So, that DECC's renewables plans entirely up in smoke then

One of the little fables, falsities really, of the DECC's approach to climate change rests upon just the one number. And that's what is the price of natural gas per therm going to be off into the future. We could assume that the price will be roughly the same as today. Or it might fall as a result of fracking, or it might rise as a result of supplies running out. But we obviously do need to make a forecast because that's the only way we can work out whether those damn windmills and so on are ever going to be economic. So what DECC did was assume that gas prices would roughly double from their current level. In that manner they could then say that those windmills would in fact be cheaper. Not because the windmills are cheaper now, nor because they're going to become cheaper in the future, but because the gas price is going to double.

They were very insistent about supporting this too. We recall one of their pronouncements being that fracking wouldn't reduce the price at all. Because it would all be exported we think was the mantra. Then they said, well, maybe, a few percent reduction: look, here's a report about Cuadrilla's find which says 3 or 4% reduction in price!

Yes, well, that report was actually about the price impact of just he extra gas find that Cuadrilla had announced as the result of just the one borehole: and that price reduction applied to the entirety of the connected European gas market. Obviously the entirety of the Bowland Shale was going to have a larger impact than that.

But everything, the whole shooting match, the entire strategy of solar, windmills, nuclear and everything, has been based upon that one single number: the price of natural gas is going to double.

DECC's latest projections assume average gas prices for this year of 47 pence per therm, down from the 62p it projected last year. It estimates the price will barely rise over the next four years, remaining at just 49p/therm in 2019, and only ticking up slightly to 52p/therm in 2020. A year ago it had expected prices of 60.3p/therm in 2020, while two years ago it was forecasting they could hit 73.8p/therm.

Ooops! And of course the decline in price is being driven by that fracking that would never affect the UK price. Tight oil fracking in the US has driven down the oil price, to which many gas contracts are linked, and gas fracking has increased the amount of LNG sloshing around the world markets. These price decreases being before anyone's even considered whatever may be fracked right here at home.

The entire strategy thus needs to be re-examined. Starting with those numbers for what the future price of gas might be.

And of course, this is also why planning centrally of anything doesn't work. Here it's obvious that, to put it at its most kindly, people became wedded to a particular analysis and simply did not want to hear of changes to it (less kindly they manufactured that analysis to order). But even when that does not happen, we still end up with a plan which depends upon the assumptions which go into it. Rather than leaving things to market forces, which means that we get a multiplicity of plans, with a multiplicity of such assumptions.

Yes, it's true, climate change isn't a problem that entirely pure markets are likely to solve, involving as it does externalities. But that's why the correct answer is to intervene in the market price, add in that externality, and then still have the markets with their mulitple answers and assumptions. Rather than the monolithic central plan reminiscent of Stalinism. Which has just failed as did that Stalinism, reality having to intrude.

The Overseas Development Institute is as stupid as the IMF

Or maybe they're being deliberately misleading. Back in May, Sam wrote a barnstormer in The Telegraph refuting an IMF report that called it a 'subsidy' when the government didn't tax oil and gas as much as the IMF would have liked it to. This report was important because the IMF is taken seriously, especially by those who don't usually find themselves on its side, when it says stuff they like ('even the IMF' etc). Sam made the obvious point that a subsidy is a subsidy and not taxing something is never a subsidy, even if you think we should—even if your model says that it should—tax that thing more to increase social welfare. If it were a subsidy to tax something (like fossil fuels) below the optimal amount, then it would also be a tax not to subsidise something (like basic research) the optimal amount. But it's not; it's patently, blatantly, ridiculous and obfuscatory use of language.

We might have thought the issue was put to bed. But here we go again, this time with the Overseas Development Institute's new report, which tells us:

While other nations have responded to the drop in energy prices by reducing fossil fuel consumer subsidies, the UK has reduced taxes on fossil fuel production, increasing subsidies to fossil fuel producers.

The industry pays £30.1bn in total taxes, including downstream levies like fuel duties, but since this is not £35bn or £40bn, it's being 'subsidised' according to the IMF and ODI.

It gets onto actual things we might call 'subsidies' later, and they are as piffling as you might expect, given how they are buried:

The International Energy Agency (IEA) estimates for budgetary support for R&D to all fossil fuels in the UK were $76 million in 2013

Note the units.

In addition, the UK government has committed to providing significant direct support for the development of CCS. The largest commitment is for the $1.6 billion for the Commercialisation Programme, although this has not yet been disbursed.

OK, this is a real subsidy, and of a significant size (but nothing compared to oil and gas tax contributions!), but you might note that (a) it's not been paid yet; and (b) it's specifically tied to abating emissions!

So this is a non-story. The real story is 'the energy industry pays a large amount in tax, slightly lower this year, but probably still enough to cover its externalities, and even if it wasn't it's certainly not a "subsidy"'.

And the ODI are as stupid as the IMF.

UPDATE: Turns out the WTO uses the 'tax break = subsidy' definition too; it's still not clear this is a useful or meaningful definition—it requires an idea of the relevant baseline.

Ten initiatives to help young people: 5. Youth start-up loans

Young people who opt for university education are eligible for loans at preferred rates.  They qualify for tuition loans of up to £9,000 per year, and for maintenance loans which could go as high as £8,200 per year for those from low income families.  Most students assume this is a good investment that will lead to higher salaries over the course of their working lives, and are cushioned by the fact that only those earning more than £21,000 per year have to start repaying those loans. But young people who do not qualify for university admission, or who decide against it, are not eligible for similar loans.  In fact young people starting out in work or seeking work find there and many associated costs.  They often have to face deposits for accommodation; they sometimes have to buy new clothes appropriate for their work or their job-seeking.  Most have no cushion of saving since few will have yet earned any money.

If young people not at university were given access to loans on terms similar to those available to students, many would find their lives much easier.  For some it would help cover the costs of moving into their first independent accommodation.  For others it might help pay for a bicycle to travel to work on.  

For others, loans such as these would offer the opportunity to start a small business.  Paying for driving lessons to pass the test and buying a car would be a real possibility for those who wanted to become professional drivers.  Others might find themselves able to rent premises to set up as independent hairdressers.  A range of small business possibilities would open up.  Far from the world of multi-million software businesses, there are small one-person businesses that operate as gardeners, window-cleaners, street traders, hairdressers, and the like.  

To set up a one-person business such as these takes initial capital, capital that young people simply do not have.  Some of the lucky ones might borrow from parents.  Some might persuade a bank to loan them money, but banks are wary of lending to those without collateral, so for most the possibility is ruled out by lack of available finance.   A scheme like that which provides student loans, but which made them available instead to non-university young people would open up countless opportunities for advancement.  For some it would help them with their move into the city to find work and accommodation.  For others it would open the possibility to start up their own small business.  It would reduce unemployment and encourage ambition.

Wisdom on housing and land from across The Pond

It's a sad commentary on contemporary British politics that it would be almost impossible to even imagine an even vaguely lefty economic adviser making the following statement:

In today’s remarks, I will focus on how excessive or unnecessary land use or zoning regulations have consequences that go beyond the housing market to impede mobility and thus contribute to rising inequality and declining productivity growth.

While land use regulations sometimes serve reasonable and legitimate purposes, they can also give extranormal returns to entrenched interests at the expense of everyone else. As such, land use regulations are an example of a broader range of situations that may give rise to economic rents. By this I do not mean the check you write to your landlord every month, but a situation in which any factor of production—in this case, land—is paid more than is needed to put it in production.

Further:

I want to be clear from the outset, some land use regulations can be beneficial to communities and the overall economy. There can be compelling environmental reasons in some localities to limit high-density or multi-use development. Similarly, health and safety concerns—such as an area’s air traffic patterns, viability of its water supply, or its geologic stability—may merit height and lot size restrictions. But in other cases, zoning regulations and other local barriers to housing development allow a small number of individuals to capture the economic benefits of living in a community, thus limiting diversity and mobility. The artificial upward pressure that zoning places on house prices—primarily by functioning as a supply constraint—also may undermine the market forces that would otherwise determine how much housing to build, where to build, and what type to build, leading to a mismatch between the types of housing that households want, what they can afford, and what is available to buy or rent.

The tradeoffs inherent in land use regulations are well known and have been of concern to policymakers and academics for decades, since at least 1961, when Jane Jacobs wrote The Death and Life of Great American Cities. In it, she argued that limits on density and mixed-use development, as well as an imbalance between preservation and new construction, can reduce housing affordability, socioeconomic diversity, and economic activity.

That's all from Jason Furman, currently chair of the Council of Economic Advisers to that well known right winger, President Obama. If only any single one of Jeremy Corbyn's advisers, heck, if just one of two of those somewhat to the left of us were this clear on the cause of our basic housing problems then we'd be able to solve them by next Tuesday afternoon.

We simply place too many restrictions on who may build what, where. To solve the problem we thus have to remove some to all of those restrictions. And that really is it.

American police now steal more from the citizenry than the robbers do

There's a good reason why we don't arbitrarily allow the State or any of its agents to take the property of the citizenry. That reason being that however logical those first steps onto hte slippery slope seem it always, but always, descends into an orgy of said State and its agents plundering the population they are supposed to be protecting. A case in point:

Between 1989 and 2010, U.S. attorneys seized an estimated $12.6 billion in asset forfeiture cases. The growth rate during that time averaged +19.4% annually. In 2010 alone, the value of assets seized grew by +52.8% from 2009 and was six times greater than the total for 1989. Then by 2014, that number had ballooned to roughly $4.5 billion for the year, making this 35% of the entire number of assets collected from 1989 to 2010 in a single year. According to the FBI, the total amount of goods stolen by criminals in 2014 burglary offenses suffered an estimated $3.9 billion in property losses. This means that the police are now taking more assets than the criminals.

The point of the police, of the criminal justice system in general, is to protect us from the thieves, not for them to become the thieves.

We in the UK have only just started down this road: we should change path immediately and go back to the old system. Once you've been convicted by a jury of your peers you can be fined, jailed, forced to pay compensation, all sorts of things. But absolutely nothing is due to the State until that jury has ruled.

We must regulate Bitcoin because.....?

We can fill in that "...." with whatever we want of course. For Bitcoin enables (despite whatever other fragilities we might think it has) people to transfer money around, do business, trade, without the intervening hand of the State. And that will never do: how can the functionaries of the State make sure they get paid if we just do things without paying them their tithe in tax? And thus:

European Union countries plan a crackdown on virtual currencies and anonymous payments made online and via pre-paid cards in a bid to tackle terrorism financing after the Paris attacks, a draft document seen by Reuters said.

In more detail:

They will urge the European Commission, the EU executive arm, to propose measures to "strengthen controls of non-banking payment methods such as electronic/anonymous payments and virtual currencies and transfers of gold, precious metals, by pre-paid cards," draft conclusions of the meeting said.

The bodies are not even buried yet, we know absolutely nothing at all about how this attack was financed. And yet everyone knows that cyber-currencies must be more regulated. Because......

Well, just because, because we cannot be allowed to do things beyond the purview of the State and any old excuse is a good enough because to make sure that that is not allowed to happen. The terrorists could have been using their own bank accounts and we'd still be having this clampdown. Because.

The myth of money and terrorism

Since the recent Paris attacks there have been a few articles (like this one) arguing that increasing foreign aid with the purpose of boosting economic development in poorer countries might be a way to battle terrorism at its roots. The first assumption here is that extremism is caused and fostered in countries with high levels of poverty, and that providing foreign aid will help to get the poorest out of poverty, thus reducing the attraction of these extremist groups.

However, there is a lot of evidence to show foreign aid itself is not actually the key to reducing poverty. Economists such Bill Easterly and Angus Deaton have successfully argued that aid does not help reduce poverty, and in fact could even increase it. In his book The Great Escape, Deaton says:

If poverty is not a result of lack of resources or opportunities, but of poor institutions, poor government, and toxic politics, giving money to poor countries — particularly giving money to the governments of poor countries — is likely to perpetuate and prolong poverty, not eliminate it.

Therefore, even if we assume that poverty leads to extremism, the remedy of increasing international aid is wrong.

However, we cannot assume poverty is a cause of terrorism in a first place. Any link between the two was proven to be more or less non existent in Alan Kruger’s paper “Education, Poverty, Political Violence, and Terrorism: Is There a Causal Connection?”, and if there is it’s indirect and incredibly weak. It is far more likely to be the result of a poor political climate within a country:

Perhaps surprisingly, our review of the evidence provides little reason for optimism that a reduction in poverty or an increase in educational attainment would meaningfully reduce international terrorism…. We suggest it is more accurately viewed as a response to political conditions and long-standing feelings of indignity and frustration that have little to do with economics.

This was backed up by a 2011 report by Christine Fair from Georgetown university, which actually found that in Pakistan people from a more affluent background with a higher level of education were most the most likely to be radicalised, as those with a lower socioeconomic status are the most likely to be adversely affected by terror attacks and violence.

There are a number of myths about the best way to stop the growth of terrorist groups, more of which are mentioned more in this blog by Mugwump, and it would appear that increasing foreign aid is just another one.

Sadly, the IFS is wrong here

The IDS has a report out talking about how wealth is unequally distributed in the UK. And it's a good report, ticks all of the procedural boxes and emphasies one very important point. It's also entirely wrong.

The full extent of the wealth gap between Britain’s rich and poor has been laid bare by a thinktank report showing that 9% of households have no assets while 5% are worth in excess of £1.2m.

The study by the Institute for Fiscal Studies shows that the UK is a more unequal country when measured by wealth – the value of assets such as housing, pensions and shares – than it is when measured by income.

Obviously wealth inequality is higher than income: it's possible to have that negative wealth and we don't ever measure negative incomes. And the report (here) does emphasise an important point, that there's a life cycle to wealth. Generally, the young have no wealth, those on the verge of retirement are at the wealthiest they will be and then wealth declines as pensions are drawn down.

Except the report is still wrong. Because it doesn't include any of the things that we do to reduce the effects of wealth inequality. On pensions, for example, a private pension, or a public one earned from a job, is wealth: which it is. But the state pension is not wealth. and yet it's wealth in just the same sense that the other pension rights are.

Similarly, we count housing equity: but a lifetime tenancy at below market rents, like a council house, is also wealth and we don't count it.

The net effect of this is that all such reports (and we must emphasise that all such reports do work this way) measure the gross wealth inequality. It's as if we measured income inequality only by market incomes. And we don't, we measure income inequality after the influence of the tax and benefit systems. We ought to measure wealth inequality the same way but we don't.

After all, what we want to know is, should we be doing more here? And we cannot possibly even think about that until w know the situation after what we do do.

Ten initiatives to help young people: 4. Personal service jobs tax deductible

Let down by the inadequacies of our education system, some young people leave school without any meaningful qualifications, and find it hard to obtain unemployment.  Meanwhile, many successful men and women in work find it difficult to balance the needs of a working life with domestic chores such as looking after children, keeping gardens tidy, and doing odd jobs around the house.  The domestic commitments make them less focused and less productive. The two could be matched, given appropriate incentives.  Young people with scant qualifications could work as nannies, au pairs, handymen, gardeners and, if they were put through their driving test, as chauffeurs.  Taking into account minimum wage and National Insurance, however, the cost of employing people in personal service would be beyond the means of many working people.

Given people to help with personal services, successful men and women could have more of their time to do work, and raise their productivity and their contribution to the nation's economy.  Government could facilitate this by making it a tax-deductible business expense for people to employ young people under the age of 25 in personal services such as those listed above.

The gains would be immense to both sides.  Freed from the hassle of domestic chores, the business people would gain time to concentrate more on their work.  The young people would gain employment, and would acquire skills and experience to render them more employable in the future.  They would have the habits, experience and discipline of work, and would enhance their CVs with good references.  Furthermore, they would have the examples of successful businessmen and women as role models, encouraging them to raise their own sights.  

There would be on-the-job training, with their employers coaching them in the requirements for acting as chauffeurs, gardeners, handymen, nannies, household assistants and the like.  It could be a requirement for tax deductibility that the employers would agree to train their employees in this manner.

There would, of course, be a tax cost to the Treasury if such employment were made tax-deductible.  But it would be offset by huge gains in employment, with fewer young people out of work, and fewer of them entering adult life without marketable skills.  Fewer of them would be dependent on state support in future.  The gains resulting from this would outweigh the costs.

It's what you believe that ain't so that's the problem

An American writes in The Guardian:

When an American talks about a “welfare state”, they’re talking about scattered programmes such as food stamps, tiny cash benefits and milk and formula vouchers for infants and pregnant women, which together provide a fraction of the benefits a British citizen is entitled to.

This is not in fact so. As that little chart shows. It comes from Lane Kenworthy, one of the better researchers into inequality and poverty in the US. The definition of the chart is:

Figure 6. Tenth-percentile household income Posttransfer-posttax household income. The incomes are adjusted for household size and then rescaled to reflect a three-person household, adjusted for inflation, and converted to US dollars using purchasing power parities. “k” = thousand. “Asl” is Australia; “Aus” is Austria. The lines are loess curves. Data sources: Luxembourg Income Study; OECD.

And his comment upon it:

OUR POOR AREN’T ESPECIALLY WELL-OFF America’s affluence doesn’t trickle down to everyone in a straightforward fashion. As figure 6 shows, the income of US households on the lower part of the income ladder is below that of their counterparts in many comparator nations.

Below that in many countries and as the chart shows, above that here in the UK. The point being that America provides a standard of living to its poor very much the same as those provided by the supposedly much more generous European countries. All are managing something between $10k a year and $30k and the US is slap bang in the middle.

All of which brings to mind Mark Twain's aphorism, that it's not what you don't know that's the problem, it's what you believe that ain't so that is. The US does have a welfare state and it produces much the same result as those of other countries.

However, there is one major difference. Which is that the US is a much more unequal country, even after the influence of that tax and benefit system. And we, being the pure utilitarians that we are, think that's fine, that's great even. For we do run with the idea that a certain minimum is going to be provided to those who cannot provide for themselves. We might argue about how that is done but we're fine with the basic set up. But once that is achieved we want the greatest good of the greatest number. And that means that once that minimum is in place then we want everyone above it to be able to thrive as much as possible.

Which is exactly what the American system provides of course: and is the explanation for that greater inequality. Because they only worry about providing that minimum, and not the inequality itself, then they tax the rest of society less, allowing it to thrive more. Sounds like a plan to us.