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mobility and stamp duty
From time to time readers ask whether it is right to play economic golf with the 'one club' of interest rates; how can it be that interest rates alone are the answer for stabilising the economy's fluctuations over the business cycle and how can it be right that when they are used they have such 'directional effects'? For example, when they are raised to cool the service sector, it is manufacturing that bears the brunt as the pound rises too. Since the North is far more dependent on manufacturing than the South, that one-club interest rate also hits the North for six while inadequately cooling off the torrid South. Could not other instruments - tax rates, public spending - be brought into play? Or can we not subsidise manufacturers' interest rate costs?
These questions bring home the problems with using monetary policy to stabilise an economy - just think how much worse they are for the euro area. Within a country like the UK we take them very seriously. First of all, regions and industries doing worse than the average automatically pay less tax and get more state benefits, such as unemployment pay: these are the 'automatic fiscal stabilisers'. Then there is emergency regional or industrial assistance - one thinks of the huge grants, which were once given to South Wales or to Corby - which were discretionary but did a similar job.
No, we do not use subsidies
on interest rates or indeed any other preferential tax arrangements. The
reason is that this would distort competition in an arbitrary way; no civil
servant knows which firm, industry or region is 'worthy'. Better to let
the market decide via the principle of tax neutrality: the same tax rate
for all in the same circumstances. We only depart from neutrality on the
basis of strong evidence: cyclical fluctuations reflect the basic forces
of competition. Resist them and you may wind up with an economy full of
out-of-date industries and regions that refuse to adjust.
Back in 1982 when national unemployment was about 10%, Merseyside's was 20%. But there was no movement of people out of the Mersey area. Its working population stayed at around 730,000 until 1983. And then suddenly in the mid 1980s the exodus began which by now has brought it down to just over 500,000.
What did the trick? Well,
in 1982 30% of houses were rented from councils under subsidised and basically
feudal conditions; if you wanted to move you had to persuade the council
in your new area to put you high up on its list - not much hope. Your only
real hope was to rent privately; but the private sector too was controlled
for the benefit of sitting tenants. So to find anything you had to pay
a fortune to rent in the tiny uncontrolled sector.
During the 1980s council houses were sold off, council rents were raised towards market rates, and the private rent controls were abolished for new tenants. Two thirds of the population now live in their own homes and the rest pay economic rents so that moving does not penalise them. These changes gave a lot of Britons control over their own lives, and they put an end to black spots and lowered overall unemployment as a result; now it is possible for Gordon Brown to say to anyone in the country, as he just has, that they have 'no fifth option'- they must take a job or training, or lose unemployment benefit.
This brings me sadly to this Chancellor's incomprehensible obsession: stamp duty on house transfers. This has now been raised to 1% for ordinary houseowners, 2.5% for houses worth between £250,000 and £500,000, and 3.5% for houses worth more than that. It is rumoured in the spinning mills of Whitehall that Mr. Brown is minded to raise these further 'to cool off the housing market'. After all on the continent stamp duty is much higher - up to 8% in Italy, 10% in France, 6% in Spain and so on. And what does it do to mobility? Stop it dead in its tracks for the population who own houses - Professor Andrew Oswald of Warwick University (http://www.warwick.ac.uk/fac/soc/Economics/oswald/) has a webpage full of statistics on what home ownership in such countries does to mobility and so unemployment.
So in 1982 we had two fifths of our people immobile, stuck in their controlled rented homes; now in 2000 Mr. Brown wants to immobilise over two thirds of our people in their own homes via stamp duty. Stamp duty is a wealth tax levied on those who move house - an evil both ways. We can only hope that the Chancellor turns out to be as fast a learner on this as he has been on the euro.
Patrick Minford is professor of economics at Cardiff Business