Double-dip dementia

The world of modern politics is so dominated by form rather than substance that we can hardly be surprised when a piece of total nonsense becomes the benchmark for success or failure of a particular governmental policy. This week we have seen the threat of a return to recession dominating the feeble sparrings of the frontbenches in the House of Commons. The problem with this is that recession is treated as an unmitigated ill when it is anything but because, as always, it depends on what is actually happening.

I know this is old ground but it is worth examining again what a recession is. The conventional definition is that it is two consecutive quarters in which Gross Domestic Product (GDP) declines. So, what is GDP? It is in answering this question that we see why recession cannot always be considered a bad thing. GDP can be measured in various ways but they all amount to pretty much the same thing, GDP is the amount the UK spends on goods and services within the UK plus the amount spent on investment within the UK plus the value of exports minus the value of imports. The amount spent on goods and services comprises both the amount spent by consumers and the amount spent by government. GDP is not a measure of profitability nor of sustainability - it tells us nothing about whether the amount of spending that has occurred was affordable.

To see the limit of GDP as a measure of substance it is possible to isolate one household and see what effect it has on GDP. Mr & Mrs Ordinary have take-home pay of £500 a week. They spend £400 and put £100 in a biscuit tin under the bed. They contribute £400 a week to GDP from their own spending and thereby allow the recipients of their spending to have more to spend and this adds to GDP and the recipients of that spending also spend and so it goes on. After three months they decide the biscuit tin is sufficiently full and not to save any more. The next week they spend £500. GDP has gone up. After three months they change their minds and start saving again, but only £50 a week rather than £100; they still spend £450. GDP has fallen. The next quarter they have further concerns about spending too much and cut their spending back to what it was before so they spend £400 and start stuffing a second biscuit tin. GDP has fallen again. Oh woe, we are in recession. But what is the reality? A family that could afford to spend £400 and needed to save £100 in order to provide for its future started overspending, then they reduced their spending again in instalments to get themselves back on an even track. The reality is that the rise in GDP caused by spending more than they could afford was an illusion, it should never have happened and if it had not happened there would have been no wailing and gnashing of teeth. As it is, panic has set-in simply because spending that could not be afforded has been removed from the system. In fact there should be a sigh of relief rather than panic. At the start and end of the exercise they spend what they can afford, in between they overspend. The problem is not the return to affordability, the problem is the unaffordable splurge between the start and the end.

The position gets even more absurd if Mr & Mrs Ordinary borrow £100 a week while they are spending all their income so that they spend £600 a week on an income of £500 a week. GDP goes up even further and it falls even further when they come to their senses and decide to live within their means. In this situation there has been a GDP bubble - like every bubble it is full of nothing but air, there is no substance to it. Deflating the bubble reduced GDP and we should say "about bloody time too".

Similarly, because GDP includes government spending on goods and services, all unaffordable spending by government boosts GDP. In particular, spending borrowed money on goods and services boosts GDP. Spending money they have gleaned in tax will always be pretty much neutral in terms of GDP because if not taken in tax it is likely to have been spent by the taxpayers (of course some could be saved, but that which would be spent would undoubtedly be spent better than government spends it).

Government could borrow £10billion a year and spend it on two gangs of workers - one gang to dig holes in the morning and another to fill them in again in the afternoon. This pointless activitiy boosts GDP because it leads to more money sloshing around the economy but it is utterly pointless in any other respect. Were the exercise to end GDP would fall; again it should elicit a sigh of relief. As things are we don't yet have gangs digging and filling holes, but we have the modern politically-correct equivalent in an army of public sector naggers, snooper, counsellors, fake charities and form-fillers who are not necessary, provide little if any benefit and yet are retained and paid for from borrowed money. What does that additional GDP mean? It means no more than the additional GDP derived from Mr & Mrs Ordinary spending borrowed money, it is bubble GDP and tells us nothing about the state of the economy as a whole. Remove it over a couple of years and we could find ourselves in the longest and deepest recession in history, a situation that would bode extremely well for the future because the future would not include the wasteful and unnecessary expenditure that boosted GDP artificially.

"Artificially" really is at the heart of the matter. GDP is boosted by government borrowing to fund pointless activities that achieve nothing other than to boost GDP. If you look only at GDP you can be fooled into an illusion of perpetual motion. Borrowed money can increase GDP therefore we must borrow more and more. Nonsense. It omits the other side of the equation which is that borrowed money must be repaid and commands interest in the meantime. If you pay 5% on the borrowed money the benefit of spending the borrowed money must be more than 5% to make the exercise worthwhile. Even a benefit that can be measured as 5% of the borrowed money only allows you to stand still, it does not repay a penny of the capital sum borrowed. That there is an increase of GDP is irrelevant because it only looks at one side of the equation, it does not take into account the cost of borrowing the money. It fails to acknowledge the broken window fallacy.

We shouldn't fuss about whether GDP is up or down this quarter or the next, it really doesn't matter. What matters is that money is used wisely because the unwise use of money eventually results in retrenchment if not bankruptcy. A decade of it being used unwisely can thrust GDP into the stratosphere but that tells us nothing about the health of the economy. GDP was never higher than before the recent recession started yet the economy (to be more accurate the government's finances) was in a complete mess. That recession has not yet ended.

Of course it has ended according to the artificial measure called GDP and we might re-enter recession according to the artificial measure called GDP, but the reality is that we still have government overspending by about £160billion a year and we will be in recession until the resultant debt is eliminated. We will be in recession because ordinary people will continue doing what they are doing now, namely paying-down debt and putting aside some money for fear of unemployment, rising taxes and rising fuel bills. All they are doing is returning their own economies to a sound state. If GDP plunges but people are in charge of their finances rather than their finances being in charge of them the country will be in better shape.

A classic case of Northern Crock

Someone I know has to sort out the estate of a friend of his who died last week, the poor fellow had cancer and was only 35. He has been making enquiries into his friend's assets and liabilities. Apart from a few hundred in the bank and normal household effects the only major asset is an ex-council flat originally bought some years ago under the right-to-buy legislation, the deceased bought it four years ago for £170,000 with the assistance of a loan from Northern Rock. It is a classic example of why Northern Rock is known as Northern Crock.

The deceased was a hairdresser earning around £30,000 a year gross in 2007. He had been renting all his adult life and wanted to buy his own home but had very limited savings, so he searched for a 100% mortgage. Northern Rock advanced not only the £170,000 needed to buy the flat but also a £10,000 unsecured loan. The mortgage was repayable over 20 years but no mechanism was put in place to repay any of the capital and the borrower was not required to take out any life assurance to provide Northern Rock with a lump-sum in the event of his death. All that is pretty sloppy, they lent £10,000 more than the property was worth, a sum equivalent to about six-time the borrower's gross income, to someone who would have no obvious means of repaying the capital at the end of the loan period. Their only security was the property itself, and that is where the whole thing becomes a true crock.

Because the flat had originally been bought from the council some years before, the lease had only 57 years to run. These days leaseholders have certain rights to extend the period of their lease but it costs money and only happens if the leaseholder gets round to asking for it. In the meantime the property is worth only what it can be sold for in the open market. Flats with less than 60 years left on the lease are not accepted as security by most mortgage lenders (Northern Rock was one of the few foolish enough to lend against such a property), although an extension can be obtained it must be paid for and when the lease is running short it can cost many tens of thousands of pounds plus conveyancing costs and valuation costs if the freeholder does not agree the figure - all these costs must be borne by the leaseholder. In the case I am discussing the lease now has only 53 years to run and I would estimate the cost of gaining an extension to be between £20,000 and £30,000 (I claim no expertise, but that is my best estimate). This affects the current value of the property enormously because it excludes the vast majority of the potential market from being able to buy the flat. Only cash buyers are in the market and they are unlikely to buy an ex-council flat for their own occupation; the real market is professional landlords looking to extend their portfolio. They will only buy through an estate agent if they can get a real bargain, otherwise their money will go further by buying at auction. The reality in such a situation is that the open market value is the forced-sale auction value. In this particular case the open market value of the property on a long lease of 90 years or more is around £190,000-£200,000. As it is, anything in excess of £120,000 would be a good price for the vendor, it wouldn't be at all surprising to find the flat sells for no more than £100,000.

His executor will sell his household possessions for a few hundred pounds to off-set funeral expenses and, if he is sensible, will simply surrender the flat to Northern Rock - there is no point him engaging estate agents to sell because he would have to pay their fees himself. Northern Rock will recover a flat worth at most £120,000 to cover a secured loan of £170,000 and an unsecured loan of £10,000. Their loss is likely to be at least £60,000 - no less than one third of the total amount they advanced.

One might think they could have protected themselves through insurance. I do not know whether any part of the loan was insured against default but the life of the borrower was not. Had they insured part of the loan itself (using what is usually called mortgage indemnity insurance) they might be able to recover 10 or 15% of the secured loan but their loss will still exceed £30,000.

Although this is just one example, it illustrates the folly of the sort of high loan-to-value mortgage loans for which Northern Rock was famed. No one knows how many similar bits of trash sit on their books.

Resigned or frustrated

I find it hard to write anything these days. It's not that there is nothing to write about, just in the last couple of weeks we've had the EU bullying Ireland at the behest of Germany, a multi-million pound talking shop farce in Mexico, the first guilty plea from a former MP who defrauded the public purse, the strengthening of the food police and people rioting about nothing in London. Yet I haven't been stirred to action. I'm trying to work out why.

When the new government limped into office the mere fact that the risible Gordon Brown and his cohort of contemptible dictators had been ousted caused me to breath a huge sigh of relief. Whatever the new lot did could not possibly have made things worse for the country than the carnage wreaked by their predecessors - carnage of a structural kind which left our society split into bitter factional interests as well as carnage to the economy. They've gone. It cannot get worse. No need to rage about things. Both my regular readers will be aware that the policy programme of the new government is miles away from what I consider in the best interests of he people of this country but at least it is a yard or two closer than poor Gordon could ever have taken us.

That can explain a quiet period while we wait for the coalition's positions to be formed clearly but it cannot explain a lack of complaint once their positions were set so closely to those of the failed Labour government. Perhaps the explanation is dispair. Because so little is different now there is, perhaps, little point in repeating my observations of the last couple of years. With the exception of Eric Pickles I have detected no current Cabinet minister prepared to pop-up above the parapet and challenge the ever-expanding State. Michael Gove did so for a fleeting moment with his proposal for schools to be run free of political involvement, then ruined it by giving detailed guidance on curriculum and examination standards. There was even a tiny hint from Andrew Lansley at the Health Department with his idea of getting rid of layers of bureaucracy only for him then to retain within the remit of the NHS every aspect of nannying that had been added over the previous two decades. Only Mr Pickles has had the guts to say he's only a politician and doesn't know how to run things on the "front line". Faced with only one obvious supporter for my views on how "public services" should be run it's easy to give up commenting on matters at least until another election is in the offing.

Or it might be that I am still in shock that so many people voted for the Labour Party at the General Election in May. More than seven months have passed since then and all the while a thought has been gnawing at what is left of my brain. Could there be a third or so of the population of this country that was both pleased with what the Labour government had done and wanted more of the same? That a fifth of school leavers were either functionally illiterate or functionally innumerate, or both, was not of sufficient concern to them that they would vote against a governing party that had interfered in schools like no government before. That there was still structural unemployment in some areas of the country was not of sufficient concern for them to vote against a governing party that claimed to be concerned for the poor above all others. That the economy was on its knees, as at the end of every period of Labour government, was not of sufficient concern for them to vote against a governing party that directed and regulated all aspects of economic activity in more detail than even Stalin managed in the USSR. Could they really think the state of the country on the 6th of May was despite Labour having been in government for thirteen years and not because of it? Could they really believe the problem was too little State interference rather than too much? Just that thought is enough to drive anyone to distraction and to the conclusion that there is no point being sensible when so many are so utterly devoid of critical faculties.

Part of me has been hoping the coalition will find the courage to join Eric Pickles in saying that government must do less. As each week goes by I see fewer and fewer signs of this happening. They still seem to be stuck in the view that government is the answer to every ill, so much so that problems caused by too much government can only be addressed by more government. Against such a background it is hard to stir the enthusiasm to comment because it feels as though you are just running into a wall. Perhaps I am resigned to the massive State now being a permanent feature, perhaps I am frustrated that the difficulties caused by government are given insufficient recognition or perhaps I am just not prepared to repeat myself too many times. Who knows.

Having said that, a couple of topics have piqued my interest so I hope to be able to add to this year's miserable number of posts a few times before the turkey is carved.

Salt, happiness and Jocky Wilson

The magnificent Mr Puddlecote has posted with his usual perspicacity on the latest scare from the health Nazis (here). The topic is salt. It is a topic that has heated my urine for many years so I'd like to chip in. Since I've been quiet for a while it seems sensible to add another current topic, the Happiness Index, although, being the cunning old boy I am, I include it because it is directly relevant to salt.

First things first. Forget any notion that science can tell us a single thing about the consequences on our health of the ingestion of a given amount of salt. There is no universal maximum or minimum daily amount, there is no way of measuring the amount which is either needed or excessive for any individual, there is no accurate way of measuring how much is being ingested, there is no accurate way of measuring how much is being expelled from the body and there is no way of measuring whether a physical condition that might be caused by excessive salt consumption has in fact been caused by that. All they can ever do it seek to evaluate average needs - no doubt this (if done properly) is a difficult exercise and takes considerable knowledge and skill, but once it's been done it is of absolutely no use to anyone because there is no way of measuring whether any given person is average, below average or above average in their need for salt or in their susceptibility to harm from salt.

For decades it has been peddled that excessive salt consumption can cause high blood pressure and other medical nasties. That might or might not be true, I am sure I once came across a blog dedicated to exposing salt scares that challenged the hypothesis but I can't find it now. Let's assume it is true. We have to be very careful about exactly what we are assuming. Because we all need different amounts of salt in our diet for our bodies to perform efficiently, only consumption above the level we require can be excessive. That is not necessarily the same amount of salt all year round because we sweat more in summer (or in the presence of Joanna Lumley) and will secrete more salt than in winter (or in the presence of Harriet Harman), to maintain a working balance we must take more in summer (Lumley) than in winter (Harman) - unless some other factor interferes to require us to take more in winter. Some claim that we simply pass excessive salt when we dispose of used beverages and they might be correct but that doesn't mean that regular consumption of more than we need cannot have adverse consequences because harm could, in principle, result from that excess quantity being in the body prior to joining gallons of second-hand beer on the floor of the gentlemen's facility at the Dog and Duck.

And then, merely physical need tells only part of the story of human life. The human body is a machine. It takes in fuel and gives out waste products, just like a motor car. The difference between the human body and the motor car is that it is far more than a machine. It has feelings, senses and emotions that are essential parts of life and not things to be left to one side while we deal with the machine only. Food and drink are part of the feelings, senses and emotions aspect of life just as much as they are fuel for the machine. If old Auntie Enid likes a whole shaker of salt on her roast potatoes and would have a miserable Sunday lunch without it, how are we to assess the salt content in her diet? Excessive - because her body didn't need that much to function - or just enough because it gave her a happy time when otherwise she would have felt excluded from the family jollity going on around her?

When thinking of this subject my mind often goes to Jocky Wilson's lager. No, I'm not joking, the point is absolutely serious. Jocky Wilson was one of the great darts players from the late 1970s until the early 1990s. In order to play well he needed to be relaxed and, for him, that required lager. Quite a lot of lager. Once he reached a certain level of intoxication he was almost unbeatable, he had the necessary level of relaxation and concentration to allow him to play as well as anyone in the world. It wasn't something that could be measured. Some days it might be just a few pints, on other days it was measured in gallons but however much was required on the day he strove to continue his consumption in order to keep the level just right. As alcohol was burnt off it had to be replaced and failure to replace it would cause him to be unable to continue playing so well. Other players could perform well without a drink or with less drink but that was irrelevant he wasn't them and he wasn't playing for them. He needed a lot of booze in order to ply his trade at the highest imaginable level - did he drink too much? It depends what you mean by "too much". In each tournament he played his consumption was too little, the right amount or too much, depending on how it affected his throwing arm on the day. In the context of his long-term health it could well have been too much but any less and he would not have been World Champion twice and revered as one of the finest exponents the game has ever known. He is now entirely out of the public eye and is reputed to be living in poor circumstances at least in part because of his fondness for the sight of an empty barrel. One could isolate the booze and say he shouldn't have drunk so much, but that would ignore his achievements which would have been unobtainable without a liver quiverring quantity of drink.

When I was at primary school lunch sometimes included mashed swede. I absolutely hated the taste and I hate it still but the addition of enough salt would allow me to shovel it down and avoid the wrath of the scary dinner lady. Was that "excess" salt (and believe me, it took a lot of salt to mask the taste) bad for me or was it good for me because it allowed my little body to enjoy the benefits of mashed swede? Was the benefit of not being harried by a harridan outweighed by the taking of more salt than was good for my young blood pressure? There's no way of knowing, it cannot be measured.

Mr Puddlecote points out that the great Delia recommends using salt in the preparation of a number of ingredients of a Sunday Lunch. She is, of course, absolutely correct. Vegetables other than legumes, particularly root vegetables, boiled in unsalted water do not develop their best flavour because the temperature is not high enough whereas salted water boils at a higher temperature and that little difference in boiling point makes all the difference to flavour. We are all happier to have flavoursome food than bland food. If the trace of salt in vegetables prepared in this way has adverse health conseqeuences, how are they to be compared to the additional pleasure given by eating a tasty dinner rather than a less tasty dinner? It goes without saying that it cannot be measured. Even the amount of salt in vegetables prepared in that way cannot be measured because some will absorb more than others.

Our Prime Minister believes it wise to spend taxpayers' money on surveys of happiness. It goes without saying that it will be a complete waste of every penny involved for two reasons. Surveys can never measure anything accurately because they only give a snap-shot of opinion on the day the questions are asked. Not only can opinion change the next day but the questions have to be vague to avoid 90% of respondents saying either "not applicable" or "don't know". Secondly, and more importantly, you cannot measure happiness by reference to factors over which politicians have any control.

In relation to salt-consumption scares, try these two questions. "Are you happy that old Auntie Enid enjoyed her day out from her care home, The Coffin Dodgers' Lodge?" Of course the answer is yes. "Are you happy that old Auntie Enid had three times her maximum total daily allowance of salt on her roast potatoes?" The answer might well be "it doesn't matter at her age" but underlying that answer will be acknowledgment of the scare; the full answer would be "yes but she'll probably die before it kicks-in." How does that rate on the happiness meter? Ten out of ten for the first answer and maybe seven for the second. The second question is completely irrelevant to anything other than government statistics. All that matters is the first question because old Auntie Enid only has one life and if that involved an ounce of salt to make a meal just as she likes it she will smile her gummy grin until her final gasp. And the second question need never be asked.

What matters is the quality of life. It is an ephermeral thing, different for everyone at any given time and different for everyone from one moment to the next. Is a longer life more desireable than a second helping of pudding or a good shake of salt on Sunday roasties? That's up to the individual to decide. Time might prove their decision to be right or wrong or it might provide no answer. One thing that is certain is that their happiness will be increased by letting them decide for themselves.

A thought on the Housing Benefit caps

Sometimes I read a "news" report and wonder whether I'm missing something. It's not uncommon for those who drink vast amounts to suffer forgetfulness and, over time, to lose their analytical powers. Perhaps I have reached that stage, but I don't think I have. I'm talking about the proposal to cap housing benefit and, in particular, about an article peddled by the BBC (here).

For the benefit of anyone who has missed the story or who is reading from beyond these shores I'd better lay the background. One welfare benefit payable in the UK is called Housing Benefit, it provides funds specifically to cover the cost of mortgage interest payments or rent. The proposal under discussion is that the amount payable towards rent should be capped. The cap will have four stages. Those renting a one-bedroomed property will be allowed no more than £250 a week, with up to £290 a week payable for a two-bed house or flat, £340 for three and £400 for four bedrooms (or more, or so I presume). These figures equate to annual rent of £13,000, £15,080, £17,680 and £20,800 respectively.

I am not the first to observe that these are large sums of money. To have £13,000 in your pocket after tax you have to earn something in the region of £18,000. On the assumption that someone renting for £13,000 also wishes to eat, water and clothe themselves at an additional cost of £100 a week, their annual pre-tax earnings would have to be in the region of £24,000. That is not far from annual average earnings. The payment of £20,800 in rent requires pre-tax earnings of around £27,000 before a single morsel of muesli has crossed the tenant's lips.

Housing benefit is paid out of taxes received by the Treasury. It is necessarily and inevitably the case that many employed taxpayers earn less than these sums and could not possibly pay that much in rent. Their taxes will be used to pay for other people to occupy homes they could not afford. It's an easy and, I think, lazy argument to say that the proposed caps are justified merely because many of those paying taxes could not afford even those sums in rent. That rather misses the point.

Someone who has been earning more than enough to pay rent of £13,000 or £20,800 a year might lose their job and be reliant on benefits until he or she finds another position. There is nothing essentially objectionable about them receiving benefits to help them keep their home until they find new work. If that work does not allow the payment of such a high rent they will have to move anyway but if it does they will resume paying the rent. In such a situation Housing Benefit provides a stop-gap relief pending the establishment of a new situation which, I would have thought, is what benefits are intended to do. That others have never been in the position to rent a property at such values is really neither here nor there. In this context Housing Benefit is akin to an insurance payment and those who rented at these figures necessarily earned more and paid more tax than those on lower incomes. Although Housing Benefit could be seen to come partly from those on lower incomes the reality is that those who previously paid their rent out of taxed income and claim the benefit while they are between jobs have already paid for it.

There is, of course, another group - those who have not had, do not have and have no reasonable prospect of ever having enough earned income to pay their rent and are habitually dependent on Housing Benefit. For this group the question "why should people with modest taxed incomes who cannot afford such rents pay so much towards their rent?" is more pertinent. Indeed it is hard to see any justification for such people to be subsidised out of tax to live in expensive areas. Harsh though it might sound in the modern world of holistic touchy-feely wibble, beggars can't be choosers. Or to put it less harshly, if you live on hand-outs you can have no complaint about the payer saying "sorry, we can only hand-out so much".

The BBC article I linked to above (this one) asserts that the majority of two-bedroomed properties in London will be too expensive for Housing Benefit claimants if a cap of £290 a week is introduced. This is where I wonder whether I'm losing my faculties. Landlords want the best return they can get but they know they have to pitch the rents they demand according to the ability of likely tenants to pay. Pitch it too high and there are no takers. More importantly, landlords know that the worst thing possible is what is known as a "void period" - a time when the property is empty and no one is paying rent. Say the desired rent is £300 a week, that is £15,600 a year. Four weeks without a tenant reduces the annual rent received to £14,400. If you have a tenant paying £300 a week through Housing Benefit and are told the benefit payable will be reduced to £290 a week, what would you do? Throw out the existing tenants - possibly incurring legal costs and risking a void period - or reduce the rent to £290 a week? No doubt some would choose the first course but reducing the rent would still bring in £15,080 a year, a tiny reduction accompanied by the certainty of payment.

Say your two-bedroomed property commands a rent of £500 a week rather than £300. It would have to be in a very smart part of town for that to be a true market rent. On being told your existing tenant will only pay £290 because he is on Housing Benefit and that is the limit, the question you have to ask is whether you will find a replacement tenant who will pay substantially more. In areas where £500 a week is a true market rent the answer is almost certainly that you will find a new tenant. It's tough luck on the existing tenant but you cannot avoid the fact that such a property is at the high end of the market and it cannot be justifiable for taxpayers to keep someone else there when they cannot pay the going rate and others could.

And that really is the point I want to make today. The Housing Benefit rent caps will only result in existing tenants having to move if others are willing to occupy the same properties and pay a higher rent out of post-tax income. That situation will prevail in some instances. There is no denying that existing tenants who are required to move will find it upsetting. Regrettable though that is, the caps are at high figures and there is only so much taxpayers should be required to pay towards the housing costs of others.

Lurking behind all of this is a state of affairs that arises whenever government subsidises anything. If the subsidy does not have a limit people will milk it for all they can. How many two-bedroomed flats for which Housing Benefit currently pays £350 a week would actually command that figure in the open market? Landlords of benefit claimants pitch the rent at the highest figure they think will be paid in Housing Benefit. The same rent might not be achieved from renters paying from earned post-tax income. If they thought they could get more from non-benefit claimants they would do so, indeed they would be mad not to do so. In real life they know there is nothing to be gained from pitching benefit claimers' rent below open market rent so it can only be the same or higher. I'll give you one guess which is the more likely.

But there's more. The Chief Executive of the political lobbying group Shelter is reported to have claimed that "tens of thousands of households could be forced from the centre" of London. Shelter started as a genuine charity finding practical solutions for the homeless. The mere fact that it has a Chief Executive means it has outgrown its charitable functon and has become a business. It is in the business of justifying its own existence in order to keep its Chief Executive and such other salaried staff as it might have in their comfortable positions, which means its first function is now lobbying. So let's look at his proposition.

Tens of thousands of households could be forced from central London, he opines. OK, let's assume that happens. How, in the real world, can it happen? The properties they occupied will still exist and the landlords of those properties will still want to have tenants. Chucking out a tenant is only a good idea if you get a replacement. A tenant who pays minimal rent and trashes the furniture but still provides a small overall profit is better than no tenant at all. It is a necessary part of the Chief Executive's argument that tens of thousands of potential tenants are currently prevented from renting because benefit claimants are hogging the properties. On what possible basis can it be right that those tens of thousands should be excluded when they are able and willing to pay but cannot do so because taxpayers (including the prospective tenants) are keeping others in those properties? It is not a one sided coin. Existing tenants will only be ousted if currently frustrated potential tenants are waiting to take their place and pay, from their own post-tax resources, for the privilege. Why is he not lobbying for these excluded unfortunates to realise their dream?

Will "tens of thousands of households" be displaced? Of course not. But even if they were, tens of thousands of other households will take their place and pay for something they desire and can afford but presently cannot attain.

The Labour Party - what is it?

I just went to the BBC's iPlayer thingy to watch Friday's episode of New Tricks. It wasn't listed separately so I clicked on "Drama and Soaps". One of the programmes listed was the Scottish Labour Party Conference.

Drama or soap?

LVT - a cart and horse inverse juxtaposition?

Perhaps the greatest mystery about Land Value Tax is the absolute certainty with which those who support it voice the benefits that will accrue. Land prices will fall and then be kept stable, the cost to business of employing staff will be reduced thereby leading to greater employment, there will be no speculative expectation pressure on land prices, malaria will be no more and England will win the World Cup until the end of time, and so the list goes on.

In my last missive I asked how LVT will cause or contribute to a fall and then stabilisation of land prices and received some jolly interesting comments, none of which made a case I find in the least bit persuasive. A number of points made deserve a more detailed answer than comments allow, so I'll do my best to explain my continued puzzlement.

The first puzzle is: how does LVT cause prices to fall? One way this question can be addressed is by asking whether LVT would have prevented the house-price bubble engineered by Gordon Brown from about 2000 onwards. My first line of enquiry must be to ask what actually caused the bubble and then to ask whether LVT would have negated that cause. My view, which I have stated before at tedious length, is that the bubble is exclusively (or almost exclusively) the result of lenders advancing unaffordable loans, a state of affairs encouraged by the government despite the knock-on effect it had on the value of the lenders' assets. The entire state of tits-uppedness in which many banks and other lending institutions found themselves a couple of years ago (and still but they don't mention it now) was the result of making bad investments - specifically, making bad loans to prospective house purchasers. Although it is to state the bleeding obvious, if Mr & Mrs Ordinary suddenly find they can borrow £200,000 rather than £150,000 there is more money chasing the same goods and prices rise. Value doesn't rise, but prices do. We saw exactly the same thing happen in the mid and late 1980s (although it didn't cause a banking crisis because securitisation and credit default swaps did not get out of hand). How was the crisis solved in 1989? Simple, by letting the market adjust naturally. Borrowing became more expensive sbecause interest rates were set to a level that was appropriate to risk so that good loans paid for bad loans and, in consequence, prices fell dramatically. LVT didn't cause prices to fall because there was no LVT. What deflated the bubble was to withdraw the very hot air that inflated it in the first place. Would LVT have prevented "liar loans"? Will LVT remove that hot air from the current bubble? I don't see how it could or can unless it is set at such a high level that people can no longer afford to pay both their mortgage and their LVT.

And that is the core difficulty I have with the argument that LVT will cause prices to fall. Because LVT is recycled through the Citizen's Dividend it can only ever increase the cost of housing by less than the additional tax charged, because part is repaid to the taxpayers themselves through the Dividend. What level of LVT is sufficiently high to cause prices to fall below current levels? No one seems able to tell me. To my mind it is a false argument. To reduce a bubble you have to look at how the hot air got into the balloon and address that, seeking to deflate it by reference to something else entirely might work but it can only do so circuitously and will, inevitably, have other consequences that might or might not be beneficial.

It is then said that LVT will keep prices stable. How it will achieve this is the second puzzle. One argument is that it will remove the prospect of speculative profit and that this will mean people won't pay over-the-odds now in order to secure a windfall gain later, but this assumes the very stability it seeks to cause. In other words it is a consequence of stability and a factor that maintains stability but it cannot be a cause of stability, so how does LVT cause that stability in the first place?

There can only be one answer because only one factor can prevent price bubbles, namely the dampening of demand. That can happen in a number of ways. You can increase supply of housing to reduce the price pressure on each individual property, you can limit the amount potential purchasers can borrow or you can reduce the income of purchasers so that they can only afford to service a smaller loan. What is unavoidable is that LVT can affect only the third of these factors and it can only do so by being set at a rate which is more expensive to the landowner than the aggregate of the amount he saves through the abolition of taxes on his income and the amount he receives by way of Citizen's Dividend.

A marginal increase won't have any more effect than increases in other bills, a few quid or even a few hundred quid a year won't necessarily do it, people adjust because they save on matters they consider less important. For existing homeowners it will be an inconvenience like recent rises in prices for food, electricity and gas. They are not suggested by anyone to have had any significant effect on house prices, so why should a tax unless it really bites into their income? And it is not enough that it makes life more expensive for existing homeowners, it must be sufficiently expensive to deter potential purchasers from paying what they otherwise might be prepared to pay. So, how high would it have to be? I have no idea but it is, I think, reasonable to suggest that it would be so much that the whole thing would be politically impossible to implement.

Warning to those of a delicate disposition - the following paragraph appears to be nonsense from beginning to end and has been retained to remind me to read what I write before hitting the "publish post" button.
My puzzlement doesn't end there. The whole exercise assumes a transfer of money from landowners to non-landowners because of the Citizen's Dividend that stands alongside LVT to prevent the government making a windfall gain. The non-landowners receive a double benefit. They no longer pay Income Tax, National Insurance or VAT and they receive the Citizen's Dividend that increases as the take from LVT increases. One would think the natural result of them having so much more in their pockets and of their landlords being hit by LVT is that their rent would go up. Assuming that to be the case the acquisition of houses and flats to rent would appear to be an even more attractive business than it is now. There's no income tax to pay and your customers suddenly have many thousands of pounds a year more in their pockets, it sounds like a wonderful arrangement for landlords; all the more so because Capital Gains Tax is to be abolished too. They only need to raise rents by the difference between existing taxes and LVT and they are quids in, after all their tenants will be in profit by a lot more than that. And the effect on property prices? It hardly sounds like a downward pressure to me.

Much more puzzles me, but that's enough for today.