End October Links

Slightly late with the end of the month links this month...

# Chris Dillow makes a good point in Trident & the limits of rationality: "I'd expect people who disagree about the case for Trident to differ in other ways. I'd expect advocates of Trident to be more risk- and ambiguity-averse than its opponents: if they are keener to buy nuclear insurance they should also be keener to buy other forms of insurance and be less inclined to gamble or invest in equities. Empirically, though, this seems doubtful." This rings true - and cuts both ways. An argument within climate change economics is about whether the cost is small or large: it's small if you assume the world continues to grow and that the impacts occur a long time from now, because a relatively small investment made now will accumulate nicely to pay out at the same time as the future loss; but the cost is large (willingness to pay to avoid the risk is approaching 100% of GDP) if it's the insurance value against civilisational collapse or human extinction (at which point we have infinite marginal utility, see Weitzman (2009)). So there should be a positive correlation between your support for nuclear weapons and your support for strong climate change action? I don't think so! I expect the nuclear supporters are not so keen on climate change action, and I'm certainly all for spending the £100bn Trident replacement-cost on zero carbon energy infrastructure!

# In discussing John McDonnell's suggestion for regional members of the MPC of the BoE, Tony Yates says "This would be a retrograde step.  Multiple committee places should be there to allow for controversies to play out about the appropriate diagnosis of the aggregate economic state, and the aggregate monetary policy.  And they should not be there to set up a tug of war between regional members trying to tilt interest rate decisions towards their own regions.". I think this misses the point: I would hope that there would not be any systematic difference in the advice offered by regional members, but the fact that they were based somewhere else might reduce groupthink and widen the perspectives that were brought to the MPC. And indeed, Tony Yates almost brings up this point: "the regionalism [in the USA] is not really regionalism anyway.  The multiple local Feds, in my view, mostly serve as a way to generate competing talent pools that produce potential FOMC members." - if the proposed regional members of the MPC were from offices of the BoE that each provided a proportional share of the BoE's analytical capability, then the UK's Central Bank would be contributing to building capacity in expertise across the UK (and might lower its costs due to the relative cost of labour and real estate outside of London).

# I recommend this George Monbiot article, Home Ground, and I can use it to plug my new local tax working paper: The opportunity for land & property taxes in Scotland.
"Joan Bakewell, ... argued that it would be “mean-spirited” to encourage “old people living alone in big houses … to sell up and make room for young and aspiring families.” I would argue that holding onto such houses while families are homeless is, in aggregate, far meaner. But she has a solution: “Let them build more houses.” ... Let’s not look back at the profligate use of the space we already possess. Let’s not change the policies that encourage it. Let’s just keep building. It’s like dumping half our food in landfill then demanding that food production rises. ... the idea that building alone will solve the problem is pure fantasy. There are 26.7 million households in the UK. In 2014, 1,219,000 homes were traded. So even if the government were to achieve its aim of building 200,000 homes a year, which some housebuilding experts consider impossible, it would add less than 1% a year to the total stock, and increase the volume of transactions by only one sixth. ... we cannot build our way out of this crisis. If we really want to solve it, the greatest contribution must come from the redistribution of existing stock."

# A further link related to my local tax paper is related to the point that savings directed towards housing may reduce investments in productive capital (and at the same time, due to frictions in the housing market, this leads only to increased land and house prices rather than to expanded supply of housing) at a cost to the level of output that the economy can produce. The BoE discuss changes in pension rules and asks whether the reduced requirements to save for an annuity will lead to a "spending spree". They find that while "greater pension freedom is likely to have only a small impact on household spending.  There could be a larger impact on property investment". Aye, cheers very much George.

# VoxEU: The housing cost disease describes a fascinating paper by Borri & Reichlin, linking the relative productivity in production of housing against that in producing the rest of the economy's output, to the increasing Wealth-to-income ratios described by Piketty.