COVID, Q+A, tough questions and sense-checking

Q+A is not real life. Nor is Twitter for that matter.

In the days since my appearance I have received more than one hundred emails and messages from people from all walks of life across the country. These are not cranks. There are academics, scientists, and doctors, who are unable to speak up in their own organisations.

“l feel silenced by my occupation.”
“I am a … working on vaccines…”
“Please keep this confidential. I am a ... professor…”

I’ve had letters from young people pleading for some sense about the human cost of lockdowns, especially from Victoria.

The theatre of television is not where truth can be found. What people will say in public and what they privately believe are rarely the same. This is true even for Q+A panellists and hosts. Very few people have the luxury I do of following the data and evidence no matter where it leads. Most have reputations to protect, for themselves and their organisations.

Such people need someone else to speak up first. That is fine. Over the past decade or so I have become the guy that says the obvious before it is popular.

In doing so I’ve been called left-wing nutter, a right-wing nutter (make up your mind trolls), and many variations of “he’s an idiot”. Very witty. Often my views are later accepted more widely as being correct. But no one cares.

We don’t live in a world where truth matters. Making good predictions provides little credibility.

We live in a society of humans who are “group-ish” and loyal. One where people form their views socially, facilitated by story-telling. Being wrong with the group is better than being right but going against the crowd.

Here are a few things that have been on my mind regarding the state of COVID policy and analysis in the past few days. Before you dive in, you can read my earlier thoughts on COVID policy here.

• Initial thoughts on some lessons from the crisis and policy reaction
• Explaining Gigi Foster's point about not inadvertently killing more people with lockdowns
• Explaining the worrying political situation we find ourselves in and some predictions

People are self-censoring

Self-censoring at present makes sense for many people.

If you don’t, the power of big tech will do it for you. Bret Weinstein is no science slouch, nor are his guests, which include doctors and scientists (including the inventor of mRNA vaccines). Yet he has repeatedly been demonetised and censored on YouTube. 

In this tweet YouTube is spreading deadly misinformation. It is creating the false impression that Ivermectin is ineffective against COVID. The evidence is discussed in the video. If there is disagreement on the evidence discussion is required. #FollowTheSilence #CensorshipKills https://t.co/uF7BjZ3tRP

— Bret Weinstein (@BretWeinstein) June 12, 2021

Totally normal words and arguments by world-leading experts have become taboo. Herd immunity? Taboo. Great Barrington Declaration? Taboo. Our public health response has devolved into a social media political team sport, with no regard for facts and evidence.

In this social climate, who would stick their neck out in public?

Our new “health experts” are anything but

Eliminating COVID is a preposterous policy objective. Not only is it unlikely it is impossible to do nationally. The only public health objective that matters is maximising overall health and wellbeing.

Yet zero COVID is trumping all other considerations. The experts are not even trying to consider the cost. Lockdowns are free of health and wellbeing costs in their fantasy world. This is astonishing.

Here’s a clip with a variety of experts, including Sunetra Gupta explaining that although they are not as attention-grabbing as COVID deaths, the human toll of lockdown is very real. 

No one cares about solving the problem. There is no plan.

Take a look at Ivermectin and the censoring of anyone who suggests that existing safe drugs should be used as COVID treatments. One might even suggest that there are financial incentives at play for pharmaceutical companies to make sure only their expensive new drugs are approved for COVID treatment.

Take a look at the logic being used to promote vaccines. The “experts” on Q+A simultaneously had the view that vaccines should not be compulsory and we should not open the borders until we are nearly totally vaccinated.

What if only 50% of people want to be vaccinated? What then?

Also, why should we vaccinate children when we know their COVID risks are minimal? Nearly 25% of the population are children, and COVID vaccines are not recommended for them. 

We are told we must learn to live with COVID and future variants, but we are unable to accept that this means people will die from the disease. You cannot have it both ways. Have a logical plan, please.

No one cares about acquired immunity from disease

Experts worry that a perverse idea has spread widely—that people don’t get immunity from their body’s own response to contracting a virus. Yet saying the sensible reality that recovering from infection provides immunity gets you censored, no matter what your scientific credentials.

I said vaccinating children for COVID was crazy on national television. This provoked a response from the President of the AMA who wanted to imply something very different, but who ended up saying that the medical advice is that vaccines are not recommended for children. My views are totally in line with much of the medical profession. So why the need to put on a show to make it seem otherwise and give a distorted picture of the evidence to the public?

Even Harvard professors are not safe from censorship around sensible medical advice.

When making unscientific claims, media often refer to "health officials" or "experts" without citing anyone. I challenge @Twitter to name vaccine experts believing that everyone, including children and those with prior immunity from natural infection, MUST be Covid vaccinated. pic.twitter.com/tYhCjdKzgf

— Martin Kulldorff (@MartinKulldorff) March 28, 2021

No one cares about killing poor children elsewhere

We know that the rollout of childhood vaccination programs has been delayed and disrupted, especially in the poorest countries. There is a huge cost to this in the form of avoidable child deaths. One estimate suggests that the disruptions due to border closures, logistics, and prioritising other vaccines and health supplies will cost the lives of over a million children aged under five. The longer lockdowns go on, and the more we devote health and science resources to COVID above other health issues, the higher this toll.

Are the figures in this study correct? I do not know. Their value is in providing a sense of balance. COVID is just one disease amongst many. Attempting to estimate the potential scale of other health issues that have been neglected is something that should have been front and centre of the policy response in Australia and globally. 

Economic development makes people live longer

The investments that make people live longer are not usually direct healthcare investments. They are instead things like clean water, dealing with city waste, functional sewerage systems, reducing urban and local pollution, and clean food supplies. These have been proven time and time again to be what makes people living longer.

Now consider the cost of locking down India. Each year investments in these types of basic services create enormous health improvements of around 0.25yrs of additional life expectancy across the population (i.e. every four years life expectancy increases one year). Delaying this process with lockdowns is hugely costly there. A one year delay costs 0.25 life-years x 1.37 billion population = 342 million years of life—an astronomically high figure compared to even the worst-case COVID death toll. 

The commentary on Australia’s economic performance is also amiss. The fact that economic activity recovered to its previous level does not mean lockdowns and border closures were economically costless. The counterfactual is where we would be today with no lockdown but with the stimulus actions we have seen, as the policy option to stimulate economic activity has always been available.

The stylised chart below shows what I mean. Comparing point A and B to show there is no economic cost is silly. Comparing point C and B is the only sensible approach. 

The coming debate about COVID deaths vs lockdown deaths

Soon we will have a heated debate about how many lives were saved because of lockdowns. We will only have the debate about how many lives lockdowns actually cost in private, as those discussions will continue to be censored for a while yet.

Here is a quick overview of some of the mistakes of logic we can expect to see.

If recorded deaths by COVID are below excess deaths over the 2020-21 period, then that gap will be typically attributed to “missed COVID deaths”. This attribution is a wrong assumption. There will certainly be missed COVID deaths, and over-counted COVID deaths, but the gap can arise for multiple reasons, including lockdown deaths.

The Economist has already been implying these are all uncounted COVID deaths (see image below). They all seem to come from Asia and Africa (puzzling). I will be very interested to check back on their modelling exercise in 12 months time when we have more accurate records of what happened. Looking at how past predictions turned out is a great way to sense check claims, but something that the media rarely does. 

Taxing rezoning windfalls (betterment)

This is an excerpt from a new paper of mine available here. 

What is the source of rezoning gains?

The answer to this question relies on understanding the nature and extent of property rights. A core right of a property owner is to exclude others. A right holder of this type usually also has a residual claim to income generated in the space over which they have exclusionary rights (“pay to use this space or I’ll exclude you from it”).

But these rights are limited. They evolve as the law evolves, including zoning and planning law. Rights to access and sell minerals within a property’s exclusive space, for example, are not part of the private property rights bundle in Australia. They are instead owned collectively by States.

The value of private property rights is primarily determined by how much revenue can be generated above costs (excluding property rights costs) on a site at a particular location. The value of property rights is a residual, just as other assets like shares in company ownership represent residual claims on income. Whichever use of a site generates the largest residual income is its highest value use. 

The revenue potential of private property rights is affected by market conditions, location-specific features, fixed improvements, and the nature and extent of the property rights bundle itself. Investing in new fixed improvements, like buildings and earthworks, can add to property value because they remove a cost to gaining revenue (remember, property value is revenue minus costs needed to earn that revenue at that location). The value of fixed improvements becomes “attached” to the property as they cannot be separated physically or legally from the property right to a location.

However, the value of private property rights can also increase due to external factors that are not due to investments made by the property rights owner. When this occurs, it is known as betterment. For example, new public works that improve the accessibility of a location will increase the value of those sites because they reduce the transport costs of using those sites to generate revenue. Similarly, when the law changes the nature or extent of property rights in a way that increases the revenue-generating potential of that site, such as with rezoning, the resulting increase in value of the property rights bundle is betterment. 

Planning rules coordinate property uses across locations by defining property rights bundles. For this coordination role to affect property uses it must legally restrict some uses so that the highest value legal use is different to what might occur with a “no zoning” property rights bundle. Hence, there is an inherent conflict between maximising the value of any individual property and coordinating the location of property uses across a region. 

The diagram in Figure 1 shows how betterment arises conceptually and how a tax on betterment transfers value to the public that would otherwise accrue to private property owners. 

Figure 1: Betterment in the residual model of property value

The left column shows the value of the property rights at a site, such as agricultural or industrial land. That value is determined by the revenue that can be made from exclusively using that site, minus the necessary costs. The site’s property rights value is the residual. 

Suppose the market value of the output being produced increases, such as the value of crops on an agricultural property, but all input costs remain the same. In that case, the site value rises to reflect the higher residual value of production on that site. The new site value and its betterment component from these external factors is shown in the second column of Figure 1. Another example is if the rent of a residential dwelling rises, but the costs of operating that dwelling remain constant. This increases the property value. Where a property tax system exists, some of the value gains accruing to property rights from higher market prices of production are shared with the public.

The third column of Figure 1 shows what happens if there is a change in the nature or extent of the property rights through rezoning. For example, if the previous highest value use of a site was industrial only because zoning laws prevented other higher value uses such as residential, then rezoning will change the highest value legal use of the site and hence its value. The difference between the “before” site value (V1) and the new “after” site value (V2) is betterment. 

A flexible planning system presents opportunities to increase revenue from development by exceeding codified density limits and hence offers another way to generate betterment for a landowner. The betterment gained from exceeding codified planning density limits is just as real as the betterment gained from rezoning. It is why, despite cost, risk, and time involved, many property owners seek planning dispensation instead of complying with codes and gaining fast approvals. 

Here is a useful way to conceptualist betterment. Rezoning adds an additional private property right to the previously owned bundle. The value of this new right is betterment, and it reflects what the market would pay if these new property rights were instead auctioned for sale to existing property owners.

The effect of a tax on betterment arising from rezoning is illustrated in the fourth column of Figure 1 using the 50% tax rate proposed in Victoria. A share of the betterment value is transferred from the private property owner to the public, reducing the private payoff from rezoning decisions and increasing the public’s share. 

The size of betterment from rezoning can be extraordinarily large, often many multiples of the previous site value. For example, a well-situated industrial site in Sydney’s inner west was bought for $8.5 million, rezoned high-density residential, then sold again just a few years later for $48.5 million.  

Rezoning at Fishermans Bend in Melbourne led to numerous sites trading at values many multiples of their previous industrial use values. At 320 Plummer Street, Port Melbourne, the 7,468m2 site formerly used as the Rootes (Chrysler) factory transacted in 2009 for $1.7 million with industrial zoning rights. After rezoning to high-density residential, an application was made and approved for the development of three towers containing 443 dwellings and 908m2 of commercial floor area. The property was subsequently purchased for over $11 million. Even after inflating the 2009 sale price to $3 million to reflect sale prices in 2015 for similar industrial properties, the windfall rezoning betterment is roughly $8 million, with the site trading for nearly four times its previous value.  

Notably, betterment is not an additional cost to housing development. The value of property rights is a residual; after all, there are no input costs to these rights. Betterment merely reflects the change in the market value of the residual claim on income of the property rights owner, and taxing betterment merely transfers this value from the property rights owner to the community. 

Harvesting housing supply

There is a common thread between the boom in lumber prices in the U.S. and dynamic models of housing supply. 

That common element is that lower interest rates make it optimal to both harvest trees slower and to build new homes slower. Let me explain.

Take a look at the diagram below representing a forest with trees at different stages of growth.

The stock of potential timber from trees at different stages of growth is marked as Q. So 10 tonnes of large trees, 7 tonnes or medium trees, and 3 tonnes of small young trees. A total of 20 tonnes of timber there. 

But each stand of trees with a different maturity has a different rate it grows per year. Young trees accumulate timber faster (proportionally) than older trees. The growth rates for the trees in each stand are marked—the oldest grow at near enough to 0%, the next at 5%, and the youngest at 10% per year.  

Given this forest with a stock of 20 tonnes of timber, how much is optimal to harvest each year?

The trick to thinking about this question is to realise that the trees are assets, quite literally growing in value each year. When you harvest a tree you are swapping a "tree asset" for a "cash asset". The way to tell what is optimal is to compare the return from the tree asset that you give up to get the return from the cash asset.  For example, if you can earn a 7% return from cash, you won't harvest a tree that is growing in size, and hence value, by 10% per year. It's a losing trade to give up 10% to get 7%. 

In this forest, we harvest 10 tonnes this year if the interest rate is below 5%, and 17 tonnes if it is above 5%. 

When it comes to forest management, lower interest rates mean slower harvesting of timber. If interest rates fall from 7% to 3%, then all the trees growing at a rate between 3% and 7% per year should be left to grow rather than be harvested and replaced with saplings. This is well understood when it comes to harvesting forests. 

But it is not well understood when it comes to "harvesting housing development opportunities". 

Undeveloped urban land is a lot like a tree—it grows in value without being developed (harvested). Like our forest, we don't just develop all land as soon as the revenue exceeds the cost. We optimise the rate per period to maximise value from the site (or set of sites). This is why developers stage housing subdivisions as much as possible. 

A lower interest rate changes the trade-off between owning undeveloped land and getting cash from development. It makes a slower pace of housing development optimal, all else equal. 

Not all else is equal, obviously. The price adjustment to lower interest rates generates demand that new housing supply responds to—interest rates are not the only factor. In the last 20 years we have relied on this temporary demand-boosting effect of interest rate reductions to generate supply, but this has led to structural low-interest-rate conditions that will not encourage supply when demand falls. 

In housing, optimal harvesting is called the "housing supply absorption rate". I explain it here. 

Stamp duty for land value tax

The NSW government is proposing to give homebuyers the option to not pay stamp duty on their housing purchase and instead opt to pay an ongoing land value tax. I have labelled such policies SD4LVT.

SD4LVT seems to be motivated by "bad economics". All the efficiency gains that economic analysts claim will occur are merely assumptions and not very realistic ones at that. 

A major consideration for SD4LVT is its effect on housing prices. While SD4LVT is often marketed as "saving buyers" thousands on their purchase, this ignores the well-known issue that stamp duty is economically incident on the seller. 

What that means is that buyers have a willingness to pay for a home that includes the cost of stamp duty. If the market price of a home is $500,000 and stamp duty is 3%, then the purchaser must have been willing to pay $515,000 to buy the home. If stamp duty is removed, then this purchaser who was willing to pay $515,000 to buy the house can spend that $15,000 saved on stamp duty bidding up the market price. Instead of the government getting $15,000, the seller gets it. 

This is why a stamp duty holiday on housing purchases was enacted in the UK last year to "kickstart the stalled housing market".

So we know that reducing stamp duty alone will increase prices. But won't a land value tax decrease prices because it adds an additional cost for the buyer?

Yes.

And we are now at the crux of the issue. Neither tax will, in the short run, reduce the cost of housing. Homebuyers are paying the maximum they are willing. Whether that payment is directed to home sellers, or the government via stamp duty or land value taxes, has no effect on the underlying property market dynamics of rationing via prices and the costs buyers will need to pay.

In a presentation I made to Victorian Treasury a few years back, I explained this point with reference to the ACT's ten-year SD4LVT transition. I showed the below graph which makes the point that if the present value of the flow of future land value tax liabilities equals the stamp duty, the same willingness to pay for housing is just distributed differently under a land tax regime.

I also explained how to calculate the likely market price effect for a government replacing the same average stamp duty revenue stream with a land tax revenue stream.

The rule is

1. If turnover rate < capitalisation rate, price increases
2. If turnover rate > capitalisation rate, price decreases

Let's work through an example with some round numbers to demonstrate. The average housing sale is priced at $700,000 with a $37,000 stamp duty (5.3%). Without stamp duty, the price would be $737,000.

Assume that turnover is 100,000, or 4% of stock per year. This provides $3.7 billion in stamp duty revenue.

For a land value tax to raise $3.7 billion, it would need to raise $1,480 per dwelling, since in this example there are 2.5 million total dwellings. A land value tax rate in the dollar can be worked out in order to raise this amount based on the land value share of the average home. Say land value is 60% of the average home value, or $420,000, then the land value tax rate on the dollar is 0.35% per year.

Whether the market price rises or falls depends on whether the present value of a perpetual stream of $1,480 annual payments is worth less or more than $37,000 upfront stamp duty. 

If the capitalisation rate is 5% (the rate at which a flow of income is converted to a present value), then the present value of the land value tax is only $29,600. In this scenario, the market price would rise to $707,400 because a $37,000 stamp duty liability has been replaced with a $29,600 land value tax liability. Notice that the capitalisation rate here is above the housing turnover rate (5%>4%). 

If the capitalisation rate is 3%, then the present value of the $1,480 land value tax payment stream is $49,300. In this scenario, a $37,000 stamp duty liability is replaced with a $49,300 land value tax liability, and hence the house market price will fall by $12,300 to $687,700.

The question of whether SD4LVT is a good policy change depends not on the price effects—it merely redistributes who gets what payment and when—but on efficiency effects from making housing turnover cheaper. On that note, I refer you to my previous analysis showing that these claims are overblown and that the revenue volatility of stamp duty is a good thing because it stabilises the economy. 

In general, if you want to reallocate the economic rents that have accumulated to landowners, then a land value tax is a good way to go. But you do not need to remove another tax that achieves the same thing. Both taxes can work well together to divert economic rents from landowner to the public.