Money taken out of the economy

Bernie Sanders described the US tax bill as “A disaster for the American people.” He said it was “a barely disguised reward for billionaire donors” (of the Republicans). For many left-wingers and some Keynesians it represents what they call “money taken out of the economy.” US Democrats predicted the tax cuts would benefit only shareholders because corporations would pass the money on to them in the form of increased dividends. Presumably if it had, they thought the recipients would have burned it, because to invest it or even spend it would have put it back into the economy. It might be that critics of the bill mean money taken out of the public economy, not counting private investment or family budgets as part of the economy.

What has happened so far, only weeks since the tax bill passed, is that over 300 companies have announced bonuses for over 3 million workers, with an average bonus of about $1,000. That represents $3bn into the private budgets of US workers. US corporations have also announced $110 billion in new investment in plant and equipment. Apple alone is going to incur a one-off $38 billion tax charge as they repatriate hundreds of billions to the U.S., with initial investment plans of $30 billion.

Sanders also said that “trickle-down economics has never worked.” He may be right about this, since I have never encountered any economist who believed that it did, or any who thought it had ever been tried. Trickle-down economics is a Straw Man fallacy of the Left, who seem to suppose that neoliberals believe that when rich people spend more money, they boost jobs for people working in restaurants or building luxury yachts.

In fact neoliberals hold that it is investment, not spending, that creates jobs. Extra money in the hands of those comfortably off might be more likely to increase investment rather than spending. Even money put into bank accounts will most likely go into investment. Still in its early stages, it looks very much as though the US tax bill will boost economic growth as intended. When that does happen, the critics will no doubt find other explanations for it.

The world's just not being serious about climate change

Please leave aside all of the arguments about whether there's anything going on, whether we're responsible and so on. Start at the point where it is, we are and something should be done.

Excellent, so, what should be done? At which point we've a report from some sciencey types talking about negative emission technologies. 

Ways of sucking carbon dioxide from the air will not work on the vast scales needed to beat climate change, Europe’s science academies warned on Thursday.

From simply planting trees to filtering CO2 out of the air, the technologies that some hope could be a “silver bullet” in halting global warming either risk huge damage to the environment themselves or are likely to be very costly.

One possible reaction to this is "bit of a pity but there we are." Another is to do that horrible trick of actually going to read the report. In which we find this:

The oceans currently provide one of the largest natural sinks for CO2, via the so-called ‘solubility pump‘ (since CO2 is slightly soluble in seawater), and the ’biological pump‘ (since microscopic plants take up CO2 to make organic matter constituting the base of the ocean food web). Both of these sinks could potentially be enhanced. The possibility of encouraging uptake through dissolution and mineralisation was included in Annex 4; this annex considers enhancing the sink as a result of biological activity. The rate of phytoplankton production is limited in many parts of the oceans by nutrient availability, and enhancing this has long been seen as a potential route for increasing the rate of CO2 uptake.

This is iron fertilisation of the oceans. The important things to know about this being that we know it works. Yes, really, we know, absolutely, that this works in a technical sense. We also know that it won't be a complete solution. What we don't know is how much it will cost - whether it will be an economic solution to a part of our problem.

One of us here has taken an unhealthy interest in this technology over the years and has also applied specialist knowledge to the point. The raw material necessary has, as the usual calculations don't include, a negative cost. It's a waste which people will pay you to take away.

But, still, we don't know quite how technically effective it will be nor quite how economic. As this report says therefore:

 These issues require considerable further research and field trials to be clarified, before OIF could be regarded as a potential contributor to achieving negative emissions.

Yes, we agree entirely. So, where are those field trials? As one of us has pointed out half a decade ago, they'd be illegal. Dumping that waste product into the oceans, that waste that people will pay you to take and which will, as far as we know at least, be a partial solution to boiling those same oceans, is illegal. Even just a few thousand tonnes into empty water, something which might suck down a billion tonnes of CO2, two Britain's worth.

The last field trials were in 2007. Positive results, it all looks like it will work, at low cost, and be that partial solution. But nothing is being done. No more research is being carried out.

The world simply isn't serious about climate change, is it? And we'll not believe it is until those field trials on this technology take place either.

66% of rail passengers shouldn't be on a train

It is a standard assumption that people don't buy things they don't think are worth it. It's not a bad nor even unusual assumption either - the very definition of people thinking that something is worth it is that they're willing to buy it. Without a gun to their heads of course - we mean voluntarily buy it, not taxation.

Thus some two thirds of the passengers on British trains shouldn't be there: 

Only one in three commuters believes their rail fare is value for money, according to the passenger watchdog’s national survey.

Transport Focus, whose national rail passenger survey asked 27,000 passengers to rate aspects of their journeys in the autumn, said that the value for money scores reflected “patchy reliability” of train services.

While 47% of passengers overall felt they had paid a fair price for their ticket, only 33% of those commuting to work were satisfied with its value.

OK, we can argue about whether it's two thirds of commuters or only half of all passengers. But they don't think it's value for money - yet by the definition of the group being asked they must all be paying for it. Thus they do value it at what is being charged, or more, by definition.

What is happening here is the difference between expressed preferences and revealed such. That people do pay current prices shows that their economic calculation shows those fares are worth it. When someone comes along and asks whether we'd like the same thing cheaper of course we say yes.

Shrug, we think that 12 year old malt is terribly expensive and we'd much prefer it to be cheaper. But that we've a bottle of it on the shelf - some part of that bottle in a glass often enough - shows we think it worth the price all the same. 

The problem with the Dream Hoarders thesis

One of the books, ideas, which ruffled feathers last year in the US was "Dream Hoarders." The essential thesis being that what ails the place isn't that 1%, it's the 20% described as the upper middle class. That's where the Great Fracture in society is according to the analysis.

There is some good observation in the book. It's true that exclusionary zoning is a pernicious failure of the society. In English we'd say planning permission perhaps but it is often applied to much wider areas making it near impossible for the bottom 80% to live in some cities at all - even counties.

However, the main strand doesn't stand up. The claim is that access to the sort of higher education which puts you into that upper middle class in one's own career is hoarded by this generation's such class for their children. This is done by the arms race of ever better public education (or private) in those zoned and exclusive areas. Those reliant on the more normal public education just don't get a look in.

Which is where the problem comes in. Even if we assume that this is all true what should we be doing about it? It's not exactly a great secret that much of the inner city education system is a monstrous disaster after all. It's been described as the closest thing to an Act of War short of revving up the tanks upon the population subject to it in fact. It's also not a secret that a goodly part of this problem is the manner in which the bureaucracy and the teachers' unions run and control such systems.

So, if we were to be arguing that the playing field needs to be levelled a bit we'd be shouting about vouchers, charter schools, killing the unions, or at least their power over the school systems. We're not and the book isn't. Why not?

Because the author is a Democrat, the teachers' unions are a major hotbed of support for that political party. Shouting at your own supporters isn't regarded as good policy wonkery. Even if it is the solution to the problem identified. 

That is, the entire argument fails for not mentioning the elephant in the room - something which isn't the Republican party despite the usual imagery. 

Ayn Rand, Pro and Con (and Pro)

Ayn Rand, the ‘radical for capitalism’ best known for her novels Atlas Shrugged and The Fountainhead, was born on this day in St Petersbury (Russia), 1905.

Her novels, with their emphasis on self-actualisation, character and principle, bring millions of (mostly young) people into to the free-society, free-economy movement. As people say, “It usually begins with Ayn Rand.”

Her ideas in morality and politics are hugely innovative, radically challenging the traditional doctrine of altruism and instead defending egoism. When we correctly understand the world and how it woks, she argues, we can understand and know what actions—moral and political—are right, and what actions are wrong. What was consonant with the world, she concluded, were life, rights and freedom. The only moral social system was laissez-faire capitalism, because it was the only one not based on force and the only one to support these values.

Her view on how we can actually get to know the world and its working was a common sense one. There is a real, objective world; we are aware of it; and the things in that reality each have a specific nature or identity. By using our minds, we can work out what that is, and how to behave in ways that are at one with it.

Many people, however, see Rand’s philosophy not as common sense but as crude—not understanding the skepticism of David Hume or F A Hayek. She caricatures them as denying existence, and building a world on a whim. But skeptics do not deny existence: they say only that we have no direct access to it, and can only guess how it works. We still act in a principled way, but on the basis of our theories, not with irrefutable knowledge. And tomorrow, the universe might throw up some new fact that makes our theories no longer tenable.

Critics also question whether Rand can legitimately move from what is to what ought to be. Her criterion is that we should do what promotes life. But whose life? Rand focuses on the individual, but humans are social creatures, and the survival of larger groups (indeed the whole species) is important too. That is why we have altruism built into us: don’t knock it.

Also, say critics, most moral choices are not about life or death. We cannot know how our decision to hand in a lost wallet without taking any of the money out of it will affect anyone’s survival. We cannot reason it out. But then, as Hayek says, the spontaneous orders of society often have more wisdom than our limited minds could ever possess. 

In politics too, critics can use Rand’s standard of survival to deny her radical defence of individual freedom and capitalism. Should we not intervene to save people from the harm they do themselves through smoking, alcohol, drugs, guns or even fizzy drinks? And, on that same standard, should we not stop the sale of these products?

Despite such criticisms, Rand still inspires millions, and makes people think. She rightly observes that many of the problems in human affairs today is down to a lack of philosophy—a lazy unwillingness to engage the brain and think things through. That is why people do not understand that the state must be limited and rights protected, and why we need moral, political  and economic freedom. And businesspeople lack this understanding just as much as politicians and the general public—which is the origin of the crony capitalism (or as I prefer to call it, crony statism) that grips too much of the world today.

With focus and self-esteem, you can change the world, Rand tells us. But that requires thought, moral qualities and character. It means not craving security over freedom, and not trading your freedom or your dignity; defending your achievements and your right to what you create; not demanding favours or sacrifices; and respecting others who do the same. It is a very attractive prescription; and even a small dose of it would indeed go a long way toward making the world better.

The remarkable thing is how little natural capital matters to the economy

We agree with varied environmentalists upon the idea that we've got to include natural capital in our calculations of how well the economy is doing. Not entirely for Gaia worship reasons, nor because of some insistence that only naturally produced items matter. We still agree upon the necessity of measurement simply because we want to know whether the system is working, is sustainable.

We've also always rather liked the finding that the rich country which is expending its natural capital at the fastest rate is Norway. Seems that social democracy is easier if you're floating on oil, who knew? 

We thus applaud the ONS and its attempts to make exactly these measurements. The result of which is that natural capital really isn't very important:

The ONS concluded that the parts of the UK’s “natural capital” that it was able to estimate contributed £16 billion to the economy in 2015. Their asset value, which is based on their contribution to the economy over the next 100 years, was estimated at £761 billion. That compares with UK GDP — the value of goods and services in the economy — of £1.9 trillion in 2015.

The number that will be splashed all over the place is that £761 billion and it will be compared to that GDP. Entirely incorrectly of course. Stocks of wealth should be compared to stocks of wealth so, at minimum, the £761 billion is to be compared to household wealth (some £10 trillion) or better some measure of national wealth including government holdings.

Or we can do it the other way and look at income streams. Which is that £16 billion and the GDP of £1.9 trillion.

Yes, we should measure natural capital and yes, we should at least estimate the contribution it all makes to our welfare. It is, after all, important to know what is going on. The answer being that it's not an important part of what creates our welfare.

Certainly, we'd miss it if it were gone, decidedly miss it. But the interesting outcome of this measurement of natural capital is quite how much of our living standards doesn't stem from it at all but instead simply from the collective efforts of us humans in adding to, rather than extracting from, the value of that natural world.

Food waste just doesn't seem to be much of a UK problem

Big numbers are big numbers. But numbers do always need to be put into context:

Occasionally a statistic emerges that makes you despair at human folly. Yesterday, there were two. The first was that Britons throw away the equivalent of 86 million uneaten chickens every year.

...

Of course, it is not just chickens, and it is not only young people. An astonishing two billion potatoes are among the seven million tonnes of food waste that we throw away each year, and everyone is guilty of excessive waste, myself included.

Total number of chickens for human consumption in the UK is up around 1.2 billion a year. Sure, we could talk about the avian massacre to fill our bellies but a wastage rate of what, 7% or so, hardly seems excessive. That's even before we wonder whether this number is achieved by adding up the weight of all those Parson's Noses going uneaten. Potato consumption is of the order of 100 kg a head and 30 potatoes each might again be in that 4 to 7% or so range.

Compared to the 50% or so of food that rots between farm and fork in those places without a supermarket logistics chain, as the FAO tells us, this seems positively frugal in fact.

We can check this another way too. A chicken and a few kilos of potatoes per year is what, £5? Just to make some sort of assumption at all. The average family is still that two adults, two children of the nuclear family, equal to perhaps 3 adults. So £15 a year in such wastage. The average family food bill is £50 a week. Or 0.6% of that food bill is this "excessive" waste.

Which really isn't quite how we'd describe quite such an absence of waste.

The point we would take from this is entirely the other way around. History - as Irish history especially shows us - is littered with examples of people actually dying for lack of potatoes. Chicken was a luxury item, very much more so than even beef, until well into the lifetime of the more seasoned in years of us. We've now a system in which several Sunday lunches' worth of exactly those foods for each of us is merely a rounding error in our food supply.

Hasn't the world got better recently? Not least in our having solved PJ O'Rourke's great existential question, what's for lunch?

Merkel, Macron and the Monster

The World Economic Forum’s annual flagship event in Davos came to an end last Friday. Davos is well known for being the mecca for movers and shakers of governments and big business around the world where they get to address some of the major issues facing the world today.

This year, the minds of Macron and Merkel were again centred around globalism, but this time not on the major benefits that globalisation brings with it. Instead, they raised concerns about a monster lurking just under the surface in countries all across the world – the spectre of populism.

Macron pointed to his rival Le Pen in the French General Election who, in order to appeal to voters in France, proposed to have less globalisation and more protectionism. Merkel warned about the poison of populism and the problems that may arise from generalising about different nations and cultures, especially in combination with high unemployment and increased immigration as a factor for growing and sustaining populism.

One of the major arguments made for the rise in populism is the ‘neoliberal’ argument. Rising inequality and more competitive labour markets, as a result of globalisation, are often claimed to be one of the main driving forces for people turning their backs on classic ideologies and looking for alternatives that populist politicians like Trump and Corbyn provide.

After the fall of the USSR and the triumph of capitalism in the Cold War there was a surge in levels of free trade and economic freedom around the world. At the same time, right wing populism began rising. In 1980 populism started off at a vote share of only 1%, according to data from Timbro’s Authoritarian Populism Index, and peaked in 2016 with 12.3%. Looking at these stats, you might suggest that privatisation, tax reforms and globalisation are pushing voters into the arms of populists.

A briefing paper by Epicentre tests this thesis and reaches the opposite conclusion. In fact, they find that through a 30-year period economic freedom correlates negatively with authoritarian populism. Therefore, increasing taxes or trying to “protect” jobs, as some propose as a solution to meeting concerns within the public, will at best be ineffective and at worst lead to policies that restrict our freedoms or destroy markets. We’ve seen what this looks like in the previous century - it’s not pretty and we don’t want a repeat of it.

Similar results are reached in the Fraser Institute’s Economic Freedom Index 2017. Immigration has attained a significant amount of attention as another reason for rising populism. Trump partly won the presidency on his tough rhetoric towards immigrants. Similar rhetoric was used during the EU referendum campaign in the UK.

The Fraser Institute contrast the neoliberal approach of liberalized migration and free markets with the anti-globalisation movement. Parts of the anti-globalisation movement suggest that neoliberalisation creates an anti-immigration backlash due to increased competition between natives and immigrants and a race to the bottom because the capitalists see it as an opportune moment to drive down wages for profits.

Another argument against the neoliberal approach is a problem not directly related to the free market. Rather, it’s a problem with immigrants who supposedly place a burden on the welfare state which leads to the natives blaming them for threatening their welfare, also known as “welfare chauvinism”.  

Using data from 27 OECD countries, their results do not show a direct effect between immigrant population share and support for populism. However, models show that in countries with higher social spending as a share of GDP and lower economic freedom, an increase in immigration may result in rising support for populist parties. This led them to the overall conclusion that there’s no justification for either the socialist argument or the mercantilist arguments – as set out above. There’s no direct effect between the size of immigrant population and vote-share of populist parties, nor are there signs of more economically free countries with high support of populism.

With all this in mind, it would be counterproductive when populists suggest that we need to restrict immigration and put an end to globalisation to protect the welfare of natives and it would result in increasing polarisation. Luckily, Merkel and Macron understand this. However, in the wake of Trump’s election and Brexit, the world looked to Germany as a potential new global leader, but Merkel hasn’t managed to live up to such expectations due to a lack of inventiveness.

Macron, however, has a good grip of what it takes to meet the concerns that produce rising populism. He understands that traditional welfare states have failed. They are no longer able to provide actual welfare and care for their citizens, instead they’ve crippled innovation and created polarisation which in the end has led to flourishing populism. Protecting jobs in the disruptive economy is pointless and it won’t do any good for the individual. Neither does a tax system that tries to reduce inequality but disincentivizes people from working instead.

Not only would these neoliberal reforms rebuke the populist movement that cries for more protection and less globalisation. They would remove the centre of the problem, effectively mitigating the polarisation that the welfare state has created.

Generational challenges at the MoD

Difficult choices will have to be made on existing equipment commitments and future priorities in order to balance the books. Rather than face up to new challenges, the retrospective response at MoD has simply been to maintain capability across a broad spectrum of programmes and just allow equipment service dates to slip. This usually adds cost rather than saves money.

The new National Security Capabilities Review might do well to engage the public in thinking about its role in protecting the UK in contrast to the traditional approach. Usually the Service Chiefs prefer to think about fighting foreign wars and conventional defence (against Russia, China etc.) rather than adjust priority to the new forms of attack,

A new generation of traditional capabilities is planned to be brought into service, including advanced armoured fighting vehicles, frigates, fast jets and maritime patrol aircraft. The costs of some of these have been negatively affected by changes in the sterling–dollar exchange rate. And the capital and in-service costs of the Carrrier programme for example, will eat into the budget for the next 40 years or so. The question has to be asked: is all this machinery now necessary?

What is absent is any meaningful conversation around our participation as a senior contributor to NATO; a realisation that there are emerging threats at home (especially from Cyber attack) and a focus on what UK is good at: namely, Special Forces capability and some parts of expeditionary warfare.

Over the past decades, the UK armed forces have largely been involved in counterinsurgency and related counter-piracy and counter-proliferation operations. Our activities overseas could be said to be behind some of the rise in risk from home-grown attacks, and states like Russia have raised the stakes of the Cyber warfare game.

Apart from the temporary deployment of armed personnel on UK city streets to protect key facilities under Operation Temperer, the criminalisation of domestic terrorism means this is largely distanced from the military effort. Similarly effort in support of cyber protection, which is best achieved by combining military, security and civilian resources, has been largely ignored.

Abroad, UK defence needs to focus on capabilities that are increasingly expeditionary in nature. Whether that is to contribute to international efforts to counter terrorism in Africa, the greater Middle East and elsewhere or to participate in deterrent efforts in Europe alongside NATO allies. At home, it needs to understand and react to the fragility of our communications.

It needs to ask serious questions about whether we continue to maintain capability from Trident to Typhoon. There can be no sacred cows when it comes to costly military hardware and their efficacy. 

In her Mansion House speech in November 2017, Prime Minister Theresa May reflected on Russia’s and others’ challenge to the UK. She noted the way in which the information age had provided opportunities for those who wished to destabilise the UK to do so remotely whether through interfering in political processes or indeed threatening critical national infrastructure through malicious activity in cyberspace.

This was also reflected in a later speech at RUSI by Chief of the Defence Staff Air Chief Marshal Sir Stuart Peach.

Elsewhere in Europe, states such as Sweden and Denmark are rediscovering the necessity and benefits of an integrated approach to defence with a focus on flexibility and strengthening of combined military and civilian effort.

There needs to be much more creative ways of thinking about how necessary capabilities are organised and delivered, recognising that we fight wars with Allies and need to complement our resources rather than duplicate them.

Learning lessons from others and preventing attacks on our way of life and economy at home should be the new priorities.

Some things that are not right about the Britain of today

There's a great deal that's good about modern Britain. We eat better food, most of us live longer, and we have neat gadgets with which to enhance our lives.  But there are some things that have been wrong for a long time and are still wrong:

1. The shortage of UK housing and the lack of affordability for first-time buyers is caused by a shortage of land on which houses can be built. The 1947 Town and Country Planning Act has strangled cities by its excessive restriction of new building. Non-green land within the green belt – distressed land and farmland - should be given building permission, and the 1947 Act replaced by a presumption of permission, with procedure for objections to be heard and ruled upon. Within cities rights should be given to add an extra storey to existing dwellings.

2. The tax code is absurdly over-complicated, serving only to keep tax lawyers and accountants in business, and even they don't understand all of it. It should be simplified, with a minimum of rate bands and an end to the complex exemptions and allowances. Income tax rates should be low enough to incentivize, both at top and bottom ends. Business taxes should be low, with investment in new equipment and machinery taken off taxable income to boost expansion and productivity.

3. National Insurance is a costly anachronism. It is income tax by another name, but governed by different rules, rates and thresholds. What is called the 'employer contribution' is a fiction, since it comes from the wage pool that would otherwise be available for employees. National Insurance should be made parallel with income tax, starting at the same threshold. If government shies away from revealing the true level of income tax by merging them, NI should be renamed 'Employment Tax' and levied alongside Income Tax and by the same rules.

4. The 'war on drugs' has failed. Prohibition promotes street crime and makes drugs expensive and untrustworthy. Teenage gang members kill each other in turf wars.  The prisons are packed with drug offenders. They overload the courts. The ban on cannabis and ecstasy sets millions of ordinary people at odds with the police. Legalization would enable quality control, better prevention of underage use, and it would augment tax revenues. It would save billions as it freed up the prisons and the courts, and would enable addiction to be treated as a medical, rather than a criminal, problem.

5. Energy policy in Britain is confused and incoherent. The EU Renewable Energy Directive requires us to reach 20% from renewable sources by 2020. This has led the UK to require companies to use expensive sources such as wind power, and has led to both businesses and private homes paying higher bills. The government wants to cap energy prices by law, and there is a real chance there will be insufficient energy to meet UK needs. In fact solar has been falling rapidly in costs, and fracked gas offers the chance to replace oil and coal for lower costs and far less pollution. Instead of capping prices, the government should give energy companies the freedom to innovate and remove barriers to new entrants wanting to compete.  

6. UK transport leaves much to be desired. We are spending billions on the High Speed Two rail links, and not enough on improving infrastructure elsewhere. Meanwhile road transport is headed for electrification and autonomy, and the UK should be accelerating the switch by promoting the facilities needed to support this, and by removing the regulations holding it back. Other innovations that need to be planned for and encouraged include the use of delivery drones and of people-carrying drones as urban taxis.

7. Departure from the EU will give the UK the chance to customize its immigration laws. The overall cap on numbers has been unfortunate in that, unable to restrict flows from the EU, the UK has made non-EU nationals bear the brunt. This has included students and much-needed skilled workers in order to bring down overall numbers. As we leave the EU and regain control of our immigration system, the UK will be free to consider removing limits on people from Canada, Australia and New Zealand (the CANZUK area), to exclude students, and to have a points system that favours skilled incomers from anywhere.

8. Education at school level is improving, thanks to the role of Academies and Free Schools in breaking up local authority control and in extending choice to more parents.  It provides a good basis for moving to a Swedish system where parents can choose between state and private schools, taking the state funding to the school of their choice.  The private schools can be both profit and non-profit ones, and the government should facilitate their establishment by removing some local authority obstruction and red tape.  At university level the loans system should be changed to one where the fees are paid by government, and the student signs an obligation to have repayments made when they are earning enough.

9. The National Health Service doesn't work. The model of free state universal care paid from taxation and controlled centrally does not work. Its founders blithely supposed costs would go down as people's health improved.  In fact the demand is potentially infinite. The overall budget makes it a zero sum game in which procedures have to compete for funds. Ones given what they see as insufficient priority will always wave shrouds on TV and demand more funds. The NHS should continue to be free at the point of use, but should be replaced by an insurance-based system serviced by private providers.

10. There should be a more flexible and encouraging approach to innovation. The Financial Conduct Authority's 'sandbox' approach allows firms designated within it to innovate financial products without the wide regulation that applies to larger, more established firms. A similar scheme should do the same for new technologies. Much of the future will be made by driverless cars, drones, aerial taxis, genetic engineering and other innovations, and it is important that government acts to prevent local authorities restricting new business models to protect existing businesses, and does not do so itself. The EU has shown itself unsympathetic to new models such as Google and Amazon, but a post-Brexit Britain should be more receptive to innovation, whether in machines, in medicine, or in business models.