The most dangerous financial phrase of all - this time is different
The Observer tells us that the water companies in England really must be taken back into public ownership. Because only the public, through that ownership, can provide the socially optimal level of capital to produce the desired outcomes in terms of water quality, environmental protection and so on.
The claim is to fail to understand why they were privatised in the first place, to insist that this time, no really, it will all be different.
Now that Europe is sweltering in record-breaking heat, a second front is opening up against the water companies. And this centres on the investment needed, not just to replace leaking pipes but to support efforts to tackle the climate emergency.
Even in Britain, water is becoming a scarce resource. In the torrential storms that have become increasingly prevalent, the water runs off the land, into rivers, rages through town centres and out to sea. Parts of the country need more reservoirs, which means giving over land near cities that might otherwise be farmed, left fallow for wildlife or used for some form of development. Where aquifers are running dry due to overextraction, public bodies need to decide on the priorities, juggling the competing demands of farmers, local businesses and households.
We’ll accept the basic contention, just for the sake of argument. The water system needs more capital devoted to it in order to deal with our new world.
The fund managers who dominate ownership of the UK’s water companies have no interest in collaborating to develop a water system fit for a dry future.
That bit being arguable of course. Argue we shall, using this same industry as our example. So, why were the water companies privatised in the first place? Because vast capital investment was needed in such systems. And public ownership, state ownership, meant that such money was not forthcoming.
The theory being used by The Observer is that government will produce the socially optimal amount of investment in whatever. Not just that it is theoretically possible that the wise and omniscient planner could, but that the political process will. And yet investment in the water systems soared after privatisation - that was the reason it was done, the public finances, the political process, wouldn’t do it.
So, why is it that this time will be different? Last time around political control produced less investment that capitalist profit seeking. Why, in this time of greater investment need, won’t it play out the same way again?
The example given to us:
Dŵr Cymru (Welsh Water) is a not-for-profit business that is busily repaying debts from its previous life as a profit generator while also improving the network. It is not the only model for change, but it’s a good start.
In the privatisation process England got for profit water companies, Wales a communally owned not for profit, Scotland a state owned for profit, NI remained with local councils supplying the water. A decade after the process OfWat checked upon progress, measuring price (lower is good), water quality (higher is better) and environmental protection (more is good). In terms of who improved the most it ran England, Wales, Scotland, NI.
That is, capitalist water companies worked by the very measures the Observer is using today. Why will this time be different? Even, why revert to the system we abandoned because it doesn’t work by these very same measurements?
The costs of German Economic Union
On July 1st, 1990, the former Soviet-controlled East Germany, liberated in 1989, was merged into the economy of West Germany as part of the reunification process. People gathered in their thousands outside banks at the stroke of midnight to cash in their low value Ostmarks for the hard currency Deutsche Marks.
The exchange rate was 1:1, whereas the real (black market) rate had been between 7 and 11 Ostmarks to each Deutsche Mark. The average sum exchanged was 4,000 marks per person. Of the 25 billion Deutsche Marks sent over ahead of the transfer, some 3.4 billion were handed out on the first day.
The changeover was applied to pensions, wages and savings as well, giving East Germans what was, for them, unprecedented spending power. They flooded to the West to buy Western goods of far higher quality than those they left unsold in the shops of the East. Many Eastern businesses closed, unable to compete once borders were opened. Factories ceased production, and unemployment soared. A government agency, the Treuhand, was established to oversee privatization of the East’s state industries.
Estimates for the cost of fiscal unification to Germany’s social system are put at about €1.5 billion, but there were dislocation and upheaval costs throughout the German economy, costs that reverberated for years to come.
The decision to unify was a political one that was opposed by some Western powers who feared that a unified Germany would unbalance the EU with its huge population and economic strength. The careful balance between a France and a Germany, previously roughly equal in size, would be upset. A larger Germany would demand greater voting power, and could be expected to dominate the EU economy.
The decision to offer an exchange rate of 1:1 was also a political decision. It was controversial in West Germany because it was far out of accord with economic reality. Chancellor Helmut Kohl wanted the full co-operation of the East in the reunification process, however, and knew that a 1 for 1 offer would secure that. Some critics described it as a bribe. Kohl knew it would cause major dislocation, but took the long-term view that when things settled down, Germany would still be united. The subsequent outturn proved him correct.
The parallel today might be with Brexit. East and West Germany had been separate for four-and-a-half decades, and a change in that relationship had to face upheaval as they adjusted to the new status. The UK has been a member of the EU for a similar period of time, and there have to be adjustments on both sides as that relationship is changed. There will be temporary dislocation and upheaval as the UK adjusts to the new reality, just as there was with German reunification. But at the end of it, the UK will still be outside the EU, just as Germany remained united. It will settle into a new role as an independent player on the world stage, and will most likely prosper accordingly.
Venezuela Campaign — Chavista terror follows a familiar path of violence as a political weapon
Aside from bribery, fear and terror are the means by which the Chavista regime keeps itself in power. As the regime weakens and has fewer resources at its command it is becoming more reliant on terror as a means of enforcing obedience. Terror methods include imprisoning or killing dissenters and their families. Of course, the regime doesn’t need to kill all of its opponents, only enough of them to frighten others into acquiescence.
Targeted violence is used against individuals and indiscriminate violence against protestors. Earlier this year, during peaceful civilian protests to support the entry of international humanitarian aid, 107 people were arbitrarily arrested, (a significant number of which were subsequently reported as “disappeared”), 7 people were killed, 58 were wounded by gunfire and a large number injured by other means, including rubber pellets, tear gas canisters, marbles & knives.
Extrajudicial killings are deployed to an increasing extent. The National Police’s Special Actions Force (FAES) is mainly responsible for these. Such killings often target poor areas that oppose the regime. Amnesty International has documented six extrajudicial executions of young men linked to the protests in February this year. The FAES often turn up to the apartment of their intended victims and then shoot them in the head.
On January 24th in Carora, (Lara state) two young men were executed after being linked to a viral audio announcing protests in the city. At around 3pm more than 20 heavily armed, hooded members of the FAES burst into the home of Luis Enrique Ramos Suárez, dragged him out in front of 10 family members, and shot him dead. His friend Eduardo Luis Ramos, also implicated in the audio, was killed when he tried to go and see where the FAES has taken his friend’s body. He was executed in a nearby alley.
Terror is often directed at opposition politicians. Councillor Fernando Alban was arrested on returning from New York before being taken to State Police Headquarters where he died, supposedly after jumping out of a 10th floor window. This is unlikely to say the least, as Alban was a devout Catholic in a secure building.
Opponents of the regime are often imprisoned. As of June 13, the respected human rights organisation Foro Penal counted 773 political prisoners, as well as another 8,613 subject to unfair criminal procedures. Opposition political leaders are usually jailed on trumped-up charges. At 2am on March 21 this year, Venezuelan secret police broke into the house of Roberto Marrero, Juan Guaido’s Chief of Staff, claimed that they found two rifles and a grenade, and arrested him for making “treasonous” social media posts calling for the delivery of international humanitarian aid. National Assembly deputies are meant to have parliamentary immunity against such charges, but this has not prevent the regime from arresting many more, including National Assembly Vice-President Edgar Zambrano, who was charged with treason on May 8th .
Some opposition figures, such as National Assembly Deputy Gilber Caro and Ferrominera union leader Rubén González, have been put before military tribunals, which according to Amnesty International, “undermines the rule of law in the country, violating the Venezuelan Constitution and international laws.”
Major Luz Mariela Santafé Acevedo, the military judge allocated to rule on the case of Gilber Caro, denounced the “planting of false evidence” and defected to Colombia because she “no longer wanted to continue making decisions against due process, effective judicial protection, the right to defence and, above all, the violation of human rights.”
Those arrested are often held in clandestine detention centres, some run by pro-regime militias. On April 5, human rights NGO PROVEA announced the discovery of several such centres, including three allegedly run by colectivos, police, state security forces, and intelligence agencies, where the regime extra-legally detains and abuse Venezuelan citizens. Torture, often directed by Cuban agents, is frequently deployed on prisoners, particularly on those with military backgrounds.
In September 2018 Argentina, Chile, Colombia, Peru, Paraguay and Canada formally asked the International Criminal Court to investigate the regime for crimes against humanity. The request is backed up by a 500 page submission from the Organisation of American States (OAS) which, along with instances of torture, rape, imprisonment, and other forms of persecution, cites at least 6,385 murders and extrajudicial killings.
Vicious brutality is a hallmark of the Chavista regime. Without the use of terror, it would have collapsed long ago. We must hope that those responsible will be held to account and Venezuelans will soon be liberated from the Chavistas’ reign of terror.
More information on the Venezuela Campaign can be found on their website.
When Hong Kong was ceded to China
The UK’s 99-year lease of the Hong Kong New Territories expired on June 30th, 1997. It would have been impractical, if not impossible, to separate them from Hong Kong Island, ceded to Britain in 1842, and the Kowloon Peninsula, ceded in 1860, so all of them were ceded to China at the time of the Handover, as it was called.
The Sino-British Joint Declaration established the principle of “One country, two systems,” declaring that mainland China’s socialist system would not be applied to Hong Kong, which would be allowed to continue its capitalist system and its way of life for at least 50 years. The democratic Hong Kong Assembly was, however, replaced by a new body in which only a minority of the seats are elected locally.
Nervousness about what the Communist authorities might do, once they were in control, led to a mass wave of emigration from Hong Kong lasting over five years. Popular destinations included the UK, Singapore, Canada, Australia and the US. Vancouver was an especially popular destination. One million people left between the start of the transfer negotiations in 1984 and their conclusion in 1997. This was reckoned to have constituted a serious drain of talent and resources from Hong Kong’s economy.
Hong Kong prospered under economic freedom. Despite having no natural resources, it went from being a subsistence economy to a global economic superpower in a single generation. The one resource it had was the native talent of its people, unleashed by light taxation and regulation, plus free trade. China, whose own economy is increasingly capitalist, does not want to disrupt this wealth-creating economy on its doorstep. Yet it remains determined to monopolize political power in the hands of the Communist Party, meaning it has a delicate balancing act.
It has already provoked street protests by young people when it is heavy-handed in restricting the freedoms Hong Kongers have hitherto enjoyed. The recent protests about accused offenders having to face extradition to trials in mainland China is only the latest concern. Companies will be reluctant to do business in Hong Kong if their executives face extradition to kangaroo courts in China under the thumb of the Communist Party and required to follow its orders. Hong Kong is under the rule of law; mainland China is not. The Chinese have wisely backed down for now.
One thing causes China to tread more delicately than it might otherwise. It is Taiwan, regarded by the PRC as part of China, but which has operated as an independent and successful country for decades. It enjoys democracy and economic freedom. It is watching how China treats Hong Kong, and will never agree to integration into China if Hong Kong loses its free way of life and its free economy.
When the facts change we change our minds. And you Mr. Health Secretary?
We all recall that there’s recently been a listeria outbreak in the National Health Service. This then being the trigger for the Health Secretary, Matt Hancock, to argue that NHS catering should be brought back in house. For the outbreak was traced to an external supplier of sandwiches. As we noted, this sounds more like an excuse than a reaction:
Listeria’s an excellent excuse to bring National Health Service catering in house, it’s just not a good reason to do so. But that seems to be the way Matt Hancock is taking matters.
Why can’t sandwiches be made in an NHS kitchen, after all?
Except the facts have changed:
A sandwich company has gone into liquidation just days after it was cleared of being the source of an outbreak of listeria which killed five hospital patients.
The Good Food Chain announced it was to cease trading with the loss of 125 jobs because the impact of the contamination crisis had severely affected business.
The company, based in Stone, Staffordshire, had ceased production at the start of June shortly after the outbreak was discovered.
Earlier this week, the Food Standards Agency (FSA) confirmed the Good Food Chain was not the source of the outbreak.
The strain of listeria was identified in meat produced by North Country Cooked Meats, which supplied produce to Good Food Chain’s sandwiches.
The interesting thing is to watch what happens next. Does the argument change to all meats must now be cooked in house? The NHS must make ham? Or are we going to remain with the idea that the NHS must be making the sandwiches, the thing which didn’t cause the listeria outbreak?
The answer will tell us two things. Firstly, whether politicians do indeed do what we do, what Keynes said all should, change minds when facts change. The other being, of course, whether this use of listeria to argue for in house NHS catering was a reason or an excuse.
Bastiat: You can’t spend the same money twice
Frédéric Bastiat was born on June 29th, 1801. He brought a great deal of sense, together with some humour, into the study of political economy. One of his most famous arguments against protectionism takes the form of a satirical plea from the candle-makers and tallow producers to the Chamber of Deputies, requesting that the sun be blotted out to reduce the unfair competition it gives them.
Another of his “Economic Sophisms” is a petition to the king to make it illegal for people to use their right hands. He was mocking the idea that making more work creates more wealth. In a further one he suggests that if a railway connected France to Spain, enabling each to buy what the other produced more cheaply, domestic manufacturers would demand tariffs to protect their output, thereby negating the railway’s benefit. If government then broke the railway, the tariffs would be unnecessary. It might be better, he suggested mischievously, just to build a broken railway in the first place.
Most famous of all is his “broken windows fallacy,” which introduces the notion of opportunity cost, although that name was only given to it much later. The shopkeeper’s son breaks a window. The glazier comes to fix it, and receives 6 francs for his work. He spends that in town, and others in turn spend the extra money, apparently boosting the local economy. No, says Bastiat. That is only what is seen.
“It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.”
The shopkeeper is back where he started with a complete window, but he is 6 francs poorer, and those 6 francs could have boosted the local economy. This is opportunity cost; you have to include in the cost of doing something the other things you might have done instead. Money spent on a night at the races cannot also be spent on the theatre or at a restaurant.
Bastiat was strongly for free trade and limited government. He wanted government to protect life, liberty and property. If it used its powers to take from one person to give to another, it was engaging in legal plunder. If government engages in this, he declared, “it can grow endlessly.”
He engaged in politics himself, being elected to the National Legislative Assembly after the 1848 revolution, but died of TB shortly afterwards, aged only 49. His contribution, his name and his ideas continue to live, though, as a humorous counter to some of the sillier ideas put forward by people ignorant of economics.
Philip Alston is deeply uninformed about the subject under discussion - inequality
We’ve been pointing out for some time now that Philip Alston, the UN’s special rapporteur on matters poverty and inequality, is remarkably ill-informed on the subject under discussion. He shows this again in two manners.
One is perhaps trivial but enlightening:
The special rapporteur, Philip Alston, told a side meeting at the UN human rights council, in Geneva, that it was a tragedy that the Tory leadership candidates were promising tax cuts. He warned that this meant “even less money, not just to spend on the poor but on infrastructure and the middle classes”.
Actually, Boris Johnson’s suggested cuts are entirely about the middle class. Being, as they are, about the level at which higher rate tax is paid. That being a useful shorthand for middle class in Britain, those who are paying higher rate tax. Those on perhaps double median wage up to those on four to five times it - £40,000 a year to £100,000 and change. Just to be rough about the numbers.
Alston is using there the American definition of middle class, everyone who finished high school but not in the plutocratic 1%. Of course, use one’s own native language, why not, but it would help if when discussing Britain one actually discussed Britain in British.
It’s this other which is more important:
He added: “Tax cuts on this level are a bid to dramatically increase inequality and benefit those who are already wealthy.” Even conservative economists could now recognise that inequality was “counter-productive to economic growth”.
Not really, no.
He cited work by the Organisation for Economic Cooperation and Development, and International Monetary Fund which suggested increased inequality was antithetical to growth.
The OECD work is discussed here, the IMF here. The IMF’s actual finding being that tax and redistribution to reduce inequality can be beneficial - or at least not harmful - up to a point. But “excessive” tax and redistribution is indeed harmful to growth. Something which just leads to our having to define “excessive” of course, which the IMF does. Trying to move the Gini between market incomes and post tax, post benefit incomes, by more than about 13 percentage points.
The UK currently moves the Gini by about 13 percentage points between market and post tax, post benefit, incomes through tax and redistribution.
The point and aim - well, the declared one - of a special rapporteur is that the UN sends an expert to have a look at things. This might sound a little harsh, reactionary and crusty even, but would it be excessive if we asked the UN to actually send an expert?
Rousseau - when philosophy ignores reality
Jean Jacques Rousseau, who was born on June 28th, 1712, holds the rare distinction of espousing a particularly unpleasant philosophy, while simultaneously contriving to be a particularly unpleasant person. Samuel Johnson described him as “one of the worst of men; a rascal, who ought to be hunted out of society, as he has been." Edmund Burke thought he was possessed of vanity “to a degree little short of madness.” He even managed to fall out with David Hume, as he did with everyone who befriended him. He was increasingly prone to bouts of paranoia.
He took the view that people in a state of nature were naturally good (“noble savages”), but were corrupted by civil society. Progress in the arts and sciences eroded virtue and morality, he said. Before society, he taught, men were naturally free and peaceable to others. But then agriculture and early manufactures enabled people to store value, bringing private property, inequality, and the vices that he thought accompanied them, vices such as idleness, luxury and vanity.
Voltaire thought that this amounted to asking his readers “to walk on all fours” like a savage. Rousseau seemed to have no concept that primitive tribes routinely made war on each other, as did their simian predecessors, and that it was the evolution of society that brought the civilized values. Rousseau’s book, “The Social Contract” (1762), pointed to a tension between the freedom of individuals and the “general will” for the good of society. Those who did not obey the latter must be “forced to be free.” “Man is born free,” he wrote, “but lies everywhere in chains.”
Rousseau was very influential. Although he coincided with the Enlightenment, he was really anti-Enlightenment in opposing most of its values. He might even be classed as an early Romantic. The later French revolutionaries drew inspiration from his work as they set about the destruction of their society and its replacement by a theoretical one they had dreamed up to replace it. Karl Marx later acknowledged his influence.
Rousseau’s ideal society might be imagined by the fact that he praised Sparta for banning art and literature to concentrate on military prowess, while denouncing Athens for its artistry and intellect.
His book, “Emile” (1762), was influential in education, favouring “natural development” in which a boy would be allowed to live like a natural animal until the age of 12, when he developed reason, and should be taught a skill when aged 16. Rousseau abandoned his own children to an orphanage, however.
Obviously, Rousseau has been favoured by those who despise what society has engendered, and who wish to remake it according to their own vision of a better one. To others, though, his ideas seem fanciful, impractical, and scientifically illiterate, and many think the world would have been better had he never been in it.
A basic misconception about the purpose of politics and government
At least we think it to be a basic misconception. The idea that we should be attempting to design the population to fit the world as we’d like it to be. A version of which is this, about the development of the New Towns in Essex post-WWII:
….while Harlow’s town centre featured work by the English sculptor Barbara Hepworth, all of which implied that the future of the UK was to be guided by civic-minded, social democratic ideals. “I believe we may well produce a new type of citizen,” Lewis Silkin, Labour’s minister for new towns, told the House of Commons in May 1948. “A healthy, self-respecting, dignified person with a sense of beauty, culture and civic pride. In the long run that will be the real test.”
The new citizen, as with New Soviet Man, failed to turn up. Give that we are talking about Essex, obviously failed to turn up.
Thus neatly illustrating one of our basic beliefs. We shouldn’t be designing the world for people as they ought to be. Rather, attempting to harness humans as we generally are to the best result that can be achieved with us. For example, rather than attempting to abolish greed, harness it though capitalism. Sure, it then needs controlling which we do through competition. Instead of those continued attempts to insist that we’ll all gladly do everything from the pure love of our hearts which is that more communal insistence.
Not that there’s anything wrong with love from the heart, nor community. It’s just not the thing that tends to motivate the humans we’ve got - as with Essex not having produced New Silkin Man.
When Gordon Brown became Prime Minister
On June 27th, 2007, Tony Blair resigned, and Gordon Brown became Prime Minister. It was not a good day for Britain. He had always resented Tony Blair becoming Labour leader and then Prime Minister, but had a free hand on the economy as part of the deal. After 10 years his allies finally out-manoeuvred Blair and forced his resignation. By then Brown’s seething resentment had made him ill-tempered and grumpy, in the habit of shouting and throwing things at his subordinates.
Brown’s premiership was coloured by the Financial Crisis, which took up most of his time and attention. As Chancellor he had spent money like there was no tomorrow, specializing in “stealth” taxes that would slip unannounced into his budgets. He claimed to be a neo-Keynesian, but he was not.
The Keynes policy was supposed to be spending at the trough of a cycle and repaying it in the boom years. Brown was spending in the boom years and had no reserve when the crash came. He claimed to have “abolished the business cycle” by smoothing “boom and bust,” but it turned out that it was only “boom” that he’d got rid of. He always called his spending “investment,” but he used the word as someone might say they had “invested” in a bar of chocolate.
Credit should be given where it is due, though, and he did two good things. In his first days as Chancellor, he gave the Bank of England its independence. The ASI had advocated that for 20 years to stop Chancellors being tempted to create inflationary booms ahead of general elections.
His second great achievement was to keep the UK out of the Euro. Blair, the keen Europhile, had wanted us to join, but Brown drew up his 5 conditions on the back of an envelope. The conditions could not be met, so the UK did not join, and had the flexibility of an independent currency in the wake of the big crash when it came.
One of his worst acts, of which there were many, was to sell Britain’s gold reserves at the trough of the gold market. Indeed, he made it plunge even lower by announcing in advance his intention to sell. He sold 395 tonnes of it at £3.5bn. Had he not done so, it could have fetched over 3 times that sum a few years later.
Otherwise his premiership will be remembered as one in which he was forced to react to events, leaving little space to initiate the supply side reforms that Britain needed. His short term in office will be exceeded by days by that of Theresa May when she formally steps down. Neither featured many significant or memorable achievements.