Monthly Archives: May 2011

Gaming the system through not progressing/adopting development plans

If local planning authorities simply wish to prevent development NIMTO (not in my term of office) there is plenty of opportunity for them to do so in the current hiatus and irrespective of the proposals for a ‘presumption in favour of sustainable development/default yes’ there are several tactics open to them.

I have had my suspicions about a lot of local authorities but some authorities are openly doing so.

Tactic 1, Progress plan but dont adopt following examination – the Coventry case highlighted this.  There was a change of administration and the new administration decided to sit on its hands.  There is no requirement to adopt under the act, the regs or the localism bill, rather they ‘may’ adopt.  Sit on your hands, no new homes bonus but if your NIMTO you cant be bought off.

Tactic 2, Let your neighbours progress their development plans but either dont progress yours or co-opoerate with them but disagree and publish an incompatible plan.  The Stevenage/North Herts and Oxford cases.  This applies to strategic sites or authorities performing a wider growth function for an area.  If your a ‘receiver’ and dont want to be you can again sit on your hands.  The duty to cooperate in the localism bill means you will have to be positive and turn up to meetings but the duty to cooperate is not a duty to agree – if you are stubborn you can scupper your ‘partners’ plans because they they then become udeliverable.  The localism bill contains no provisions for resolving this.  Statutory joint planning commitees are permissive powers and their is no power for the SoS to set up statutory joint committees and define LA members in default.  This ommission has been pointed out the dept for many years but they have taken no action, so at this rate they never will.  Take advantage sit on your hands.

Tactic 3, Roll forward your old low and out of date 5 year requirement from the existing local development plan.  The method statement on trajectories has been withdrawn from the PINS site following the letter putatively (and illegally) from the SoS abolishing RSSs.  In two recovered appeals in Cornwall the SoS has simply rolled forward the old local (non RSS) numbers.  Now there is some difficulty here following Cala II.  RSS remains until after SEA on revocation, you cant hold proposed revocation as a material consideration in pushing forward your core strategy, on planning applications though it can ‘exceptionally’ be material.  The key here is to stall, refuse and hope any appeal gets called in so either the SoS can use this get out, or the decision is made after RSS revocation if it ever happens.

Tactic 4, Ensure you approve just enough housing to keep your old 5 year supply, even on unallocated sites.  Make a few decisions on the least bad sites to do so.  Following the above recommendations you are at risk of having an even more out of date development plan.  Under the NPPS there could be a ‘presumption in favour of development’ dont worry if you maintain a 5 year supply you should still be able to refuse and have the decision upheld by the SoS on a recovered S78 appeal whatever one of those troublesome independent inspectors says.  If you have a 5 year supply it will be hard for developers the plan is out of date, even if the 5 year target was set 15 years ago, as the SoS is abolishing/revoking all of the powers to ensure 5 year supplies are kept up to date and all of the audit requirements of councils that fail to do so.

In short just ignore all of that rhetoric of the government about housebuilding increasing.  Thats just to keep Osbourne and Cable happy.  As you can see Pickles, Clarke and Schapps have designed a system of masterful slothfulness and inertia designed to ensure that NIMTO councillors everywhere are pleased.  One where those troublesome plans, the updating of which causes so much controversy, just doesn’t happen.

House Price Myths #1 ‘Free banking’ would have prevented the bubble

Free banking is where banks are free to issue their own money, there is no government/central bank monopoly of money. The money is backed by either the value of assets – the so called ‘real bills’ doctrine, or specie, that is hard money a precious metal such as gold or silver or both. Under either system different reserve requirements can apply.

If a bank goes bust so be it competition would mean people would save with the most trustworthy banks.

For many, especially Tea Party american conservatives, under the influence of a faux Austrian economics this is an attractive system. In their view fiat banking, state banking using non-convertible (to specie) paper money is inflationary, pushes interest rates too low and this boom in lending led to sub-optimal investment decisions driving an asset price boom. Especially according to this narrative in housing. Hence the great recession was a problem caused not by a breakdown of capitalism but because of government interference in the economy.

Whatever view you hold about capitalism this narrative is just plain wrong.

The proof is that house price bubbles can be just as dramatic even in free banking regimes.

Michael Cannon writes in the Land Boomers (1966) of the 1892 Melbourne land crash

The land mania of the 1880s took two main forms. The first was based on a plethora of building societies, whose optimistic officials were relieved that every family in the colony could simultaneously build their own house, keep up the payments through good times and bad, and support an army of investors who were being paid high rates of interest for the use of their money. The second form of mania was the deeply held belief that it was impossible to lose money by investing in land, a belief that persists to the present day…

In 1886 it appeared to some of the associated banks that the land boom had reached its zenith and would now plunge downwards. They became alarmed at the large withdrawals being made to meet land payments, and increased the interest rate on deposits and overdrafts by 1 per cent. For a year land speculation became less profitable.

Then in 1887 there began a new wave of speculation, the land boom proper, so forceful that it over-rode all considerations of interest rates. Land selling in Surrey Hills for 15 shillings a foot in 1884 rose to 15 Pounds in 1887. Land at Burwood rose from 70 to 300 Pounds an acre.

In the city there was fantastic competition for blocks, fanned by constant reports of fortunes which had been made by holding on to the blocks for a few months and reselling.

Once again the banks, dismayed by wildly fluctuating values, began calling in overdrafts. Unfortunately, some of the leading banks had encouraged speculation when money was plentiful, and ruthlessly suppressed it when the inevitable reaction set in. This traditional banking policy, aimed primarily at safeguarding the banks’ own interests, proved utterly ruinous to the general community. (my emphasis).

The land promotors began looking elsewhere for easy finance. Thus the years 1888, 1889 and even 1890 saw the formation of most of the disastrous land and finance companies, and so-called land banks. Under the loose banking and company laws of the time, they were able to take savings deposits, issue shares, float loans, discount promissory notes and other commercial paper, and in general perform all the functions of an established bank.

The boom soared upwards to dizzy new heights. How could such values last? The maximum rentals which tenants were willing to pay often amounted to only 2.5% return on the money spent on sites and buildings. As the boom petered out, many tenants could not pay even that. A few experienced speculators realised what would happen, and quietly began to sell off their shares and land while there was yet time…

There was a run on banks, with no lender of last resort 16 went bankrupt, only halted by a government note issues, and 50% unemployment.Whole streets of newly built suburbs remained vacant; A national depression was created that lasted most of the 1890s.

All under free banking. Indeed as the quote shows the competition for speculative lending, wildcat bank formation and coordinated contraction all made matters worse.The example is serious embarrassment to advocates of free banking, Kevin Dowd of Nottingham Business School, a major advocate, in his book ‘The Experience of Free Banking’ tries to present a breathtaking defence that it was primarily bad banks that failed (dont they always) and this showed a ‘flight to quality’ and that it ‘had little effect on the real economy’ – as if a national depression after a slight pause, and a local depression immediately after, was not the real economy. The nature of the speculative land economy plays almost no part in his account.

Now it is possible to make arguments for free banking and not claim that fiat banking by itself is the cause of house price booms, Fred E. Foldvary for example offers a more nuanced georgian explanation.

What is clear from the Melbourne boom is that a one sided fiat banking based explanation of the bubble and great recession will not wash.At the heart of the issue is the relationship between interest rates and house price rises. Put simplistically when annual house price rises are greater than interest rates this leads to false perception of risk free arbitrage. Demand for money in banks lowers and demand for credit for land purchases rises. In free banking money is endogenous. Banks monitor their own reserve ratios but valuation of land based assets secured against loans may be exuberant and not backed by long term rental (real) growth.

None of this requires a government or central bank at all to create a land based boom/bust cycle. Fiat banking, if interest rates are too low, may widen the perception of false arbitrage and have other effects, but it is neither a necessary or sufficient explanation for financial instability.Wildcat banking allows anyone to set up a bank and lend lend lend against falsely valued assets. Recently Iceland was a nation run on wildcat banking. Advocates of free banking need to explain how they will avoid this downside and control house price inflation.

Now the fans of Murrey Rothbard would propose 100% reserve banking (note the issue of fiat v gold is a huge diversion here – under a gold standard reserve requirements or otherwise still influence the rate of lending). I have yet to see a good argument of how financial intermediation would work under full reserve banking, as banks could no longer have their current dual role, as banks and intermediaries, or how a market for ‘black market intermediaries; could be avoided. The great risk is the difficulties of raising credit could halt investment.

A good example of full reserve banks are islamic banks, many of which went down following the collapse of the dubai property bubble and required state bailouts. Barred from lending many simply invested in property companies under many complex structures tested against islamic law. 100% reserve banking is less than 100% if the assets are wrongly valued. It can still amoungt to ‘embezzelment’ in Rothbards terms. This is the issue the corrent valuation of non-monetary assets held on banks assets sheets. Providing these are correctly valued, even with fractional reserve banking, there is no ‘embezzellment’.

Harry Enfield makes a campaign ad for Ron Paul

‘Blot under the landscape’

As described by an opponent of a basement excavation by britains second richest man.

Where not to put your construction waste

Windfarm Wars

Been enjoying windfarm wars on BBC2  its fair appraisal of all sides in the Den Brook Saga and wire like realistic slog through every last detail without editorial shortcuts.

If there is one lesson from this – dont cry like Cartman at public inquiries, it will get you nowhere. On the other hand local resident Mike Hulme shows what a pointed and calm letter on two sides of A4 can do .

7 years for consent!  Now larger farms will go through the IPC/PI route so 18 month should be the max. Whatever the merits or otherwise of a particular case its unlikley that such controversial schemes will be recommended for approval by head of planning worried about their jobs being merged or outsourced out of existence – simply so Pickles can make the decision.

I wonder if the government – if the pressure from the treasury proves too much – will take the same straight to PI route for major housing schemes.  The spin being that its not anti-localist as they are all going to appeal anyway.

If Eric is overloaded with red boxes each weekend, and troubled by the fact he is expected to read inspectors reports, he should remember that one of the key ideas behind the RSS based system was that ministers should almost never have to take the decision on major applications as the rules would be set by local authorities sitting jointly and by default by planning inspectors.

CEBR predict house price rise because of critical housing shortage

Published today CBRE forecast a 5% per year house price inflation by 2015 because we are only building half the numbers of houses needed to meet household growth.

If we did have that level of house price inflation, and banks were lending again, it would trigger a self feeding house price boom if the rise in prices were grater than interest rates- as borrowers and lenders could falsely see a risk free arbitrage opportunity

The government would claim that the last quarter housebuilding rates showed a 26% rise.

Two points

Firstly the annualised figure from the latest stats is 116,000 houses a year, the CBRE figure is based on 130,000 a year. Half current household projections. However a TCPA report suggests the need is 264,000 a year plus backlog (growing by 130,000 a year for several years) so the real need is much higher.

Secondly its a dead cat bounce. With housebuilders now clearing their balance sheets of bad debt and moving into profit they can begin to start again on completing sites they halted. This is clearing of inventory in the main not new sites. The flow of large new sites has dried up because of RSS abolition. New sites are disproportionately responsible for step changes in completions. There is no way a LPA constructing 400 a year can move to 800 a year – what is needed – without large new sites, and you cant see 20 neighbourhood plans in the same authority building an extra 20 a year when they have been fighting with every last breath for the last 10 years against the same potential allocations equivalent to 200 dwellings over the deliverable and developable period.

Unintended Consequences

Gove is consulting on a new admissions code

A Department for Education spokesman said the consultation is “particularly important” because of the potential for any changes to have unintended consequences.

They must have learnt from the Health reforms.

Shame Pickles didnt think of that before publishing the localism bill.

The Fallacy of Purposeful Action

Following up an earlier post

I would like to explain a little a little more why I think the Mises concept of Praxeology – purposeful action as an axiomatic framework for explaining the market economy – is fundamentaally flawed.

My argument has two parts:

1.  Modern descision theory tells us that purposefulness is not a sound explanation for the vast majority of human actions.

2. The reasoning that human action can act as an axiomatic foundation is flawed, because the adjustment mechanisms found in market can in  large part be explain by homoeostasis – as I explained in my earlier post – a phenomenon that does not not even require humans or purposeful action – it equally applies to the beehive, the anthill, and the flock of birds.

I didnt cover the first point in my earlier post so here goes.

The Mises Institute uses the example of catching a ball:

“when we throw a ball, we do not reason that it is guided in a teleological way by some mystical spirit or “prime mover.” Instead we use the laws of mechanics and causality to examine the position, velocity, and forces acting on the ball, in order to predict the future position and velocity of the ball.”

This example would greatly amuse modern thinkers in decision theory such as Prof Gurd Gigerenzer.

In his book ‘Gut Feelings’ he mocks the idea that somehow humans have a model of ballistics where we in a fraction of a second use calculus to purposefully and rationally calculate the position of the ball.

Rather he says that animals have evolved to use Heuristics, simple decision rules, which often we hardly or don’t have to think about.

In this case the rule is simple look up at 45 degrees, and run towards the ball. If the ball is above the line of sight slow down, if below it speed up. He doesnt mention it but this is a classic example of Homeostasis, of the Governor Principal from control theory.

Now an Austrian might reply that this does not undermine the deductive approach simply that Mises Human Action had a missing axiom early in the chain. That would be a good argument. Market phenomenon such as flocking and instability can only be explained through the control theory concept of ‘hunting’ – how stochastic lags in feedback mechanisms cause overshoots. If they did Austrians would have a less flaky and one dimensional theory of the business cycle.

But I dont think that would work, loading a decision concept not based on deductive logic on top of and within a framework that does seems like a construction that is on poor foundations. A better foundation is one which looks at what makes us human, creatures evolving to our environment and shaping it.

The Real Enemies of Enterprise

Who are the real enemies of enterprise?

David Cameron’s speech criticised planners and public servants, much to the annoyance of the cabinet secretary and public servents everywhere.

With the growth agenda and recognition that the uk most export its way out of the crisis what is the government doing to ensure that employment land supply is increased and that space for enterprising small businesses are provided?

The short answer is to ensure that as much of it as converted to alternative uses such as housing as quickly as possible. The initiative comes from the policy exchange – their report More Homes Fewer Empty Buildings.  The theory is that we have a surplus of industrial land, empty buildings, so if they have been empty for more than a year allow a change of use without the need for planning permission.

The government has now consulted on the proposed change.

‘The clearest evidence of the relative undersupply of land for housing compared to the supply of land for other uses is in their respective land values….In most cases housing land has a significantly greater value than that for commercial uses.

The price differential has grown over time in a way which should not happen if the market, or the local plan, is responding to these signals by providing more land for those uses, such as housing, that are relatively more valuable.’

Critically though it does not include the one year criteria. Also the first draft of the NPPF talks of removing protective zoning for employment land.

This is a horrible confusion of three separate economic issues. How much development land is available for housing, the margins of change between housing and employment land, and the sufficiency and location of supply of industrial land. You can provide more land for the most valuable use by not losing land from less valuable use if you expand the overall land supply. If you don’t then you get a change of use. But will this have good or bad consequence for growth.

Now the traditional Planners arguments for this are often weak, and not just in the UK. Endless reports for towns here and in the US suggest a shortage of industrial land etc. if economic growth targets are to be met. Clearly also empty buildings now may be filled in a year or two. But it is not automatically self evident that a planned solution is more efficient to society as a whole than a free market solution, the arguments are not rigorous. Some may argue that if house prices fall then this will boost the economy and firms will be able to afford higher rents bringing about a new equilibrium. Also firms if facing a shortage of land may become more land efficient.

Now the arguments are quite complex but my instincts are that in reality enterprise will be harmed.

Firstly because of the rent difference between industrial and housing land land will be held speculatively vacant by landowners. This may mean existing firms being displaced, as happen every day in areas like London. If a firm cannot find premises it may move abroad, or close, for a small business the worker might retire and make workers redundant. Each of those land use change induced phenomena have a real net loss to output.

Secondly the housing market operates on very long timeframes of stock and flow – only 3-5% of the housing stock is sold in any year. This means that existing housing is not flexible downwards in price, to allow for a change of use back for example to employment. There are also generational issues. Many people will have amassed savings over a lifetime and once retired may not have the incentive to lower prices and sell if they do not have a job – for example caused by insufficient employment land. This means that land use change in cities tends to be a one way street, from employment to housing.

In some towns employment may be lost altogether, this may be masked by aging and some towns becoming sunset communities. But in other towns a lack of new employment may mean that there is a net loss of inmigration – leading in due course to a housing oversupply and in extreme forms the creation of urban prairies.

Now you may ask if a town loses demand for employment land supply will slacken, prices fall and that supply will be taken up. This neglects the ‘Employment Density’ effect. In some well know works Fothergill, Kitson and Monk of the Cambridge Department of land economy have argued that overtime firms have become more land intensive per employee (a consequence of increasing capital intensity). This means that growing firms find it difficult to expand where land is tight, and may flee cities.

Therefore employment land supply overall needs to be increased in rural areas. If this is not done economic growth will be harmed.

But firms may move to areas where employment is already tight, for growing forms quality of life of directors seems to be a more important consideration than availability of cheap unemployed labour. This may mean the unemployed in cities become trapped, unable to move to where jobs are growing. Cities become ever more polarised as new housing on former industrial land is taken by those with high incomes and new small businesses can no longer afford space. Society as a whole pays a tax, directly because of the high equilibrium level of unemployment, and indirectly from the ‘Aspen Tax’ with less land for low cost labour to be employed city residents have to pay through the roof for certain uses requiring employment land as a ‘backend’, such as plumbers etc. Alternatively residents may have to pay more from firms having to drive into cities rather than within cities. We are already seeing this in some areas such as waste management. Councils sell depots for a short term hit, but forever and a day residents have to incorporate the higher transport costs, plus rental costs for other sites, in their council tax bills.

Who now are the real enemies of enterprise?

The ‘invisible hand’ as homoeostasis – How Economics replaced god as designer

Few ideas in economics are so misunderstood and misrepresented.

It was a well known 17th and 18th century metaphor – which basically meant the invisible but intelligent design of god. Medieval thinkers postulated the invisible hand of God as the source of the order we observe in celestial motion.

This, put very simplistically, was the essence of the concept in the early Adam Smith, of the Theory of Moral Sentiments.

Following his visit to France he brought back a revolutionary economic idea – and giving it a different name ‘invisible hand’ in the Wealth of Nations.  It was revolutionary because it replaced god with man, the conscious actions of an intelligent designer replaced by the unintended outcomes of the actions of self interests of many actors.  It was revolutionary too because it replaced the need for a benevolent despot undertaking – as they saw it- the will of god.

Modern discussions of ‘the invisible hand’ often use the phrase ‘homeostasis’ as a metaphor – but theoretical work treating the market as homoeostasis are almost non-existent (there are notable exceptions such as Boulding).  We have rather as Mark Thornton has described it

‘a proverbial black hole where the invisible hand is described, over and over again, as the emergence of
social orders unintended.’

But Homoeostasis is critical as it provides an explanation of how the pursuit of self interest can led to equilibrium growth (in some circumstances).  Without this the ‘invisible hand’ can seem almost like a mystical concept lacking explanation of how and why- though Smith must be partially at fault for his not entirely clear and consistent explanations.  This has led some modern authors such as Warren Samuels – to call to ‘Erase the Invisible Hand‘ calling it without economic content. By not looking at the origin of the idea in earlier thought they are led to this gross error.

Homeostatis is a C19 term from biology which describes the state of maintaining balance.  Through multiple feedback/control mechanisms an organism maintains it conditions for life and reproduction, intentionality is not always necessary, for example control mechanisms can make a plant grow towards the sun.  In the C20 the idea was extended towards ecosystems and dynamic systems theory.

The essence of the concept was present much earlier – certainly in C17 century anatomy.  William Petty, widely acknowledged today as the founder of classical economy was an physician, and he described his political economy as ‘political anatomy’.    The study of cycles and flows in the economy could be studied in the manner of studying the circulation of blood around the human body, as discovered by Sir William Harvey (1628), for Quesney too, also a physician, the self regulation of  circular flows (or lack of if economic blood letting was introduced) was a powerful organising concept.

The concept found its development in C18 french proto-physiocratic writers and modern economic historians such as Mark Thornton, David Nally and Tony Aspromourgos, are widely agreed on this.

Cantillon emphasises the equilibrating function of the entreprenuer — in an uncertain market that forecasting and invest, making profits through anticipating shortages and avoiding adding to oversupply – hence regulating production.

Boisguilbert was less conceptual but more direct

“So long as we do not interfere with her [Nature's] workings, our attempts to get as much as we can for ourselves will maximize everybody’s happiness in the long run.”
“the pure desire for profit will be the soul of every market for buyer and seller alike; and it is with the aid of that equilibrium “(un équilibre” ) or balance that each partner to the transaction is equally required to listen to reason, and submit to it.”
 

The concept of unintended beneficial consequences from pursuit of individual self interest was here and fully formed prior to Smith.

Pursuit of profit requires information – visibility, so the metaphor of ‘invisible hand’ is to some extent unfortunate. But Smith used it in one instance in the context of international traders who never meet and are hence ‘invisible’ to each other.

This focus on the process of profit seeking and competition regulating production could be described as ‘neo Austrian’ and reading backwards into Adam Smith modern conceptions. By going back before Smith however we can seen that this view is flawed.

The concept of market processes as homoeostasis is clearly not Austrian though in one critical respect – intentional action is of secondary importance. In a population of foxes (predators) and rabbits (prey), an increase in the number of foxes will cause a reduction in the number of rabbits; a smaller rabbit population will be able to sustain fewer foxes, and the fox population will reduce. Foxes act but the number of rabbits has nothing to do with the subjective views of foxes, it has everything to do with the initial conditions of ‘reproduction’ and dynamic feedback of the system. The criticism of the idea of the ‘invisible hand’ as teleological ignore this whole-part interaction in complex systems.

Homeostasis will only create conditions of growth in the presence of conditions of appropriate feedback and control. Again these control need not imply intentional action. If these conditions are in place we gain equilibrium and growth, if not there is the risk of disequilibrium and breakdown.

Intentionality though is different from design. In his book J. Scott Turner [2007] in The Tinkerer’s Accomplice: How Design Emerges from Life Itself. Cambridge, MA, argues that homoeostasis of organisms adjusting to, creating and shaping their environment provides the context for biological evolution. Therefore evolution is a matter of design, but design by life itself not a designer. To criticisms that this is not ‘design’ he uses the duck test ‘if it acts like a duck as quacks like a duck it is a duck’.

In this light the invisible hand of design is not such a bad metaphor, but only if god is replaced by the many hands of humans throughout history.

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