Dalibor Rohac: Labour's policies would help create the next housing bubble

Dalibor Rohac is an economist at the Legatum Institute in London. Follow Dalibor on Twitter..

After the sub-prime bubble in the United States, one would assume that policymakers have learned that governments need to be cautious about encouraging the accumulation of debt in specific areas of the economy. Not in the United Kingdom, it seems. Ed Balls, the Labour Party’s shadow chancellor, presented his plan to boost the supply of affordable housing at his Party’s conference in Manchester on Monday.

While the specifics differ, the plan would set in motion in the exact same patterns of behavior as the Community Reinvestment Act and other pieces of legislation, which fostered home ownership in the United States. Without sharing the details, Mr. Balls wants to use the revenue from 4G auctions to build 100,000 new affordable homes – “creating hundreds of thousands of jobs and getting [British] construction industry moving again.” The shadow chancellor also proposed a stamp duty holiday for first-time buyers of properties up to £250,000.

Even if one ignores the fiscal implications of his plan, the idea to throw more money at the construction sector is an awful one. Firstly, the plan is not aimed at helping poor people – the UK already has a very generous supply of social housing, larger than Sweden or Denmark. And it’s not clear that the country suffers from an absolute shortage of housing, as some 450,000 housing units are unoccupied, according to a 2010 research project done by the Guardian.

Dalibor Rohac: Europe doesn't need an Alexander Hamilton - it needs leaders who will stand against bailouts

Dalibor Rohac is an economist at the Legatum Institute in London.  Follow Dalibor on Twitter.

It has become customary for European leaders and observers of eurozone’s debt crisis to invoke the name of Alexander Hamilton. As the first U.S. Treasury Secretary, Hamilton urged the federal government to ‘assume’ and honor the debt of U.S. states that emerged from the Revolutionary War as indebted as Greece or Portugal are today. “Europe is at an Alexander Hamilton moment,” former Fed Chairman Paul Volcker declared in January, “but there’s no Alexander Hamilton in sight.”

No wonder Hamilton is popular these days. For the proponents of ever-closer Europe, this is too good a crisis to waste."For a genuine economic and monetary union to be established, I think that we need a banking union, a fiscal union and further steps towards a political union," says Jose Manuel Barroso, the president of the European Commission. Similarly,François Hollande, alongside Italy's Prime Minister Mario Monti and Spain's Prime Minister Mariano Rajoy, are the most vocal proponents of a closer fiscal union, in which Europe would stand ready to honor the debt obligations of its individual members.

Those who use Alexander Hamilton as a pawn would benefit from a more nuanced reading of U.S. fiscal history. The federal government in the U.S. was not set up with the purpose of bailing out colonies in financial distress– it was created to provide public goods for the United States as a whole: provision of security, justice and defense, and foreign policy. Recall that the enemies of the young American nation included the King of England, who was running the world’s greatest military and naval power of the time.

Dalibor Rohac: Wealth is the best protection from natural disasters and climate change

Dalibor Rohac is a Research Fellow at the Legatum Institute.

Although we do not yet know the final number of victims and have only an uncertain idea of the current situation at the Fukushima nuclear plant, it is clear that the earthquake that hit Japan on Friday is an enormous tragedy, pointing out the fragility of human existence and the magnitude of natural forces that are beyond human control. Japan has a long-standing record of destructive earthquakes. The 1896 Meiji-Sanriku quake killed some 27,000 people, while the great 1923 Kantō earthquake had an enormous death toll, estimated between 100 and 142 thousand people.

We should always remember that, however sophisticated human civilisation might be, there will always be forces that escape our control, and we should always be humble when engaging with nature. As Jon Stewart once said on The Daily Show, "God, you’ve made your point. You’re all-powerful."

But besides pondering our role in the universe, feeling sympathy with the victims, and thinking about the possible ways of helping them, this catastrophe should remind us of three important lessons which are all too often forgotten:

1. Humility. We do not have a perfect control over nature - and policies that pretend that we do are bound to fail. The standard thinking about climate change, for instance, is predicated on the belief that humans can exercise direct control over the climate and that, through their action, they can prevent certain climate-related phenomena from happening. If only we cut our emissions below a certain level, the argument goes, we will be able to tame the climate.

However, that belief rests on very shaky foundations. Given the uncertainty about the nature and drivers of climate change, trying to cut CO2 emissions does not guarantee that the adverse effects will be mitigated. Instead of pretending that we can shape the climate to our benefit, our best bet is to make human civilisation as robust as possible to whatever form climate change can take. That means that encouraging adaptation in poor places should be the foremost priority of any serious climate policy.

2. Prosperity brings resilience. While we don’t have a direct control over nature, wealthy societies are enormously robust and resilient to natural disasters. Given the total population living in the areas hit by the quake and the tsunami in Japan, it is a miracle that the death toll is not much higher. In the past decade alone, smaller quakes in Sichuan (2008), Kashmir (2005), Iran (2003) or Gujarat (2001) killed tens of thousands of people each. It is easily imaginable that the death toll of as massive an earthquake as the one we saw on Friday could be higher by an order of magnitude, if the quake hit a place that was poorer and therefore less resilient.

Also, it is reasonable to expect that no humanitarian crisis will ensue in Japan, unlike in other places that were hit by weaker, but effectively more destructive quakes. So while it would be naive to think that humans can ever tame nature fully, this quake shows that economic development and wealth are the most effective ways of minimising human losses and social costs of natural catastrophes.

3. Natural disasters are making us poorer, not richer. After this quake, it is very likely that at least a few pundits will argue that the post-quake reconstruction of Japan will serve as a handy fiscal stimulus, which could perhaps pull the country out of the current secular decline. Massive spending programmes aiming at rebuilding destroyed infrastructure will give employment to people and cascade into the wider economy, stimulating spending and economic activity.

Except they won't. If that was true, then Japan should have endorsed a policy of destroying roads and setting buildings on fire a long time ago. In fact, current Japanese stagnation has little to do with a lack of "stimulus," but rather with demographics, lack of market flexibility and with the lingering issue of massive government debt accumulated precisely because of a decade of inept fiscal stimuli.

Dalibor Rohac: To form a more perfect Union?

Dalibor Rohac is a Research Fellow at the Legatum Institute

The Franco-German proposal for common economic policy in the Eurozone, presented today at the European summit in Brussels, can be seen as a case of political posturing directed at the German electorate, in order to provide an ex-post justification for the financial aid packages directed at Europe’s ailing periphery, which would be palatable to the domestic audience. If the proposal is meant seriously, however, it would probably represent the most radical change to the post-war European political and economic order.

The proposal includes a common EU retirement age of 67, harmonised corporate taxes, elimination of inflation-indexed wage agreements, and limits on deficits – coupled with tougher penalties for countries that breach the rules. While each of these individual proposals could be evaluated on its own merits – and clearly raising the retirement age and eliminating wage indexation are measures that would have a very solid economic justification – the underlying tone of this proposal is very disturbing.

If adopted, the plan would force Eurozone countries to amend their constitutions to forbid public deficits above a certain level. While an economist might sympathise with the intention to curb irresponsible public spending, this step would essentially mean the end of sovereign nation states in Europe. After all, the very purpose of setting up elected parliaments was to grant them sovereign powers to tax and to decide over public spending. The Franco-German proposal would constrain substantially that power, and would represent a decisive departure from the institutions of sovereign nation-states and representative democracy.

Again, there can be a legitimate discussion about whether such a move is warranted or not. It is certainly possible to imagine persuasive arguments for constitutional checks that would curb deficit spending. Nonetheless, such dramatic modifications to our present political and institutional order should not be a result of a proposal that has been drafted in secret, without any open public discussion, and which – if adopted – would probably be rushed frenziedly through national parliaments to prevent any such discussion.

While possibly signalling the end of the era of standard representative democracy in Europe, this move should not be surprising. It is only a logical extension of the project of a common European currency. In the past, there are not any examples of stable monetary unions that would have taken place without a political and fiscal union. The assumption made by many supporters of the Euro in the late 1990s – namely that it was possible to square a common currency and political and fiscal independence of individual nation states – was thus rather unrealistic to begin with. Clearly, there were many in Europe who hope that the Euro will serve as a motor for further political centralisation, and these people seem to occupy the high grounds in the present debt crisis.

So while the proposal is partly directed to appease German taxpayers, it is part of a much broader theme which we witness in European politics, motivated by the idea that “harmonisation” is always preferable to diversity and that institutional competition between different fiscal, regulatory, and monetary regimes is, in general, harmful.  Obviously, nothing could be further from the truth. Europe’s economic growth cannot be sustained without a perpetual process of yardstick competition and institutional learning. For the sake of Europe’s future, it is necessary that the current movement towards an ever-closer Europe, and political centralisation at all cost, is reversed.

At this stage, there are two possible scenarios how the events in the Eurozone can play out. The Eurozone could be sustained in its present form, at the cost adopting an institutional package similar to today’s Franco-German proposal and massive, Europe-wide, fiscal transfers. Alternatively, we should brace for a disorderly unravelling of the Euro occurring at its periphery – potentially at very high social and economic costs. Needless to say, neither of these two paths is particularly appealing.

Dalibor Rohac: The last thing the European economies need today is an EU-wide tax

Dalibor Rohac is a Research Fellow at the London-based Legatum Institute. Formerly a Weidenfeld Scholar at the University of Oxford, he works on topics related to development and free-market economics.

When the EU commissioner Janusz Lewandowski unveils his proposal to introduce an EU-wide tax in September, he will not be met warmly. Nor should he be, as the idea of a European tax is profoundly misguided, especially at a time when the economic recovery is still fragile. Clearly, the tax is a bad idea regardless of one’s opinion regarding accountability issues at the European level and about the fact that levying taxes has always been a prerogative of nation-states – not of intergovernmental organisations.

It is true that the effects of the tax on European economy would likely be modest, especially if the tax is not levied directly on productive activities but on, say, carbon emissions or air travel. And a financial transaction tax, while potentially popular with voters across Europe, is unlikely to be adopted since Europe needs its financial centres to be strong. Thus, the EU tax will effectively serve as a kind of consumption tax, and as such will not likely introduce major social costs.

Nonetheless, an EU-wide tax is an extremely ill-advised idea for a number of reasons. First, the suggestion comes at a time when many European governments are struggling to contain their own deficit problems without excessive tax rises which could interfere with economic recovery. The EU is mandated to run a balanced budget, and its 2011 draft budget is similar in size to this year’s budget, something for which the EU should be lauded. The very last thing that the European economy needs right now are new taxes that would not even serve the purpose of balancing frail public budgets but would be pocketed instead by the EU institutions.

Second, it would just disingenuous to claim that the objective of the suggested tax is to tackle climate change or to address the “too big to fail” problem – as some might be tempted to argue if the levy takes the form of a carbon tax or a financial transactions tax. In fact, the EU institutions simply seek to raise additional revenue, independent of the contributions arriving from member states. It is true that, when measured by the standards of European nation states, the EU budget is rather small.  In 2011, its expenditures (and revenues) are planned to be €142.6bn, close to 1% of EU’s gross national income. The modest size, however, does not imply that the money is spent well. Quite the contrary.

Before the EU institutions demand additional sources of revenue, they should investigate whether the money that they already have at their disposal is being spent on the purposes the EU has already identified as most urgent. For instance, back in 2000, European leaders set out for themselves an ambitious programme of fostering the knowledge economy and improving Europe’s competitiveness, known as the Lisbon Agenda. Clearly, this programme has been an utter failure. Yet this should not be a surprise given that the EU spends half of its budget on agricultural subsidies and a dominant fraction of the rest is directed towards structural and cohesion funds – large transfer programs to economically challenged regions of the EU. Only slightly more than 10% of the total budget is used towards projects which are at least nominally aimed at improving competitiveness for growth and employment.

Clearly, the Common Agricultural Policy does little to make Europe a more prosperous place – besides making it a net exporter of dairy products. Likewise, in spite of decades of transfers and regional development programmes worth tens of billions of Euros yearly, the structural and cohesion funds have not eliminated some of the most blatant regional disparities existing among the old member states.

This is not to say that the EU should direct more resources into infrastructure or research and development, or that it should supplant the role of national governments in making their economies more flexible and open. The role which the EU institutions can play in improving Europe’s competitiveness remains an open question – and there are reasons to believe that this role is rather small. At the same time, it ought to be clear that this goal will not be attained by subsidizing large-scale farming or by purchasing and subsidizing exports of powdered milk.

We are in a period when more and more Europeans feel disenchanted with what has been done in their name by their governments in the European Union. This strongly suggests that before even contemplating an EU-wide tax to finance its activities, the European Union needs to rethink radically the structure of its own spending and the effectiveness of activities which it is pursuing. Until such rethinking takes place, Mr Lewandowski’s plan should – to borrow from Sarah Palin - emphatically be “refudiated”.