Wednesday , December 11 2019

What theft?

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There’s some hyperventilating about Labour economic plans. At CapX Tim Worstall says that John McDonnell’s proposal to give private tenants a right to buy their home at a discount is “straight out theft.” And the FT says Labour plans to confiscate £300bn of shares*. Such claims are, I think, an exaggeration. Let’s take private tenants first. The problem here is that house prices are high in large part because of policy mistakes. We can disagree upon what the precise failure is – restrictive planning laws, promotion of financialization, inadequate public building or insufficient taxation of land. But both left and right would agree that high house prices are, at least in part, due to errors of commission or omission by successive governments. Which poses the question: does anybody

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There’s some hyperventilating about Labour economic plans. At CapX Tim Worstall says that John McDonnell’s proposal to give private tenants a right to buy their home at a discount is “straight out theft.” And the FT says Labour plans to confiscate £300bn of shares*.

Such claims are, I think, an exaggeration.

Let’s take private tenants first. The problem here is that house prices are high in large part because of policy mistakes. We can disagree upon what the precise failure is – restrictive planning laws, promotion of financialization, inadequate public building or insufficient taxation of land. But both left and right would agree that high house prices are, at least in part, due to errors of commission or omission by successive governments.

Which poses the question: does anybody really have a right to profit from bad policy? I’m not sure. If they do, it requires some argument which Tim doesn’t supply. In the absence of such a right, there can be no “theft”. What McDonnell is instead proposing is a different sharing out of the profits of state failure.

This is not to say his proposal is a good idea. It’s not. It gives a windfall to a group – present tenants – which is just as arbitrary as the beneficiaries of state failure. And it’s not clear that expanding owner occupation is a good idea. Andrew Oswald and Danny Blanchflower have shown that higher rates of owner occupation are associated with higher unemployment and lower investment – because owner occupiers are less able to move to where there are jobs, and more likely to resist commercial and industrial developments in their area. And there’s also evidence that more mortgage lending – an obvious corollary of more owner occupation – can crowd out productive business loans.

Labour’s best proposals on land reform – Land for the Many (pdf) – did not propose a right to buy, and rightly so I think.

The FT’s claim that Labour would “confiscate” share is, I fear, an egregious error. What the party is proposing is a gradual dilution (of 1% a year) of existing ownership and corresponding expansion in worker ownership. This is not so much a confiscation as a transfer: the headline could equally well be “Labour to give workers £300bn windfall.” The FT is in this sense committing a common error – of describing something as a cost when it is in fact a transfer.

And, indeed, it’s possible that this won’t cost current business owners anything. We have good evidence that worker ownership (pdf) can boost productivity simply by giving employees more skin in the game. And Labour’s plan might in the long-run be especially successful in this as it would expand public support for business-friendly policies. More efficient companies would be in everybody’s interest.

If you want to make a coherent case against Labour’s plans, you shouldn’t talk about theft, but rather show evidence that worker ownership would not be as beneficial as I think. Poluncertdy

In fact, in whining about Labour’s “confiscation” and “theft” distracts us from what is a bigger and more genuine destruction of wealth. My chart shows the point. It shows that there’s a strong correlation (0.56 since data began in 1997) between the dividend yield on the All-share index and global policy uncertainty, as measured by Nick Bloom and colleagues. The cliché is right: markets really do hate uncertainty. It means lower share prices.

Uncertainty now is unusually high, which is costing investors billions. If uncertainty were at its 1997-2015 average, the relationship in my chart implies that the dividend yield on the All-share index would be almost a percentage point lower than it is. Which means that share prices would be £700bn higher than they are**.

The uncertainty created by Brexit and by Trump’s trade wars is, therefore, costing people vastly more than Labour’ plans. If you must complain about theft and confiscation, complain about this instead.

*The original headline to that piece was Labour “would cost UK companies £300bn.” That was obvious drivel, and the FT has rightly amended it.

This calculation is very rough. On the one hand, it understates the cost of uncertain. If we had less of it, capital spending and economic activity would be higher, which would mean dividends would be higher. But on the other hand, there might be some omitted variables which help explain the link between uncertainty and equity valuations. To the extent that there are, I might well be over-estimating the impact of uncertainty on yields. Net, though, I very much doubt that the impact of uncertainty upon valuations is small enough to ignore, as Brexiters and Trumpites are doing. 

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