The key point is that increases (declines) in demand can bring sharply rising (falling) house prices when supply is constrained. However, when land supply is not regulated, it adjusts to demand and house price volatility is reduced.
As long as commentators focus primarily on the demand side of the housing market, whilst ignoring supply-side constraints, they will never fully understand the drivers of housing bubbles and busts. The resulting incorrect diagnosis will inevitably lead to poor policy prescriptions and outcomes.
The economic forces underpinning the housing affordability crisis
12 May 2015 2 Comments
in applied price theory, economics of regulation, politics - Australia, politics - New Zealand, politics - USA, urban economics Tags: housing affordability, land supply, land use regulation, RMA, zoning
The Ten Pillars of Economic Wisdom
10 May 2015 Leave a comment
in applied price theory, applied welfare economics, Austrian economics, comparative institutional analysis, constitutional political economy, development economics, economic history, economics of education, economics of information, economics of media and culture, economics of regulation, energy economics, entrepreneurship, financial economics, health economics, history of economic thought, industrial organisation, survivor principle Tags: David Anderson, evidence-based policy, offsetting behaviour, pretence to knowledge, The fatal conceit, unintended consequences
via The Ten Pillars of Economic Wisdom, David Henderson | EconLog | Library of Economics and Liberty.
Land use regulation knocks 10 points of US GDP!
10 May 2015 Leave a comment
in economic growth, economics of regulation, income redistribution, macroeconomics, politics - New Zealand, politics - USA, rentseeking, urban economics Tags: Enrico Moretti, Green Left, housing affordability, Inner-city Left, labour mobility, land supply, land use planning, land use regulation, NIMBYs, regional mobility, RMA, zoning
Bloomberg Business highlighted a great new study by Enrico Moretti on power of the regulatory restrictions on land supply to destroy wealth.

Moretti focused on the impact that restrictions on land supply have on the ability of workers to move to higher productivity cities. Moretti is the second best urban economist working at the moment. The best is Ed Glaeser. Moretti concluded that
A limited number of American workers can have access to these very high-productivity cities
He concluded that a more efficient distribution would be “a general benefit for the entire economy.”
The secret of his analysis was to look at how different US cities, the high productivity cities, contributed to national economic growth. He then explore the implications of fewer and fewer workers been able to move to these cities to take advantage of the great productive potential. The barrier to them moving was high housing prices and high rents.
For example, labour productivity grew quickly in San Francisco, New York and San Jose overt 45-years. All of these cities are famous for their human capital-intensive industries including technology and finance. These cities weren’t America’s growth engine:
The reason is that the main effect of the fast productivity growth in New York, San Francisco, and San Jose was an increase in local housing prices and local wages, not in employment.
Despite the large difference in local GDP growth between New York, San Jose, and San Francisco and the Rust Belt cities, both groups of cities had roughly the same contribution to aggregate output growth.
The drivers of US growth between 1964 and 2009 were southern U.S. cities and 19 other large cities. These cities attracted many residents because of good weather and abundant supply of cheap housing.
The lesson both the US and for New Zealand, and Auckland in particular, is this reallocation of population away from the expensive cities with restricted land supply reduced national output because these population movements bring workers to cities "where the marginal product of labour is low."
In a technology boom town such as San Francisco, it is now what like New Zealand will be as Generation Rent runs its course – 65% of residents are renters:
Over the past year, the City and County of San Francisco boasted the second strongest labour market in the nation, adding 25,000 new jobs. Yet only 2,548 new housing units were permitted and even fewer were built.
Just think: 25,000 new workers and their families have been knocking on San Francisco doors, but there are new units for less than 10 percent of them. It is not surprising that apartment prices get bid up.
Coming to a nanny state near you
10 May 2015 Leave a comment
in economics of regulation, health economics Tags: compassion Fascists, food police, health warnings, meddlesome preferences, nanny state, safety Nazis
The left has become it once mocked. They are all school marms now. http://t.co/2AgTfZ2ZuQ—
The Left, Exposed (@leftexposed) February 11, 2015
FA Hayek on piecemeal analysis such as cost benefit analysis and evidence-based policy
09 May 2015 Leave a comment
in applied price theory, applied welfare economics, Austrian economics, comparative institutional analysis, constitutional political economy, economics of regulation, F.A. Hayek Tags: Constitution of Liberty, cost benefit analysis, evidence-based policy, offsetting behaviour, The fatal conceit, The pretence to knowledge, unintended consequences
Happy Birthday, F.A. Hayek!
(8 May 1899 – 23 March 1992) http://t.co/K431Kj9nok—
Screwed by State (@ScrewedbyState) May 09, 2015
Senator Warren made a good case against Investor-State Dispute Settlement in the TPP
09 May 2015 Leave a comment
in economic history, economics of regulation, entrepreneurship, industrial organisation, international economic law, international economics, law and economics, politics - Australia, politics - New Zealand, politics - USA, property rights Tags: Australian productivity commission, free trade agreements, investor state disputes settlement, Leftover Left, preferential trade agreements, Senator Elizabeth Warren, Twitter left
In the Washington Post a few months ago, Senator Elizabeth Warren made a balanced case against investor state dispute settlement, not only in the Trans-Pacific Partnership. But in any trade agreement.
Apart from a few rushes of blood in rhetoric to appeal to her base, she made reasoned arguments, good use of history, and put up constructive alternatives to what she was criticising. Furthermore, she put forward arguments that appealed to every point in the political spectrum. The Left over Left critics of investor state disputes settlement clauses in trade agreements in New Zealand never do that.
She echoed arguments I have made the at investor state disputes settlement clauses have no place in trade agreements between liberal democracies.
Liberal democracies have independent courts and honest politics where everyone gets a fair go. That means sometimes you’re on the losing side of politics, but you as free to persuade the majority that they are mistaken. That is democracy in action: sometimes you win, sometimes you lose and there is an election in a few years where you can get another go.
New Zealand has a Closer Economic Relations Agreement with Australia. One provision is a requirement that in most cases New Zealanders are treated the same as Australians under Australian law.
To explain this, some years ago, a New Zealand television production company successfully sued the Australian television regulator to have New Zealand made television shows recognised as Australian content under the 50% Australian content regulations for free-to-air television in Australia.
Note the New Zealand business sued in the Federal Court of Australia and won. They had their day in court.
Senator Warren makes the point that if a business in the USA is unhappy with a regulation, they can challenge by normal democratic and legal means, which investor state disputes settlement undermines:
If a foreign company that makes the toxic chemical opposes the law, it would normally have to challenge it in a U.S. court. But with ISDS, the company could skip the U.S. courts and go before an international panel of arbitrators. If the company won, the ruling couldn’t be challenged in U.S. courts, and the arbitration panel could require American taxpayers to cough up millions — and even billions — of dollars in damages.
Senator Warren also provides a good history of the emergence of investor state disputes settlement and the relevance of that history to contemporary developments:
But after World War II, some investors worried about plunking down their money in developing countries, where the legal systems were not as dependable. They were concerned that a corporation might build a plant one day only to watch a dictator confiscate it the next. To encourage foreign investment in countries with weak legal systems, the United States and other nations began to include ISDS in trade agreements.
Investor state disputes settlement were indeed created to protect businesses that did not have robust democracies and legal systems. Would be international investors in one of these countries were promised international redress if there was a coup, a takeover of their investments or some other unforeseen negative impact because sovereign risk.
She then asked why are these provisions in trade agreements with liberal democracies where they have no relevance:
Those justifications don’t make sense anymore, if they ever did. Countries in the TPP are hardly emerging economies with weak legal systems. Australia and Japan have well-developed, well-respected legal systems, and multinational corporations navigate those systems every day, but ISDS would pre-empt their courts too.
Senator Warren also makes a good point that investor state disputes settlement undermines competition between legal jurisdictions and the rewards for having a sound legal system:
…to the extent there are countries that are riskier politically, market competition can solve the problem. Countries that respect property rights and the rule of law — such as the United States — should be more competitive, and if a company wants to invest in a country with a weak legal system, then it should buy political-risk insurance.
Political risk is is an entrepreneurial opportunity for the insurance market. The World Bank’s Multilateral Investment Guarantee Agency provides insurance to those investing in developing countries against expropriation (including indirect expropriation), as well as acts of war and terrorism. Export Finance schemes of many governments offer political risk Insurance. Anyone who travels in the less safe countries of the world routinely buys travel insurance.
The World Bank puts out an annual index on ease of doing business in every country of the world so foreign investors can’t say they won’t warned of the risks they were taking for the profits they sought.
Investor state disputes that were indeed referred to international arbitration used to be rare. Now they are more common as Senator Warren explains:
From 1959 to 2002, there were fewer than 100 ISDS claims worldwide. But in 2012 alone, there were 58 cases.
Recent cases include a French company that sued Egypt because Egypt raised its minimum wage, a Swedish company that sued Germany because Germany decided to phase out nuclear power after Japan’s Fukushima disaster, and a Dutch company that sued the Czech Republic because the Czechs didn’t bail out a bank that the company partially owned. U.S. corporations have also gotten in on the action: Philip Morris is trying to use ISDS to stop Uruguay from implementing new tobacco regulations intended to cut smoking rates.
In a response to Senator Warren’s op-ed, Gary Clyde Hufbauer said:
…only 13 ISDS cases have been brought to judgment against the United States. The United States has not lost a single case.
Why? Because the United States does not expropriate private property without compensation, and the United States does not enact arbitrary or discriminatory laws against foreign firms. Contrary to what the Senator implies, American taxpayers have not had to cough up millions and even billions of dollars in damages. They have not had to cough up anything.
The best part of Senator Warren’s op-ed is when she appeals to all points of the political spectrum based on arguments that do indeed appealed to them:
Conservatives who believe in U.S. sovereignty should be outraged that ISDS would shift power from American courts, whose authority is derived from our Constitution, to unaccountable international tribunals. Libertarians should be offended that ISDS effectively would offer a free taxpayer subsidy to countries with weak legal systems. And progressives should oppose ISDS because it would allow big multinationals to weaken labour and environmental rules.
Senator Warren did make a good case against investor state disputes settlement, particularly between liberal democracies. Foreign investors should take their chances in domestic politics and the courts like the rest of us. They’ve invested in a liberal democracy with independent courts, honest politicians and a commitment to a market economy.

Investor state disputes settlement clauses in trade agreements allow foreign investors to sue the host country for laws, policies, or court decisions they find objectionable. This gives foreign investors more rights than local investors; more influence than local citizens. That is contrary to equality before the law, which is the essence of liberalism.

The point that the Twitter Left rarely makes against investor state disputes settlement, and Senator Warren goes a way towards making is the shield offered by investor state disputes settlement clauses against predatory, corrupt governments in underdeveloped countries, many of which were socialist kleptocracies, has become a sword against regulations that arise in any liberal democracy that were sought and obtained through normal democratic means.
The Australian Productivity Commission held a public inquiry into regional and bilateral trade agreements in 2010. The commission specifically addressed investor state disputes settlement in its subsequent report:
1. There does not appear to be an underlying economic problem that necessitates the inclusion of ISDS provisions within agreements. Available evidence does not suggest that ISDS provisions have a significant impact on investment flows.
2. Experience in other countries demonstrates that there are considerable policy and financial risks arising from ISDS provisions.
The Productivity Commission concluded that investor state dispute settlement provisions are just not worth bargaining coin:
Nor, in the Commission’s assessment, is it advisable in trade negotiations for Australia to expend bargaining coin to seek such rights over foreign governments, as a means of managing investment risks inherent in investing in foreign countries. Other options are available to investors.
The Australian Productivity Commission was quite right to question the advantages of setting up a preferential legal system for anyone:
…a bilateral arrangement with Australia to provide a ‘preferential legal system’ for Australian investors is unlikely to generate the same benefits for that country than if its legal system was developed on a domestic non-preferential basis.
To the extent that secure legal systems facilitate investment in a similar way that customs and port procedures facilitate goods trade, there may be a role for developed nations to assist through legal capacity building to develop stable and transparent legal and judicial frameworks.
When the Left over Left usually argues against investor state disputes settlement provisions they get so carried away with the conspiratorial rhetoric that they overlook a much better argument.
Investor state disputes settlement provisions are bad deal from liberal democracies. Liberal democracies with the rule of law, a market economy and private property rights offer ample protections to any foreign investor.

In trade agreements with less democratic countries, the need for reciprocal promises may not be worth the price when there are other options for investment protection, such as political risk insurance.
The question must be asked as to who lobbies for these agreements considering how much is opposition they provoke, and how useful they are as a mobilisation tool for the Twitter Left in their relentless campaign against lower prices and higher living standards.
Organic farming is a rebranding of pre-industrial revolution agriculture
09 May 2015 Leave a comment
in economics of information, economics of media and culture, economics of regulation, health economics, technological progress Tags: agricultural economics, consumer fraud, industrial revolution, organic farming, quackery, The Great Enrichment, The Great Escape
Non-price competition is intense under government-sponsored cartels
08 May 2015 Leave a comment
in economics of regulation, industrial organisation, transport economics Tags: airline regulation, cartels
1970’s Continental Airlines in-flight piano bar http://t.co/cNd6Re3W6P—
Old Pics Archive (@oldpicsarchive) March 29, 2015
How much snow it typically takes to cancel school in the US
02 May 2015 Leave a comment
in economics of regulation, politics - USA Tags: winter snow
How much snow it typically takes to cancel school in the US http://t.co/9tYHIOG3pV—
Amazing Maps (@amazinmaps) May 02, 2015
Down and out in NZ = social housing with fast broadband
02 May 2015 Leave a comment
in economics of regulation, politics - New Zealand, poverty and inequality, urban economics
The Dominion Post had a front page story yesterday about an 80-year-old pensioner required to pay for fast broadband in her new social housing. Her new apartment happens to be in my same suburb. I can see the new apartments from my window as I type.

She didn’t have much use for this fast broadband, which cost an extra $20 a month, because she is legally blind. She cannot have a landline-only option because of the way her apartment is wired and the way in which fast broadband works.
The 27 flats have been fitted with fibre-optic cabling, and residents, many of whom are pensioners or have disabilities, cannot opt for a landline-only service.
National building standards require new apartments to be wired with fast broadband. A classic example of the inability of central planning to deal with the diversity of preferences and incomes.
In this case, the victim of central planning it is an old age pensioners obviously in poor circumstances as well as legally blind who is out of pocket. She is one of a number of old age pensioners who are similarly out-of-pocket when they living on a strictly limited budget.

New Zealand and US real housing prices, 1975 – 2014
01 May 2015 Leave a comment
in economics of regulation, politics - New Zealand, urban economics
The RMA is the Resource Management Act and was passed just before New Zealand housing prices started to rise rapidly. Was this introduction of much stronger restrictions on the supply of land, followed by a 20 year long rise in the price of land housing more than a coincidence?

Source: Dallas Fed; Housing prices deflated by personal consumption expenditure (PCE) deflator.
What are the prices on the black market for animal parts?
01 May 2015 Leave a comment
in economics of crime, economics of regulation, entrepreneurship, environmentalism, law and economics, property rights Tags: black markets, economics of prohibition, endangered species, offsetting behaviour, or unintended consequences
Animated #Dailychart: Bear bile, rhino horn, tiger bone–how much do animal products cost? econ.st/1nfrFKf http://t.co/oG5HtZvzOL—
The Economist (@ECONdailycharts) July 23, 2014
This is how fast America changed its mind on the biggest social issues
30 Apr 2015 Leave a comment
in economic history, economics of media and culture, economics of regulation, economics of religion, political change, politics - USA Tags: expressive voting, preference falsification
This is how fast America changed its mind on the biggest social issues bloom.bg/1DIk6PQ http://t.co/RjAiw0y2dV—
Bloomberg Business (@business) April 27, 2015
Further evidence of the Anti-Science Left
27 Apr 2015 Leave a comment
in economics of information, economics of media and culture, economics of regulation, environmentalism Tags: advocacy bias, Anti-Science left, anti-vaccination movement, expressive voting, motivated reasoning, rational ignorance, rational irrationality
The right of the political spectrum is less likely to accept scientific conclusions if they involve excessive regulation of the economy. The anti-vaccination infestation of left-wing thinking shows that they are not immune to magical thinking and therefore should not be so smug.
Moral panic compared: allergies versus vaccination
26 Apr 2015 Leave a comment
in economics of regulation, environmental economics, health economics, law and economics Tags: Allergies, Anti-Science left, anti-vaccination movement, cranks, Left-wing hypocrisy, meddlesome preferences, quackery, Quacks
Recent Comments