Housing stimulus in the UK

July 7, 2012

The executive summary of the first part of our Global Economy course goes like this:

  • Prosperous countries are prosperous because they’re more productive:  they generate more output from the same inputs.
  • Productivity comes from institutions:  the thousands of things that make it easier or harder to run a productive business.

The second bullet is a wonderful opportunity to share stories about bad institutions:  corruption, fraud, red tape, etc.

Well, here’s one from the UK courtesy of the always entertaining Tim Harford.  He’s interested in the idea that a house-building program might help get the economy going.  When he looks into it, he finds:

The chief obstacle to house building in the UK is the planning system, which, 65 years ago, did away with the idea that if you owned land, you could build on it, and replaced it with a system where planning permission was required.  Permission to build houses is severely rationed, and such rationing can be seen clearly in the gap between the value of agricultural land without planning permission (a few thousand pounds a hectare) and the value of such land once permission has been granted (a few million).

Bill Lewis (great book, by the way) made a similar point years ago about the low productivity of retail in the UK.  A lot of the productivity gains in other countries (the US, France, etc) come from large stores.  But that’s hard to do in the UK:  you can’t get permission.  So productivity remains low.  Harford’s twist:  it also gets in the way of short-term stimulus programs.

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