Tory and Labour Short-Termism

In the last week, both Labour and Tories have come out with economic policies that reflect the way populism, and short-termism dominates their thinking.  The Tories have proposed making Stamp Duty on house sales payable by the seller rather than the buyer, whilst Labour has proposed enabling local Councils to take over empty high street shops to provide subsidised premises for various businesses.

What is the likely effect of the Tories proposal.  It is to reduce supply, and thereby to cause house prices to rise, the opposite of what the Tories claim is the purpose of their proposal.  In other words, it will have the same effect but from the opposite direction as their Help To Buy Scam, which helped to push up prices, by artificially inflating demand.  But, that is not surprising, because, although the Tories want to seek electoral popularity by claiming to be doing something to make home ownership more affordable, they need to keep house prices actually inflated.  The intention of conservative governments, and of central banks for the last thirty years has been to keep asset prices inflated, because 1) financial and property assets (shares, bonds, property and derivatives) are the main form of wealth of the dominant section of the ruling class, the top 0.01%, and 2) the conservative social-democratic (neoliberal) model during all that time has been to substitute the liquidation of capital gains on assets for the the creation of revenue, via the production of new value, as the basis of sustaining consumption.

They have needed to keep house prices inflated, not because the top 0.01% has their wealth tied up in their houses, but because a large chunk of the population has their wealth tied up in that way.  Its on the basis of this property wealth that large chunks of the population are encouraged to take on further debt so as to sustain consumption, given that during much of that time, real wages have been declining or stagnant.  Its only necessary to look at all of the TV, newspaper and online advertising encouraging elderly property owners to take out lifetime mortgages, or take part in equity release scams, to provide them with money to finance their, or their children and grandchildren's consumption, to see the role that plays.

But, its not just at the personal level that that applies.  A large part of the state's activities has been predicated on being able to liquidate paper capital gains on rapidly inflating assets too.  All of the proposals about financing elderly social care, and so on, require a situation in which the price of the house of the person taken into care, continue to inflate, year after year. 

There is another reason that the central banks and conservative governments have wanted house prices to continue to inflate, or at least not to collapse, it is that the banks and financial institutions themselves depend on it.  Commercial banks long ago ceased being a major source of finance for actual investment.  Some years ago, Michael Roberts showed that around 90% of the loans provided by commercial banks simply fed into property speculation by one means or another.  A tiny amount went to finance loans to business for real capital accumulation.  The claims that money printing via QE, or the policy of low official central bank interest rates were designed to stimulate investment, or the real economy are nonsense.  The additional money, and cheap money to commercial banks was deliberately channelled into assets, so as to inflate those asset prices, and in inflating those asset prices, it also acted to create paper capital gains, from speculation, which further encouraged money to flow out of the real economy and into this financial and property speculation.

If house prices drop sharply, as they did in 2008, and in 2010, then all of that vast amount of loans undertaken by the commercial banks looks suspect, because it means the inflated assets sitting on those banks balance sheets, suddenly becomes massively depreciated, destroying their capital reserve ratios, and their ability to lend further.  It would mean that the banks themselves would need to suck in large amounts of capital, as occurred in 2008, so that they were recapitalised.  That is important, because the banks have an important role to play in keeping the other asset prices (shares, bonds, derivatives) inflated, via their investment (speculative) banking activities.

Part of the reason that property prices remain high, is not just that government actions have tried to artificially inflate demand, by targeted low mortgage rates and subsidies such as Help To Buy, but because supply has been constrained.  Supply is constrained, because inflated land prices means that landowners have an speculative incentive to hoard land, waiting for higher prices, which is encouraged further by state sponsored monopoly imposed via the Green Belt policy.  But, builders too, naturally constrain supply - not only because they are landowners themselves - because they build houses to make profits not to be altruistic.  With such inflated house prices, they know that the demand for new houses is highly restricted to a few people each year who can afford to put down a deposit, and commit to the monthly payments, even with the massively subsidised mortgage payments.  They know that if they produced more houses than that they simply could not sell them at prices that would produce a profit for them.  That is why all large builders now only sell new houses "off plan", i.e. when they already have a buyer for he house.

But, the supply has also been constricted, because a lot of the first time buyers, who must come into the market each year, for the market to expand, do not buy new houses, but houses from existing owners, because these are the cheapest ones.  But, that requires that the owners of existing houses themselves want to sell.  That source of supply has been restricted, because the rise in house prices has been such that the gap between the price that sellers can get for their existing house, and the price they will have to pay for the house they want to move up to has become unbridgeable, so that existing homeowners tend to stay put, to settle for making improvements, building extensions and so on.  Without that supply of cheaper existing homes coming on to the market, there is no supply of those homes, for first time buyers to bid for.

For the seller of a house, its not just that unbridgeable gap they have to consider; it is also all the other costs of moving.  The seller of an average £200,000 house could expect to pay around £5,000 in estate agents fees, solicitors fees and so on.  The Stamp Duty on such a house would be around £3,000, nearly doubling the transaction costs for the seller.  Moreover, because Stamp Duty does not start until £125,000, every increase in price over £200,000 would mean a much steeper increase in that cost.  For sellers of existing properties, already discouraged from selling, the imposition of the additional Stamp Duty proposed by Javid, is yet another reason not to put the house on the market, which will further constrain supply, pushing house prices higher yet again, or at least, in places like London, where house prices are again falling rapidly, acting to limit that fall, which would actually make houses more affordable. 

For those that do decide to sell, what is their likely response, in those conditions?  It is obvious that they would simply lump the Stamp Duty they now face having to pay on to the selling price of their house?  So, rather than making houses more affordable to buyers, it will make them less affordable, at the same time as further restricting supply.  In reality, that is again likely to be the real purpose of this move, whilst attempting to gain short term populist approval, for undertaking a measure that is promoted as making houses more affordable, just as they did with the Help To Buy Scam.

Last week, Labour also came out with a policy to deal with the continued decline and decay of the town centre high street.  The policy involves allowing local councils to take over premises that have been empty for more than a year.  But, this is also another populist, short-sighted and short-termist solution whose outcome will be different to what is proposed as its intention.  Labour's proposal is that council's having taken over such premises, should then make them available to start-up businesses, pop-up shops, charity shops etc.  This solution has a lot in common with the reactionary, protectionist policies of the Tories in relation to the creation of Enterprise Zones under Thatcher, and more recently, the proposals of Boris Johnson for Free Ports.

Let's take the most obvious example of that.  In the midst of a period when retailers are dropping like flies, because, as I wrote more than a decade ago, far too many of them had been created, and because they are now facing rising costs, and increased competition from online retailers, Labour's proposal amounts to putting those existing retailers under even more pressure, by siting alongside them, small businesses that are given subsidies that the existing retailers do not enjoy!  If you are an existing retailer, currently paying your full rent for your premises, full Business Rates, and so on, what do you think is going to happen to your competitiveness if next door to you is some new business that does not have to pay those things?   The obvious effect is to undermine the competitiveness and profitability of the existing retailers, at a time when their profitability is being squeezed anyway.  Labour's policy means that a few empty shops might be filled at the cost of expensive subsidies, but at the cost of driving even more existing retailers out of business with the loss of jobs that entails, and creating an even larger number of empty spaces on the high street.

Labour might respond that the intention is to fill the voids with more charity shops, not for profit shops etc.  But, charity shops also sell commodities that existing retailers sell, which means that these subsidised shops represent cheap competition to the existing stores.  The charity shops undercut the retailers not just because they get their stock provided for free, and get cheap rents and so on, but because in many cases they rely on unpaid labour.  That unpaid labour directly undercuts the paid wage labour employed in the actual retail stores.

And, don't we already have more than enough charity stores on those high streets?  And, the use of the space for those shops is itself incredibly wasteful of resources.  In past decades, the things now given to charity shops would either have been passed down to younger children, within families, in the case of clothes, games and so on, or else given to neighbours to meet their needs, or else sold at jumble sales held periodically in schools and church halls, at a fraction of the price the charity shops now charge, to cover their costs.  The sprouting of charity shops has arisen for three poor reasons.  Firstly, the existence of empty spaces in high streets, led to a search for some means of filling those spaces; secondly, the underfunding of many areas of social life by the state, for example in healthcare, meas that the funding for research for heart disease, or cancer has fallen to charity; thirdly, the need to encourage consumption to keep aggregate demand raised, meant that the majority of the population was encouraged to dump its previous habits, and to be perpetual shoppers for new commodities, enthralled by so called "retail therapy", so that an endless supply of used commodities could be fed into the charity shops.

Rather than encouraging a continuation of that culture, Labour should be implementing policies to reverse it.  It is a disgrace that vital areas of social life such as healthcare and so on should rely on charity, a situation we thought had ended with the creation of the NHS in 1947.

Labour's policy is based upon an approach that is essentially reactionary and protectionist.  The high street, and town centres are in terminal decline.  That is not just because for thirty years, aggregate demand was sustained on the basis of a promotion of consumer demand financed by debt, and by an unsustainable growth, therefore, of commercial activity and jobs, whilst actual productive-activity was increasingly concentrated elsewhere in the globe; in other words that there were just too many shops created.  It is so because, today, the town centre high street, situated in 18th and 19th century towns and infrastructure, cannot compete with the dedicated retail environments of the out of town retail parks, let alone with online retailing.

Trying to cling to the models and methods of the past is the characteristic of conservatism, not of socialism, or social-democracy.  It is time to recognise that the town centre as a retail environment is a thing of the past, and to move on and encourage the development of its replacement.  Town centres that have a few pubs, cafes, and other such establishments is one thing, but as retail centres, their day has past.  Even the large out of town retail parks' days are numbered, because the future lies with online retailing, which is much more efficient.  The main role of the out of town sites will increasingly become as distribution centres, and bricks and clicks stores, where having browsed the Internet for your purchase, you simply collect from an actual store, or go to view it, before confirming your online purchase.

Instead of trying to protect the high street, by subsidising inefficient small businesses that can only exist with such subsidies and protections, which in turn undermines both existing larger businesses, and workers' pay and rights that goes with it, Labour should be looking to turn empty town centre premises into residential properties, to help alleviate the housing crisis, as well as turning them into doctor's and dentists surgeries, etc. so that workers either living in, or working in the town can get appointments at their convenience, which also requires a large investment in primary healthcare by Labour, an extension of the use of the Internet, for patients to be able to use any available healthcare professional as required, and so on.  That in itself requires continued membership of the EU, so that we do not lose the healthcare professionals we already have, as well as having the required pool of trained professionals to meet the expanding need immediately.

Its time for politicians to stop looking for populist short-term solutions, and begin to develop thought out, long term solutions that will actually address the problems we face.