Stumbling and Mumbling

Author: chris dillow   |   Latest post: Tue, 26 May 2020, 2:30 PM


Broad-spectrum policies

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Is there a case for the Bank of England to target house prices? The debate, I suspect, highlights a difference in how we think about economic policy - between what might be called a single-issue technocratic approach versus a broad-spectrum approach.

Many of us, I suspect, agree that high and rising house prices are a cultural and economic menace. They encourage high debt which is potentially destabilizing (pdf). They divert spending towards rent and mortgage payments (and sometimes housebuilding) and away from new goods and services, thereby reducing dynamism and innovation. They encourage people to commute long distances, which increases stress and cuts productivity. And they encourage "property development" at the expense of more productive forms of entrepreneurship.

There's therefore a case for limiting them. Equally, though, there are reasons to question whether this can be done merely by giving the Bank of England a target for house price inflation alongside its CPI target.

Granted, such a target might work simply by reducing house price expectations, thereby deflating speculative buying - especially if the target is set as low as Grace Blakeley has suggested (pdf).

There are, however, legitimate doubts about its effectiveness. The Bank's only policy for curbing house prices would be to limit mortgage availability. But how effective would this be if overseas or shadow banks fill any gaps caused by conventional lenders withdrawing? Also, housing booms are often localized, so how would limiting mortgages in Leicester curb London's high prices? Such restrictions would also be inegalitarian: they'd deny mortgages to young people without deposits but grant them to those who have access to the Bank of Mum and Dad. And, of course, one policy might not be sufficient to cut prices. We might need others such as taxing land, encouraging renting, changing planning laws or simply building more houses. Such policies are outside the Bank's competence.

Ms Blakeley replied to criticisms such as these by saying, reasonably, that a house price target should be part of a radical reform of the banking system.

Which brings me to the issue. Sometimes - often - there is no single magic bullet policy. Instead, we need a whole range of them. This isn't true only of curbing high house prices. Here are two other examples:

- How should we improve the bargaining power of workers? I'd advocate a range of policies: a high basic income; job guarantee (arguably); support for trades unions; and macro policies aimed at sustained (over-)full employment.

- How to raise productivity? There are countless possibilities: better infrastructure; more vocational training; stronger competition policy; more open international trade; encouraging finance for R&D, capex and intangibles investment; shifting tax from incomes to land; better migration policy; encouraging coops; and so on. House-stacy

Such a range of policies is a sensible reaction to ignorance and uncertainty. If we don't know what'll work we should throw lots of possible solutions at the problem in the hope that something will stick - in the way that doctors, when faced with a patient with a strange condition, might put them on broad-spectrum antibiotics in the hope that something will work.

Of course, this is only sensible if the policies in question have little or no downside - if they are free hits (which is not true of prescribing antibiotics!). But in the examples I'm considering here, this is largely the case. Even if land taxes don't reduce house prices much, there's still a case for them. Similarly, most policies to raise productivity wouldn't do much harm even if they fail. A few Harberger triangles are not a big problem: as Adam Smith said, there is a great deal of ruin in a nation.

Herein, however, lies an oddity. What I'm advocating seems inconsistent with the empirical turn in academic economics. The use of randomized control trials or other clever identification strategies give us (at best) precise answers to narrowly defined questions. In some cases, however, what we need are rough answers to big questions.

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