When All Else Fails, Housing Bubble

Last month I asked:

So what’s Osborne’s plan to generate growth?

Today we seem to have an answer.

As Anatole Kaletsky sarcastically put it:

That’s right — aside from an underfunded infrastructure pledge, a duty cut on beer and cigarettes, and a tiny and delayed corporation tax and national insurance decrease, George Osborne’s plan is to throw money at housing and hope for the best. 

Sounds markedly similar to the American strategy following 2001 when Greenspan “created a housing bubble to replace the NASDAQ bubble”, and we all know how that ended.

I’d tend to argue that the opposite is a much better idea. Instead of propping up the housing market, Cameron and Osborne should deregulate construction and planning (getting planning permission can be a long, costly task in the UK, and planning restrictions are estimated to add up to £40,000 to house prices) so that housing prices fall (if not absolutely at least priced in median wages) and Generation Y can start getting on the housing ladder.

As Faisal Islam put it:

But alas no. Instead of using the ultra-low interest rate environment and idle resources to invest in a quality business infrastructure  — high speed broadband, roads, railways, energy — and lower unemployment, Osborne has chosen to throw his stock in with the malinvestment-loving property speculators.

Unfortunately, pumping up credit bubbles can win elections (as we saw with Bush in 2004), so this may have improved the Tory electoral chances for 2015. But in the long run, we will see this as a dire move.

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Thoughtcrime is Real

I am careful what I say on Twitter especially, and the internet in general.

The sad reality is that the internet is not the place for expressing views that you do not want the wider public — including law enforcement and intelligence agencies — to know you hold.

We already know that the National Security Agency will soon capture all communications — phone calls, search histories, web history, e-mails, passwords, etc — in their Utah data centre.

In Britain, a dangerous precedent is being set.

From the BBC:

A teenager arrested over a malicious tweet sent to Team GB diver Tom Daley has been issued with a warning.

Dorset Police said the 17-year-old boy was held at a guest house in the Weymouth area on suspicion of malicious communications and later bailed.

After coming fourth in the men’s synchronised 10m platform diving event on Monday, Daley, 18, from Plymouth received a message on Twitter.

It told him he had let down his father Rob, who died in 2011 from cancer.

Arrested and cautioned for expressing an opinion. Not for threatening violence. Not even for racial or sexual abuse — as happened in March when a student was convicted of incitement to racial hatred after he tweeted a series of racial slurs.

Just for expressing an opinion that the authorities found to be distasteful. 

I admit, it was a distasteful comment. But the idea that the government should arrest the person who made it is far, far, far more distasteful still.

Meanwhile, the number of bankers arrested for rigging LIBOR remains at zero.

This is a very salient example of the problems with the internet in its present state. If the state has the opportunity to gather and index citizens’ thoughts, these cases in Britain — supposedly a free country — illustrate that it is a very short and slippery slope toward the state punishing citizens for expressing their opinions.

While the First Amendment might seem to protect speech, the United States has already got involved in policing expression. And the First Amendment has a massive loophole — it only restricts Congress’ ability to legislate against speech. Other agencies — like the TSA — would seem to be be able to restrict speech under “administrative” grounds (the same rationale they use to gut the Fourth Amendment and search travellers without probable cause).

From the BBC:

Holidaymakers have been warned to watch their words after two friends were refused entry to the US on security grounds after a tweet.

Before his trip, Leigh Van Bryan wrote that he was going to “destroy America”.

He insisted he was referring to simply having a good time — but was sent home.

Trade association Abta told the BBC that the case highlighted that holidaymakers should never do anything to raise “concern or suspicion in any way”.

The US Department for Homeland Security picked up Mr Bryan’s messages ahead of his holiday in Los Angeles.

The 26-year-old bar manager wrote a message to a friend on the micro-blogging service, saying: “Free this week, for quick gossip/prep before I go and destroy America.”

US law enforcement represents the overwhelming majority of requests to Twitter for users’ private information.

From Reuters:

Law enforcement agencies in the United States are behind the overwhelming majority of requests for Twitter users’ private information, the social media company revealed Monday in its first ever public report on the subject.

Of the 849 total government requests for user information during the period spanning January 1 to June 30 this year, 679 — or 80 percent — took place in the United States, typically for use in criminal investigations, Twitter said.

Japan was in second place after the United States with 98 requests filed by police, followed by 11 requests from law enforcement agencies in the United Kingdom and the same number from agencies in Canada.

Speech on Twitter — and on the internet in general — isn’t free.

UPDATE: It would seem that the arrested party did later make some threats. Whether he was arrested for these or his initial messages remains to be seen — he was cautioned for “malicious communications” which means “causing anxiety or distress”, and so could easily apply to the first tweet — as opposed to intimidation or criminal threatening, which he was not cautioned for.

Krugman Trashes Cameron

Regular readers will know that I have a track record of bashing arch-Keynesian provocateur Paul Krugman. But my views on Krugman — as well as Keynesian thought in general — are complex. For a start, I think his work on economic geography is excellent, and I rather wish he could take it to the same logical conclusions that I do.

In a way, he reminds me of Karl Marx. Marx’s exhaustive studies of 19th century capitalism are fascinating and essential reading. But Marx’s proposals for the global economy were ineffectual, just as Krugman’s solution to today’s economic malaise — throwing more money at the problem — is quite superficial. Plus, as a polemicist, he has been guilty of some raging hyperbole. But so have I.

Now, admitting that austerity is a problem has been quite difficult for me. Most of my political impulses are libertarian, and I see the accumulation of state power and an expansive state role in the economy as deeply problematic, mostly due to the problem of capital misallocation. But is a time of severe economic recession and weakened confidence really the appropriate time to cut spending, and throw welfare recipients – many of whom are elderly or disabled — into the blender?  I’d love to see less state involvement in the economy, and I think there are a good deal of wasteful programs — e.g. overseas military adventurism — that  can be cut right now in the name of paying down debt and improving infrastructure.

But the time to really cut is when the economy has significantly rebounded: when the private sector is creating jobs, when confidence is higher, when tax revenues have rebounded.

Krugman’s criticisms of Cameron have been rather different to mine: his line has been that cutting spending in a demand-depressed economy will just lead to lower demand. I take a slightly more qualified line.

The real problem here is that cuts in today’s environment are contractionary. That’s because of the debt. A high debt load means that service cuts are not offset with tax cuts. The money saved just goes toward balancing the budget, and not back out into the real economy where it can be used to create jobs and growth. The correct time for Cameron’s policies was during the last boom — when the economy is naturally at high steam, and is creating lots of jobs and growth. The best future period for these policies will be the next boom. Now, the argument Cameron might use is that there won’t be a “next boom” unless we take drastic action to reduce debt. Britain already has a huge total-debt-to-GDP ratio; we can ill afford another credit-financed boom. But austerity doesn’t even seem to be much use at reducing deficits: in a depressed economy, as government-spending falls tax revenue also seems to fall

Today Krugman obliterates the austerity policies of David Cameron’s coalition government:

Back in June 2010, when George Osborne unveiled the Cameron government’s austerity plan, it was all about confidence.

So how’s it going?

The Cameron government likes to point to low British interest rates — which are not just the result of safe-haven flight into the bonds of every advanced-country government that still has its own currency. Except, actually they are:


Still, the government’s commitment to fiscal responsibility has led to rising consumer confidence. Or, actually, not:


Business confidence! That’s the ticket! Or, well, no:

Will Osborne and Cameron listen to the raw empirical data that suggests very strongly that their policies are not working? Or will they drive onward on the strength of their ideological fervour?

Taxation Nation

Is it true that Americans are paying too little tax?

The short answer is no.

Current levels of overall taxation are close to the historical norm. So what’s changed?

Well, far less of the money is coming from corporations, and far more from payroll taxes. That means that a lot of the burden has been switched from corporations to their workers. That puts the power to invest into increasingly fewer hands. The middle classes, who pay the overwhelming majority of payroll taxes are left with less to invest. That means, broadly, that more money gets invested in big business and large corporations and less in small enterprise, who are the greatest job creators in America:

From the Economist:

Research funded by the Kauffman Foundation shows that between 1980 and 2005 all net new private-sector jobs in America were created by companies less than five years old. “Big firms destroy jobs to become more productive. Small firms need people to find opportunities to scale. That is why they create jobs,” says Carl Schramm, the foundation’s president.

So while I agree that the top 1% should be taxed more, and the bottom 99% less, what the above graph reveals is that America right now has is a spending problem, and not a tax problem.

Here’s spending as a percentage of GDP:

It is spending that is climbing well-above its historical norm. The difference really adds up:

The next American President and Congress will face a stark choice as they seek a balanced budget — do they raise taxes or cut spending?

Well, it’s an open question. Other nations spend far more than America, but they also tax more. 52% of French GDP, 37% of Japanese GDP, 47% of British GDP, 18% of Thai GDP, 32% of Swiss GDP, 78% of Cuban GDP, 27% of Indian GDP and 17% of Singaporean GDP is government spending.

Most interesting by far  is “communist” China. Only 20% of Chinese GDP is government spending. 

That’s quite a wide range. But to spend more you have to tax more, and that will be unpalatable to many Americans.

America is really at a crossroads. Growth would be a panacea. But with the economy in a Japan-style depression, generating sustained growth will be difficult.

American Infrastructure Is Being Built By The Chinese

Just how dependent is America on Chinese labour, manufacturing and supply chains? Decide for yourself.

From Addicting Info:

San Francisco is getting a new bridge connecting to Oakland. But it’s not being built by American workers. It’s being built in China and shipped back to America for assembly. But that’s not the only infrastructure project being built by the Chinese, and it’s not just being built in China. It turns out, the state-owned Chinese contractors are being hired out to build American infrastructure right here in the United States.

According to Engineering News Record, five of the world’s top 10 contractors, in terms of revenue, are now Chinese. One of them, China State Construction Engineering Group, has overtaken established American giants like Bechtel.

The Chinese contractor has already built seven schools in the US, apartment blocks in Washington DC and New York and is in the middle of building a 4,000-room casino in Atlantic City. In New York, it has won contracts to renovate the subway system, build a new metro platform near Yankee stadium, and refurbish the Alexander Hamilton Bridge over the Harlem river.

But why are we hiring contractors from China to build American infrastructure, when we have a perfectly good workforce here in the states? The answer is profit, and it’s the reason why Republican politicians and many corporations do not support infrastructure projects that would put millions of Americans to work. Because the Chinese contracting firms are government owned, they are able to bid for contracts at very low prices. In other words, the labor is cheap. American companies don’t want to hire Americans to do the work when they can call up Communist China to come do the work instead.

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