Picking Losers

Thresholds of pain

The Government and the opposition parties believe that climate-change and energy policy should revolve around identifying the technical solutions and their potential, calculating what each of them needs to encourage their deployment, and implementing mechanisms that provide just the "right" level of support for those solutions. They do not believe that, to whatever extent Anthropogenic Global Warming is a reality, emissions of greenhouse gases are an externality whose impact (and therefore social cost) is the same however and wherever they are emitted, and that the most efficient way to encourage less to be emitted is to apply that social cost to those emissions regardless of provenance.

Our politicos' assumptions of omniscience and omipotence tend to be undermined by reality. When it comes down to the reality of providing just the "right" level of support, they are amazed to learn (if they ever do) how many variables have to be taken into account, and how often it turns out that the information they were working on was wrong or has changed. Policy-making becomes a process of arbitrarily picking those variables that you will take into account (and about which you hope it is safe to generalize) and those variables that you will ignore and expect those who are disadvantaged just to suck it up, and then regularly changing them in ways that are unpredictable to investors. Such policies thereby achieve the brilliant combination of being altogether too changeable and complex (by taking account of too many variables) and yet partial and insufficiently reflective of the real-world (by ignoring so many inconveniences).

The recent banding of the Renewables Obligation (RO) was one such case, piling further complexity, irrationality and partiality onto many existing layers of partiality, irrationality and complexity. Now we have another case looming. A banded RO might be complex, irrational and partial, but it wasn't complex, partial and irrational enough for the politicians and civil servants. Some variables, particularly scale, weren't sufficiently covered. So they are bringing in a micro-generation Feed-in Tariff (micro-gen FiT), to support similar (though not identical) technologies to the RO, supposedly at a smaller scale, though the upper size threshold for the micro-gen FiT encompasses a large number of the projects currently included in the RO. They are also introducing, at more leisurely pace, a Renewable Heat Incentive (RHI), which will probably work in a similar way to the micro-gen FiT, but in the heat rather than electricity sector, and without (probably) the upper size limit.

The micro-gen FiT will provide a value beyond the ordinary electricity price, for each unit of electricity produced by an eligible micro-generation installation. It will be tailored supposedly to provide the "right" level of support for each technology. But that isn't specific enough, because the economics of a 5 kW micro-gen unit are very different to the economics of a 5 MW "micro-gen" unit (the upper threshold for eligibility, thanks to some strange definition of "micro" for public-choice and rent-seeking reasons) of the same technology. So the Government declared their intention to "band" the micro-gen FiT (and the RHI) not just by technology, but by scale too (and they were also considering banding by type of consumer, but hopefully have abandoned that option).

We know what the effect of banding by scale is. People make all sorts of irrational decisions about the type and size of plant, in order to achieve the maximum level of support under the bands. So, with the proviso that the whole approach is wrong but recognizing that something rubbish was inevitable and trying to minimize the damage, I came up with a suggestion for how they could achieve the same benefits that they wanted to achieve with banding without the harmful effects of banding. The suggestion was to "front-load" the mechanism, so projects would get a higher price for their first X MWh, and then a lower price thereafter. Large projects would get through X in a couple of months and would have to rely on the lower price for most of their lifespan, making the mechanism fairly similar to an unbureaucratic grant for them. Small projects would take years to get through X, and would therefore receive a higher level of support for a longer part of their lifespan. Medium-sized projects would fall in between, in terms of the effect of the front-loading. There were many advantages to this approach, but most importantly, there was no size threshold, so there was no disincentive to install simply the most appropriately-sized unit and technology for the circumstances.

To its credit, the industry broadly adopted and supported this idea, and extended it from the RHI (for which I had suggested it) to the micro-gen FiT. To rather less credit, but typically for a committee camel, the industry decided that they could improve the concept by making it more complicated, which was the form in which it was promoted to the government. Still, their bastardized version was a lot better than the Government's idea of banding by scale. Amazingly, for anyone with any experience of "consultation" in recent years, there were even some signs that the Government was giving the concept some serious thought.

We still wait for details of the RHI, but the Government has recently provided more detail on how it sees the micro-gen FiT being implemented. And guess what? Front-loading is out, and they are sticking with banding by scale.

We have to assume that this irrationality will apply in due course to the RHI as well. And I have some first-hand experience of the effect of that assumption.

As I have mentioned too often in recent posts, our company supplies wood pellets. I therefore have a stronger-than-average interest in installing a pellet-boiler for my home. As it happens, the cluster of three houses where I live make a particularly suitable opportunity for a micro-district-heating scheme powered by a shared pellet boiler.

We got quotes from a number of suppliers. They sized the project variously at between 60 and 80 kW. The prices unfortunately were all too high to be justifiable by the fuel-cost savings to be made, even though we were displacing the most expensive fossil fuel (LPG) and would have taken a longer-term view than most customers (given the commercial interest). The reasons why the capital costs are too high (and significantly higher than in other countries) is another story, also related to the effect of government intervention.

But sticking to the case in point, the main reason why the value did not justify the investment was the absence of any carbon value. Indeed, the low rate of VAT on domestic fossil fuels effectively creates a negative carbon cost, as those fossil fuels are cheaper than they would be if they were simply treated as any other product in the market. But after extraordinarily-prolonged cases of first myopia and then prevarication, something is on its way: the RHI. Doesn't that make the difference and justify the investment?

  1. When should I assume it will come in? The Government refused to drive it on the same timetable as the micro-gen FiT, which means that unlike the latter, the RHI will certainly not be introduced before the next election. The Government promise April 2011, but what value should one place on any policy promised by this Government to be introduced long after the next election?
  2. The Tories have said they would introduce something similar, so perhaps one would take a view on that (though I doubt it will be top of their legislative agenda). But what form should I assume the RHI will take? The Government couldn't even bring out some suggestions to accompany the panoply of consultations and policy-statements on low-carbon policy that they have released in the past couple of weeks. As I said, I am reduced to assuming that they will apply similar logic to the RHI as they apply to the micro-gen FiT. But what confidence should I place in that sort of assumption? They have shown an exceptional ability to reinvent the wheel at every turn so far.
  3. Perhaps I could take a view on the sort of mess that will emerge, knowing the similar predilections of Labour, Conservatives and civil servants for micro-managed complexity (whatever their denials). I am prepared to take an informed gamble that the RHI will be a FiT, that it will be banded by technology and scale, and that it will be introduced by 2012. But that is as far as I can go, and I probably know more about this than any other potential pellet-boiler customer. What will be the thresholds for the bands, and what will be the levels of support within each band? One can try to read the runes from what the Government has so far published, but in reality it's not much better than picking numbers at random. How does one invest on the strength of that?

For instance, what if (as is not unlikely, but not predictable) they make 50 kW a threshold between one band and another? And what if the level of support for boilers below that size is double the level of support for boilers above that size? How much of a plonker would I look if I now installed a 60 kW boiler? In those circumstances, I will obviously want a 50 kW boiler, and find ways to eke it out (larger buffer tank, or top-up from another heat-source). Or if I really want more than 50 kW, maybe I will divide the project and install two 35 kW boilers, attributing each nominally to a different property to be able to claim the higher rate on each, even though that is a dreadfully economically-inefficient solution compared to one 70 kW boiler. But what if I try to hedge my bets by going for one of these options, and then find that they have set the thresholds at 30 or 100 kW? Sizing sub-optimally is then money down the drain.  

Clearly, I can't invest now, precisely because of the thing that is supposed to encourage this market. And whenever I do, I will not necessarily be installing the most suitable setup for the location, but the most suitable setup for the perverse incentives. A government proposal aiming to put right their failure over many years to treat heat equally to other forms of energy has, in practice, created the opposite effect for the foreseeable future. And all because they are so ill-educated in economics and deluded about the quality of their information and competence that they can't just do the simple and right thing: front-loading at the least, or better still scrap most of the existing and proposed mechanisms, replace them with a carbon tax, and let the market figure out where and how carbon can best be saved at less cost than the social cost of the emissions.

Merton doesn't Rule, OK

One way that politicians and civil servants have tried to drive the uptake of renewables is through the application of what became known as the Merton Rule (after one of the first councils to introduce the measure) to planning policy. The Merton Rule stipulates that developers must include a certain proportion of on-site renewable-energy production (typically 10 or 20 per cent, depending on the council) within the fabric of the buildings they are developing.

Why a particular proportion should be encouraged is not clear. Faced with a choice of a technology that could supply a notional 10% of the property's energy needs for £X at an operating cost of £Y/MWh, or another technology that could supply 80% of the property's energy needs for £2X at an operating cost of £0.1Y/MWh, the rational developer focused on the bottom line (and they mostly are) will install the former as the most cost-effective way to meet the Merton Rules.

Nor is it obvious why one would want to target incentives at new-build, rather than providing equal incentives for the existing housing stock, which is vastly more significant. In one way, older buildings offer greater potential, as the lower energy-efficiency results in more energy-consumption (relative to its size), which means higher utilization of any renewables installed, which means faster recovery of the capital cost.

Nor is it fair to assume, as the planners do, that one knows how much energy a particular technology will contribute in particular circumstances, and how much energy will be consumed in total in that property. It's an arbitrary measure that rewards bullshitters (those who provide inflated claims for how little energy will be required for the building or how much energy their technology will produce).

But let's say that they really could plan and assess this accurately. The system would still encourage perverse outcomes. As a supplier of wood pellets, we are seeing at first hand one of the more perverse consequences.

For individual properties, solar panels (thermal or PV) are probably the winning option for many developers. But for larger properties, such as blocks of flats, installing a pellet-boiler that could meet part of the heat load is often a good option.

To minimize cost and maximize convenience, the pellet boiler will be installed to feed the hot-water buffer tank in tandem with one or more gas boilers. Because the Merton Rule is satisfied regardless of whether the equipment ever runs (it requires only that it should produce a certain amount if it were run), and because gas (and oil) are currently cheaper as fuel than pellets (because of stupid energy policies designed to keep domestic fossil fuels as cheap as possible), the developer has no interest in installing a pellet boiler that will run effectively because the plan is for it to rarely run at all. It will be undersized (because you only need renewables to be able to supply a fraction of the properties' energy, and heat is such a big proportion of the whole). It will be the cheapest model available, regardless of whether that model will give trouble-free and efficient operation. It will have an inadequately-sized fuel store, which further pushes up the cost of running, as many suppliers will not supply small loads, and those that will (such as us) will charge much more per tonne for small, frequent deliveries than large, infrequent deliveries. The fuel-store will be located wherever suits the architect, regardless of whether it is practical to get the pellets to that location. The flange, to which the delivery-lorry connects in order to blow the pellets into the store, will be positioned wherever is convenient to the architect and developer, regardless of whether the delivery lorry can get near it, or can stop there (e.g. on double-yellow and red lines). The reality is that no one intends to run the boiler, so who cares?

Recently, this logic may have taken a step further. A developer is touting around a pair of "barely used" pellet boilers of the cheapest, nastiest type, which he is taking out of one of his sites. Are we seeing the start of the next wave, where developers will install the obligatory renewables just long enough to get signed off by the planners and Building Regulations officers, before taking them out and selling them on for installation in the next development that needs to meet the Merton Rule targets? A handful of boilers and solar panels could deliver multiple permissions and positive SAP ratings. The authorities' figures will show that large numbers of properties are running on renewable energy, while in reality most of those properties carry on being as dependent on fossil fuels as ever. The figures for numbers of properties where renewable boilers were installed will no doubt be presented as a tremendous success, and the authorities will be mystified when our fossil-fuel consumption figures once again don't fall in proportion to the displacement that has supposedly been achieved (just as for EEC/CERT/CESP). There will be more head-scratching, and then someone will come up with an even more complex and perverse scheme to encourage displacement of fossil fuels whilst keeping the costs of those fossil fuels as low as possible. And so the cycle continues...

It's very simple. If you want people to use less of something, you need to make it more expensive. If you try to make them use less of it by pushing efficiency-improvements at them whilst keeping the price cheap, demand will rebound - it's an effect well-known to economists as the Rebound Effect. The purpose of these policies is to get us to reduce our fossil-fuel dependence, whether for environmental, economic, social or energy-security reasons. And yet the Government persists in trying to keep domestic energy prices as low as possible while promoting these policies aiming to reduce our consumption, and all the opposition parties and most of the commentariat support them. We really are cursed with one of the dumbest intellectual classes of any nation on earth.

Poor consumers

Speaking of the IEA (see previous post), Richard Wellings, their excellent Deputy Editorial Director, has posted a piece on their blog, on the recent slew of climate-change policies and targets from the Government. It is mostly well-judged, but there is one point where we diverge. I need graphics to illustrate why he is mistaken, so I'm posting here rather than in the comments section on his site.

Richard rightly criticizes the impossibly ambitious targets, the delusional claims about the benefit to the economy, and the impact on what remains of our industry of increasing the costs of energy. But he overstretches when he brings domestic consumers into the picture:

"Then there is the impact on the less well off. People on benefits, for example £64 per week Jobseeker’s Allowance, may already be using around one third of their (non-housing) incomes to pay utility bills inflated by existing environmental policies."

Actually, we have the cheapest domestic energy of the EU-15 countries. Here is the comparison for gas (from European Commission, DG TREN Staff Working Document, Report on Progress in Creating the Internal Gas and Electricity Market, 11/3/1009, SEC(2009) 287):

EU gas prices 2008 

Notice that only 6 New Accession countries had cheaper domestic gas than us (on old, unsustainable, subsidised Russian prices), so not only all the other EU-15 countries were dearer, but several of the New Accession countries as well. And notice that the reasons why domestic gas is so cheap are not only that the untaxed price is competitive, but significantly that we apply less tax to our domestic gas than any country except for Latvia. Doesn't look like domestic gas prices are too inflated by existing environmental policies, does it?

Attack or surrender in the battle of ideas

In the long run, it's ideas that matter. And they aren't all equal. Truth is not subjective, and neither are right and wrong. Political tactics and novelty may seem all-important to the chattering class, but expedient can never make wrong right, or prevent reality from finding ways around illusion. Tactics and rhetoric can endlessly extend and exacerbate the harm that is done by bad ideas fighting a Canute-like battle against the tide of reality. They may prevent good ideas from being heard, understood and implemented. But they can't stop the effect that the true concept describes.

Most modern think-tanks are engaged in the political battle. Their ideas are superficial, inconsequential and often nonsensical, and developed in pursuit of a political objective, rather than the truth. Organisations like IPPR and Policy Exchange are window-dressing in the political shop-front. They may be effective in terms of short-term political influence (though effective may not be the right word to describe justifying concepts that their audience had already assumed to be true), but their shallow ideas will mostly fail in practice and be forgotten in due course.

The IEA exists for a different purpose. It exists to fight the intellectual, not the political battle. It does not trim its sails to the political wind. It has no political or commercial affiliation, although critics on the left often assume that it does, seeing everything through tribal eyes as they do. Its purpose is to preserve and promote the classical-liberal philosophy, and explore the ramifications of that philosophy for our understanding of policy, history, economy, society, etc.

At least, that's what I understand the purpose of the IEA to be, and that is why I am proud to support it. So what am I to make of the following bit of tittle-tattle in this month's Prospect magazine?

"the grandest name on the right, the libertarian Institute of Economic Affairs (IEA), finds itself in crisis. This June it gave director John Blundell the heave-ho. Officially, it was time for the long-serving Blundell to move on. Unofficially, his failure to impress team Cameron took its toll."

John's departure was indeed unheralded, and there has been little effort to pretend that the usual platitudes are the real reason for his departure. Despite the absence of any more credible explanation, I was prepared to give the trustees the benefit of the doubt that they had good reason and had made the change in the best interests of the Institute and its objectives. But "failure to impress team Cameron" is not a good reason, and bringing in someone more to team Cameron's taste would not be in the best interests of the Institute.

The most likely explanation is that Prospect's diarist is talking out of his backside. He goes on to attribute Philip Blond's departure from Demos to the fact that "senior Cameroons were unconvinced by Blond's philosophical style". I don't know whether Prospect has an inside line at Demos, but it's unlikely that it has one at the IEA (they're not exactly on the same philsophical wave-length). The juxtaposition of these stories makes it look like the author wants to puff the influence of the Cameroons, whether at their instigation or not we cannot know. One gets the impression that it wouldn't be out of character.

But in the unlikely event that there is some substance to this rumour, the trustees would have made a serious misjudgment. We would be in quis custodiet ipsos custodes territory. Not because they decided it was time for a new Director, but because of the reason for that decision, and what that would imply for the direction they wanted the Institute to take in future. The IEA should not seek the approval of the Cameroons or any other group. The IEA should promote its principles and ideas as strongly as possible, but it is largely out of the IEA's control whether those principles and ideas find favour with leading political figures. After all, only for a small part of its history has the IEA found itself in this happy position. Should they have replaced Ralph Harris or Arthur Seldon because their ideas didn't generally impress Harold Macmillan or Ted Heath? If the IEA finds itself in philosophical opposition to the dominant group in the Conservative party, far from seeking approval and compromise, it should do its best to reveal why that group's philosophy is mistaken, and to provide intellectual artillery for those in any party (or none) who agree with the IEA's point of view, whether or not they are in control of the party.

Too many Cameroons have been soaked in the swamp of paternalism and positivism that is an Oxbridge or LSE human-sciences education. Too few of them have spent long enough outside politics to gain a first-hand understanding of the pernicious effects of well-intentioned government intervention. There is nothing that anyone at the IEA or elsewhere can do about that except point out their errors, promote a better alternative, and wait either for a conversion or (more likely) for their failure and replacement.

The remorseless decline of tribal socialism

My copy of Dan Hannan and Douglas Carswell's book, The Plan, arrived today. Haven't read much yet and don't agree with all that I've read, but all the same, if you haven't got a copy, you should. It's well worth the read, and more right than wrong.

Something struck me about a graph of voter turnout in UK general elections, early in the book. It looked like Conservative wins were generally on higher turnouts than Labour wins. I thought I'd check.

What follows is not strongly statistically significant, but it's not insignificant.

My impression was confirmed by the figures. Since the war, the average turnout at elections where the Conservatives won was 76.4% and when Labour won was 72.5%.

In collating the figures and looking for an explanation, some other trends suggested themselves. The Labour vote appeared to be much more consistent than the Conservative vote. And indeed it is. The standard deviation in the Conservative vote is 1,932,000, whereas the standard deviation in the Labour vote is 1,393,000. The standard errors from the linear regression lines show similar but even stronger outcomes (1,955,000 for Conservative, 1,224,000 for Labour).

Graph of votes for 2 main parties in UK elections since 1945

And even this overstates the variability of the Labour vote, due to two extraordinary performances (one good, one bad) in 1983 and 1997 (the reasons for which are well known and not representative of Labour's performance under normal circumstances). Without these two, the standard deviation in their vote is only 1,122,000, whereas you can take the two most extreme performances by the Tories out of the equation and the variability of their other performances would still be such that their standard deviation would be around 1,600,000, much higher than Labour's all-inclusive figure.

The consistency of the Labour vote made it relatively easy to spot another trend. Their vote is heading quite remorselessly downwards (with the exception of 1997), even as the voting population increases. So, statistically, is the Tories' vote (though marginally less so). But in the Tories' case, this trend is dominated by their dismal performance in the last three elections, again for reasons that are well known. Taking those performances out of the equation, the Conservative trend is somewhat upwards, whereas the Labour trend remains unremittingly downhill.

Some highly-speculative conclusions suggest themselves to me.

  1. The Labour vote is more tribal and dependable (and, I am tempted to say, unthinking).
  2. Elections are won or lost by the extent to which non-Labour voters are sufficiently alarmed by Labour to turn out for the Tories, or sufficiently disillusioned with the Tories to stay at home and let Labour win by default. With the exceptions of '83 and '97, the electorate seem to swing to or from the Tories, much more than they swing to or from Labour.
  3. Labour may not be able to rely on disillusion with the Tories bringing them back to power in the future, as their core vote is declining, and they don't usually pick up much of a swing vote. Recent events won't have helped.
  4. Going by the trend, even with a fair wind and a competent and likeable Prime Minister, they would be doing well to pick up 10,000,000 votes at the next election. If they are out for more than one term, their core vote may be down to 9,000,000 and that will rarely be enough to win an election, even against an unpopular Tory party, and even if the Tories don't correct the constituency boundaries that are currently gerrymandered to Labour's advantage.
  5. Labour are unlikely to have a fair wind between now and the election, and they bottled the chance to ditch their incompetent and contemptible Prime Minister, so 8 to 9 million votes looks like a realistic expectation for the coming election.
  6. If the last three elections were representative of a sustained trend, but assuming that Cameron will come in above trend, the Tories could expect upwards of 11 million votes.
  7. But the last three elections look like aberrations rather than part of a trend to me. If so, the Tories have a decent chance of being in the 12 to 14 million range for votes. Psephologists may doubt the likelihood of such a strong swing, but 1997 demonstrated that something of that scale is possible, and Brown's government is every bit as unpopular as Major's was, Brown is personally much less well-liked, and Labour won't be able to point to three years of strong economic performance and good guardianship by a judicious Chancellor.

Unless the Tories self-destruct or Brown gets his economic miracle, this highly-speculative, statistically-weak analysis hints that Labour may be about to get drowned by a democratic tsunami greater even than the media have been starting to suggest.

Good on the British people. It may be slow progress, but it seems that each time we give the socialist alternative a chance and discover what a disaster it is in the long-run, a few more people learn the lesson and don't forget it again. They may still be susceptible to all sorts of woolly, interventionist, paternalist nonsense from wet, one-nation Tories, but at least they have recognized that the socialist snake-oil doesn't work. I haven't felt so optimistic in a long time - not about the political options that we have at the moment, but about the fundamentally-sound economic sense of a good swathe of the British public, despite all the best efforts of our intellectual class. It confirms my belief that British voters could be persuadable to support a genuinely-economically-liberal party, if one were to present itself to them.

Judged and found wanting

This week's Spectator includes an article by Elliot Wilson about nuclear power and Barbara Judge, one of the great-and-the-good, chair of the UK Atomic Energy Authority (amongst many senior roles), and wife of Sir Paul Judge (he of The Jury Team). The article contains the following passage:

"If there's a model to follow, it is the French one... In the wake of the first global energy crisis, the goal was to find ways to wean France off Arab oil... the plan work[ed] blindingly well - four fifths of French energy needs are now provided by 59 nuclear plants..."

I have written to The Spectator, quoting this passage, and pointing out that this is yet another repetition of the nuclear lobby's lies on this subject.

According to the International Energy Agency, nuclear energy provides 43 per cent of France's Primary Energy Supply, and 17 per cent of their Final Energy Consumption. Oil provides 33 per cent of their Primary Energy Supply and 49 per cent of their Final Energy Consumption. Their consumption of oil has reduced by 3 per cent since 1970. Over the same period, consumption of oil in the UK has reduced by 17 per cent.

France's lips are still wrapped firmly round the petroleum teat. Nuclear energy is not a substitute for oil. But when have the nuclear lobby ever let the facts get in the way of their propaganda? 

Mr Wilson has made the classic mistake, on which various rent-seekers in the energy sector rely (including the wind and solar lobbies, as well as the nuclear crowd), of failing to distinguish between electricity and energy. It's not the first time this fundamental error has appeared in The Spectator, as in many other parts of the media. It's a particular favourite of Michael Portillo and Bernard Ingham. But journalists who are not aware of this basic distinction ought not to be writing on the subject. 

Coincidentally, Sir Paul also has a track record of "economy with the truth" on this sort of subject - in his case, providing misleading claims about BA's carbon-offsetting facility. Perhaps it's a conjugal thing.


Many of the more delusional, socialist contributors to the Claverton Energy group of energy fantasists (as I labelled them previously to their founder member's apparent offence) are persistently and vehemently opposed to "growth". See, for example, a recent exchange of half-baked ideas on the subject of "Olduvai theory". But to be fair, this sort of nonsense is at least partly provoked by the frequent exposition of the opposite extreme: the naïve promotion of growth at all costs (popular amongst our political elites).

Of course, neither side bothers to define what it means by growth, and it struck me that the concept seems to be singularly ill-defined, at least in the context of popular philsophizing. At best, it seems to be mostly useless in its vagueness, and at worst, it seems to be the cause of much confusion and misunderstanding, leading to economic and philosophical errors, and hostility between groups who mean different things by the same term.

What these Clavertonians want is a shift to a more "sustainable" way of life (and energy system in particular). There's a whole other can of worms in the term "sustainable", but let's imagine for a moment that we could all roughly agree on what it meant. And let's say that the Clavertonians persuaded most people to share their preference. The economy would become more focused on sustainable goods and less focused on unsustainable goods. The share of sustainable goods in the economy would increase. Increased demand for and supply of these goods would cause not only their share of the economy, but the economy as a whole to grow (unless inhibited by bureaucratic inefficiencies). Growth would be synonymous with improved sustainability, rather than antithetical to it, as these Clavertonians perceive is the case at the moment. Would they still oppose growth in those circumstances? If not, why do they oppose growth per se now? What they really oppose is not growth, but the undervaluing (as they see it) of sustainable goods and the overvaluing of unsustainable goods. But starting from this misapprehension, they fall easily into other economic fallacies and socialist delusions.

Conversely, the "growth at all costs" crowd are pandering to mirror-image delusions. Some of them focus on GDP growth, forgetting that some things that are harmful to the economy and to people's welfare, such as monetary inflation or expansion of the bureaucracy funded by deficit spending, can give a short-term boost to GDP. Simple population-change can give a distorted impression - mass immigration will probably increase GDP even though it may not be beneficial to most people, but if we were to try to counteract that by referring to GDP per capita rather than plain GDP, we could be fooled into thinking that high mortality (whether natural or artificial) can be an economic blessing.

Others confuse growth with consumption, and seek any means to stimulate consumption (whether or not our propensities to consume and to save are reflected in a sustainable balance of spending and saving, or have been distorted by government policies) because they perceive that resumed growth hinges on resumed consumption, and that our general prosperity and wellbeing hinges on resumed growth. Actually, where (as in recent times) we have had substantial malinvestment and an imbalance of spending relative to saving thanks to unwise government action (or inaction), we need a period of creative destruction, rebuilding of savings and consequent reduction in spending, in order that the economy can return to a more realistic and satisfactory balance (until the next time that governments decide to screw it up).

Growth is not necessarily good or bad. It is the nature of the growth that matters. There will be many shades of opinion on what constitutes "good growth", but to oppose growth per se or promote it willy-nilly is like opposing or promoting discipline. A world in which there is no discipline and everyone does exactly what they want (the law of the jungle) would be chaotic and dissatisfying to most, but a world where the need for some discipline is abused, perhaps by an authoritarian power, is intolerable. The virtue of particular instances of discipline or growth depends on whether they enhance or reduce people's scope to move from a less to a more satisfactory condition.

And for that, there is no satisfactory metric, whether we are talking about discipline or growth. GDP is not a meaningful proxy for the latter, even for a "first-order approximation", nor is any other econometric index. Instead of approaching this with the objective of trying to measure the immeasurable, we should approach it from a philosophical or systemic perspective. We can say that, if we create the conditions that provide the greatest scope for people to move to a more satisfactory condition and be protected from unwarranted impositions by others, then the developments that proceed from those conditions are as "good growth" as it is possible to encourage, without trying vainly to put a figure on it.

Wind in the sails of our patronage state

According to the Guardian:

"The government will today demonstrate its willingness to exert influence over Royal Bank of Scotland and Lloyds Banking Group by announcing £1bn of lending to wind farm developers whose schemes have been becalmed by a lack of cash... The £1bn cash arranged by the government is part of the additional £4bn of EIB lending to support UK energy projects announced in the spring budget."

This brings together several threads I have been following recently: the Government's coopting of EIB funds for their political objectives, the hype, ignorance and political-preference surrounding wind power, the resurgence of "industrial policy", delusional confidence in some quarters about the returns from and security of investments in "green technologies", and the disaster for the effective operation of markets that was the bale-out and nationalization of our most incompetent financial institutions.

Why should the banks prefer one technology over another? Presumably, they should look critically at the business models for projects of all kinds that fall within the EIB's objectives, and disburse the money on the basis of the credibility and suitability of the proposal, not simply on the basis that it uses a technology that the Government seems determined to favour almost to the exclusion of other, often more practical, alternatives.

It's utterly corrupt and stupid. And the Tories and LibDems wouldn't do much different, also having been blinkered by VILE-company rent-seeking.

This is our money they're burning, and our freedom they are destroying. How long before we can have a political option that takes government out of where it doesn't belong? Or (as some people whose political judgment I respect have depressingly concluded) is it hopeless? Must we resign ourselves to continuous decline into a patronage state, where success is achieved not by anticipating correctly and providing efficiently what people need and want, but by influencing governments to implement policy in your favour?

Who will speak for those of us who are aware of the lessons of history and know what that latter world brings? How do we fight it?

UPDATE: By coincidence, I was sent a link today to an article on EIB funds being used to bale out a bankrupt project for a Belgian offshore wind-farm. Financial services are only going to get more politicized and corrupt in the current climate.


What a waste

According to David Kidney, Energy Minister with responsibility for fuel poverty, the Government has "spent £20 billion helping people in fuel poverty since the year 2000" (it's near the end of the interview).

UK fuel poverty levels 1996-2006 At 3.5 million, the number of homes in "fuel poverty" in 2006 was significantly higher than it was in 2000 (see graph from DEFRA's UK Fuel Poverty Strategy 6th Annual Report 2008), and that was before prices went really high.

Is it possible that the Government's strategy is not working? Have we wasted a colossal amount of money trying to encourage improvements to energy-efficiency and usage whilst keeping domestic energy prices as cheap as possible? Is fuel poverty a bogus concept that gets in the way of rational energy policy?

Or is £20 billion to make things worse a good return on investment (to use the Government's favourite word for spending)?

Stepping marginally

Here's a graph from the Renewable Energy Strategy, of a type that the Government has been growing increasingly fond, as it steps up the complexity of its efforts to calculate outcomes and costs of support policies:

Marginal resource costs of renewable generation by sector in 2020 

The first and most important point is that it is remarkable how precisely the Government believes it is possible to predict the costs of achieving the 2020 target. But let's nevertheless play the game of pretending that these figures are worth applying some critical thought to.

It is amazing how much the marginal resource costs of various technologies within the three sectors cluster together. One would have thought that one of the fundamental features of marginal costs is that they vary across the piece, and don't proceed in a few large steps. For example, it seems that there are no opportunites for renewable heat that incur marginal resource costs of between £15/MWh (the second, dark-blue block) and £70/MWh (the eighth, mustard-yellow block).

Perhaps I am holding them to too high a standard, and the mustard-yellow block is (for example) intended to contain all potential renewable-heat projects with marginal resource costs between £15 and £70/MWh. But in that case, why does the chart distinguish consecutive blocks of transport energy with marginal-resource costs of £20, £35 and £40/MWh (approximately, see the third, fourth and fifth blocks in the graph)? Couldn't they all have been lumped together like the 10% (mustard-yellow) heat block, or the 24% (sixth, salmon-coloured) electricity block? And doesn't this contradict Government policy on support mechanisms, which tries to tailor the support-level to ensure that projects all get only just enough to make them viable (projects of each technology being consistent in cost and the Government's knowledge perfect).

Constant as the wind

The Government intends to rely on renewable electricity to meet the largest part of its renewable-energy targets, and for wind and other intermittent generators to supply most of that renewable electricity. To be precise, they have produced the following graph (p.44) indicating what they think the capacity of the various renewable-generation technologies will be in 2020 compared to last year:

Chart of renewable electricity capacity in 2008 and 2020

Of this, output from the wind (onshore and offshore), some of the wave and tidal, and most of the small-scale projects will be inconsistent and unpredictable at more than short timescales. That makes up around 32 GW of the capacity envisaged for 2020.

Here is a graph of how our demand for power has varied over the past week, from National Grid's realtime data-display facility:

Graph of GB electricity demand, week ending 17 July 2009

The vertical scale is in megawatts (MW, of which there are 1000 to a gigawatt, GW). As you can see, the peak demand last Sunday was around 34 GW, and demand at night-time is under 30 GW. So, even if we hypothetically switch everything else off (the nuclear, gas and coal-fired power stations, and the more reliable renewables like bioenergy and hydro), on a windy summer night we may be producing more power than the total demand in the country. And this is only a hypothetical, because much of that alternative capacity cannot just be run up or down to suit the weather patterns.

Conversely, under an anti-cyclonic system in winter, we may have minimal wind output (5% of capacity across the country) and demand of 58 GW or more. The unavailability of around 30 GW from intermittent renewables will not be helpful. The other technologies will want and need to charge very high prices at this time, as they will have to recover their capital and fixed operating costs over fewer periods when they can export, as they will be displaced by wind (etc) for a fair amount of the time.

But this is not good enough for the Government. It is altogether too unambitious. From p.41 of the Renewable Energy Strategy:

"In particular, in the case of offshore wind, our ambitions are for much greater levels of deployment than shown in Chart 2.3. Discussions with the offshore wind industry suggest that far higher levels may indeed be possible. Estimates of what is achievable are nearer to 20 GW and the Strategic Environmental Assessment recently undertaken for offshore energy indicates that a further 25 GW is feasible by 2020, in addition to that already deployed. In all cases, the estimated contributions for each technology in this lead scenario are in no sense an upper limit on our ambitions."

Note 30: "The figure of 25 GW relates to new capacity (on top of existing plans for 8 GW from previous leasing Rounds) in the UK Renewable Energy Zone and the territorial waters of England and Wales, in water depths of up to 60m. The Scottish Executive is in the process of assessing the potential for an additional 6.4 GW in Scottish territorial waters, which is subject to a separate SEA."

So that's 8 GW from previous rounds, plus 25 GW of new capacity around England and Wales, plus 6.4 GW around Scotland, plus the 14 GW of onshore wind already assumed and around 5 GW of other intermittent projects. That's 58.4 GW - coincidentally almost exactly the same as the highest level of demand achieved in any half-hour period so far this year. So 99.9% of the time, on a windy day under an "ambitious" scenario for the Government where all this capacity is developed, we would be producing more power than we could use, even if we shut down all other technologies. And for a good part of the year, there would be a risk of producing more than twice as much as we could use.

But that's just a detail. Governments can't let details get in the way of their ambitions.

Tripe and baloney

For connoisseurs of government tripe on energy and the environment, the last couple of days have been like a banquet. The releases of the UK Low Carbon Transition Plan, the Low Carbon Industrial Plan, the Carbon Reduction Strategy for Transport, the Renewable Energy Strategy, the Renewable Energy Financial Incentives consultation, and the announcement of the new "eco-towns" are such a smorgasbord of cant and delusion that I am struggling to digest them all. In the long-run, they should provide tasty morcels of insanity for weeks to come, but in the meantime, here are a couple of choice cuts that others have spotted, just in case you missed them:

  1. The Times noticed that the claims of job-numbers currently in the green-energy industry and to be added by the Government's new measures are just slightly over-stated - including such jobs as slipper-makers, "workers in the North Sea gas industry as well as suppliers of wallpaper and animal bedding".
  2. Grant Shapps, shadow minister for housing, noticed (unusually sharply for a Conservative spokesman on green issues) that the minimum standards to which houses in the new eco-towns must be built are lower than the standards that will be required of all other developers by the time the first eco-towns are expected to be built (2016).

That'll do for the starters. Now, what shall I have to follow...

Old Hat

Just came across a post on Richard Murphy's blog (via Bishop Hill and Tim Worstall, who have both been laughing at a more recent contribution from him) that claimed to show that cutting public-sector jobs would cost the government more money than it would save. For him, this means that we should increase public-sector employment to deal with the government debt problem. I have posted a comment, but I don't know if it will get moderated away, so I thought I would stick it up on here as well, just in case...

You appear to have demonstrated that welfare provisions are more generous than we can afford, and that the combination of tax and withdrawal of benefits creates a very high effective rate of tax on those just above the mean earnings level.

By your maths, someone with gross pay of £25,000 has a disposable income that is £7,365 higher than someone who is earning nothing. That is an effective tax-rate of over 70%. Not great reward for the effort involved. No wonder public-sector employees don’t cost us much more than the unemployed - but is that something to write home about? What you are saying is that we don’t reward people doing work much more highly than people doing nothing.

Your conclusions do not necessarily follow from this calculation. One might equally conclude that we need to rebalance our tax and welfare system so that effective and marginal rates of tax are lower and people are better rewarded for work.

That's not a pensions crisis. Want to see a real pensions crisis?

A couple of weeks ago, I went to a drinks party for a Climate Campaign organized by the Conservative Energy & Climate Change team. The crowd was amiable enough - mostly pin-striped types with a leavening of tweedy country squires and the odd celeb, as one might expect. But the level of bullshit was off the scale. And I'm not principally talking about the politicians, though there wasn't much substance to their words. I am talking about the guests - the people the Tories are talking to and apparently listening to on energy and climate policy.

One squire told me about the Energy-from-Waste (EfW) project that was planned for his neighbourhood, in which he was involved. This was not any old EfW project. It was a full-blown, cloud-cuckoo, mad-hatter's EfW project. Though located in the sticks, it was going to take twice as much material as the giant EfW plant that has just been built near Heathrow. It wasn't going to use conventional technology (like the Heathrow project), but gasification - a technology that people have been trying and failing for decades to implement commercially to run on waste. And this was not "vanilla" gasification (which is unproven enough for waste), but a particularly high-temperature version known as plasma technology. It wasn't just going to take municipal solid waste (MSW - the stuff in our bins), but waste straw and other agricultural residues and energy crops (which was where the squire came in), despite the fact that this plant would be located around 30 miles from one of the biggest existing straw-burners in the country, which had so distorted the market for waste straw when it was commissioned that it had pulled in material from a 150-mile radius. By some magical means, it would produce absolutely no waste by-products at all - not a tonne of char, tar or contaminated recyclate would need to go to landfill. And this, I have since discovered, was the scaled down version - it was originally intended to be twice as big, using technology from a different supplier (who had never built one before to demonstrate the commercial and technical feasibility of the concept). But most worryingly, though this fantasy project using unproven technology was expected to cost £200 million (according to the squire; £250 million, according to my subsequent research), they already had three-quarters of the funding in place, and had funders falling over themselves to provide the final 25%. Or so he said. I don't know if he had been fooled, or if he was trying to fool me, but someone somewhere was being kidded in a big way.

But perhaps he was just a lone fantasist. Or so I hoped until I spoke to a pin-striped type who ran a green-energy investment fund. I suggested to him that his difficulty would be finding enough projects that were solid enough and offered a good enough return to satisfy his investors, and that as a result he might have to be settling for less than ideal average returns. Not so, apparently. It seems that the world is awash with attractive, solid, green-energy projects, to the extent that he was confident of averaging 24% returns. That is some performance, when one considers that none of the renewable-energy companies that I am aware of is delivering figures like that, nor indeed many companies of any description. "Carbon prices" are low, support for mature technologies is being reduced, and estimated costs of immature technologies are being repeatedly increased. T. Boone Pickens has just knocked his plans for the biggest wind farm in the world on the head because he couldn't make it stack up, despite levels of support that have been making America the favourite country for new wind developments. Nothing in the world of green energy or the wider economy gives grounds for optimism, and yet this fund-manager was confident of returns to make a speculator blush.

But what was really concerning was the type of fund he ran. He claimed his fund acted as a middle-man to bridge the gap between pension funds and green-energy developers. If he was telling the truth (a big "if"), the money that he was taking to invest in these mystery projects, was money that ought to be invested in the safest, dullest investments available. But instead it was going into high-risk (whatever he claimed, you don't get 24% returns with low risks) green-energy projects promising returns that no experienced developer in the sector would believe remotely feasible.

Perhaps the room was just awash with fantasists, and the finance was not in reality so easily available for their fantasies as they claimed. In that case, we need "only" worry about the sort of advice that our probable future government is being given. This tone that there is easy money to be made in energy and climate change, and that the City can deliver masses of investment, profit and jobs in the sector if suitably encouraged certainly chimes with the Tories' policy pronouncements in this sector so far.

But just possibly, people in the City really believe this (as well as the Tories). The room was certainly throbbing with optimism. And there were a lot of pin-stripes there. And you can certainly find reports prepared by consultants that could justify this sort of delusion, if you were ignorant enough of the practicalities that you believed the consultants' bullshit. Could these people be representative of a City view that genuinely believes, despite never having built anything real in their lives, that longstanding technical obstacles, energy-price volatility, and sovereign risk from inadequate, badly-designed, micro-managed, government interventions, are details that can easily be overcome through a combination of their cash and their genius?

Hedonic losses

One of my new socks has a hole in it already. That's no surprise. Nowadays, at least one of each pair that I buy usually develops a hole within weeks. Or I buy size 10-12s and within a couple of washes, they are down to a size 8 (I am a 9). It's the same with new boxer shorts: fly button gone within a week, shrunk within two, and ragged within a few months. My new shirts seem to have a tendency to develop holes at the elbows, lose buttons, and shrink, like my old shirts never did. Trousers quickly develop holes where trousers never should.

Being a cheap-skate and (as a married man) not too worried how I look down to my grundies, I am still making my old socks and boxers do duty as well. They may show their age a little, but they are still hanging together - few holes, buttons still there, still fit. Old trousers don't get so much of a look in thanks to an expanding waste-line, but old shirts still do duty and soldier on dutifully without needing repairs.

In my subjective impression, there has been such a deterioration in quality of off-the-peg clothing over the past two decades that it barely matters whether clothing is two decades, two years or two months old - it's a moot point which will need replacing soonest.

When discussing indices of price or progress, economists like to talk about hedonic valuation - the improvements in performance (due, for example, to modern technology), which are not reflected properly in changes of prices over time. The classic example is computers, where prices have been quite stable since the early big gains, but the processing power that you get for your money has increased exponentially. If we use raw computer prices as a component of price inflation, they have been a stabilising or modestly deflationary influence. But if we adjust the contributions of computers within the index to take account of their increased ubiquity and power, they are a strong deflationary force - a given unit of processing power costs a tiny fraction of what it used to.

Yet this example has always irritated me. Hedonic valuation refers to the increase in utility that derives from improvements to a type of good. I cannot say that I get twice as much utility from a computer with twice as much processing power. In fact, in recent years, increased processing power seems to have been dedicated mainly to providing the cycles to allow for irritating bells and whistles that actually reduce my utility (the Office paperclip, anyone?). Perhaps, if I were still running Windows 95 on a modern computer, I'd appreciate how much faster it ran. But of course, generally Microsoft won't let me, and finds ways to force me to upgrade. And anyway, would I really care that steps that took 100 ms in 1997 now take 10 ms?

You could see this in a couple of ways. Maybe the hedonic gains from improved hardware are genuine, but they are compensated by the hedonic losses from the bloated, glitchy software that fritters away the hardware improvements. On this basis, there is a good case for viewing the Microsoft monopoly as one of the most pernicious inflationary forces in the modern world. Or maybe we should treat them as one (you can hardly use one without the other), and attribute a limited net hedonic gain to the combination (most core computing tasks - writing, calculating, communicating, researching - are little better than 10 years ago, but some things, like improved graphical capability have brought genuine increases in utility). Whichever, we can say that hedonic valuation is most often used to exaggerate the benefits of the modern world.

As my socks demonstrate, it seems to me that we might usefully apply the logic in reverse. If the price of off-the-peg socks has stayed fairly steady, but the service that one pair of socks would have given a decade ago needed three pairs of socks to do the same job three years ago, or ten pairs of socks now, shouldn't we say that there has been powerful inflation in sock values, on a hedonic basis? Likewise for other clothing items. It seems to me that this is a germ of an idea that goes some way to explaining (along with the increasing gap between earned income and disposable income due to high levels of taxation and property-price inflation) the dissatisfaction that people feel with modern life, despite the statistical evidence that we have been getting progressively better off.

So I started thinking what other things in our life showed significant changes in hedonic valuation.

Liquidating reality

Can we get one thing straight? Administration and liquidation do not destroy productive assets or viable jobs. If the assets can be put to profitable use based on any valuation down to a penny, they will be put to that use, unencumbered by the debt that had weighed down on them, as the company emerges from administration or the assets are offered for sale at liquidation. If they are not even worth a penny in that process, then the value had been destroyed before the company went into administration or was liquidated – either because the market changed (i.e. people no longer valued the products to whose production the assets contributed enough to justify the ongoing cost of the asset), or because the managers who invested in the asset made a bad judgment in the first place. Either way, administration and liquidation offer the best way of discovering whether someone with better judgment than the existing management thinks they can make profitable use of them.

Likewise for jobs. If someone believes that they can make a profit out of the use of an insolvent company's assets, they will need employees to operate the assets. If the best use is the original use, the existing employees will be able to carry on as before (although possibly with reduced remuneration that reflects the economic realities). If the best use is a change of use, some employees may be able to retrain, and others will lose their jobs, but still others will gain jobs created by the change of use. If no profitable use can be found, the jobs, like the value of the assets, had been destroyed by the market and the management before the company went into administration.

Subsidising an insolvent company to maintain the existing jobs destroys jobs in the round, it does not conserve them. The subsidised business is continuing to do something unprofitable, requiring taxpayers' money to keep it doing that. It is destroying wealth by continuing to use the assets for a loss-making purpose, when we could be creating wealth (if a profitable alternative could be found by an administrator or purchaser) or at least not destroying more of it, by spending good money after bad (if the best that we can do with the assets is send them to the knacker's yard). The amount of taxpayers' money needed to keep the thing afloat exceeds the value that it adds to the economy (otherwise it could raise the money by other means than relying on the taxpayer). At the margins, those unnecessarily-high taxes are destroying jobs, and because the cost exceeds the benefit, more jobs are being destroyed elsewhere than are being conserved by the subsidy. Unfortunately, politicians, the commentariat, and the public can see the direct effect of the jobs being conserved, whereas they cannot easily spot the indirect effect of the jobs being destroyed, though if they stopped to think about the levels of unemployment in the circumstances where governments prop up bad businesses (usually a downturn), it might occur to them that taxes to subsidise bad businesses do not appear to be helping at a wider level.

Temporary lacuna

Sorry I've gone quiet again.

Although I work in the energy industry, my greatest passion (policy-wise) is the perversity and cruelty of welfare policy and the overwhelmingly negative effect it has on our economy and the wellbeing of those it affects, rich and poor alike.

I was recently lucky enough to sit next to Shaun Bailey, and chat to him about welfare issues. Shaun's descriptions of the follies of welfare policy are powerful and authentic. However, for me, he has not yet followed his diagnosis through to the logical prescription: Basic Income plus Flat Tax (BI+FT).

I have been planning for some time to put together a website to set out a political programme, to be called Freedom and Responsibility, based on Austrian, classical-liberal, individualist principles, in which a BI+FT approach is a central plank. The conversation with Shaun motivated me to get on with it. That is what has been distracting me from Picking Losers. It may take some time (although I have already programmed the system that allows you to compare the outcome of the current system and a BI+FT system for your household's disposable income over a range of earnings).

In the meantime, here are a couple of gems that I gleaned as I updated myself on our current welfare system (I first got into the tedious detail while lying in bed with a ruptured Achilles and watching the Tory party conference on TV around 3 years ago - ah, those were the days...). You may already be aware of these, but they exemplify for me the stupidity and perversity of the current system:

  1. When calculating entitlement to Pension Credit (a top-up to the State Pension for those with little additional income), the state takes account of the amount of savings that the pensioner has. The basic Pension Credit can be worth upto around an additional £1800. If the pensioner has more than £6000 of savings, the Pension Credit is reduced on the basis that each £500 over the £6000 will yield income of £1/week (i.e. £52/year). So the government, whose policies have been primarily responsible for the fact that you are doing well to get over 1% interest on a savings account, treats pensioners as though they get over 10%. When did anyone last get 10% on a savings account? If you were on a modest wage, would you bother saving more than £6000 (which would contribute under £100/year to your income at the moment) for your retirement, faced with this extraordinary disincentive? 
  2. If you are unemployed and receiving Jobseekers Allowance (JSA), and find a part-time job paying over £2600 p.a. (for contributions-based JSA, zero for income-based JSA), your JSA will be reduced by £1 for every £1 that you earn. That is a 100% marginal effective tax-rate! You will be no better off earning £5000 p.a. than you would have been if you earned £2600 p.a. (and in fact worse off for some, once one takes account of other benefit withdrawals). There are also ridiculous penalties under the JSA for savings, given current savings rates. It has made little sense for quite some time now for low-medium earners to put money away for a rainy day - the government will penalise them for it until the money is gone.

The mindless, heartless stupidity of it makes me seethe. As does the equal stupidity of commentators who allow that Brown and Balls, the architects of our dysfunctional system, are either intelligent or compassionate. They are clever in the art of intimidatory politics, but utterly unintelligent, verging on sociopathic.

Devaluation or deflation - are these genuine alternatives?

The choice for countries like Latvia, whose currency-peg to the Euro is crippling their economy and which have borrowed heavily in Euros, is routinely presented as devaluation or deflation. Either they must allow their currency to float (down), making their exports more competitive and imports less competitive but at the cost of making their Euro debts more expensive, or wages and prices must be driven down if they wish to retain their currency peg. Are these genuine alternatives, and is either of them a solution?

What I am wondering, which no one who posits these alternatives seems to address, is: how will they pay their debts when wages and profits have been decimated? Or conversely, if they honour their debts (whose cost of finance will be a major component of overall costs, as will be taxation to pay for increasing welfare requirements from a shrinking tax-base), will cuts to wages and prices make much of a difference to their competitive position? And won't their government deficit get even worse in these circumstances, maintaining pressure on their currency? Already, no one wants to buy their government bonds.

Isn't the reality that we long ago passed the point at which Latvian default on external debts was inevitable, and all the efforts to prop them up is simply delaying the inevitable? Massive deficits, government borrowing and (when they arrive) defaults already put them in breach of the terms required to enter the Euro. And if they maintain the fiction of exchange-rate stability, they will have to join the Euro at a level that will cripple their economy for decades. Isn't it time to bow to the inevitable, allow their currency to revalue, and start the process again at a more realistic exchange rate, if they are so foolishly determined to join the Euro?

Consultation on the IMS&ER of the EUEEUP&ELF Directives

I have just received the following invitation from AEA Technologies (energy bureaucrats who have separated but not divorced from the greater bureaucracy, and who are "managing" this aspect of the "Market Transformation Programme" for DEFRA). Truly, the EU, the Labour government and its client consultancies have perfected the art of combining menace with incomprehensible language in pursuit of illiberal and bureaucratic objectives in every nook and cranny of our lives:

Dear Stakeholder,

We wish to inform you that Defra has just launched a consultation on Implementation of the Market Surveillance and Enforcement Requirements of the EU Eco-design of Energy Using Products and Energy Labeling Framework Directives and seeks your views and comments.

It's hard to wrap your brain around so many (upper-cased) nouns in short succession in one sentence. Nevertheless, you get the drift without reading the consultation documents that this is something to do with the application of authority in pursuit of standardization and homogenization, with the (supposedly unintentional) outcome that choice, innovation, and flexibility to circumstance will be limited.

Market Transformation indeed. Our markets are being transformed into non-markets - places where we exchange what the Government thinks is the appropriate proportion of the income that the Government thinks we are entitled to, for those goods that the Government thinks we ought to want, designed in the way that the Government thinks is best for us.

Orwell wrote about it, the Soviets implemented it, and now Western governments are following suit. Corruption of language and inversion or elimination of meaning are a sure sign of a bureaucracy that is looking to intervene in every aspect of our lives.

Construction as leading economic indicator

The core business of our family company is producing aggregates (sand and gravel) for the construction industry. I focus on our energy activities, and don't have much to do with gravel, so wouldn't normally comment on it.

However, what I have just learnt seems to have broader significance. I understand that, after a brief pick-up earlier in the year, demand for aggregates has fallen back, at a time of year when normally it would be picking up. The Ready-Mix Concrete plant that operates from one of our sites (not run by us) has just had its worst month ever, and it has been there for decades. The only demand still going strong is public-sector infrastructure projects.

Construction has always been a leading indicator of economic activity. And it is obviously linked in particular to the prospects for the property market. So the first obvious point is that this suggests that the recent optimism that the property market is close to the bottom is misplaced.

You might say that this also proves how important it is that the Government maintains its Keynesian policy of trying to pump-prime the economy through infrastructure spending. But I would look at it another way.