Markets do not believe in global warming

According to this alarmist web site, a number of cities in the US and presumably elsewhere are soon going to be flooded due to rising sea levels (that is, future rising sea levels that will inevitably occur but that for some reason we  have not seen yet). These predictions are consistent with the official view promoted by the IPCC. Regardless of whether these predictions are correct (this is not the issue here), we would expect them to be taken at least mildly seriously by market participants. In particular, land prices in the soon-to-be-flooded areas should be falling as doomsday gets nearer.

I obviously have no time to conduct a serious econometric study, but the example of Bay Harbor Islands, Florida, is a case in point. According to the official view, enough CO2 has been released into the atmosphere that this community is certain to end up 100 % under water. Yet as this chart makes clear, real estate prices in that community have risen by some 50 % since their 2010 trough, which is much higher than average house prices throughout the state of Florida, that have recovered by only 15 %. (A similar conclusion can be reached with the slightly less exposed city of Key Biscayne, FL).

This evidence suggests that markets lend much less credibility to IPCC reports than politicians and the mainstream media.


More derogation culture

The derogation culture is a stealth abolition of the rule of law and its replacement by tyrannical rule by decree. The trick is to pass a law that is inapplicable and grant selective derogations to the law in a totally discretionary and arbitrary fashion.

Last week, the French government was about to implement such a derogation to its own 75 % tax on incomes above 1 million Euros. It was obvious from start that the second-rate French football league would fall to third rate as the cost of attracting the very best players would nearly double. This is what the dismal science calls the distortionary effects of taxation: if you tax people more, people have lower incentives to work. In the case of football players, this means greater incentives to simply go away. You see, these effects also exist in the real world. How surprising. So when  you put in place a new tax, presumably you are willing to live with the consequences. If this tax is meant to confiscate almost the entire income of the 1,000 best paid workers in the country, one just expects most of these (presumably very mobile) people to go away.  This means, in the dull economist’s jargon, that the distortionary effects are large. If you put in place a tax with large costs, it must be that the benefits are large. Since the tax will eventually bring very few receipts, we can only speculate that the benefits must be that people are overall happier with fewer rich workers around. We could relabel it the hate tax: you pay a tax because others hate you. It can be viewed either as a compensation for the envidious feelings that your existence is eliciting or as a Pigovian incentive to just go away, since your absence generates welfare benefits for the others.

So what happens when the government faces the very predictable consequence of its policy that the top 100 football players in the country are going to leave? It considers implementing a derogation to the tax. This means abolishing the constitutional principle of equality before the law, in order to prevent the French football league from becoming third rate instead of second rate. (In fact it is expected that the constitutional court will veto such an exemption)

Taxes are no longer determined by a tax code (these are for the idiots), but by how much the government — or its constituency — likes you. The government does not seem to like Gerard Depardieu but it likes football players. Hence poor Gerard Depardieu has to leave for cold Russia (when I was young it was rather the Russians who were trying to come here) but the football players can stay if we can sneak in some exception to the law for their benefit.

Or is it that the government suddenly discovered, just when the league informed them that the top football players were about to leave, that this activity generates “positive externalities” so that it needs to be subsidized? Perhaps the French people want more poor people and fewer rich people in their country, except whenever the latter are football players (I suppose that top surgeons,  managers, computer scientists, architects and biochemists are, on the other hand, welcome to join Depardieu).  Perhaps the moral qualities of football players  are such that we want to keep them — despite that they are rich — to serve as an example to younger generations, unlike surgeons, architects and managers?

In any case, the government expected that such a derogation would not pass the constitutional court, so they packaged it in a clever way. They amended the law by putting a cap on the total high wage tax paid by a firm equal to 5 % of its total turnover. In the short run, the cap will obviously be binding only for firms for which a significant portion of the wage bill consists of wages above one million euros, that is for football clubs and perhaps a handful of medical clinics. In the long run, though, nothing prevents a big firm from outsourcing their top paid employees  to some small consultancy. These consultancies will be closely watched by tax authorities, though, because some law says you cannot be a de facto employee without being a de jure employee (this law is intended to prevent firms from asking employees to set up a personal business instead of hiring them, which allows the de facto employer to bypass employment protection legislation). But we can be confident that big firms will find a viable legal arrangement to benefit from the 5 % cap.

This is the problem with rules: because they are rules, everybody can adapt  to them. It is very difficult to craft a rule that would harm Emmanuel Goldstein and nobody else.  Discretion gives much more leeway to politicians in distributing rents to selected groups at the expense of the others.

Ubu sets prices

The French government is about to pass a law (so-called Duflot II) that establishes rent control for 70 % of privately-owned rental housing. The local representative of the government will regularly set a rent ceiling which will not exceed 20 % of the median rent in the area. Owners who have an “exceptional” house will have to ask for a derogation (once again) and demonstrate to government officials that their house is indeed exceptional.

This law is intended to address the problem of housing shortages  in selected areas (only these selected areas represent 70 % of the total supply).  No, there is no typo in this sentence. The supposedly educated elites in charge seem to believe that when demand exceeds supply, reducing the price by law helps.

In the face of such abysmal idiocy one’s first reaction is clearly to remain speechless.  But some economist has  to speak out…

How does the private housing market currently work? First, it is extremely heterogeneous. Even in a given area, apartments differ a lot by quality. So far we do not know how the bureaucrats who will set the dreaded local median rent will operate. How large will the relevant geographical area? How will apartment quality be imputed? Clearly apartments with vastly different market values will be forced into the same price. Second, even controlling for quality there is substantial price dispersion. The more expensive apartments stay longer on the market and the owner can pick among fewer applicants. The opposite holds for the cheaper apartments. These have many applicants, and the owner will usually pick the most solvent one.

The immediate impact of the reform will be to force the price of a large fraction of housing below its market level. Since the ceiling is indexed on the median in the area, these were the most expensive ones in relative terms. So the reform is not so much about reducing rents overall as about truncating the upper tail. These apartments were more expensive than average for a reason. Either quality was higher or the owner preferred income over applicant quality. In both cases, when the price is forced down, the apartment will either be withdrawn from the market or it will have more applicants. As pointed out above, this means that those who will get the apartment will be richer.  Poorer people who could have rented the apartment because they liked it and were willing to pay the price will simply be forced into lower quality products.

In the short run, the reform is simply making life harder for the very people it is supposed to help.  Similarly, a ban on renting rooms smaller than 9 square meters by the preceding government (amidst hateful  speeches against supposed “sleep merchants”), subsequently heightened the student housing crisis (the evil sleep merchants would no longer rent the rooms that the good people in government outlawed).

In the long run, the private rental market, which is already undersized, will likely disappear.  Investment in quality will fall because the owner will be able to reflect it in the rent only if Big Brother says it is OK.  There will be a race to the bottom in quality, because quality will be poorly measured by the officials and this will be a device to raise the effective (quality-adjusted) rent while complying with the law. If, as a result the median rent eventually falls — which is far from certain since withdrawing houses from the market will per se lead to rising prices — this will only make things worse as it will negatively impact the official rent cap.  (And furthermore one will be under the illusion that the law has worked in reducing rents while this would be incorrect adjusting for quality)

People with enough cash for an upfront payment will buy (you need to put 30 % of the value to be able to buy a house, because of regulation). Others will suffer in the jungle of public, rationed, rent-controlled housing and end up with a place they don’t like, in a neighborhood they don’t like, and be stuck with it for the rest of their life. More apartments will be rented through informal channels such as relatives or the black market.

The reform denotes pure contempt for individual property rights as well as ignorance  of even the most basic economic principles.