Picking Losers

Government ≠ Country

Alistair Darling, explaining that the downside of reduced bonuses in the City is reduced tax revenues, said (on the Andrew Marr show this morning):

"that's why our income as a country has gone down".

No Alistair. That's why your income as a government has gone down. Government income is not the same thing as national income, and government is not the same thing as country. This confusion is at the root of the Labour delusion.

Or are you claiming that City bonuses drove national income? And if so, why are you trying to make dramatic reductions in City bonuses?

"There's no shame in going to the IMF". Oh really?

What does it mean if a government has to go to the IMF for funds?

  • The government couldn't run a balanced budget.
  • The economic outlook was so poor that there was little prospect of the budget coming back into balance over a reasonable timeframe.
  • The government couldn't raise taxes sufficiently to bring the budget back into balance over a reasonable timeframe, without doing more harm than good to the economy.
  • The government wouldn't cut public spending sufficiently to bring the budget back into balance over a reasonable timeframe.
  • Lenders were so pessimistic about the government's ability to bring the budget back into balance over a reasonable timeframe that they were not willing to lend as much to the government as it needed to cover its net obligations.
  • The central bank was so pessimistic about the government's ability to bring the budget back into balance over a reasonable timeframe that it was reluctant to print enough money to pay for government debt (because of fears that, when it came to unwind some of the monetary expansion, the gilt market would be flooded with a combination of central-bank assets and government new issuance, making the unwinding impossible and collapsing the value of new and existing gilts). 
  • The government was so cowardly, that it would rather turn to the IMF for expensive funds and instructions on what it must do to balance its budget, than figure out, implement and take responsibility for the necessary cuts itself.

No shame in going to the IMF?

Only for a government that has no shame.

McKillop vs Myners

Much too late, but I had to get it off my chest...

Why do all the journalists and opposition politicians seem simply to have accepted Tom McKillop's version of his discussions with Lord Myners about Fred Goodwin's pension? One of them is lying, but the fact that McKillop's letter is the most recent version is hardly a reason to trust it.

Better to look at people's incentives.

What would be Myners' incentive to hear the full details of Goodwin's pension arrangements, sign it off without question, and then pretend that he had been fooled?

Compare that with McKillop's incentives to hand his old pal a parting gift on their way out the door, and stitch up the Government in the process?

And look at their records.

You may not like or agree with Myners, but his record suggests that he has wanted to do his best for what he viewed as the public good. He could have an easier and more profitable life doing other things. It is hard to see how he is in this for the money or popularity.

Compare that with McKillop's record as chairman of RBS...

I know who I believe.

Are those who have swallowed McKillop's line still impressed by the status of a senior banker? Do they somehow imagine that the old honour code is in any way still alive, and that we should simply accept Sir Tom's word as his bond?

The public-choice incentives of the economics profession

I am a supporter of and enthusiast for the Institute of Economic Affairs (IEA), the leading free-market think-tank. So I was shocked to read, in what I think is the best post I have seen on Guido's site, that the IEA's Shadow Monetary Policy Committee (SMPC) are unanimously in favour of a policy of Quantitative Easing (QE).

The IEA was founded after Anthony Fisher sought the advice of Friedrich Hayek on what to do about the increasingly socialist trend of British politics after the war. Hayek advised him not to go into politics, but to try to change the intellectual climate, to fight the battle of ideas. So Fisher founded the IEA to fight this battle, recruiting Arthur Seldon and Ralph Harris as the thinker and persuader of his organisation, and with Hayek as a substantial intellectual influence.

Hayek was a leading figure in the Austrian school of economics (to which I adhere). Hayek and any self-respecting Austrian would be profoundly opposed to QE. The school believes in removing the power of governments to manipulate their currencies, whether through commitment to a genuine gold standard (as advocated by Hayek's mentor and my hero, Ludwig von Mises, and by Hayek himself originally), or through denationalising money and creating a system of competing currencies (as became Hayek's preferred option). The IEA published works by Hayek and others to this effect, and Seldon advocated the approach. In this, as in other respects, Austrian economics was a significant part of the IEA's challenge to the leftwards trend of politics in the UK, which ultimately came to fruition with the election of the Thatcher government in 1979.

It wasn't the only influence. Milton Friedman and the monetarist approach became increasingly influential on the IEA and on the Conservative Party. But Hayek and the Austrian school remained important influences on both groups. Which is why it is such a shock to find that the Hayekian view has been completely marginalized in the SMPC.

I know that the Hayekian perspective has not been marginalized in broader IEA circles (though it is somewhat embattled). So why is it not represented on the SMPC? The answer, it seems, is that it is increasingly hard to find economists in the UK who hold to the Austrian (or at least sound-money) view, particularly in the macro-economic, monetary-policy field. The sound-money tradition - the attitude that once distinguished us from our more profligate neighbours to north and south in Scotland and France* - has almost disappeared from British academic circles. In fact, I am told there are only two credible contenders - Kevin Dowd and Anthony Evans. I don't know why neither of them has been invited onto the SMPC, but it is admittedly a small pool compared to the massed ranks of monetarists.

Austrian economists have an excellent record of forecasting future outcomes. The approach avoids the unreal abstraction that causes many people to doubt the value and truth of economics. Its conclusions and lessons are more important than ever, and experience provides ever more illustrations of the failure of the leading mathematical, interventionist schools of economics - Keynesianism and monetarism, which actually have more in common with each other than do monetarism and Austrian-school economics. And yet British universities and academics have almost completely eliminated it from the syllabus. Why should that be?

It occurs to me that there is a good public-choice explanation for this. Public-choice theory is the name given to Buchanan and Tulloch's extension of economics into the political realm. Conventional political studies and socialist philosophy viewed policy-makers as well-intentioned, well-informed, altruists. They were interested only in doing right, and the challenge was merely to establish what was right. Buchanan and Tulloch pointed out that politicians and other public-sector employees are actually subject to economic forces in the same way that market participants are subject. For instance, they have powerful incentives to favour the short-term over the long-term and to favour activism over laissez-faire.

But economists, whether employed by universities, government departments, or in large commercial organisations, have similar incentives. Not many economists get hired for telling their potential employers that markets are unpredictable, uncontrollable and best left to their own devices.

Commercial organisations will want economists who can make cases why the government should intervene in their sector in a way that is advantageous to their employer, or how they can best manipulate their position in the market to maximise profits.

The civil service will not want its economists to tell politicians that their interventions are at best pointless and usually harmful, and that market corrections are necessary and good for the economy and should be allowed to play themselves out. The civil service will want economists who can draw up schemes that satisfy politicians' desire to be seen to be doing something about whatever issue arises.

Universities will want economists whose papers influence policy (and which are therefore, by definition, activist). They will want economists whose views and specialities maximise the chances of obtaining research grants.

Monetarists appear to have the answers. Their analysis and policy prescriptions can vie with the Keynesians and other neo-classical, mathematical schools for the favour of those who pay the bills.

Not so Austrians. Austrians reject the idea that policy can improve the outcome of markets, other than through the creation of an institutional framework that protects property rights and enables exchange. This is of no earthly use to rent-seeking businesses, vote-seeking politicians, or grant-seeking universities. So Austrians are gradually, over time, driven from these organisations. The very people who could have told banks that there is no such thing as a free lunch, governments that monetary, trade and budget imbalances eventually have to unwind, and universities that economics must be based on sound philosophy and not just mathematical models of scenarios where all the reality has been abstracted out, are not there to give this advice, because it is deeply inconvenient.

So Austrians must live in the real world. This is good for understanding how economies really work, rather than how they ought to work if only pesky humans could be more like the models predict. But it is bad for influencing policy, in a world where the value of your advice is not measured by the strength of the argument but by your station in life.

That is where organisations like the IEA should come in. Let's hope that they see sense and correct the bias towards monetarism on the SMPC. And let's hope against hope that some balance and philosophy can be miraculously restored to the study of economics in the UK. After all, haven't we just found out that the world doesn't work quite like Gordon's favourite - neo-classical endogenous growth theory - would expect?

I suggest that the IEA, to show that its heart is still in the right place, should publish a public-choice analysis of the incentives acting on the economics profession. But which economist would be brave enough to carry out the study? 

What to do about MPs' expenses:

Besides each candidate's name on the ballot paper should be their declared annual budget. The successful candidate's budget will be raised from local taxes. There will not be any indexing. There will not be any expenses or other allowances - the candidate has to live within their declared means. If a candidate cannot live within their declared means, they can stand down and a by-election should be held.

This would focus candidates on how much money they really need to run their affairs. In office, it would focus their attention on not spending money they don't need to spend. The lack of indexation will give them a strong incentive to oppose inflationary measures. The public, not the MPs, will be the arbiters of what each MP deserves, and not on a uniform, collective-agreement basis (as at present), but according to the needs and merits in each case. Constituents will know that they got the candidate and the budget that they deserved. Good MPs may be able to put in a higher budget and still be elected, rewarding them for their effectiveness.

Of course, getting MPs to vote for this system may be quite tricky...

Tax sovereignty

Tim Worstall covers the efforts by Dan Mitchell to persuade the American government to step back from its efforts to clamp down on tax havens. This is picked up and expanded at Sounds in the Hickory Wind (nice blog, added to the blog roll).

I agree with a lot of this, as I have already posted. But I think some nuance is needed.

Where do you draw the line on honouring sovereign rights and encouraging tax competition, which I agree with, and preventing complicity in the sheltering of criminal proceeds? We are investing in Switzerland at the moment, and the tax position is one of the many attractions, but that is a legitimate transaction, which I feel no need to conceal. Is not some degree of international cooperation to deal with illicit transfers warranted, and would not some degree of transparency be a part of that?

For instance, should we be pushing for a system where a foreign government would present evidence of criminality to a court in a tax-haven country, and if the court were satisfied that the evidence did demonstrate criminality, details of that person's transactions would be provided to the petitioning government, who would be able to launch proceedings in the tax-haven's courts for recovery of the funds, on an agreed basis? Wouldn't some treaty to that effect respect sovereign rights sufficiently, but cut down the rampant laundering that is going on in some of these locations?

What do we mean by bureaucracy and red-tape?

It occurred to me, as I wrote the last post, that we have a problem with terminology.

I am sure I have been as guilty as David Cameron of lazily attacking bureaucracy. And attacks on red-tape are commonplace amongst the right.

But the left have an easy defence. They challenge critics to provide examples of this bureaucracy and red-tape. And it often proves surprisingly difficult to come up with really bad examples.

I think that's because we picture bureaucracy and red-tape as the effect of form-filling, pencil-pushing jobsworths. But that's not where the greatest negative impact on our lives springs from, though it seems closely associated in our minds.

I think what we are really talking about is the effect of bad rules and incentives. These are often very bureaucratic, but it is not in the bureaucracy that their harm lies. The harm lies in their arbitrary and unmerited effect on our position relative to others.

For example, I wrote recently (not for the first time) about the negative impact of a particular grant decision. These negative effects are legion in those parts of society and the economy where grants or other subsidies are handed out (and that's pretty much everywhere, nowadays). They are usually horribly bureaucratic but they would be equally harmful if they were not.

We lost out because a competitor knew how to manipulate the system to get money out of the government. They doubtless had to fill in acres of forms to get the grant, and provide a distorted picture of what they planned to do (or plan actually do the wrong thing) in order to maximise their chances of qualification. But we would have been just as upset if all they had had to do had been to tick a box. It wasn't the bureaucracy that hurt, it was the commercial advantage achieved not through being more efficient but being better at brown-nosing the politicians and civil servants, or simply by falling into a category of which they approved.

There will never be a system where there will be enough money that everyone can be handed money equally, whether they tick a box or fill out a hundred-page form. The object of the exercise for the government is to prefer some applicants over others, and the outcome will always be unfair, and usually uneconomic. No amount of effort on our part will be able to overcome such advantage, which makes us question whether effort is worth expending. That sense of powerlessness is frustrating and depressing. That is what we are angry about.

This effect is repeated ad infinitum in our industry. I'd say we learn of something like this on an almost daily basis. I think it's likely that people experience similar unfairness and disincentivisation in other walks of life and in their home lives as well. And it is this that they are referring to when they complain about bureaucracy and red-tape. What they really mean is arbitrary rules from which they lose out and which they are powerless to counter.

What we want, then, more importantly even than fewer bureaucrats, is less picking of winners, through grants, subsidies, tax and benefit rules, regulations, school-selection procedures, etc. The bureaucrats will fall away with the discarded or simplified schemes, but that is not the important part. The important part is the simplification and reduction of government intervention.

The post-bureaucratic age?

I've just been reading David Cameron's article in last week's Spectator, which presents the idea that they will "usher in a post-bureaucratic age" as the Tories' big idea for the next election.

A post-bureaucratic age will presumably need fewer bureaucrats. So he can start telling us now how many bureaucrats he intends to cut, and how much money this will save us. He seems surprisingly reluctant to do that, though. In fact, he seems to be warning us that the state's share of national income will be larger for the next several years. A bigger bureaucracy for a post-bureaucratic age? Sounds typically Cameronian.

In any case, this is an illusion or political fiction. We may have many bureaucrats that we don't need, but we are not and never will be in a post-bureaucratic age.

Cameron ought to read Ludwig von Mises's small book Bureaucracy to understand why. The market is the best solution in those areas in which it is possible to foster genuine competition. But there are plenty of sectors where that is not the case. And this is from one of the strongest advocates of the free-market system in history.

Mises's illustration (II.3) of how a market approach cannot work for the police or the FBI is masterly. What we need is not a blanket term like the post-bureaucratic age, but a recognition of where bureaucracy is unavoidable and how best to organize it in those cases, and where it is unnecessary (and usually counter-productive) and how best in those cases to structure the institutional framework within which markets will deliver the best outcome for society.

It is failure to understand this that has led to the inappropriate and unsuccesful attempts to introduce commercial management techniques into those activities that are inherently bureaucratic, and to apply bureaucratic controls to market activities.

Perhaps Cameron knows this, which is why his promises don't match his rhetoric. But a man who starts by lying to us before he is in office is unlikely to improve once he has power.

Or maybe he has so little experience, both of the commercial and industrial sector and of the public sector, that he doesn't understand the different purposes that they serve and constraints within which they operate. But that doesn't bode well for government either.

Most likely, he doesn't mean a post-bureaucratic age, but thinks this is an attractive term to serve as a dog-whistle for his followers. He seems to mean a decentralized age. But that really is triumphantly optimistic to think that moving power from the centre to local communities will reduce the amount of bureaucracy. It would also be optimistic of me to imagine that an incoming government would actually reduce their own powers, but let's imagine for a moment that he means it.

His secret weapon is IT.

"Every citizen in their home can have access to exactly the same information as the most powerful bureaucrat in a ministry." Why would we want that? And who is going to collect and provide this information?

"In pilot studies around the world where people have been provided with accurate information about their energy use...their energy consumption fell by at least 10 per cent..." I think he'll find that depends on their incentives. If energy is cheap, seeing exactly how little you are paying is likely to encourage you to increase your comfort level by consuming more. Only if energy is expensive enough does this hold true, and then only to the extent that people are able to control their energy-use. It is good for behaviour modification, but it may not be sufficient to provide the incentive to investment that is needed if we are to go beyond the easy gains from persuading people to be more careful about switching off lights and shutting windows. Incentives matter more than perfect information, though the combination of both is best. But Cameron seems to be treating information as sufficient on its own. It is as though he thinks that people are too ignorant to work out that turning off lights will save them money. And who, by the way, does he think is going to compile and provide the information collected by these smart meters? Private or public, will their jobs not be essentially bureaucratic?

Those appear to be his only examples of what his philosophy would mean in practice. Otherwise, he seems to rely on contrasting himself with the accurately-depicted failures of the Labour government. But it does not follow from correctly identifying someone else's failings that your alternatives must be right. (We may all have been guilty of falling for this illusion in the case of Vince Cable, who is a fantastic critic of the Government, but some of whose suggestions, such as proposals to reflate the housing market, may be as bad as the government programmes he criticizes.)

Let's take that last environmental case. Cameron says that "there was an assumption in the past that you could only achieve improvements to environmental protection through central government regulation and rules laid down by experts in the bureaucratic machine... But we've seen the results of that: over the past decade of Labour government, despite its endless green pronouncements and initiatives and plans, and its new armies of highly paid environmental analysts and inspectors and officials - our carbon emissions actually went up."

Well, yes indeed. But smart meters are hardly the antidote. It does not follow from the inappropriate use of regulation that regulation is necessarily the wrong solution. Nor that the replacement of regulation with public information is sufficient.

Take a couple of examples:

(a) Air pollution. Where chemical compounds released into the air have a real impact on health or property, what post-bureaucratic or market solution should we adopt? Should we provide some means of allowing people to find out how much their health or property is being damaged? What should they then do with this information, if there are no bureaucratic rules about how much is allowed? Or should we put a price on emissions of those harmful compounds, so a company is free to emit them if they are willing to pay the price? No. In this case, there is no alternative but to put limits on concentrations in the air, and emissions from any particular process, monitor those compounds and enforce the limits. That is an appropriate role for government and it is inherently bureaucratic.

(b) Carbon emissions. In this case, we don't know how much is harmful, and how much is an appropriate amount for each person or business to emit. No sensible bureaucratic rules can be applied, and the costs of trying to do so will be immense. But information won't help much either. It's no good letting someone know that they have emitted 6 tonnes of CO2 this year. Is that good or bad? Why should they care? In this case, we need incentives to make a judgment about the costs of activities whose consequence may be an increase in the risk of harm from damage caused by anthropogenic emissions of greenhouse gases. And it's not just any old incentive, because any old incentive can provide distortionary and damaging signals that can do more harm than good (see the various articles on this site about the EU-ETS). The incentive must be proportionate, impartial and rational, and should incentivise ends (e.g. carbon reductions), not means (e.g. renewables or nuclear). The key is the institutional framework that creates the incentive. We will need bureaucrats to design and enforce the framework, but not to choose how people should respond to it. The bureaucrat's job in this case is to provide the framework and then leave the rest to the market.

The real reason, one suspects, that Cameron is focusing on information is that information is cheap and popular. He knows he will have no cash, so he is setting up his excuse for only doing things that don't cost much. If they don't have much effect either...well...he'll deal with that later. It could be worse. It could be more micro-management like the current lot. But it could be a lot better.

Has Brown united the country?

Plenty of people hated Maggie, but plenty of people admired her too. Jim Callaghan and John Major may have been failures, but this was tempered by a sense that they were decent men trying, however ineffectually, to do the right thing. When one sees the response to Michael White's comments on the Dan Hannan speech, it is clear that even Guardian-readers, many of them self-declared in the comments as socialists or Blairites, agree with many of Dan's points and feel that much of what he said spoke for them.

It is clear to those of the right that whatever Brown claims to have implemented, it is not capitalism or free markets as they know it. And it is equally clear to the left that it is not anything like the socialism that they dreamt of. The Third Way turns out to be No Way to run a country.

Is there any former Prime Minister who has been regarded with such united contempt after he left office as Brown will be when we get the chance to get rid of him?

Time-travelling economics

BBC journalists were reporting last night that Gordon Brown, who is apparently an avid student of history, was explaining how it was important to reach agreement at the G20 on a broad, fiscal stimulus, or it would be like 1933, when failure by the governments to reach agreement led to the Great Depression.

This seems somewhat inconsistent with the line that we have seen repeated by many journalists, particularly in the BBC, that recovery began in 1932, with the introduction of the New Deal.

So we started recovering in 1932 from a Depression that began in 1933, did we? Do the Brownite/Keynesian crowd have no shame in their manipulation of history?

And where is the BBC's coverage of Dan Hannan's speech to Gordon at the European Parliament, which is currently the most-viewed video globally on YouTube? Fox News have covered it, but our media...

Smoke and solar mirrors

A member of the Claverton group of energy fantasists (of which I am amused to be a member), posted the following article not only to the other members, but to Ed Miliband, Mike O'Brien and Joan Ruddock. See if you can spot the flaw, children:

The United States may have helped to pioneer solar technology, but it has fallen behind nations like Germany, China, and Japan in producing it.

According to iSuppli Corp, these countries have moved ahead of the United States, with Germany holding the lead in this fast-growing alternative energy market due the nation's and Europe's long-term commitment to solar power.

"Europe's early and enthusiastic embrace of solar energy is paying off, with the region leading in production of photovoltaic (PV) cells, potentially paving the way for a 300 billion Euro savings in electricity costs," said Henning Wicht, senior director and principal analyst for photovoltaics at iSuppli, in a statement.

According to iSuppli's data, European companies supplied 27.4% of global PV cells in terms of wattage in 2008, just besting China's total of 25.8%, and exceeding Japan's 16.2% and the United States' 13.7%.

The market research company reported that more than 80% of new worldwide PV capacity installed in 2008 was in Europe. Germany and Spain accounted for 84% of Europe's installed PV capacity during the year.

"Beyond leading in the production of PV cells, Europe is by far the world's largest market for solar installations," Wicht said. "This hasn't happened by accident, as European governments, research institutions, and industry players during the last two decades have worked in close coordination to reach this point."

Behind the collaborative effort was an aspiration to move the European economies away from hydrocarbon-based electricity sources while creating jobs and establishing a new industry capable of competing on the global stage.

The US Recovery Act, endorsed by semiconductor industry groups including the IPC and the SIA, takes a similar approach in its alternative energy strategy and is expected to in part spur tech job growth while making the US a more formidable competitor in such spaces as solar energy.

ISuppli suggested that when looking for ways to boost the US solar market the Obama administration consider what the company called the "main factor behind Europe's leadership in this area," feed-in-tariffs. Feed-in-tariffs -- incentives that allow entities that feed the grid with solar energy to receive premium pricing, making the return on investment on PV installations more attractive -- are starting to slow in 2009, iSuppli said, noting this is especially true in Spain. However, such incentives have successfully served their purpose by driving down prices and building a large-scale, competitive PV supply chain, according to Wicht.

ISuppli also noted that during the recent Sustainable Energy Week event in Brussels, the EU Commission further presented a plan for renewable energy in which solar plays a strategic part and will generate 15% (12% by PV electricity and 3% by concentrating solar thermal systems) of the region's electricity demand by 2020.

According to iSuppli, the world's top producer of PV cells in 2008 was Q-Cells of Germany. As PV demand expands around the world in the coming years, iSuppli said it expects European companies will continue to play a major role.

That's right, Zippy, there's not a single mention of kW or MW, let alone kWh or MWh, in the whole thing. Nothing that gives us a feel what those percentages mean in real terms. Percentage of what?

Well, here's a couple of figures for you. PV contributed 2.5 TWh of the EU-27's total electricity production of 3,196 TWh in 2006 (the most recent year for which EU stats are available). Total final energy consumption in the EU-27 ("by far the world's largest market for solar installations") that year was 13,869 TWh. Germany's contribution was 2.2 TWh of PV, out of 595 TWh of electricity and 2,710 TWh of final energy consumed.

Solar photovoltaic power is so insignificant that, in almost all countries, its share of total electricity generation is under 0.05% and less than 0.01% of final energy consumption. Even in Germany, the supposed success story, it is less than 0.4% of electricity production and less than 0.1% of final energy consumption. The average across the EU is around 0.08% of electricity supplies, and without Germany would be 0.01%.

With that sort of start, and "large-scale, competitive PV supply chain", 12% of our electricity supplies by 2020 should be a doddle.

So go ahead, America. Copy the Germans' magnificent success at spending a fortune encouraging a technology that contributes two-fifths of bugger all. So long as you can light your houses with percentages, you'll be fine.

Or could this just possibly be yet another example of rent-seeking lobbying in the energy industry? After all, that "300 billion Euro" figure for potential savings in electricity costs looks a bit steep. Taking 150 Euros/MWh as a reasonable estimate of the European average of retail electricity prices, we would need to increase our PV output to around 2000 TWh p.a. to achieve this saving. That's a mere 80,000% increase. Now, there's a percentage that tells a story.

Government "achievement"

We know that what follows is typical of how they see the world, but rarely do we see it spelt out so clearly. In the recently issued consultation on a Heat and Energy Saving Strategy, the Government details (p.13) "What we have already achieved" in this field:

  • The Act on CO2 help line
  • The Carbon Trust and Business Links ("supporting businesses to accelerate the move to a low carbon economy")
  • The Energy Performance Certificate (EPC) on properties
  • The EU-ETS (European Union Emissions Trading Scheme)
  • The Climate Change Levy (CCL, and associated Climate Change Agreements)
  • The Carbon Reduction Commitment (CRC)
  • The Carbon Emissions Reduction Target (CERT)
  • A £1 billion fuel bills package (to "help householders who are struggling to pay their fuel bills")
  • £350 million for the Community Energy Saving Programme (CESP)
  • £950 million on the Warm Front scheme to improve the properties of low-income households
  • The Decent Homes programme for the social-housing sector, which has "generated investment" in insulation and energy-efficiency of £5.6 billion since 2001.
  • Mandatory sustainability standards ("Quick Wins - Buy Sustainably") for government procurement
  • Salix Finance, a public-funded company that "accelerares public sector investment in energy-efficiency technologies through invest to save schemes."
  • Higher efficiency standards in the Building Regulations, moving to zero-carbon standards by 2016.
  • European product standards (e.g. for labelling electrical equipment)
  • Voluntary Agreements with energy suppliers to "promote energy services and savings".

Truly, a mountain of money, legislation and quangos.

But strangely, there is no reference, within this list of "achievements", to the effect that these measures have had. No quantification of how much more efficiently we heat ourselves and how much energy we have saved. Could this, in some way, be related to the fact that there has been little change in the amount of energy we use to this end?

These "achievements" are followed by a short list of estimates of how many properties have installed condensing boilers and small-scale renewable generators, and how many have had improved insulation. But there is no virtue in this spending if it has not reduced energy-consumption. If people have responded by heating their property to tropical temperatures and leaving the windows open at night, these installations are no achievement, they are a massive waste of energy and public money.

There seems to be a confusion in government circles between means and ends. Legislation is not the achievement. Nor is spending. Nor is bureaucracy. They are the means by which one hopes to achieve one's ends. Listing their policies and spending as their achievements highlights the mindset that predominates in this government.

The prudential cost of the financial crisis

"Borrowers have been warned they face higher mortgage rates for up to nine years as banks hit customers with the cost of tighter regulation."

So begins the lead article in the Money section of this week's Sunday Times. The problem, it seems, is that the regulator has ordered them to increase their capital ratios.

So it's the regulator's fault, is it? Nothing to do with the imprudent lending in the lead up to the crisis? Prudence has been restored, not because the banks realise they made mistakes, but because they have been ordered to be more prudent. The guilty party is the one ordering prudence. And the cost is the cost of regulation, not the cost of good banking practice. Anyway, don't worry, because prudence will last only as long (nine years) as necessary.

And what happened to reserve requirements? Banks are in the business of borrowing money from some people (savers) and lending it to others (borrowers). The system cannot work efficiently if they have to rely on their own cash to lend (unless banks own most of the economy, they won't have enough of their own cash to meet demand from borrowers). But that is what the drive to increase capital ratios is trying (partially) to achieve.

There are two options to improve our financial stability. They are not mutually-exclusive, but they do have very different implications. Banks could improve their reserve ratios and/or they could improve their capital ratios.

  1. To improve their reserve ratios, they would have to offer higher savings rates to match the higher borrowing rates, until the two balanced. The gap between the two rates should not expand significantly - they would rise in parallel.The prudent (savers) benefit. Borrowers pay. Banks' margins remain similar, but volumes fall (because of the cost of borrowing) and therefore so do banks' profits (and bonuses).
  2. To improve their capital ratios, they have to increase the gap between saving and borrowing rates, to increase their margins on their activities. Savings rates fall as borrowing rates rise. Banks' clients of both types (saver and borrower, prudent and imprudent) suffer, though savers suffer more and borrowers suffer less than if greater emphasis were placed on increased reserve requirements. The banks (and their bondholders, shareholders and employee bonuses) gain.

Clearly, after our debt binge, we need to increase our savings rates to restore some degree of equilibrium. But we are pursuing option 2 almost exclusively. Rates for borrowers go up, for savers go down, and banks pull in the difference.

The argument of the intelligentsia, amongst whom this is widely agreed to be the right approach, is that to increase reserve requirements now would take money out of the economy at a time that it can least afford it. But increasing capital ratios takes money out of the economy too, and from both groups (savers and borrowers), rather than just from the people who need to tighten their belts (borrowers). This is actually the time that we can least afford not to do it.

Of course it will be painful, as borrowing gets even more expensive and less available, more businesses go to the wall, jobs are lost, and the economy shrinks. But these changes have to happen anyway. There is no avoiding a return to a more sensible equilibrium between borrowing and saving. The question is whether we let it happen, take the pain and then start again more sustainably, or whether we try to prevent the inevitable, ameliorating the immediate pain but prolonging its duration and extending the damage. And whether the ones who should suffer most pain (which is coming one way or the other) should be those who were less, or those who were more prudent.

The latter is the solution of America of the Great Depression and New Deal and Japan of the Lost Decade. Contrary to the journalists and economists who state blindly that "the recovery began in 1932", it didn't, and it won't work this time either. If somehow our governments and central banks manage to reinflate the economy (e.g. by printing money) without correcting this balance, they will only be preparing the ground for an even bigger crash later.

At some point, we have to accept that there is a natural balance in these things, that the interest rate reflects and corrects the changes in this balance, and that centralized direction cannot overcome this basic law. The impositions of regulators only reflect our attitudes and responses to this law. They do not create the costs, they just influence who incurs them and when, and thereby the lessons that people take from economic developments. Are we teaching the right lessons at the moment?

Name our Tea Party

There is a movement developing in the States to send tea-bags to senior Democrats (including the President) and to hold local "Tea Parties", in reference to the Boston Tea Party, in objection to the massive Obama programme of bail-outs and public "investment". One could quibble about the precision of the analogy, but in essence it's a nice way of using American history to draw people together and illustrate the dangers of heavy-handed government. The Americans intuitively treasure this tradition and distrust the state.

I was trying to think what historical event we would use in the UK if we wanted something similar to symbolize the people rising up for liberty and against tax-unfairness and oppression by an overmighty state. After thinking about this for a couple of weeks and discussing it with a few friends, I don't think we have such an event in our history. Which tells you something about Britain, doesn't it?

I reckon a couple of factors are significant: (a) our establishment has generally known just how far they could push their authority without causing rebellion, and (b) where there was resistance, the opposition was usually led by another bunch who were just as authoritarian. There are probably many other factors, but whatever they are, they all combine to make us a particularly supine (what we might like to think of as "phlegmatic") lot.

The upshot is that British classical-liberalism is like the frog in the slowly-warming pot. And the water is reaching boiling point.

Can anyone think of a suitable event?

'Ere mate. Can you spare a few billion for a wind farm?

Classic example of corporate rent-seeking in the Business section of today's Sunday Times.

In the past week, the Renewables Obligation (RO) Order 2009 has been passed. This converts the previously (roughly) technology-neutral RO into a targeted mechanism to pay more for carbon-savings from some types of renewable electricity than for others. So (amongst many technologies and several bands) support for landfill gas is reduced by 75% (they get quarter of a ROC for each MWh they produce), while support for offshore wind is increased by 50% (1.5 ROCs per MWh), presumably implying that carbon-savings from offshore wind are six times more valuable than carbon-savings from landfill-gas generation.

But this isn't enough for the ever-subsidy-hungry wind lobby. Despite the hundreds of millions of grant-funding that has been provided to offshore wind, the steering of investment in transmission networks to help the wind industry, and now the corruption of the RO to put more money in their greasy little mits, they want more.

The ST's headline is "Energy firms demand £2bn to save wind farms". Any suggestions for what one could do with the billions of pounds that have been thrown at, or are being demanded by the big energy companies to develop a technology that so far has barely registered an impact on our energy supplies?

And so it goes... When the Government ask which technologies can contribute the most, the big companies tell them that wind is plentiful and cheap. The government duly picks this winner, but then "discovers" that wind isn't quite as plentiful and cheap as they had been told. Indeed, wind (they are now told) will need more support than many of the alternative "losers" that they had chosen to support less generously. And once they have discovered what sort of woman the Government is (as George Bernard Shaw would put it), all the big energy companies have to do is haggle over the price. So they keep discovering that their costs are getting higher, and of course, this justifies the Government in throwing more money at the technology.

Shouldn't it mean that wind should get less, not more? After all, the promises have turned out to be false, and we have discovered that wind is one of the least economic ways of achieving our targets. Shouldn't the Government be revisiting how they could better use the money?

By the way, do you like the way that the ST refers to the wind lobby as "the energy industry"? That is, of course, because the lobby is dominated by the vertically-integrated large energy companies (the VILE companies, for short), the BWEA's perpetual rent-seeking is substantially on behalf of these large members, and the ST know who are behind it, and like the Government, and most commentators, assume the big guys are the industry, rather than just a toxic part of it. Disintegrate the bastards.

And as for getting your analysis from the ST (or most other papers, to be fair), try this sentence from the article for a perfect demonstration of a journalist who hasn't got a clue:

"Increasing the subsidy from one ROC per megawatt to two would triple the revenue that power companies collect for wholesale electricity."


  • You get ROCs per megawatt-hour (MWh) not per megawatt (MW). Failure to understand the difference is a classic symptom of someone who doesn't understand the basics of this issue.
  • The legislation has already been put in place for offshore wind to get 1.5 ROCs/MWh from April (apart from existing projects). So they are asking for an increase from 1.5 to 2 ROCs/MWh not from 1 to 2.
  • For a renewable generator, the value of ROCs is separate from the wholesale value of the electricity produced. Increasing the number of ROCs/MWh would have only a marginal impact on the wholesale electricity value, through the impact of higher costs on demand.
  • "the revenue that power companies collect for wholesale electricity"??? What he may mean is: "the revenue that offshore-wind generators collect for their output". That is not remotely the same thing.
  • Anyway, it's not true. Wholesale electricity prices are around £50/MWh. If an offshore developer had to contract a long-term power-purchase agreement (PPA) with a separate supplier, they might have to settle for as little as £35/MWh. But as these offshore developers are major suppliers, the nominal value in any contract with themselves is largely irrelevant - one way or another, the company will capture the full value. But anyway, let's call it somewhere between £35 and £50/MWh. One ROC may be worth £40-45 in the future (unless these offshore wind projects are shelved, in which case ROCs will be worth more, which will make one or more of these projects viable - see how it works?). There are also some other marginal values (CCL-exemption, triads, embedded benefits, etc) that add another £6 or more per MWh to the value. So if offshore wind is entitled to one ROC/MWh (as it is before April), operators can expect to collect around £82-102/MWh. From April, when offshore wind gets 1.5 ROCs/MWh, operators can expect around £102-125/MWh. And if they were granted 2 ROCs/MWh, they could expect £122-147/MWh. So, on the journalist's naive assumption (doubling from one ROC to two), revenue would increase by less than 50%, and in reality (increasing from 1.5 ROCs to 2 per MWh) it would increase by less than 20%. Even if the journalist didn't have the figures, how could doubling one part of a project's revenue ever increase the total revenue by a factor of three (unless one or more of the revenue-streams were negative, which is a cost, not a revenue)? Idiot!
  • The best explanation I can come up with for this stupidity is that he was spoon-fed the figures by "the energy industry", and (along with all the other mistakes) misinterpreted profits as revenue. In which case, do we really feel like throwing more subsidy at the VILE companies so they can triple their profits on an investment?

How government stimulus works

My company is in a very immature sector. It is probably not an exaggeration to say that no company in the sector is making a profit at the moment. Those of us in the business are ploughing money into it in the belief that it will become profitable in due course, and that the position we establish and the experience we gain now will stand us in good stead when that time comes. That sort of informed bet is the essence of entrepreneurship.

To that end, we (or more precisely, our parent company) have recently invested significantly in infrastructure to service this inadequate market. Imagine my delight when I bumped into one of our competitors last week, and he told me that he had just been awarded a 100% grant for very similar equipment. He was revelling in the fact that he was able to obtain such a good grant because his business partner used to be an assessor of grant applications under this scheme, and therefore knew how to work the system. As illustration, he told us that when they received the award, they judged they had been "short-changed" by £19,000, so his partner rang his squash-partner, who still works for the assessors, and squared it so that they got all the money to which they were "entitled".

How do you compete with that? This is in a renewable-energy sector that the Government would like to be developed. Why would you bother investing capital if you faced this risk?

The result is to drive those companies who want to make a straight (i.e. competitive) profit out of the business, and leave it to those who are best at playing the political system. Being good at playing the system doesn't usually go hand-in-hand with being good at satisfying customer demands or running businesses efficiently. Consider the Soviet Union.

This is a small example. But our economy is littered with similar examples. And it is about to get worse in our sector.

I got an email from the Renewable Energy Association (REA) one evening last week. It was distributed to all the members, and read as follows:

Dear member,

We have identified an opportunity to make suggestions on specific renewable energy content in the proposed recovery stimulus package. Unfortunately the time window is very short and we will need to release this in the next couple of days. We have therefore drafted the attached and would appreciate any swift feedback on major errors or omissions.

Treasury has suggested that this should address areas where short term stimulus can bring immediate returns (especially in the form of jobs). This response is therefore weighted towards decentralised energy and small-scale applications, though we have also suggested several early 'barrier busting' opportunities in other sectors.

My understanding is that it is important to put a stake in the ground now (in time for the budget), but that the detailed implementation (and funding breakdowns) can follow at a slightly later date. We are doing more work to try to firm up the figures in brackets by noon tomorrow. Any numbers you can give to help build up these funding requests would be appreciated.

I am sorry to allow such a ludicrously short response time on this, but would appreciate any input you are able to give.

Best regards,

[Director General of the REA]

"The attached" contained a shopping list:

  • £230m for extension of the Low Carbon Buildings Programme
  • £75m for the Bioenergy Capital Grants scheme, to support biomass heat projects and 100 new anaerobic digesters
  • £35m for biomethane production, cleanup and injection into the gas grid, a demonstration heat network using heat from a co-firing power station, and biogas vehicles for the 2012 Olympics
  • £45m for large-scale smart-metering roll-out
  • £80m for skills training for 10,000 workers in the buildings services industry, using unsold show-homes

£465m in all.

I actually have some sympathy with this, not because it makes any sense at all, but because it clearly wasn't a question of whether the Government was going to waste taxpayers' money, but who they were going to waste it on. Any sector refusing to come up with a shopping list would lose out. Even given plenty of time, there would be no way to produce a rational list, because this sort of exercise lacks precisely the information that markets provide. And in a "ludicrously short" period, these irrational figures were no less irrational than any other set of numbers they could have plucked out of thin air.

As we had under 24 hours to respond and I was in London the following day, I didn't get my comments in until too late (late the following night). Others were obviously not so busy, because the REA received over 100 responses. The version that went in to government had blossomed to £625m, plus a "Green Bond" to raise a further £2bn of government-underwritten funding for the industry. The proposals were outlined in their Press Release, and detailed in a paper submitted to Government.

It could have been worse. Within a couple of hours of the email from the REA, one of their members had posted it to an online community of which he and I are members, offering to pass any suggestions back to the REA for inclusion in their shopping list. This community is a mixed bag, with some decent energy-engineering knowledge scattered amongst its members, but almost complete economic illiteracy. Many of the members are extreme central-planners, with outrageous grand plans for government to control and improve not just the British electricity system, but a linked system incorporating the whole of Europe plus North Africa and Russia (and probably wider afield still, if given the opportunity).

The comment of the site's founder in distributing the shopping list was:

This seems to me to be woefully inadequate - I want to see money allocated to the construction of several wind turbine factories in various locations in the UK.

Anyway make your input ASAP - you have only hours to react?

I wrote to the person who invited non-members to put in their bids through him via the REA to the Government, pointing out that the REA ought to represent its members, not all and sundry. None of this group's mad-cap ideas appeared in the revised shopping list, so maybe this warning did its job. But had I not, who knows what sort of hair-brained scheme would have been promoted to the REA and through them to the Government?

In the event, the Government retreated from an immediate announcement, though they remain committed to a New Green Energy Deal, and hold out the prospect of significant announcements later. The REA reacted angrily to this false start, but nevertheless circulated their paper to other parties to try to get it adopted, even though they claimed originally that this was simply an ad hoc response to a short-term opportunity, and acknowledged privately that the grant mechanisms they were promoting were highly unsatisfactory and justifiable only as a stop-gap measure. The paper, which was put together in no time on the assumption that a blank cheque was about to be signed, was adopted and promoted by a group of businesses, and forwarded to a cross-party group of MPs (Elliott Morley, Tim Yeo, and Malcolm Bruce) who had adopted a similar position.

These numbers may, in this way, gradually coalesce into what appears to be a consensus view of what the industry and its supporters believe is the right way and amount for the government to provide support. And yet it relies on policies that almost no one in the industry likes, and on numbers that were near enough plucked out of thin air. That is the sort of process and information on which a centrally-planned economy routinely relies. Markets may be messy, but they are never as bad as this.

The Jury Team

Sir Paul Judge was on Andrew Marr's show this morning, promoting his new party of independents, the Jury Team. I have posted the following on their website:

If I vote for my local Jury Team/Independent candidate at the next election, what policies should I expect to be implemented by a Jury Team government?

This works for individual protests in individual constituencies, but it doesn't work for a national organization aiming to put up as many candidates as possible.

And by the way, Sir Paul Judge repeatedly refused to address a mistaken claim that he had made about costs of carbon, so the idea that an organization funded by him will be cleaner and more open is laughable. Let's see if your commitment to transparency includes leaving this in.

Just thought I'd stick it up on here, in case it goes AWOL from there. And in case there is any doubt, I have taken a snapshot of the site with the comment (not that I don't trust Sir Paul, or anything...).

The incident began in summer 2006, when Sir Paul parroted BA's claim that the carbon impact of flying could be offset for £1/hour of flying. There are many different views one could take on climate-change, from scepticism to alarmism, but what no one of any intellectual calibre has claimed is that climate change is a real problem, but it will be dirt cheap to address it. It certainly wasn't a view for which there was any credible intellectual or market support at the time, but it was a remarkably convenient myth for BA to peddle.

When my father wrote to him to challenge this claim, he repeatedly refused to respond. We chased him from the original letter in July 2006 until April 2007, when we gave up on ever getting a response. You can decide whether that is the sort of man who you would trust to be genuinely interested in honest dealing, as he claims is his only motivation in setting up this new party.

EU economics: boost the economy by using today's money to pay for white elephants in five years' time

Attention focused on the renewables component of Obama's stimulus plan today. But the Americans aren't the only ones using the credit crunch as an excuse to plough vast sums of public money into their pet projects.

The European Commission today issued a revised draft list of white elephants projects to be supported under its proposal for a Regulation "establishing a programme to aid economic recovery by granting Community financial assistance to projects in the field of energy". The programme is to cost €3.5bn. The money is to be drawn from the Common Agricultural Policy, which is obviously swimming in so much cash that several billion can be siphoned out at short notice without affecting its intended recipients.

In the  Explanatory Memorandum at the start of the Commission Communication accompanying the proposal, the budgetary implication (p.4) is described in the following words:

A financial envelope of €3,500 million is foreseen in total for the three sub-programmes, consisting of €1,500 million for 2009 and €2,000 million for 2010.

The main volume of payments will be made between 2009 and 2012 with the last payments, notably for carbon capture and storage projects, foreseen for 2014/2015.

So this is a package "to aid economic recovery" in which some of the payments will be made in 2014/15. And if we look at the draft list, we see that the share for carbon capture and storage (the money to be spent at that late date) is €1,150m, one-third of the total.

The text is a little obtuse, with the budget envelope being assigned to 2009 and 2010, but the spending parcelled out over a number of years upto 2015. The only sense I can make of that is that the money will be drawn from the 2009 and 2010 budgets, but spent over a wider number of years. So, in the name of aiding economic recovery, we are drawing money out of current budgets in order to spend them on white elephants in the future, one-third of it a full five years later. How exactly is that supposed to help ameliorate the current economic difficulties?

There may be an argument for some of these projects, particularly some of the Eastern European infrastructure projects. But why are they justified in the name of economic recovery rather than energy security? Is it because it would have been impossible to justify tacking on the CCS white elephants for Western European governments' favourite oligopolists (EDF, RWE, Eon, Centrica, Enel, & co)?

How much assessment was carried out on whether these particular projects provided the best stimulus effect or the best value for energy security and carbon reductions? If we have €1.15bn available to stimulate the economy by spending tax to reduce our carbon emissions (which is the only point of CCS), there are many other options that could be delivered sooner and would provide a better bang for the buck.

Or better still, we could return this money to taxpayers, create rational incentives that value carbon fairly and appropriately, break up the vertically-integrated utilities to create a genuinely competitive and liquid market, and leave it to the economy to work out where the money can be most effective. The market certainly wouldn't pick CCS, which is why it takes a political behemoth manned by apparatchiks whose only understanding of energy and environment comes from what they are spoon-fed by the oligopolists to blow this much money to such negative effect, at a time when we can least afford it.