The origin of the current recession lies, unlike some other recessions that we have been through, with the balance sheets of corporations and households: These balance sheets look less good now than two years ago because we are in a spiral of declining asset prices. Both households and corporations are holding off on consumption because they are using funds available to 'repair' their balance sheets. When cutting taxes, the Government runs the risk that households' and corporations' tax savings will simply be channelled to a further repair of those balance sheets. This is a good thing, but only in the very long run, with asset prices taking many years to react. More immediate measures are needed if we are to avoid a recession, and raising direct government spending would be a more appropriate way to boost demand.
Justified as any criticism may be, I've always preferred not simply criticising but coming up with a good alternative as well. The below is only one idea of how the UK Government could provide more direct fiscal stimulus to the economy - certainly not a full fiscal program but at least one idea that could be an important contributor to economic growth. I'm very enthusiastic about this idea, although some may find it outrageous, and I strongly invite comments.
My proposal is for the UK Government to engage in a program of house demolition and re-building. The UK housing stock is notoriously old and suffers from relatively low energy (and water) efficiency when compared to our closest neighbours, while the rate of housebuilding has been slow compared to the needs of the UK population. As of late-2007, empty homes accounted for 3.2 per cent of the housing stock, or 672,924 units (2), of which I estimate approximately 50% to be in the state sector.
A Government program of demolishing empty homes in its ownership and tendering work for their rebuilding, could provide for a dramatic injection into the economy at minimal cost or even a profit. The current value of an empty home to the state sector is zero or negative, since most of these homes are, at best, unfit for habitation and, at worst, an environmental liability. I presume that the cost of demolition that gets us to a blank canvas for re-building is also low and would, in any case, be money well-spent that stimulates the local economy.
The above means that there is a real opportunity for the Government to inject money into the economy while, in the long run, easily recovering its investment: Population data clearly show that housing demand continues to go from strength to strength, at prices, although declining, still well above building costs. The Government could easily re-sell or rent out the additional housing it creates - indeed, doing so has been an aim of the current Government since it came to power.
But it gets better still. Rather than tackling the re-building work itself, the Government should tender out each stage of the work in the re-building process in a way that stimulates innovation and maximum spend by the private sector (3): It should set very high standards in terms of living and environmental quality. Then, it should have architectural and surveying firms bid for the design work to be done, have construction firms bid for the construction work (and make certain that both small and large firms get their chances), have firms that develop innovative and efficient fixtures and fittings bid for work - and many other such instances that provide both a fiscal stimulus and help drive innovations.
Outside of the housing stock explicitly owned by the state, the Government could provide incentives for the owners to private, empty homes so the exact same dynamic develops in the private sector. It could either force these owners to sell up at knock-down prices while at the same time providing them with an incentive to demolish and re-build. Programs can be envisaged such as stage-by-stage grants paid to owners as they demolish and re-build to a certain standard or direct and more important Government aid in exchange for which the Government takes a share of future rents or sales prices.
The key advantages of the program described are that it is efficient in solving a large number of problems that have been long-term goals of this government in a cost-effective way:
(a) Current book values of empty housing stock plus re-building cost is well below current market value, with housing demand high enough to absorb additional supply of housing stock to the market without an undue effect on prices (4);
(c) Government funds spent have a maximum multiplier effect as the private sector makes significant outlays to try to take advantage of this Government program;
(d) This program could provide a major stimulus in providing the necessary updating of a significant part of the housing stock that urgently requires it;
(e) This initiative would stimulate a domestic 'green' industry with international allure that is at the vanguard of environmentally friendly construction worldwide;
(f) Budget deficits created by this program now are recovered quasi-automatically in coming years as tax revenues increase and the Government sells or leases the renewed housing stock now in its hands .
A program in which the UK Government applies the above principles to the housing stock it owns would represent, at conservative estimates, a £30billion+ direct stimulus to the UK economy, with the total effect a multiple of this number. It is not suggested that this type of measure be anywhere near the most important measure taken, but the numbers involved suggest that it can be at least one, significant measure. Importantly, it is one of few significant measures that is both fiscally conservative while providing a very large boost to the UK economy.
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Notes:
(1) The additional risk exists that the economic program currently proposed is too short-term in scope. My intuition (and I'm largely relying on my reading of the Japanese crisis in the 1990s) seems to suggest that a longer-term program is needed to get households and corporations to start spending with confidence. A short-term fiscal relaxation on behalf of the Government runs the risk of being ineffective, especially if counter-balancing measures for the years ahead are already announced - and it raises the fear of having to implement a stricter fiscal policy when the economy is still experiencing, at best, fragile growth (2010-2011 ?). Trying to reduce the UK budget deficit while the economy is still not back on track raises the perverse possibility that stricter fiscal policy will widen the deficit even further.
(2) http://www.communities.gov.uk/housing/housingmanagementcare/emptyhomes/(3) The risk that adding formerly empty properties to the existing housing stock will further depress already declining house prices is largely countered by the fact that empty homes are, generally, in areas that have been unattractive to buyers. Adding quality homes to the available housing stock in those areas may have a positive rather than a negative effect on house prices in the areas involved - especially if the Government would also pay attention to improving local conditions by, e.g., incentivising local councils to improve local streetscapes, green areas etc., all of which are measures that, in turn, help stimulate local demand and employment.
(4) The Government should ensure that the type of program that I propose has maximum multiplier effect, i.e. stimulates maximum amounts of private investment based on the funds that it injects itself. It can do so by packaging work regionally or in other manners, such that every contract represents a huge amount of work that is attractive to many firms (For those interested in micro-economics, this kind of recommendation relies on what I call positive skew, the reason why more people buy lottery tickets when the jackpot is large, even in cases where their chance of winning is lower than in other instances when the jackpot is lower). This approach runs the risk of excluding smaller firms. Another way is to have firms bid on a house-by-house basis. Maybe the best way is a mixture of both plans, where large-scale packages are combined with a series of individual house-by-house projects. Key is to multiply the effect on the private sector as efficiently as possible.
