First home buyer help – lets repeat others’ mistakes

National has announced policy to support first home buyers to take on more debt. It will have an entirely predictable outcome: higher house prices and higher debt.

The only good thing about this policy is that it is relatively small: $64m over four years. That’s $16m per year and assuming 90% gearing, $160m of house sales. That’s just under 0.5% of $36b of housing turnover in the year to July 2013.

To National’s credit they couch it in terms of a short term response and in the backdrop of other work to look at housing and land supply. But it is still a bad policy that inflames demand for housing even further, before they have tangible impact on increasing supply.

First home ownership subsidy/support policies have been tried in USA, Australia and UK. This led to a high amount of borrowing by those who could not afford it. It was also at the heart of the sub-prime crisis in the USA and the subsequent GFC. Read more

The UK’s political divide

The Economist this week explores the political divide between the North and South of the UK: the North belongs to Labour and the South to the Tories. Unfortunately, they are unable to pinpoint the reason for the divisions, saying that “even controlling for factors such as education level, housing tenure, benefit receipts, local unemployment rates and age, the political divide remains in evidence.” That is not particularly surprising since voting doesn’t tend to follow economic divisions, for whatever reason.

An interesting theory of political divisions is provided by Jonathan Haidt’s descriptive theory of morality. He suggests that there are six foundations for our emotional response to situations and ideas: caring, fairness, liberty, loyalty, authority, and sanctity. His empirical research shows that left and right-wing people systematically differ in the weight they place on each of those foundations. For example, left-wing people are far more responsive to ideas that trigger their caring response, while right-wing people are more likely to worry about proportionality. Crucially, he claims that almost all of our responses to ideas are determined by an initial emotional response that we then rationalise. He uses his theory to explain the divisions between Republicans and Democrats in the US, but it could equally be applied in the UK.

For example, Haidt claims that most conservatives will have an emotional response triggered by the sanctity foundation, while liberals will not. The recent debate over gay marriage in the UK shows precisely that division. While liberals pointed to the importance of the liberty to marry freely, conservatives talked about the ‘sanctity of marriage’ and were morally disgusted by the idea that homosexuals could marry. Those differing emotional reactions drew the battle lines for the ensuing debate and were post-hoc rationalised in various ways by both sides.

Perhaps economists who view ideological and political divisions through a materialist lens are thinking far too narrowly. Rather than pointing to industrial policies and wealth redistribution as vote-winning tactics they should look to the emotional responses that the parties’ rhetoric evokes.

Get out and shout about it

Another study where the main question is whether you believe in their identification strategy.


Can protests cause political change, or are they merely symptoms of underlying shifts in policy preferences? We address this question by studying the Tea Party movement in the United States, which rose to prominence through coordinated rallies across the country on Tax Day, April 15, 2009. We exploit variation in rainfall on the day of these rallies as an exogenous source of variation in attendance. We show that good weather at this initial, coordinating event had significant consequences for the subsequent local strength of the movement, increased public support for Tea Party positions, and led to more Republican votes in the 2010 midterm elections. Policymaking was also affected, as incumbents responded to large protests in their district by voting more conservatively in Congress. Our estimates suggest significant multiplier effects: an additional protester increased the number of Republican votes by a factor well above one. Together our results show that protests can build political movements that ultimately affect policymaking, and that these effects arise from influencing political views rather than solely through the revelation of existing political preferences.

The economist and the politician

There has been a small kerfuffle over the appearance of Jonathan Portes, Director of NIESR, at the Treasury Select Committee. Portes was there to discuss NIESR’s latest economic forecasts and encountered unexpectedly aggressive questioning about his political beliefs from one of the Members. Jesse Norman claimed Portes’ statement that the Government’s austerity plans had ‘failed’ relied upon his personal politics. Portes responded that, while his opinions might be politically relevant, they were purely positive economics.

Norman has now clarified on his blog (HT) that he is specifically saying that reaching a conclusion about a policy’s ‘failure’ requires a normative judgment. Regular readers of TVHE will know that we entirely support Mr Norman’s view that policy judgements require normative statements. Given that a normative statement doesn’t have a right or wrong answer, it must at least be influenced by the same set of personal beliefs as a political view. Hence, it may be that knowing somebody’s personal, political view is helpful for interpreting some of their policy judgements. However, there is a spectrum of normative judgements from those that would be agreed with by only people who share one’s specific political views to those that would be agreeable to experts of all political stripes.

In this case it is clear that Portes statement about ‘failure’ referred to two things: the results of a NIESR modelling exercise, and a belief that the UK’s current economic predicament is due to a demand shortage. His conclusions about each require value judgements, but not the sort that would usually generate a political division among serious macroeconomists—which isn’t to say they’re not divided! Norman, despite his protestations, was not seeking to engage in a discussion about whether the specific value judgements were likely to be politically motivated. Rather, he sought to discredit Portes view of gilt rates by casting aspersions upon his independence.

It is episodes such as these that discourage experts from contributing to the policy debate, even when they have much to contribute. That is a great shame. As Antonio Fatas says

…some of what we do as academics is not useful enough for policy makers, and in these circumstances is better to be honest and stay out of the debate. But …one can find answers to those questions after careful thinking and a lot of data analysis.

policy makers need to choose a number, not a range. [Academics] can be criticized on their assumptions or calculations but not on their willingness to advance the knowledge on an issue of great policy relevance. If any, they should be praised as academics who want to go beyond writing great papers to make those papers useful for policy makers or society at large.

Annals of improbable statistics: public choice edition

A bit late, but this case study is too good to pass up! The local Wellington newspaper reported that:

Wellington City Council’s strategy and policy committee this morning agreed to a joint plan by Positively Wellington Tourism, Grow Wellington and the council to implement the council’s new ”Destination Wellington” programme. … The proposal agreed to today will see the city’s tourism agency work to tell the ”Wellington story” [which] should return $50 for each $1 of council investment

If someone called you up offering a 5000% return on investment you might be a bit suspicious. Indeed, some councillors were:

Helene Ritchie arguing that… ”This is a significant amount of ratepayers’ money … We don’t know what we are going to achieve and how we are going to measure it, and we need to do that first.”

Unfortunately, she didn’t prevail:

…other councillors argued that… would just be putting up more red tape when they should be getting on with it.

Now, I don’t know the details of Grow Wellington’s plans, and they may well be excellent. For all I know, their only fault may be incredibly poor economic impact analysis. However, the council’s rationale for approving funding appears to be summed up by the final quote in the article:

You have to have a plan and that’s what people want to see – they want to see that we’re doing something.

This is why public choice theory exists!

Have election turnouts been falling?

After appallingly poor turnouts in recent local elections in the UK The Guardian has a post implying that election turnouts have been falling over time. The key figure is this:

They also have a chart showing that smaller, less nationally important elections get a far lower turnout. Given that their time series data combines all election types, I was curious about how the time series broke down by category.

The first thing to note is that local elections (with lower average turnout) are far more prevalent in recent years, at least in The Guardian’s data. That immediately means that the overall trend will show a decline in turnout, even if turnout within categories hasn’t declined. Read more