Economic Illiteracy (3): “The Country Can’t Afford It”

The facts are deeply worrying. A third of the country starting to experience third world economic conditions? It makes the Brexit vote easier to understand, more as a political scream of anguish than a judgment on the EU. The housing shortage is damaging the UK economy, and the problem is getting worse by the day. The latest productivity figures show what happens when investment is inadequate – and it is inadequate because real estate as a financial asset offers investors a better rate of return than assets that would boost productivity – and this better rate of return is driven by the housing shortage. Straightforward supply and demand, straightforward cause and effect.

But there is an equally straightforward fix to this. If we solve the housing shortage then we simultaneously reduce the cost of housing and decrease the proportion of disposable income spent on keeping a roof over the heads of this third world third. So, if we build a few million houses on an emergency basis over the next five years or so, the following benefits sequentially accrue:

  1. Housing shortage removed
  2. More disposable income.
  3. Big economic stimulus from the spend on construction.
  4. Disposable income increased, poverty decreased.
  5. Poverty decreased, so public expenditure on poverty and its myriad effects decreased.
  6. Greater expenditure through increased disposable income, so increased tax revenue.
  7. Increased tax revenue decreases public debt.
  8. Right to buy can be activated on the new housing stock, with building society/bank funding of sales used to repay debt and finance further housebuilding.
  9. The project could be financed by selling National Housebuilding Bonds. These bonds return an interest rate of 3.5% – quite attractive at today’s rates. If it costs £100k to build a house that can be rented out at £100 per week, the interest is paid and there is another £1.5k to put towards building more houses (£200 for admin and maintenance) per annum. If the occupier wants to buy the house, they can, but they must get a mortgage and the sale price (say £200k) goes back into the housebuilding fund. Now two more houses can be built, and so on. The process is exponential.
  10. A national asset base that returns an income to the public purse is created. The economic problems caused by the housing shortage are removed. It is a virtuous circle.

So why hasn’t the problem been solved? The big clue is to be found in a Newsnight special from 7th February 2017, ‘The Home Front: The Battle to House Britain’. Roughly 27 minutes into the programme there is an extraordinary section involving Gavin Barwell, then Minister for Housing and Planning. Emily Maitlis quite correctly asks why councils can’t borrow to build and thus solve the crisis. Barwell says that this can’t be done because it will increase public debt: “The country can’t afford it.” Maitlis points out that this would be creating an asset but doesn’t follow up. She probably doesn’t fully understand my ten point sequence.

Barwell’s knee-jerk response demonstrates the crass, doctrinaire, economic illiteracy that stands in the way of a solution to two major problems. The expenditure I advocate creates a publicly owned asset. It’s not like increasing spending on health or education or foreign aid or the armed services. The asset that is is created generates income and has liquidity, so, over the (long!) lifetime of the asset, it becomes self-financing – profitable even, if public policy dictates.

It’s called investment. Something, apparently, that we are only capable of doing in the UK if the funding comes from abroad, probably China. The problem with that is that UK assets are increasingly foreign-owned with the concomitant loss of control over the UK’s economic destiny – a phenomenon that supposedly underpinned the arguments of Brexit campaigners whose xenophobic nationalism apparently collapses in the face of false neo-liberal economic doctrine.

I repeat: economic illiteracy.

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