If I were setting the ordinary level Leaving Cert economics paper my first question, an easy one, to get the students started would be a simple one about supply and demand. It would go something like this:
A country is experiencing a shortage of supply of starter houses; builders say they can’t make enough profit at the existing prices to make it worth building. What would happen if the government gave people a tax break to help them buy houses? Would the price of houses go up or down? Please demonstrate your answer with basic economic charts of supply and demand.
The right answer would centre on the fact that the demand curve for houses would shift outwards straight away, driving up prices immediately. Supply might respond in time, but the impact of such a move would be to definitely drive all prices of starter homes upwards.
A good ordinary level economics student should get this.
For some reason the public servants in the Department of Finance, didn’t figure this out. Or maybe they don’t care? It is difficult to fathom. Now we are talking here about basic stuff. This is one of the basic laws of supply and demand. It isn’t complex. It is basic microeconomics.
The reason I am singling out these mandarins rather than politicians is because politicians do what they have to do to get elected. The politician sees the “first time buyer” as a homogenous voting block and he or she wants to be sure of their vote next time. That’s fair enough. In a PR system, the margins between winning and losing a seat are so wafer thin that the politician has a serious career interest in being seen to be the friend of what is perceived as a block. That’s the economic weakness of democracy, but I suppose it is also its political strength at the same time.
However, the economist in the Department of Finance, the mandarin who doesn’t have to face the electoral music every few years, knows better. Not only does he know that the first time buyers are not a block, but he will also surely know the first fundamental rule of macroeconomics, which is known as the paradox of aggregation.
This rule in plain English means that what is good for the individual is not always good for the collective.
So take the block of first time buyers. Yes, they are all individuals but they compete with each other in the market for houses. We also know that it is a market for scarce houses.
The basic rule of macroeconomics says that what is good for the individual is not always good for the collective. This means that a tax break for the individual is great for her and gives her a leg up in the market, so long as no other first time buyer avails of the same tax break. When all the rest of the first time buyers avail of the same tax break it simply cancels out the individual advantage and forces everyone to compete with each other at higher prices if the market is tight.
The same thing happens when the market is slack and faced with too many houses and broken balance sheets like it was in 2008. Banks would tell the individual who had too much debt to sell his extra apartment to fix his balance sheet. This was good advice so long as the bank didn’t tell every bankrupt the same thing because if they did (which they did) everyone would sell at the same time and prices would just fall and the seller would be faced with the same problem of trying to sell but at lower prices.
The paradox of aggregation is perhaps the simplest rule of macroeconomics.
Now when you look at the budget this week, which must have been signed off by the Department of Finance, we see a total absence of any understanding of the basics of both microeconomics, which involve the laws of supply and demand, and of the basics of macroeconomics, which centres on the, sometimes counterintuitive, paradox of aggregation.
This is also galling because these are the people who spouted the “soft landing” mantra a few years ago and were rewarded for that failure with promotions and foreign tax-free sinecures.
Indeed, when the public sector goes for the big pay deals to compensate them for the fact that the economy is growing again, these top mandarins – the faceless nomenklatura of the country – will be paid handsomely.
They should have explained the basic laws of economics to the politicians. These people are the permanent government. They will be around when the sweating politician, being grilled under the TV lights, is well gone. The mandarins will still be drawing gold-plated “defined benefit” pensions when the punters in the private sector will have to deal with the fact that at interest rates of zero, the chances are that their “defined contribution” pensions will not provide for them.
I have no problem with paying civil servants well. But I do have a problem with rewarding stupidity. These mandarins are trained economists who should explain to politicians what is likely to happen in a dysfunctional housing market when you introduce tax breaks for first time buyers.
On Friday, it was widely reported that many developers automatically increased the price of starter homes in response to the budget. They didn’t even wait for the Finance Bill to be enacted, prices all over the country simply jumped overnight.
This is exactly what I would have expected a decent ordinary level Leaving Cert economics student to have replied in answer to the opening question.
And there we have it folks in a nutshell!
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Older readers will recall that we’ve already been down this path. In the early 80s there was the 2000 punt (just realised that I dont have a pound key on my keyboard) grant for first-time house buyers. Didn’t work then, won’t work now.
Just goes to show that we have complete idiots running the country, doesn’t it? Simple economics is just totally beyond them!!!
Quod Erat Demonstrandum
David, I don’t think at this stage you need to have any level of economics. Just simple common sense will do the trick. People don’t need to study economics anymore to understand the fine ins-and-outs of stupidity.
They’d never have done it to raise the margin for their builder buddies? would they??
anyway, they can take the electorate as a bunch of lemmings , just look at the quality of politicians we elect , time and again…
Of course David, this is by design. The devleopers are effectively on strike, and they told their buddies in the Property-Government nexus that they needed more money to build. And so they got it. Apparantly they will now build more houses, but theres a flaw in that logic. If costs are ( say) 200K and you can sell 20 at 250k or 12 at 300k, that latter is more profitable of course.
In 2012 the Government deliberately tied up most developable land for 7 years. Developers transferred their land holdings to newly-formed subsidiaries who wanted to keep the market flat for 7 years, followed by a boom. The Government obliged with the 2012 “Capital gains exempt from Capital Gains Tax”: http://www.citizensinformation.ie/en/money_and_tax/tax/capital_taxes/capital_gains_tax.html “In Budget 2012, a new incentive relief from CGT was introduced for the first 7 years of ownership for properties bought between 7 December 2011 and the end of 2013 (extended to the end of 2014 in Budget 2014), where the property is held for more than 7 years. The relief… Read more »
If the Government was serious about looking after first time buyers they would make grant available for purchase of second hand homes. There are thousands of empty houses out there, often much cheaper than new houses, but it seems these ‘bargains’ are being targeted by LAs for social housing purposes. But any grant for FTBs is really a grant to builders/ developers. If you want to encourage building cut VAT on building materials to make it viable? Levels of new build housing is lamentably low; is a result of inter alia repeated failures at a national and local level to… Read more »
Here we go again. The cure for the mess created by Ponzi-economics…is….more Ponzi-econommics.
Of course it is stupid.
Unfortunately, it is in agreement with the mores of the Irish establishment. They love Ponzi-scheming.
Back to the something for nothing culture. It always ends up in disaster. But the peopel who want it, will not listen to common sense.
A copy of the incomprehisible state of UK state pensions, from the Daily Telegraph.
http://www.telegraph.co.uk/pensions-retirement/financial-planning/government-officials-as-baffled-by-new-state-pension-scheme-as-t/
We need the same for the Dublin residential property market. An attempt to make sense of something, that eventually merely proves that state policy is nonsense !!!!!
I am with Noonan on this one. The decision makes sense. However, 1)Dublin property is still in a bubble !!! 2) It will burst !!!
The issues in Ireland is that Nama put a floor under prices and we are still very much in a big fin bubble.
Society will be asked to bear the costs of Ponzi-nomics. Same here, as anywhere else. Same now, as any other time. Those that sweat and toil will be shortchanged. Those that gamble and spoil will have a party.
And then when it is done, with people in dire straits, there will be stern words from the main political parties condemning people for voting for the “sinister fringe”, etc…
@Deco It’s about time that the Irish electorate ‘woke up’ in regard to listening to the main political parties condemning them for voting for the ‘sinister fringe’, etc…. If the Irish electorate went away and voted for the so called ‘sinister fringe’ then things might begin to change for the better! Ever since the foundation of the state all we’ve had were either FF and FG/LAB governments and where has this gotten us, up to our necks in debt and still the people keep on voting for the same crowd. Why do they keep on doing it?? Are the people… Read more »
It’s not the civil servants who are the problem – they have regularly been ignored since Charlie’s time. Why would the government listen to them when there’s no votes in doing the right thing? Coveney has his eye on the leadership contest next year, so wants a few short-term headlines to look like he is doing something. Noonan is still busy keeping the ecb/banks/nama/developers happy. Perfect recipe for ripping off first-time-buyers and getting the taxpayer to fund it. Zero measures in Coveney’s ‘plan’ or Noonan’s budget on reducing the cost of development land. Has anyone heard Enda Kenney ever make… Read more »
“If you give people tax breaks to buy homes, you cause house prices to rise” David McWilliams. Pretty basic stuff. Increase thee amount of money with which to buy anything and the first thing is to increase demand and up go the prices. Conversely by increasing the amount of anything and the price or value drops. The funny thing is this is the basic problem with the interference in the volume of money provided to the economy by the central bankers who play the economy like a fiddle. First the central bankers increase the money supply to the chartered banks… Read more »
But the Pentagon is not a victim and it didn’t fire those missiles and kill those Yemeni radar operators in self-defense. Instead, like its other interventions in Iraq, Libya, Syria, and elsewhere in the Middle East, it is an illegal participant in the ongoing conflict in Yemen…………..
http://ronpaulinstitute.org/archives/featured-articles/2016/october/13/prepare-yourself-for-blowback-from-yemen/
A contrarian view; “A country is experiencing a shortage of supply of starter houses; builders say they can’t make enough profit at the existing prices to make it worth building. What would happen if the government gave people a tax break to help them buy houses? Would the price of houses go up or down? Please demonstrate your answer with basic economic charts of supply and demand” Response from a savvy teenage student; Dear David the price will rise. I can’t supply you with a chart right now because we are using all available paper for loo roll as my… Read more »
But Daddy won’t be building a house for you unless you earn €75k a year. Because Daddy doesn’t think the market is rigged. Or that young people are being screwed every which way – either stump up €330k or we won’t build you any houses and you can pay more than a mortgage to rent a place.
How many developers are on €200,000 salaries from nama for the last five years for doing not a whole lot of building?
A house is a building , a home is a feeling. I cannot afford a house,but I do have a home. You talk of “basic rules of economics or macroeconomics” The Governments of the last 16 years make up their own economic policies, yet we try and use traditional held economic views to make sense of this,which obviously does not work. Debating ideas that are brought in by subservient Government is a waste of time. These people are intellectually lazy and are moral cowards. They follow extreme capitalism without question. They need not fear the people anymore as most have… Read more »
The Daft Trinity guy tells us that the median Irish household income is 45,000 euro, so based on the 3.5 times income rule they qualify for a mortgage of 157.500 euro. “When all the rest of the first time buyers avail of the same tax break it simply cancels out the individual advantage and forces everyone to compete with each other at higher prices if the market is tight.” -DMW The customers for the 320,000e house need to be earning double the Irish median household income. There is only a limited market in the first place for these houses. The… Read more »
My motives for giving u information about Hillary Clinton are : . u become more wise to how much a crazy dangerous nasty person she is . u influence U.S.A. imminent voters to vote for Trump instead ; Trump being the lesser of 2 evils . u become alert to her supporters in the Irish State ; These supporters — which include politicians independent [ e.g. Ms. Zapponne ; Min. for Childeren & Youth ], & Fianna Fail, & Fianna Gael, & Labour, & Progressive Democrats, & Sinn Fein, & Anti-Austerity Alliance, & feminists [ especially militant “misandry” & “pro-abortion”… Read more »
http://timesofsandiego.com/military/2016/10/12/nearly-4500-active-duty-military-personnel-to-deploy-from-san-diego-oct-14/
http://www.reuters.com/article/us-deutsche-bank-settlement-silver-idUSKBN12H2HB
Deutsche Bank to pay $38 million in U.S. silver price-fixing case
Just a small licensing fee as the cost of doing business!!
I will tell you one sure thing David McWilliams; you are no property economics professor. Any independent property economics (real estate, if you like) expert who could speak freely would debunk the false assumptions that your ideas are based on immediately with simple imperical evidence. Real property is not private property. It is bounded by a completely different set of laws ( and hence governing factors) than private property from where your price equilibrum models derive. Take a look at real estate for example and the laws that govern it in a hierarchial sequence; first there is the ancient canon… Read more »
Maybe Minister Noona should have consulted with Spock and his sound advice in The Wrath of Khan before introducing that thoughtless tax break. FG could be best described as Klingons in their quest to cling on to power. We are definitely screaming out for THE NEXT GENERATION.
http://www.goldcore.com/us/gold-blog/euro-will-collapse-house-cards-warns-architect-euro/
http://www.nydailynews.com/new-york/naked-statue-hillary-clinton-sparks-fight-manhattan-article-1.2834970
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EXCERPT ;
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Around 8:30 a.m. officers with the counterterrorism unit arrived to the scene and ordered Scioli to dismantle and remove the statue because he failed to get a permit for the demonstration.
No one was arrested and no one received a summons, according to police.
The statue was taken away in a van moments later, cops said.
https://theuglytruth.wordpress.com/2016/10/18/dr-al-assad-israel-no-different-than-isis-al-qaida/#more-159596 . EXCERPTS . Dr. Al Assad: Israel No Different Than ISIS, Al-Qaida . “For me, it’s a very strange thing,” he began. “Daesh, ISIS, with their ideology, never threaten Israel. And Israel never threaten[s] Daesh, ISIS. It’s like some kind of agreement about – maybe not friendship – but neutrality. Why, [do] you think, it’s like this ? And what’s the role of Israel in this war ?” . Israel is actively working to “undermine” Syria by supporting “terrorism,” Syria’s embattled president Bashar Assad said in an interview with Russian tabloid Komsomolskaya Pravda on Friday. . “There’s no contradiction… Read more »
It is a valid point that ISIS has never attached Israel.
Highly unlikely to see any debate..
RR6
78% of Irish consumers use their mobile phones to make purchases.
I 100% do not believe that statistic.
Yip, Hillary Clinton the evil hypocrite about caring for women & children.
Here is a handy blurb from her taped interview where she is boasting & chuckling how she got a male rapist of a female child scot-free from being sentenced despite she knowing he guilty ;
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https://twitter.com/LucidHurricane_/status/788524519187251200/photo/1
WW 3 COMING FAST ? Looks more probable now with stuff like this ; . EXCERPT . UK Nat West Bank has seized all bank accounts of Russia Today (RT) to end their broadcasting, according to its editor-in-chief- Margarita Simonyan who took to Twitter to announce: “They’ve closed our accounts in Britain. All our accounts. ‘The decision is not subject to review.’ Praise be to the freedom of speech!” RT says that its bank NatWest, a division of the Royal Bank of Scotland Group, has declined to provide any information for its decision and says it is not appealable. In… Read more »
THE DEUTSCHE BANK LIABILITY
http://globalbritain.co.uk/images/pdf/GB-Soft-Copy3b-The-Brexit-Papers-1-The-Deutsche-Bank-liability-HR.pdf
http://tinyurl.com/jkhc9nn
https://www.sott.net/article/329334-Interview-with-Al-Nusra-commander-Abu-al-Ezz-The-Americans-stand-on-our-side
‘Trader/analyst Gregory Mannarino says don’t be fooled by the recent surge in the markets. Mannarino explains, “I think the Federal Reserve is legitimately becoming fearful of what they have done. There is no recovery here whatsoever. All you have to do is look at two metrics and two metrics only. The Labor Force Participation Rate remains near record lows. The money velocity, that’s the rate the money is moving through our economy, is remaining at record lows. Without these two metrics moving higher, you cannot have a recovery. What we have here is a debt bubble, and everything is being… Read more »
” All you have to do is look at two metrics and two metrics only.” – Tony. Irish Economists have stopped looking at metrics. They ignore real value debt because they made no effort when it came to rehabilitating debt after the debt crash. Tut Tut, they say. To this day Irish economists are calling the Debt Bubble of 2008 a property bubble despite the fact that we needed the houses. Leaving cert economic students understand that it was ignoring debt affordability metrics that caused house prices to rise above their real value. The same is true for the economics… Read more »
I assume yee are intelligent enough to know the wood from the trees. So, when I give links, I expect yee to use yer discretion. . http://www.veterenstoday.com does have good articles Especially from the likes of ; Jonas Alexis ; And, no, NOT a typo spelling of Alex Jones 8-) They are 2 different people. . Regrettably, veteranstoday.com is known also to have compromised contributions e.g. deliberately wacky stuff about UFOs & lizard-human mutants from time to time by Preston James PhD ; And, this despite he sometimes writing some great articles. And, editor & owner of this site —… Read more »
I’m selling, so house price rising is good
Was unfortunate enough to buy in 2003, getting out now, cutting my loses
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