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Money, 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 Resist them and you may wind up with an economy full of out-of-date industries and regions that refuse to adjust.
The big factors we do rely on are wage flexibility and job mobility. When, say, Merseyside is being badly hurt by the decline of both the docks and of manufacturing, falling wages help suck new capital and jobs into the area; and its workers go elsewhere to work where prospects are better. One of the unsung improvements brought about by Thatcherism was greater job mobility - the wage flexibility bit was important too but well known. Unemployment black spots are now not what they were. Unemployment on Merseyside is now 8.1% on the benefit claimant count; the equivalent national figure is 4%. The difference is not very great. In other erstwhile black spots around the country the differences are smaller still; for example Newport in South Wales now has unemployment of 4.2%, Hull 6.2%, and Tyneside 6.5%.

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.
Furthermore those sitting tenants (another 12% of households) were as unlikely to move as the council tenants for exactly the same reason; they would lose their rent subsidy and have to find new accommodation at high rents. So in 1982 two fifths of the population were immobile; as they were the worst hit by the unemployment of the early 1980s, this was a black spot disaster. The other three fifths were mercifully home-owners. Even though it costs you, moving is perfectly possible for a home-owner. There is a one-off 'transactions cost' of the move, worth paying if your local prospects have changed seriously for the worse.

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 School  

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