Economic growth no longer possible?

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According to a new report from the hair-shirt brigade at the New Economics Foundation, it just isn't possible for the economy to grow any more with destroying the planet. The press release contains this partcularly inspired piece of analysis:

We tend to think of growth as natural for economies, forgetting that in nature things grow only until maturity and then develop in other ways. A world in which everything grew indefinitely would be strange indeed. A young hamster, for example, doubles its weight each week between birth and puberty. But if it grew at the same rate until its first birthday, we’d be looking at a nine billion tonne hamster, which ate more than a year’s worth of world maize production every day. There are good reasons why things don’t grow indefinitely. As things are in nature, so sooner or later, they must be in the economy.

My response is quoted on the BBC website, but here it is in full:

The nef’s latest report exhibits a complete lack of understanding of economics and, indeed, human development. To compare to the growth of an economy to the growth of a hamster, as the report’s authors do, is juvenile and misleading. Growth is emphatically not a zero-sum game. Trade brings mutual gains, and drives a process of innovation and technological advance that no-one can predict in advance.

It is because of this endless human ingenuity that we can and will continue to create wealth and raise living standards, so long as we are not prevented from doing so by foolish government policies. And it is precisely this economic growth which will lift the poor out of poverty and improve the environmental standards that really matter to people - like clean air and water – in the process, as it has done throughout human history.

There’s only one good thing I can say for the nef’s report, and that’s that it is honest. Its authors admit that they want us to be poorer and to lead more restricted lives for the sake of their faddish beliefs. I suppose they deserve some credit for making that admission.

Climate change and energy efficiency

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Whether you believe in man made climate change or not, you probably think that energy efficiency is a good thing. And luckily in this respect, the goals of most climate change fanatics (a couple of Guardian columnists excepting) are compatible withd the interests of businesses. However, most tend to ignore this fact and go on advocating for sanctions on businesses, despite the fact that the primary goal of both interest groups is best met in another way.

So how can this goal be achieved? One solution which has been tried  is to hold a meeting between the world's political leaders and let them 'almost' come to an agreement committing them to strangle their domestic industries in order to achieve some arbitrary goal in the reduction of CO2.

The other solution is for governments to let businesses use their profits to invent and invest in technological improvements through a more business friendly tax system. Would all of the profit then go to technological progress? A great deal would, because it is a core interest of companies to develop more efficient ways of using energy to stay ahead.

The current tax levels force companies to stay inefficient because they either can’t afford to innovate. Giving companies an incentive to survive by letting them compete in the global market would lead to more efficient ways of producing goods and would drive less efficient producers out of the market. This would lead to lower energy usage, which is essentially the common goal. Thus competition, not cooperation is the key to decreasing energy use.

So what are these government leaders waiting for? The answer is that many leaders (particularly in the West) have bought into the idea that businesses are essentially evil. We have a saying in Denmark that is fitting: 'It’s hard to escape if you have painted yourself into a corner while painting the floor'. It looses something in the translation, but I hope you get the point.

On banning things in the name of Gaia

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You'll recall that our masters over in Brussels decided to ban the incandescent light bulb all in the name of protecting Gaia? You might also recall the occasional mutter from the likes of me that we really don't want government picking technological winners in quite such a manner? Even if you don't, here's an illustration of the point:

Light-emitting wallpaper may begin to replace light bulbs from 2012, according to a government body that supports low-carbon technology.

A chemical coating on the walls will illuminate all parts of the room with an even glow, which mimics sunlight and avoids the shadows and glare of conventional bulbs.

Now as someone who works in the lighting industry* at times I'm a little more suspicious of this new technology than the journalists who have been printing this press release are. However, it does illustrate one problem with this "picking winners" approach. Note please though that I'm not talking about the government funds going into developing this new technology, rather I'm interested in the banning of the old.

Lighting as a whole is going through a technological revolution. It's quite obvious that at some point in the coming decades light will be provided by some variation of Light Emitting Diodes (LEDs, as this is a form of). The incandescent bulb will be gone after having had its century in the Sun. But so also will the mercury vapour bulb, including the compact fluorescent lights which we are now all urged to install and consume.

And the problem with the banning of the incandescent is that we're currently being forced into investing in the re-equipping of a large percentage of domestic light fixtures because CFLs will not work everywhere that incandescents do: and the LED technologies are just not ready for prime time yet.

That is, because politicians have to do something, anything, right now, are entirely incapable of simply doing nothing and allowing the world to unfold at its own pace, we've been forced into the very expensive process of adopting a third light technology. An unnecessary one: if we'd left well alone we would have gone from incandescent to LED without the costs of retro-fitting for CFLs.

That's why we don't want politics or politicians deciding which technologies we may use: they always, but always, make the wrong decisions.

* Just to note that my work in the lighting industry makes money out of people using mercury containing bulbs. So I'm delighted personally by this stupidity but I do try not to think that what is good for Tim Worstall is also good for Great Britain.

Bringing the profession into disrepute

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Tim Leunig is right here, it's very rare that economists prefer regulation over prices. But he then claims that climate change makes the difference and we really should be preferring regulations. There are two basic errors I'm afraid.

The first is looking at a carbon tax as a means of changing behaviour: something which if he'd actually understood the Stern Review he claims to support he would know isn't the point at all. As Pigou pointed out way back in 1912 when he first outlined the idea what we want is to internalise the external costs of an action into the market price. So the tax is not set so as to reduce the level of that activity to some target (as Leunig assumes in his example) it is set at the social cost of the action itself. And we know what the social cost of petrol use is, Lord Stern, in that report, told us: 11 p a litre. So scare stories of £18 a gallon are just that, scare stories.

The second is here:

The reality is that prices work very well when supply is able to increase when the price goes up. If demand for clothing goes up, people plant more cotton. But prices don't work very well to ration a given amount of goods.

What? But that's when prices are at their most effective! Substituitability old boy, substituitability! This can come from the supply side (a couple of years back the rise in platinum prices led one chip manufacturer to start plating the pins with niobium instead of platinum) or the consumption side: shank's pony as opposed to a car. But much more important than even this is technological change and the incentives that changing prices give to it.

If the price of carbon emissions goes up as a result of us taxing carbon itself more highly this does not simply limit us to consuming this fixed number of carbon units and rationing them by price. Other technologies which allow us to perform the same tasks (transport, fertilisers, heating, whatever) become more attractive as they are and investigation and investment into further such also become more attractive.

Which is of course what we actually want: not a reduction in transport or fertilisers or heating but a way of having more of them, more cheaply than at present, just without the carbon emissions. And prices are a much better way to get this than regulation is.

And to think, Tim Leunig is teaching at the LSE these days: O Tempora, O Mores.

Taxing climate change

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This is something I've been banging on about for some time now: that those proposing green taxes don't seem to realise quite the rate at which they should be levied. Quite how low a rate that is. Take the recommendations of the Stern Review for example, as the New York Times editorial does yesterday:

Translated into a gas tax, Mr. Stern’s price tag is about 66 cents per gallon...

Given 3.8 litres to the US gallon and an exchange rate around $1.50 to £1 and we get to the 10 pence to 12 pence range per litre that I said it should be when the Stern Review fisrt came out (in these very pages in fact). So should we be adding another 10 pence to hte fuel duty then?

No, absolutely not, we've already raised fuel duty substantially over the years. The fuel duty escalator was put in place by Ken Clarke to aid us in "meeting our Rio committments". To tax the externality of CO2 coming out of your car's tailpipe in other words. And how much has that escalator increased fuel duty over the years? 23 p by my last count actually.

So we are already double taxing petrol use, taxing it twice as much as we should be in order to get the best of all worlds as laid out in the Stern Review. Please note that this is not an attempt to deny that climate change is happening, nor that we shouldn't do anything about it. It is rather, taking the arguments being put forward seriously and looking at their implications. And one of those is that the British Government's own report states that we already tax petrol too highly for climate change reasons. So we most certainly shouldn't let them use that report as an argument for raising petrol taxes even further.

For further fun and games try this paper from Richard Tol (and please do note that he's one of the economists within the IPCC). We in Europe have already got in place just about everything we need to do to deal with climate change. We're done: we've just got to wait for the changes in incentives to work their way through the economy. Which is rather good news at the end of the year, isn't it?

Appealing to reason

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A year or so ago I attended a launch party for Nigel Lawson’s excellent book that questions the policies of dealing with a changing climate: An Appeal to Reason. During the Q&A a very impolite man berated Lord Lawson with a small clan of followers chipping in and egging him on. They were not bright for they failed entirely to distinguish (as Lord Lawson so clearly does) between the science and the policy dealing with climate change.

It was not the disagreement that was the problem, but the manner in which it was expressed that was surprising at the time. This was the first glimpse for me of the fanaticism that climate change engenders in its ‘supporters’. Crucially these ruffians did not stumble in off the street; they were – and presumably still are – affiliated with top London universities. Not one, it turned out, was actually au fait in the latest climate research, but all were part of that odd cabal festering in the pit of our research institutions.

Just because they ready and willing to use such strong-arm tactics to express their strongly held beliefs does not mean they are wrong, but it does show that they are not the impartial scientists in pursuit of knowledge that so many in media have built them up to be. Let the media’s silence not kid anyone. As things stand, the peer review process lies in tatters, internet geeks have exposed many of the scientific tricks that these ideologues have been using.

This is the view expressed by the excellent Patrick J. Michaels of the Cato Institute in an article for the WSJ entitled ‘How to Manufacture a Climate Consensus’. Clearly that famous split between rational science and faith-based belief is far from complete. To make matters worse scientists have aligned with leftist economists, politicians and big business. This is bad science, bad policy and bad thinking. It is liable to lead to a chronic misallocation of resources and possibly another economic bubble that somewhere down the line the truth will come along and pop – with all the attendant job losses and misery for the people of the world.

The Brothers twitch

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The fiasco of Unite’s strike ballot of BA staff brings back memories of the 1970s when the Trade Unions were immensely powerful. Their leaders, now mostly dead, were household names and strikes were endemic – most notably at the Longbridge and Halewood car plants. The economic damage was immense and no politician – until Mrs Thatcher hove into view – was prepared to tackle the Trade Unions head-on. But successive Acts of Parliament in the early 1980s virtually emasculated them. As manufacturing industry declined, so did their clout.

Now, with a modest domestic car manufacturing base, a coal industry – under the struggling UK Coal – which is a shadow of its former self and a declining steel sector, union disruption has been minimal. Indeed, in the latter’s case, every effort has been made to save the Tata-owned Redcar steelworks, whose closure was confirmed recently.

However, there are two companies where union power remains entrenched. Despite BA’s privatization, it still remains heavily overstaffed, especially compared with such highly successful operations as Easyjet and Ryanair: admittedly, neither flies regularly beyond Europe.

Strong management is needed if BA is to prosper. Perhaps, Ryanair’s garrulous – and acerbic – Chief Executive, Michael O’Leary, should be piloted into the Chief Executive’s seat. And, of course, like an eternal millstone around its neck, is BA’s accursed £3.7 billion pension deficit.

Poor productivity is also an endemic problem at Royal Mail – and similar solutions are needed. In terms of ownership, privatization – under a strict regulatory regime as applied to the water sector – offers the best option. Of course, in terms of economic damage, Trade Unions can validly point to the unprecedented financial bill for supporting Royal Bank of Scotland inter alia.

But the BA scenario has seen the Brothers twitch once again. With heavy public sector job cuts almost inevitable after the Election, will Trade Union power now reassert itself?

Groupthink

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When the Climate Change Bill passed through parliament last year, I read the cost benefit assessment ministers are obliged to produce for any bill. Amazingly, it put the potential costs (of reducing carbon emissions by 60%) at £205 billion ($331 billion)—yet the maximum benefits (of reduced climate change damage) were estimated at only £110 billion. This is the first time any government had asked parliament to support a bill that its own figures say will do more harm than good. Yet just five of us voted against it. At least I had the satisfaction of pointing out that while the House was voting for a bill based on the assumption the world is getting warmer, it was snowing in London in October for the first time in 74 years. I was told, "extreme cold is a symptom of man made global warming."

Peter Lilley, 'Global Warming as Groupthink' WSJ

Down the sewers

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Crammed into carriages on a daily basis, forced to share personal space with strangers and made to endure a service that is regularly poor. It's no wonder the public behaves as the latest London Assembly Transport Committee report, "Too Close for Comfort" shows. Each of us reacts differently to our journeys on the Tube, but undoubtedly all of us find it stressful. Coupled with an almost sensory deprivation lack of information, frustrations only rise.

There is nothing more annoying than arriving at a Tube station during rush hour to see that there is a 5 or 6 minute gap between trains. This means that it could be anything up to 15 minutes before you can board a train (as regularly occurs on the District Line) due to overcrowding. In this era we, as customers, should not be forced to accept such a poor service. The system is creaking under the sheer weight of numbers, the lack of proper investment and it is also held over a barrel by the unions. All of which compounds the stresses that we, the users, have to suffer.

Traveling by Tube won't improve any time in the near future (or indeed the long-term) until the customers are treated with some respect by TFL. The lack of respect we show each other is only amplified by the contempt we are shown regularly when we use the Underground. Still at least it's slightly better below ground than it is above. Life on buses is more akin to the state of nature described by Locke, as evidenced here.

Climate change: the new Nazism?

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For those against further government meddling in the economy, an eminent scientist voicing his desire for the Copenhagen negotiations to break down may sound encouraging. However, this isn’t the case when that scientist is James Hansen, the original harbinger of global-warming doom.

Despite pledges to cut carbon emission having potentially large impacts on national economies, Hansen believes that any Kyoto style global agreement would be fundamentally flawed – for its lack of radicalism. He likens the tackling of global warming to the struggle against Nazism and Slavery, claiming "on those kind of issues you cannot compromise. You can't say let's reduce slavery, let's find a compromise and reduce it 50% or reduce it 40%."

Many countries plan to reduce CO2 emissions through carbon market schemes and the trading of carbon permits. Assuming the best thing for human development and the planet is to cut carbon emissions now (even though that is not nearly as clear-cut as the climate change fanatics insist), then using a market mechanism is one of the better ways to go about it. Allowing people to trade limited carbon rations should lead to the best allocation of these amongst the competing needs, and ensure that even with reduced carbon emissions the most useful goods are still being produced. The incentives for firms to develop and install green technology could also encourage investment and technological advancements in other areas too.

However, Hansen believes in much more drastic action – the swift abandonment of coal as a source of fuel coupled with an escalating carbon tax across all other fossil fuels in order to force producers to magic up alternate forms of energy.

With no room in Hansen’s arsenal for compromise, there is no room for disagreement or dissent either. For him ‘business as usual’ while we learn to adapt to a lower-pollution economy is not an option. The opportunity costs associated with an extreme attempt to tackle global warming are unimportant. Never mind falls in GDP and average income, reduced development prospects for the poorer nations and stagnation in innovation and healthcare; these are examples of inconsequential collateral damage when defeating the danger of climate change.

It seems that changing international agreements to suit Hansen’s taste would require the bypass of traditional democratic politics; which after all seeks to mediate between many competing interests. Hansen may be right when he likens climate change to Nazism – but only in the sense that once the ideology gains popularity in politics it can lead to totalitarianism, and significant constraints on our personal liberties and behavior.