FT Comment - UK Investment

24 Nov 2011    

The article I commented on today is: Urgently needed: a plan C to save Britain’s economy, by Robert Skidelsky and Felix Martin. What does the article say? It talks about how the UK has relied on monetary stimulus, how that hasn't worked, and how we consequently need "a plan C".

Dear Robert Skidelsky and Felix Martin,

Today the UK has the highest government spending budget deficit in the EU after Greece, it is printing money like no tomorrow, it has one of the highest negative real interest rates in the developed world, yet this appalling profligacy has done nothing to improve it's economic growth rate, indeed it also has one of the worst growth rates in the EU. I often talk about the UK as the epicentre of bad ideological economic policy and economic nemesis. I like to compare the UK with Germany, and SELL THE UK has long been one of my messages. So as you say the UK needs a "Plan C" urgently!

But what should "Plan C" actually consist of? Stigliz talks about “State Investment for a Profit”, or what we called post Word World Two the “European Marshall Plan”. It's a very big topic, but briefly the idea is to combine cheap capital, political muscle and economy of scale to create profitable investments which contribute positively to government finances and stimulate the economy. Unlike simple Keynesian policies such as cutting sales tax, it squares the circle by both stimulating and improving the debt outlook simultaneously. Unlike monetary stimulus it does not create champagne bubbles, in fact it is a stomach settler rather than an aggressor.

For the UK the most obvious place to start state investment is in the housing market, it was also the way the Marshall Plan kicked off. Forget Taylor Wimpey, think of a cross between Prince Charles’ Poundbury and Singapore. Use compulsory purchase orders to buy agricultural land at agricultural prices, use compulsory purchase orders to buy ex-council estates at ex-council estate prices, then use modern materials combined with neo-classical architecture and ambitious central planning to create valuable new cities as beautiful as Chelsea. Such investments will (a) make an enormous profit, (b) stimulate the economy, (c) solve the housing crisis, (d) help mend our broken society and prevent riots because squalor is the number one cause of social alienation.

What are the UK Conservatives doing? Absolutely nothing like this! They are tinkering around trying to prompt what Steve Jobs called capitalist hell companies such as Taylor Wimpey to build some more houses, and trying to persuade investors to back a few pet ideas such as superfast broadband. They are coming at all it all the wrong way around, looking to help the private sector to stimulate the economy, rather than talking the lead inside government itself. What they are proposing right now in the housing market is both a tragedy for the economy, a tragedy for inequality, and a tragedy for the British countryside. Four years ago I sat down at a dinner with Boris Johnson and a senior Conservative shadow cabinet member and described to them both this neo-classical building plan and the Ken Livingstone plan for Honk Kong style residential sky scrapers in Tower Hamlets. It was like trying to get blood out of stone, they just described every idea as “un-Tory” based on pure gut feel with no pragmatism at all. Boris Johnson joked that the Tower Hamlets plan was for “rabbit hutches in people's back gardens”. Based on the dinner I had with senior Tories four years ago, I can say the UK is truly run by the most stupid and insane people I have ever met in my life – and as long as it stays that way just forget about plan C and sell the UK!

William Hooper

PS: Further Reading on this topic at TheOligarch.Com

Update 29 Nov 2011

News: UK Seeks To Revive Growth with Pension Fun Money (Wall Street Journal)

The article says: "Mr. Osborne will also announce an extra £30 billion in new money to be spent on infrastructure such as railways, roads, classrooms and broadband connections, said a person familiar with the matter. Of this, £20 billion will be provided by pension funds."

News: China offers to invest in Western infrastructure projects

The article says: "[Although the Chinese have by in large turned down European Sovereign Bonds as too risky] China Investment Corporation, the country’s main sovereign wealth fund, has expressed an interest in investing in the dilapidated infrastructure of developed countries, starting with the UK. The $410bn Chinese fund “is keen to team up with fund managers or participate through a public-private partnership in the UK infrastructure sector as an equity investor”, Mr Lou writes in an opinion article in Monday’s Financial Times."

Investment is the key to reviving the UK economy, and whilst I have nothing against investment in railways, roads, classrooms and broadband connections etc, I do want to stress the role of UK housing.

In many countries such as Germany pension funds are large holders of residential property. It's really the perfect pension fund asset because it is protected against inflation by capital appreciation. Also when pension funds buy residential property they bring economies of scale and a level of professionalism to the rental market that ends up making a huge positive difference to the people. There are big advantages for the economy as a whole too, the stable professionally run low price rental market in Germany prevented a housing bubble, indeed widespread pension fund ownership of real estate is one of the key reasons why Germany is in much better shape than the rest of Europe today. Now in the UK we have a terrible housing shortage and we have an appallingly expensive and corrupt rental market run by mum and pup landlords.

The UK also has zero growth and desperately need stimulus. So I think journalists and politicians should get the ball rolling by talking about housing. This is the holy grail of UK profitable stimulatory investment, and it's also a great way to tap pension fund money or Chinese Sovereign wealth. I want to push the idea of both new cities like Poundbury, and the rebuilding of London and other cities. Note that rebuilding London is also a important tool for retaining the City. The City is in structural decline anyway, but you have to make London a place the worlds elite want to live in if you want to retain that industry.

However I need to add that if the Conservatives picks up on this idea without really finding the big vision they could destroy the UK by building garbage everywhere. There is a funny half awake article in the Times today about "big housing vision" and the Barbican. You need to have that housing vision debate at the same time as you talk about real estate investment or you will destroy the UK. Think about real estate market, a cheap out of character house in Saint John's Wood will sell for a vast amount of money. An expensive house in Stanford will still sell for peanuts. Capitalism relies on individual incentive aligning itself with communal good, but in real estate the dynamics point in precisely the opposite direction. That is why Western capitalism has destroyed it's cities, and why no really great new cities have been built in the last hundred hears or so. The UK Conservatives have to connect with the sort of spirit of "Victorian Idealism" if they are going to improve the communal good. 

I know journalists think Poundbury is un-trendy, it was panned by the press when Price Charles started the project, but people love it and it makes Britain beautiful. Put all that ideology away and think about what is really going to make the world better, and neo-classical design is a big part of that in the UK. The Sunday Times had an article yesterday about the most popular house in Britain, a white neo-classical house in Avenue Road Saint Johns Wood. I one lived in Saint John's Wood round the corner from that house, and people are right that neo-classical white is the best way to go. White neo-classical houses in Saint Johns Wood that cost perhaps £200k to build sell for perhaps ten times that amount. How do you take advantage of this? It means compulsory purchase orders to buy up private land and council land, something the Conservatives hate - and it means re-housing a lot of poor people in cheaper areas, something the Labour party hate, but it's the only way you can make it work.

Build some sky scrapers as well if you like, try and get some kind of old & new mix like New York, but don't make the mistake of "not central planning" and ending up with god forsaken cheap modern semi detached all over the countryside and Docklands style tower blocks all over London. In order to grasp this concept one needs to admit that most modern architecture is a tasteful as The Sun and Britney Spears, insist on a 80-90% traditional style build using modern materials to revive the UK.

I should also say that the UK are often at the forefront of revolutions, and the rebuilding of Europe is the next natural growth area. Think Wren, Brunel, Jonathon Ive. If I was Prime Minster of the UK I would set out to build the best housing industry in Europe, from architecture to toilets, from homes to factories. I don't think the UK should give up on the dream of competing with the Germans by building cars, or the French building Nuclear Power Plants, of the Chinese building trains, but I think the smart niche to look for right now is in building. It's also quite a good industry because the UK is at the epicentre of sort of Nimbyism and traditionalism, and one should choose an economic strategy that attacks your psychological flaws as directly as possible.