Broad-spectrum policies

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.

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.

Comments

[dilbert dogbert]

Just back from the dentist where was reading a Nat. Geographic about a local man who commutes 8 hours a day from Auburn CA to his bank job in SF. This has been a common thing in California for decades.
My wife makes that trip occasionally to visit the grand child in San Jose. She hates driving in the traffic down there.
Some have said the housing market is the business cycle. Our house in Palo alto has increased 2million dollars in 10 years. Crazy!

[Nicholas Gruen]

I wrote about RCTs as the new front for our discipline's serial scientism here

[D]

Does anyone know of past attempts at broad spectrum policies?

[Ralph Musgrave]

Grace Blakeley’s argument is: “House prices are too high, which makes it difficult for people to buy houses, so the solution is to restrict mortgages which makes it even more difficult for people to buy houses.”

Or have I missed something...:-)

[James Peach]

The FPC’s housing interventions already act as a non-binding constraint on house prices, by limiting the ratio of house prices to incomes. These sorts of interventions are probably the most sensible - they curb the worst excesses of the housing market while not second guessing market prices.

[James Peach]

And yes Ralph... it seems at IPPR they pump out ideas before thinking them through.

[Avraam Jack Dectis]

.
Fully agree with the analysis of the nature of the problem.

The hard part is the solution.

Constraints via mortgages and taxes are bureaucratic, expensive and inefficient.

Basic supply and demand suggests that if you want the price of something to drop, you have to increase the supply.

It should be a core governmental responsibility to engineer a surplus of desirable housing.
.

[Bob]

What is really needed is 100% land value tax on the unimproved site value of land, not including buildings and improvements, just "location, location, locatioN" value which via progressive tax reform can replace 20p rtae (to 0p), VAT and Corporation Tax, with the rest going to fund a basic income.

Secondary policies could include banning all bank lending except capital development (0% overdrafts capital development) and a Job Guarantee - guaranteed jobs offer of work near where you live with the hours you want.