Tuesday, 2 September 2014

Economic myths: economic recovery is being stunted by problems in the property sector

Via Pete Green at HPC Surivivors, from The Telegraph:

Growth in Chinese manufacturing activity slowed in August, two closely watched surveys showed on Monday, losing momentum as a declining property sector and waning stimulus effects weigh on the world's second-largest economy...

Analysts said the result indicated China's economic recovery was being stunted by problems in the property sector - where new home prices posted their fourth consecutive month-on-month decline - as well as the weakening impact of stimulus measures taken to boost growth.

"The weak PMI data suggest that China's shallow growth recovery has started to lose momentum, likely because of the ongoing property market correction and a decline in the efficacy of policy easing due to structural problems in the economy," economists at Nomura International said in a report.

So they hammer the same point home three times in a row: the health of manufacturing depends on house prices going up, presumably in a straight line to infinity.


Land rents are not an input or a cause of anything; they are merely a balancing figure between value and costs. If the real economy is doing well and town planners are doing a good job, then land rental values go up. Land rents are not a component of GDP, they are a way in which GDP is distributed, just like tax and welfare payments (privately collected land rents are simultaneously a tax on those paying them and welfare for those collecting them).

And land prices (or house prices) are like a parasite on the real economy, the real economy grows and land prices go up, thereby soaking up more and more of output until the tipping point is reached and the virus starts severely weakening the host.

That's what's happening to the Chinese economy now.


Anonymous said...

The problem in China is massive lending for purposes of property speculation-construction. They are building ghost cities. Many buildings and even whole towns lie empty. Often they are sold but remain empty none the less. Sounds like a modern version of Dutch 17thC tulip mania. Confucius would be mighty pissed off.

Mark Wadsworth said...

PC, yes, that is one way in which Home-Owner-Ism manifests itself; people try to own as many "homes" as possible, even though an empty building is clearly not a "home" by definition.

Lola said...

GDP is such an iffy measure. I bet those that construct it do include 'rents' as part of it. But as you say, land rents are a cost of production, not a benefit.

Lola said...

The statement 'all profits return to rents' needs to be hammered into the heads of children from birth.
That's what I have done to mine - and mightily pissed off they are. With both the facts on the ground but mostlty with and my constant repetition. "You're Boooorinnnngg Dad. Yawn".

Mark Wadsworth said...

L, it is an iffy measure, but what is important is that it is consistently compiled.

Kids understand land rents and town planning perfectly well. It's adults who've had it driven out of them.

DBC Reed said...

@ paulc
Dutch tulip mania gets quite a bad write-up.But it was not a market in the economic rent or scarcity value of the bulbs which would put it into the same investment class as land.The buyers were hoping to breed from the rarest bulbs ad infinitum or exponentially ..This was productive investment not the negative-capitalist form of investment that tries to keep production at the same or even lower levels
((In my view the enemy of capitalism is not Socialism but Negative Capitalism which profits from re4strictng production. Socialism by trying to increase effective demand among the masses is Capitalist production's little helper.)

Pablo said...

Lola: 'all profits return to rents' - I've not heard this one before: a word of explication please.

DBC Reed said...

The best explication IMO comes in Marx's Capital no less ,distressing though this may be to all the half arsed libertarians who support LVT because its the least demanding way of raising tax for minimal public services.
It comes in Part V1 chapter 37 entitled "Transformation of surplus profit into ground rent"in which he describes how "surplus value produced by industrial capital falls into the hands of the land owner."
So lola is showing his instinctive sympathy with Marx!

Pablo said...

That ref. is to the Guide by Brewer, not to Capital itself (thank heavens, for the book itself is unreadable).