ability to pay. However, the Prudences have no corresponding right* to check on the landlord's credit situation, and should Mr Hazard's bank foreclose, they will have no defence when the bailiffs turn up at their door...

Mr Matthew Hyland, London.

* That's not strictly true, but such a request is not going to endear you to a prospective landlord.

Putting the cat among the pigeons

The CEBR have grabbed the bull by the horns and set the hare running with their suggestion that VAT should be cut from 17.5% to 12.5%, a story which appears to have been featured by most major newspapers.

As I have long argued, VAT is The Worst Tax Of All (followed closely by Employer's NIC)*. The detractors are swift to point out The Elephant In The Room:

The EU's VAT Directive sets a lower limit of 15pc for all member states, but it allows for a temporary cut under "certain conditions". Brussels is unlikely to object strenuously at this stage.

I am quite sure that the CEBR are perfectly aware of this, so they are killing two birds with one stone; they are highlighting the fact that VAT is the worst tax and that it's imposed on us by the EU.

As to the other objection:

The drawback of a VAT cut is that stimulus leaks overseas through imports, a risky strategy at a time when the UK current deficit is already running at 3pc of GDP – although imports are now collapsing. It also puts off the inevitable day when Britain must shake its addiction to shopping and start to live within its means.

Well, no actually. Total VAT receipts are derived about half from the sale of goods and half from services. Services are by definition almost entirely produced and consumed domestically, so an even better suggestion would be to leave VAT on new goods as it is for the time being, and scrap VAT on services completely. Services already suffer a super-tax, i.e. Employer's National Insurance, so that would level up the playing field.

* Even the European Central Bank's research backs this up, from page 19 of this:

Thus, it seems that while for the OECD countries social contributions are more detrimental to growth, for the EU countries indirect taxes are more harmful. In contrast, direct taxes and size do not seem to affect growth significantly for either set of countries.19 This could suggest that direct taxes (such as income taxes) are less distortionary than indirect taxes (such as VAT, sales taxes, goods and services taxes) and social contributions.

(please feel free to suggest more animal-based metaphors in the comments)

Land values (3)

To sum up; land values vary enormously across the country, depending on what type of land it is, and in the long run are a function of local amenities and planning permission.

There is a third element, the speculative element. As we are now finding out at great cost, booms and busts in the property market are actually poison for the economy*. Since the early/mid 1990s, residential land values (i.e. land with suitable planning permission or land with a house already on it) have increased between four- and tenfold.

This is a pure speculative bubble - you can blame greed; mass-immigration; buy-to-let; estate agents; reckless lending by banks; very restrictive planning laws; land-hoarding by builders; the complicity of existing home-owners in thrall to the 'feelgood factor' or anything else you like. These bubbles occur every 18 years or so, and the fall-out is always the same (only this was the biggest bubble ever, so the fall-out will be far worse...).

So to my mind, the main argument for a tax on 'land values' is that it is really a tax on the speculative element of property values, which I tried (and probably failed) to explain over at ConHome last month.

* Notwithstanding that sell-to-renters, property developers, estate agents, down-sizers, presenters of TV property porn, derivatives traders at banks etc have all benefitted enormously over the last ten years. See also disclaimer 10 in the ConHome article. I am looking at the overall impact.

The Brown Bubble

I have stared at the chart showing the ratio of house prices to average disposable income per household that I posted yesterday, and something else strikes me; the rapid increase in house prices in the early 1970s coincides with Anthony Barber's "Dash for growth" * and the rapid increase in the late 1980s coincides with the Nigel Lawson's "Lawson Boom" **. And we all know what happened next ...

May I hereby coin the phrase "The Brown Bubble", to refer to the periods from 1997 to 2007, when house prices marched seemingly inexorably upwards, and from 2008 to 2010 when we suffered from the corresponding debt-hangover?

* Scroll down. Not to be confused with Reggie Maudling's 'Dash for Growth' a decade earlier, obviously.

** See previous link, scroll down a bit more.

SNP don't understand economics

"The SNP has already pledged to match the UK's growth rate by 2011 by cutting business rates and channelling investment in enterprise, transport and education more effectively", it says here.

Wrong on two counts.

If you cut business rates, landlords just put the rent up and/or your premises go up in value. Our governments have tried this several times, and that is exactly what happens.

As to 'channelling investment', that sounds like 'subsidising' to me. Which is always a bad idea.