From the editor...
Those who fail to learn from the past are doomed to repeat it. That is why, after the financial crisis, Russell Napier, one of MoneyWeek’s favourite analysts, set up the Library of Mistakes in Edinburgh. Illuminate financial history and we can learn from our mistakes, he hoped.
Perhaps the political and economic establishment should arrange a field trip to the library. The past few weeks have been marked by bad ideas that just keep coming back, like zombies refusing to die. We keep hearing about rent controls in London. These always produce a shortage of rental accommodation since they remove the incentive for landlords to make flats available.
Failed 1970s policies return
Similarly, the fuss over greedflation (see Merryn’s monthly column on page 26) has prompted calls for price controls, despite their equally lacklustre pedigree. They also backfire by causing a reduction in supply.
It’s always worth recalling Milton Friedman’s take on the issue: “We economists don’t know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can’t sell tomatoes for more than two cents per pound. Instantly you’ll have a tomato shortage. It’s the same with oil or gas.”
I’ve always suspected that bad ideas are more likely to recur when the generation in charge are too young to remember the last disaster they caused. That seems plausible enough for price controls, a policy from the 1970s, but there is no such excuse for this week’s recurrence of Help To Buy, one of the silliest ideas of the past decade or so (against some very stiff competition indeed).
The government should drop the notion, for reasons that we have rehearsed often in MoneyWeek: a policy designed to get firsttime buyers onto the housing ladder stoked overall demand, raising prices further (and enriching the big housebuilders). A far better approach would have been to leave the absurdly overvalued market alone to correct itself, making houses affordable for far more first-time buyers. The handsoff policy is also a far better bet for the problems to which price and rent controls are supposed solutions. Capitalism is self-correcting, as economist Joseph Schumpeter noted with his work on “creative destruction”; get in the way of the system’s natural tendency to reset, and you end up frantically designing solutions to problems you inadvertently caused with your approach to a previous problem.
Cowboy builders
That’s what Ronald Reagan was getting at when he joked about the state’s approach to the economy. “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.” In this scenario governments end up in a vicious circle of problems and half-baked solutions causing yet more problems – like cowboy builders reassuring a homeowner that their next solution will definitely fix the hole in the roof (that they caused trying to install a cooker).
In this case, the housing market, boosted to excessive levels by a central bank keeping the price of money far too low for far too long (to temper the effect of the bursting of a bubble it originally caused) has finally embarked on a long overdue correction. Just leave it alone.
“If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.”