Housing bubbles and social mercantilism

A two-part essay on the problems of social division and failures of urban planning and management using Sydney and Melbourne as "compare and contrast" examples is here:

Since 1990, owner-occupied and investment property credit has expanded its share of total credit from 23 per cent to 58 per cent. (Business credit has dropped from 63 to 34 per cent.) Australians have been taking on large amounts of debt to invest in houses whose prices are largely a product of quantity controls: Australia has become a country highly leveraged on regulatory approval

and here:

Sydney’s land policy in particular is based on the social mercantilist model—with the inequality, conflict, inequity and corruption that model is inherently prone to. Melbourne can be thankful that its better social dynamics have ameliorated the ill-effects of the same disastrous ideas.

The author should have made it a bit clearer that you can have housing bubbles without quantity controls, they just make them more likely (and possibly more severe).

Patterns

I will preface my comments by noting that all the environmentalists in the world have not done nearly as much damage over the last few years as the inflation hawks on the Federal Reserve Board. Watching patterns from the 1930s being replicated leads one to despair of the capacity of people to learn. (And some to assign central planning of the money supply to the ever-expanding list of failures of central planning: a particularly clear post on current monetary issues and why they matter by someone who does not take that option is here.)

There is, alas, a lot of evidence that facts are subordinate to frameworks. Indeed, that the more highly educated and knowledgeable you are, the less open to changes in outlook you are likely to be. That, for example, having left-of-centre views makes one more prone to believe economic fallacies may be amusing to those of us not on the left but, at another level, is deeply depressing. (Since it implies that those engaged by helping the marginalised, and those with a good grasp of how to help the marginalised, are disproportionately likely not to be the same people.)

The failures of central banks over the last few years (but not, we in Oz can be grateful, the Reserve Bank) are a manifestation of powerful cognitive insularities. How like-minded folk in networks of various kinds (and organisations are a form of network) can reinforce frameworks in a way that makes it very hard to challenge those frameworks. Such challenges are, after all, very cognitively unsettling and it is natural to prefer reassuring agreement to being cognitively unsettled.

The recent surge in the Green vote in the Australian federal election has led to a lot of Green triumphalism at various levels. Voting Green has come to be seen as a major moral statement—particularly among the inner city folk who are my friendship networks.

Since I judge public policies by their likely effects, not their stated intentions—effects are what people live with, stated intentions may never be fulfilled, they can be self-delusion or simply cover (or both)—I am vastly less impressed by this. I am particularly unimpressed if people dismiss concern for what the Greens policies actually are as some irrelevancy or minor detail. If Greens are elected to Parliament, those policies are what they are committed to pushing public policy in the direction of. (Unless, of course, you think they do not really mean their stated policies, which makes the alleged moral statement involved in voting Green a thorough triumph of display over substance.)

I am particularly unimpressed given that the alleged moral statement is so often accompanied by contempt for other people’s perspectives and concerns. Insistence that one’s own views are obviously worthy of respect, but other people’s are not (and, indeed, represent a failure of moral character), may make for a great status claim, but massively fails the principle of reciprocity.

It can have legs if one then carefully examines consequences. But this is precisely what is not done—either in terms of likely effects of stated policies or of the effects of such easy dismissal of differing views.

The danger of contempt
This is particularly of concern when such concerns are majority concerns. It is simply not healthy for democracy if a highly educated, well-connected, generally well-paid, generally-in-secure jobs elite feels that its moral perspective is so obviously superior that the concerns of the majority of their fellow citizens can just be dismissed as not merely wrong-headed, but as illegitimate. If, through holding the institutional high ground in organs of public debate, such folk drive such concerns out of the political mainstream, then those will become fodder for political entrepreneurs outside the political mainstream. They fester rather than being usefully engaged and break out in all sorts of ways.
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Which, in different ways, was the lesson of both the Redfern and Cronulla riots. Both were ultimately driven by failures of policing. But if one can see that a black minority might riot for understandable reasons, yet if white folk get riled up, it must be because they are raging racists with illegitimate concerns, then that is precisely the outlook which gave racist demagoguery its “in”.

This is what worries me about the entire “boat people” controversy. Even leaving aside that seeming to be an “easy touch” for entry clearly encourages people to pay to get into leaky boats on long ocean voyages, the attitude that concerns of the resident working class can just be dismissed as “racist”—and so they should be excluded from having any say about migration policy—mixes powerlessness and contempt together in a very dangerous way. (And the conspicuously compassionate can show a level of contempt for their fellow citizens that an ancien regime aristo might envy.) The fact that the Howard Government, and Abbott Opposition, broke with the elite logjam on the issue may affront the inner city, but it has also taken a lot of the genuine social danger out of the situation (and restored the popularity of the migration program, though attitudes to migration unsurprising vary by education level—i.e. how much your income is based on capital compared to labour, since education creates human capital).

This goes to a point political scientist Jonathan Bernstein makes about the use of the term “left” and “right” in democratic politics:

once you have a democratic republic, it's not clear that "left" and "right" mean anything -- because as the constitution-makers of revolutionary and post-revolutionary Americans discovered after 1776 and through the 1780s, in a democratic republic there's only people.

It is one thing to use the notion of being “progressive” to engage with helping the less fortunate, connected, the more marginalised. It is something quite different when it is better connected, better educated, more job secure, higher income folk using their public debate advantages against fellow citizens who have less of all these things, even if done on behalf of refugees (real or pretend). This is the paradox of progressivism in a particularly noxious form.

It does not help that the same inner city benefits from a high migration policy. High migration (in conjunction with land use control) drives up the value of their properties and increases the scarcity value of their human capital. The resident working class faces increased competition and increased crowding costs (congestion, crime, higher rents, etc). I have no problem with the inner city speaking up for policies that are in its interests: I have a big problem with parading that as moral superiority and dismissing other groups sticking up for their interests as illegitimate.

Environment matters
In particular, I have no problem with environmental concern. As our numbers and capacities have grown, this generates serious issues that deserve to be seriously dealt with.

Which is my big problem with Green display. The best argument for not voting Green is precisely that the Green movement has such a regular penchant for environmental failure.

I am not talking here of the Tasmanian dams issue—there is a reasonable argument that the Tasmanian hydro strategy had reached its use-by date—but of issues such as water and forest management. It is madness that Victoria, for example, has had a 30% increase in (mainly urban) population without any significant new dam being built. If the urban population shoots up but we do not invest commensurately in water infrastructure, then (particularly if prices do not reflect the induced scarcity) you will get water shortages.

Why were there no new dams? Because politicians were not willing to face Green demonstrations on the issue. The resulting water shortages then become an “environmental problem” which is seen to vindicate Green concerns.

Yes, of course, the failure to invest in any new dams with a 30% increase in population is an "environmental" (specifically “climate”) problem! (Not.) By sabotaging sensible policy, an “environmental problem” is created which politically rewards the saboteurs.

This is, as we say, a negative selection process.

The same with forest and other fire risk management. A Victorian Legislative Council committee report (which seems to have disappeared off the web), and the recent Victorian Bushfire Royal Commission report both made clear that the excessively passive fire-risk management of the national parks and other public lands was a major contributor to the scale of the bushfire disaster. As the Victorian Government relaxing restrictions on property rights indicated that over-control had been a problem. That passive management and over-control was due to Green pressure. So, by sabotaging effective property management, we get much higher risk of catastrophic bushfires. When we get a massive bushfire, this is an “environmental problem” which politically rewards the policy saboteurs again.

It is in the interest of the Greens that environmental management be made worse, not better, so we have high profile “environmental problems” which justify voting Green. Just as it is in the interests of the progressivist inner city that private sector activity be undermined so that the government/education/NGO/welfare sector (and clients) gain greater weight—there is a reason that the Greens do best in the ACT and Tasmania

Selection processes
This does not have to be a conscious process. I used the term “negative selection process” quite deliberately. All that is needed is a series of false, but strongly adhered to, premises which then set up the relevant selection processes.

Including providing psychic rewards for adopting the outlook based on such premises. Such as, for example, getting a sense of belonging to a moral elite.

The premises are really quite simple. That people are the problem: their wishes, wants, aspirations, actions. Hence the solution to environmental issues is human withdrawal and passivity. No dams, no active burning, no private control.

There are various grander versions of this, of course. None of which work. It is, for example, nonsense to claim that, when it comes to the environment, “capitalism” is the problem. Command economies have much worse environmental records than do liberal capitalist states. For triple-whammy reasons: first, they are much more impervious to popular concerns. Second, command economics is a systematic pattern of the producers also being the regulators, with all the conflict of interest that involves. Third, command economies are a mass of official discretions, which leads to poor incentives—in both productivity and the husbanding of resources—and (fairly rapidly) massive corruption (corruption being the market for official discretions, so is worse the more—and the more valuable—such official discretions are).

These problems cannot be fixed within the framework of command economics: they are endemic to it. For example, one cannot have free politics in a situation where the state (and thus officials) control all significant resources. Indeed, it is an open question whether a certain level of dependence on the state does not lead to a downward demographic and public debt spiral—as arguably is happening in much of Europe.

It is also nonsense to claim that, when it comes to the environment, “prosperity” is the problem. Prosperous societies have better environmental records than poor ones, in part because environmental concern is very much a “luxury good”: in a situation where your big concern is whether your children will eat tomorrow environmental concerns are not going to loom large. Even in developed countries, polling indicates that environmental concern goes up in booms and down in recessions and is stronger the higher up the income scale you go.

But that capitalism and prosperity per se are not to blame goes against the notion that people are the problem (rather than poor institutional structures and the poverty such entrench). If people are the problem, then people have to be controlled and their “wrong” aspirations frustrated and denied. Which means embracing restrictions on economic activity, and on property rights, which means expanding the ambit of state action and official discretions. Which empowers the progressivist inner city—their perspectives, their jobs, their career paths. Which creates powerful selection processes in favour of such perspectives.

This is particularly so in the government (and government-dependant or engaged) sector, since the coercive power of the state—especially taxpayer guarantees—is a powerful insulating force. (Even negative selection processes in markets often have strong public policy elements.)

The silly notion of “food miles” for example, is not merely a reworking of the C19th German idea about “local food” (a food romanticism which sneered at the urban working class desire for cheap food and justified protecting the Junker estates from foreign competition, just as the modern version comes out of the EU of the Common Agricultural Policy). It is part of a general tendency to denigrate (on “environmental” grounds) the rural, provincial and suburban folk who make a living creating or moving around stuff compared to inner city folk who make living manipulating symbols. If you live by manipulating symbols, environmentalism is a great basis for making status claims against those who make a living via grubby “Gaia-damaging” stuff.

Even better if it is all about having the right ideas (in a sense, manipulating symbols in the "correct" way). For what these outlooks have in common is that other people, and their perspectives, are the problem and they, and their ideas, are the solution. This is clearly much more powerful than any learning about what works and what does not.

Particularly if one’s networks do not include contact with relevantly different perspectives—such as working class folk, farmers, people whose own capital is at stake in their businesses, etc. Or, if they do, such individuals fail to “rock the boat” because it is not worth the social bother of cognitively unsettling people.

As political scientists Jonathan Bernstein (here) and Ron Replogle (hereZ) have blogged about recently, there are reasons for ideologies to select according to common networks. But, in Replogle’s words:

Ideologues have perfectly good reasons for running in packs. They only get into intellectual trouble when they run in herds.

And cognitive comfort, and even more status, can give strong reasons for herd behaviour.

Policy learning (or not)
Which gets in the way of realising that there has been a lot of public policy learning experience over the last few decades—both within Australia and around the globe. What is perhaps the most frustrating aspect of the perspectives underlying Green sentiment is how dismissive it is of all that. Which, of itself, suggests that the alleged “concern” isn’t really.

For we have seen negative selection processes of the form I pointed out above before in Oz—in indigenous policy. Classing “racism” as THE problem, and indigenous “identity” as the solution, led to a series of disastrous policy errors that, in many ways, made things worse for many indigenous communities. But the more failure one gets, the more the analysis that the problem is “racism” and “lack of respect for indigenous identity” can seem vindicated, setting up a disastrous downward spiral.

In fact, the big problem for indigenous people is moving from hunter-gatherer societies to industrialised society in so few generations. It is pathetic to claim that it is all important to respect indigenous culture and then dismiss any notion that culture might have consequences. (In, for example, attitudes to housing.) It took Europeans thousands of years to travel from hunter-gatherers to industrialised societies, and we have had plenty of bumps and derailments along the way. Doing it in less than 200 years is hard and has proved so in every society that has had to confront the problem.

So, in a sense, lack of respect for indigenous identity is central, but not in the way that inner city progressivist sentiment means.

The romanticising of indigenous identity, just like the romanticising of “local” food, is part of a general movement towards romanticism. The romantic idea is a heroic idea: hence artist-as-hero, writer-as-hero, thinker-as-hero and so on. It also came in a militarist vision: soldier or warrior as hero. Nowadays, we get activist-as-hero. The anti-modernist historian Christopher Beckwith writes of:

the elimination of the dichotomy between the elite, which strived for perfection, and the ordinary, which strived for the commonplace (p.293).

But a heroic drive for moral perfection can be a grand form of elitism.

Alas, if becoming more like mainstream Oz society is the solution, then status from critiquing that society is not the solution but a problem. In both the environmental and indigenous policy cases, the error in thinking is from seeing existing society as problem, not as a source of solutions—because the latter gives the “wrong” status effects. It undermines the romantic vision of heroic moral perfectionism (and the romanticising of nature, indigenous identity and asylum seekers that underpins it). A romantic vision that creates a sense of moral heroism via a process of moral inflation—a process seen in such moral extravagances as claiming Tony Abbott becoming PM would be some great moral disaster.

Wrapping up one’s preferred public policy in status claims is dangerous. It makes learning what actually works that much harder, sets up negative selection processes in politics and public policy and poisons public debate. The trouble is, it can be a great source of cognitive comfort.

The lucky country

When Donald Horne wrote The Lucky Country, the title was an ironic indictment of mediocrity. And one can point to fortunate things about the land of Oz, more commonly called ‘Australia’. The rich resource base. Being settled by the British rather than by, say, the Spanish.

But a resource base can be squandered. And one may inherit an institutional structure, but it is what one does with it over the long term that matters. Luck only takes you so far. Over the long haul, other things matter much more.

Australia has done well with its good fortune. For example, the Australian stock market had the highest returns and the lowest volatility of any stock market in the world over the last 100 years. While other countries face serious public debt problems, we have one of the lowest levels of public debt in the developed world. Where other countries had the Global Financial Crisis and the Great Recession, we did not even technically have a recession. Due in large part to our Reserve Bank performing significantly better than other central banks. The Deputy Governor of the Reserve Bank recently spoke about Australia’s world-beating economic performance:

"The period since 1991 is the longest period of growth that Australia has recorded for at least the past century," he said.
The next longest period during which year-ended growth remained positive was the 13 years between 1961 and 1974."

The period when Donald Horne wrote his book.

All this while successfully absorbing lots of foreign migrants. Australia has a very high proportion of foreign-born residents (much higher than the US, for example). Of 29 cities around the world with a more than 25% foreign-born population, 3 are in Australia. (19 are in various former parts of the British Empire: 20 if you count Muscat.)

It was reasonable to complain about the limited substance in the recent Federal election campaign, and the hung Parliament result made its own statement about the lack of defining content in the election. Yet, we also had two personable, intelligent, public-spirited people on offer as Prime Minister. Leading proposed ministerial line-ups of generally sensible and experienced people. (Claims that there is some great moral urgency that one or other lose or win, or that one or other becoming PM is some grounds for moral despair, tell us far more about the folk indulging in such extravagances than Julia or Tony.) The election campaign was fought with a lack of violence we take entirely for granted but would be regarded as a miracle in large parts of the globe.

Even the hung Parliament may prove to be something of a blessing. In the US, for example, periods of gridlock (when different Parties control the Presidency and the Congress: and so the politicians constrain each other) show higher stock market returns than periods when the same Party controls the Presidency and the Congress (so politicians are less constrained: average stock market returns are, in fact, negative across such periods since 1973).

Since 1983, we have generally had competent federal governments which have brought public finances to a much sounder basis than most developed democracies, have delivered reforms which provided an astonishing period of continuous economic growth and unemployment levels which most developed economies would envy. We have low levels of corruption: what corruption there is, fairly predictably, is where official discretions have high “resale” value (land use regulation and “vice” regulation). Complaints that the performance of our politicians over the last quarter-century represent some moral disaster again tell us much more about those indulging in such moral extravagance than the reality of things.

There are some obvious problem areas. Indigenous policy has been a long-term disaster, with conditions in many indigenous communities deteriorating over recent decades. But, revealingly, indigenous policy has typically been based on maximising differentiation from the rest of a highly successful society rather than building on its successes. Our housing prices have reached madness territory, due to official discretions creating ludicrous artificial shortages in land for housing. Having the populations of Sydney and Melbourne increase by 30% without any significant new dams, while having water prices that do not reflect resulting scarcity, has, fairly predictably, created water shortage problems. Investment in transport infrastructure has seriously lagged population increases. All these fit into the “could do better” category.

Our politics has its low moments, as a recent book on NSW Labor details. Yet, even at its most pathological, our politics still works so much better than that of so many other countries. It is not some weird accident that Australia regularly rates in the top three countries in the UN Human Development Index.

Australia is a highly successful society and highly successful polity. Any perspective that does not grasp that will tend to undermine that success rather than build on it.