By Michael Dwyer.
In the wake of Napoleons defeat it was decided at the Congress of Vienna to restore the Bourbons to the French throne. It was not a roaring success. In a few short years they demonstrated that in the famous words of Talleyrand ‘they had forgotten nothing and learned nothing’. It is now clear that we have nest of very own Bourbons alive and well living on the Labour party’s Manifesto Committee.
In the search for some ideas that would draw clear red water between themselves and Fine Gael and hopefully arrest their relentless fall towards electoral oblivion they have hit upon the old reliable of price controls.
Under a labour administration the price of land for development will not be set by the market. Rather the government will set a cap, a maximum price beyond which land may not be sold. This will ensure that there can be no gross inflation in the cost of building land and consequently avoid bubbles of the type we saw during the boom.
This is not a bad idea. This is far worse than that. This is an idea which tells us that our local social democrats have forgotten none of the nonsense notions that impoverished millions across the globe in the name of Marxian economics. This is straight from the centrally planned play book. Twenty four years after the fall of the Berlin Wall they are proposing a return to the kind of thinking that made Albania the workers paradise it was.
Price controls do not work. They have a longer history of not working that perhaps any other idea in economics. When Diocletian came to power in Rome the Empire was nearly bankrupt. Inflation was an endemic problem caused by the continual debasement of the coinage. In an effort to control the problem he issued an Edict of maximum prices. Within weeks those goods that had prices set below the market rate disappeared. Except on the black market.
Revolutionary France succeeded in pretty short order in wrecking the currency by flooding country with worthless pieces of paper called assignats which people were commanded to accept as legal tender on pain of death. Hyper inflation was the result, as it always is. To counter this Robespierre et al introduced in 1793 the Law of the Maximum. The resulting shortages produced misery and starvation. Producers chose to keep their produce for themselves, sell it on the flourishing black market or simply stop producing. In December of 1794 the now hated law was repealed.
J M Keynes (1883 – 1946 ) the English economist is the patron saint of interventionists and economic fiddlers. But he believed that freely moving prices were indispensable for the proper functioning of a capitalist economy. He opposed price controls even during the Second World War. He states in “The Economic Consequences of the Peace”, “The preservation of a spurious value for the currency, by the force of law expressed in the regulation of prices, contains in itself … the seeds of final economic decay, and soon dries up the sources of ultimate supply.”
If we were to impose an artificially low price on land for development history teaches us that two things will inevitably happen. Firstly the amount of land available to develop will decrease, dramatically and overnight. This will lead a shortage of housing and that will encourage the development of a true housing bubble. Secondly after time people will work out ways of circumventing the price control, legally and illegally. Hidden side deals in cash most likely will happen as developers top up prices. The Caymen Island banking sector can expect to do some very good business.
The worst of this whole sorry story is that here we are six years into the crash and we are still being sold a nonsense story about the causes of our predicament. Greedy farmers sold land to greedy developers funded by greedy bankers who fleeced a nation which had gone collectively mad.
When Morgan Kelly made his now famous prophesy on the fate of the economy and the banking system he made a point which has been relentlessly ignored. What we experienced in Ireland was not a housing bubble. It was not even an asset bubble. It was a credit bubble. Credit bubbles are not made out of land price hikes in County Meath. They are made in banks. They are made most often in Central Banks.
The feeding frenzy in the Irish property market happened on the back of years of cheap money. Interest rates had been set too low for the needs of this economy since 1999. They were set to meet the needs of the Germans and French. That is the case now, and will continue to be the case as long as the Euro exists. We will be fine as long as our economy is in sync. with the Big Boys. But if we ever happen to grow fast while they grow slowly then it will all happen again. So, if the brilliant boys in labour party really want to have a bright idea they might have a go at solving that problem.