The problem with government planning things
There are problems with planning. There’s that uncertainty about the future which gangs aft agley the ability to make it arrive on time and in line as upon rails. There’s the quality of the people doing the planning of course, a talent for kissing babies not being notably efficient as a method of selecting those who should decide upon, say, what the energy production mix should be. There’s that problem with planning for everyone rather than just for the self-interested who bother to engage with the planning process.
But the really big one is that no one has a clue about the present:
But you don’t need to have spent those ten minutes on hold — or to have read MPs’ rather more critical report on the early months of the pandemic, published last week — to have doubts. The kind of doubts I get when I read that the government has authorised visas for 800 butchers, or 5,000 HGV drivers, or 5,500 poultry workers, to tackle the supply chain crisis.
In the very precision of those figures is a built-in assumption that the state has a perfect understanding of the employment market, just as it has a perfect understanding of infection rates. And yet as Dominic Cummings — remember him? — pointed out last week, this is the state that experienced large waves of immigration from the EU for 20 years but “was so useless at handling this, it could not even estimate its size to the nearest million”.
GIGO is not just some computing term, garbage in, garbage out is a truism of any system of calculation. It’s why philosophy spends so much time in defining terms before even attempting logical deduction - which is why the subject is still chewing over whether truth is actually beauty these millennia after folks started writing stuff down. And let’s not get started on the complications of thinking our way through “What is truth?”
If we don’t know the present then we cannot possibly plan our way to a preferred future. Simply because not knowing the starting point makes the navigation impossible.
Of course, this has been pointed out before. Hayek’s Nobel Lecture is on this very point. But it’s worth insisting, once again, that we need to pay more attention to it. Every attempt at central planning does indeed leave us where we don’t want to be. For the simple reason that we never do have much more than a vague clue as to our starting point.
At least we're getting an accurate definition of austerity
How long has this taken to arrive?
“Restrictions on the growth in health and social care expenditure during ‘austerity’ have been associated with tens of thousands more deaths than would have been observed had pre-austerity expenditure growth been sustained,” said Prof Karl Claxton of the Centre for Health Economics at the University of York.
“Our results are consistent with the hypothesis that the slowdown in the rate of improvement in life expectancy in England and Wales since 2010 is attributable to spending constraints in the healthcare and social care sectors.”
This past decade people have been screaming about the cuts. And there it is, the actual definition - a slow down in the rise of such social spending. It should be obvious that such social spending cannot continue, forever, to grow faster than the economy as a whole. For the, well, obvious reason that if it did then soon enough we’d have nothing but social spending and nothing financing it.
Some haven’t quite got the message yet. Polly Toynbee, obviously, among them:
I once chronicled Labour’s social programmes and their effects from 1997 to 2010. Spending on the NHS rose by an average of 7% a year, more than since it was founded in 1948.
Well, yes, but it can’t do that forever, can it?
Perhaps now that it’s in a scientific journal we can all agree that there were no cuts? That it was the rate of growth which was shaved, nothing else? That what actually happened was that after an election the new government declined to follow the spendthrift ways of the people who had just lost the election? That being, we’re really pretty certain, the purpose of having elections, that we folks out here get to decide whether the current plans should be followed or that the nation tries some other ones?
Democracy?
We fear the Prince has been grievously ill-informed
It is never The Prince who is wrong but the advisors. So we fear it is here:
In his interview about climate change, ahead of his inaugural Earthshot Prize awards, the duke said: 'We need some of the world's greatest brains and minds fixed on trying to repair this planet, not trying to find the next place to go and live.'
This about Bezos boldly firing Shatner off into sub-orbit and all that.
The mistake being to think that space isn’t a (not the, a) solution to repairing this planet. For example:
But what if we could have solar panels that always face the sun, that are immune to the vagaries of British Isles weather, and which could never be accused of blighting the countryside?
That is the idea behind out-there proposals for a series of giant solar farms floating in space, which are now being considered by the Government. Experts say the systems - each one able to produce power equivalent to a nuclear plant - would provide 24-hour reliable energy and account for a quarter of Britain’s electricity needs.
The first mistake is to think that the current rocket firings are just those sub-orbital tourist trips. They’re actually part of the development programme for orbital heavy lift. The second is to think that being up there isn’t a solution to woes down here. It’s possible to take the Elon Musk view that there is indeed that asteroid out there with our name on it and the solution is to have some of us where that asteroid won’t be. It’s not necessary to take that view though.
For space based solar is entirely possible right now. It’s simply fearsomely expensive and thus not a viable solution as yet. Billionaires spending - or making in one case - their money making getting into orbit is not a diversion from solutions it’s a path to them. For getting into orbit cheaply then makes those fearsomely expensive possible solutions cheaper. Cheaper here means more viable - to the point that if orbit becomes cheap enough then space based solar becomes the solution of preference to our energy desires.
This isn’t to say that orbit will ever become cheap enough for this to be true. It is though to insist that finding out whether it can be made so isn’t a diversion from solving our local planetary problems, it’s one of the means of devising those solutions. As, you know, privately funded technological development tends to be.
Covid and the Permanent Income Hypothesis
In a rare display of political bipartisanship, Joe Biden and Donald Trump have been united by their belief that fiscal injections are the sole gospel of salvation for the Covid-19 economy. This idea is derived from the largely untested Keynesian axiom of the ‘consumption function’, that stipulates a universally positive correlation between one's disposable income and their levels of consumption (measured by their personal consumption expenditure).
This thinking flows into the idea that government injections of capital into an insolvent economy is the secret elixir to restimulation. However, many have been sceptical of the efficacy of this idea, none more so than Nobel Laureate economist - Milton Friedman.
Friedman contended that Keynes has misunderstood the relationship between levels of disposable income and consumption, and that such a faulty premise contaminates much of his work. The Chicago school economist argued instead that the true relationship lies between one’s permanent income and their level of consumption. Through this, Friedman theorised an idea called the ‘Permanent Income Hypothesis’, whereby individuals calibrate their levels of spending today by their expected earnings tomorrow; a direct assault upon Keynes’ long-held premise.
The partitions can be clearly observed: Keynes arguing a strong positive relationship between disposable income and consumption, Friedman arguing for one that is much weaker.
Despite numerous micro-experiments over the past decades to prove or disprove either man, there was not any conclusive far-reaching evidence. However, through the actions taken by the United States government of three separate fiscal injections over the past eighteen months, there has been a clear opportunity to judge this gladiatorial feud.
The period modelled in Figure 1 (January 2020 to present), presents the relationship between Disposable Personal Income (DPI) and Personal Consumption Expenditure (PCE). Through observation, the periods of fiscal injection where the US fiscal stimulus bills were enacted, DPI spikes, and correspondingly PCE is shown as largely inelastic. This theme is continued through the weak positive correlation between the two variables. This suggests the past eighteen months confirms a faulty relationship between disposable income and personal consumption, suggesting that over six decades since theorising, Friedman may just be right after all.
While the state-induced economic fallout necessitates adequate compensation, a point eloquently argued in an earlier article of ours, the sheer magnitude of the fiscal stimulus inevitably raises the question whether such money has been worthwhile. Despite spending over $5 trillion, levels of consumption have been measly affected. This futility is tantamount to the government's sheltering of Keynesian dogmatism behind a Maginot Line of state intervention. It is time this line is broken.
Finally, a sensible complaint about business rates
It really does seem to take time for good economics to sink into the collective consciousness. Henry George was making this point a century and a half ago:
The industry groups – representing all sectors of the UK economy from airports to pubs, shops, construction and manufacturing – said the current system served as a tax on investment and could hold back firms from spending on green projects and boosting their operations outside London and large cities.
Their statement urged the chancellor to announce a cut in business rates alongside other reforms to lower the burden on firms, including removing disincentives for green investment.
Under the current system, a company investing in its physical premises by installing solar panels or heat pumps could add to the value of the building, raising its rateable value and therefore the firm’s tax burden.
This is entirely unlike the landlord whining that we complained of a couple of days back.
The value of a building depends upon two things. What the building is, what’s been added to it - this is investment. Then where the building is, the plot of land it occupies - that’s land value. We actively desire to tax that land value whatever the landlords have to say about it. And we don’t want to tax the investments because investment is what makes society richer.
The correct reform to business rates is therefore clear. Make it a land value tax and be done with it.
Dealing with Covid was easy
We don’t say that dealing with Covid was well done but we do insist that it was easy. We’ll also admit to a certain fondness for the Swedish Method - government action on the really big things and leave most of life to the good sense of the population - and also for Jesse Norman (despite an historic contretemps there). For Jesse was, according to reports, the only person within half a mile of the Cabinet who actually asked the important question: “How much is this going to cost?” Not, we hasten to add, in anything so crude as the mere monetary sense, but in the proper one of what is being given up as a cost of this plan?
Tom Chivers starts our point for us:
But the valuable lesson, I think, is not “we should have done X” or “we should have done Y” specifically, but that we should be less confident in our ability to predict highly complex situations. And more than that: we should look at the possible results of being wrong in our attempts to predict those highly complex outcomes.
A reasonable estimate is that there are, currently in London, 1 billion things on sale. Not 1 billion items, but different things, left handed, right handed, brass, steel, tin, half inch, 3 mm screws and on with the combinations of nails and hammers and on to cars and hoovers and…. Karl Marx was astonished that century and a half ago that one could buy 500 different types of hammer in that city.
Now note that the billion in London are different from the same billion in Birmingham, both ditto Bradford, all three from Brighton and on.
The economy., that is, is a complex thing. Compared to managing, planning and running that economy dealing with covid was elegant simplicity. Yet having observed the performance - and not just of our own government, many did equally badly - with respect to covid there are those who insist that the economy can be run by dictat. Without all of us falling about with laughter. Or, perhaps, without us all rising up to remonstrate with those who could say something so observably stupid.
Covid was simple compared to the economy. Yet there is still that delusion, despite the very evidence before our eyes, that the more difficult task will be achieved more easily than the simpler, or even better.
We wonder if one of those 500 types of hammer can be described as a cluebat? If not, can someone get on with the invention bit please?
Greetings everyone!
I found out about the Adam Smith Institute in the classical free-market way; page 23 in a book by Owen Jones.
In the revelation of learning about an entire organisation that shares my free-market principles, I was infatuated with the idea of one day becoming part of it. Deciding post-application that Economics is my undergraduate calling, and feeling disillusioned to the prospect of backpacking in Vietnam, the opportunity to spend a year in Westminster at the spearhead of neoliberalism was one I wished to unequivocally pursue.
Following my application being sent over summer, I was notified that I have been successfully shortlisted and called to an interview in Westminster. After making my way across from Euston Station, I was immediately struck by the unbridled passion and enthusiasm permeating throughout the office, and knew in an instant that this is a place I long for. I received the news of my successful application while brewing a cup of tea, and in my euphoria, ran upstairs to inform my mother.
My journey into neoliberalism started with the realisation that the only guarantee for prosperity is enshrined within the framework of free enterprise. Through this, a close friend and I founded a classical-liberal advocacy website called Friedmanomics, in order to create a platform for young people throughout the nation who feel their beliefs in individual liberty have been marginalised. From our humble beginnings in a single History classroom, we now have writers from around twenty different schools nationwide and an active following. I am extremely excited to bring this previous experience to my time at the ASI, and contribute in the fight to restore the invisible hand to the role now occupied by the state’s creeping hand.
My experience so far has surpassed every expectation (as high as they already were). Walking across Westminster Bridge every morning, brushing shoulders with my political idols as I shop at the local Tesco’s, being paid to investigate free-market ideas; for a boy from rural Cheshire with a poster of Margaret Thatcher on his bedroom wall, this is an opportunity of my wildest dreams.
Charles Bromley-Davenport is joining the Adam Smith Institute for the next academic year as a Research Associate
Hello all!
Never one to take the conventional option, I declined my place at a top university to embark upon a gap year. However, unlike many of my peers who take gap years, I am taking a break from formal education to do something more academically challenging.
I have always loved debating controversial issues, taking stances which seem objectionable to my audience but convincing them of their merits. In the homogenous environment of school, the only way to do this was by presenting arguments with which I (and everybody else) fundamentally disagreed. Now however, I look forward to advocating for neoliberal policies and winning round a begrudging population. I believe this is needed in order to make significant progress in transforming the NHS and Social Care. Intensified through the pandemic, the British public are intent on resisting any change to the NHS, making reform contentious despite economic merit.
Coming to politics (relatively) late, my interest is driven by academic curiosity, rather than dogmatic ideology, and I look forward to my opinions and beliefs continuing to be shaped and challenged throughout the year. My current particular interest is exploring immigration policy, and am looking into the Nationality and Borders Bill. After working within the system at a refugee support service I discovered how harsher policy towards asylum seekers often doesn’t deter entry but simply prevents people from becoming economically constructive.
With the Budget just around the corner, both in time and geography, I am excited to critique and challenge it. During the initial stages of the pandemic, I competed in the IEA National Budget Challenge, and Economics Horizons Competition, coming 2nd and 3rd respectively, giving me an insight into the process and trade offs required when creating the budget. It will now be interesting to examine a budget from Johnson’s Government that gives a more long term indication of the economic priorities of the Government, rather than simply short term crisis control.
As someone who brings the political conversation to every party or pub I go to and am frequently told that there is a time and place, I am looking forward to spending the year with people who, like me, believe that it is always the time and place.
Fiona Townsley is joining the Adam Smith Institute for the next academic year as a Research Associate
Sir Simon insists that we're all terribly naughty peasants
Travel was the great beneficiary of the leisure society. Only now are we appreciating its cost, not just in pollution but in the need for ever more extravagant infrastructure. Cities sprawl when they should be densified. Communities have become fragmented. British government policy still encourages car-intensive settlement in countryside while urban land lies derelict.
It is an uncomfortable fact that most people outside London do most of their motorised travel by car. The answer to CO2 emissions is not to shift passengers from one mode of transport to another. It is to attack demand head on by discouraging casual hyper-mobility. The external cost of such mobility to society and the climate is the real challenge. It cannot make sense to predict demand for transport and then supply its delivery. We must slowly move towards limiting it.
The aim of having an economy - heck, of having a civilisation - is that folks get more of what folks want. That utility is maximised. There is, of course, that problem of third party costs imposed on others by our gaining our wishes. To which, as every good little economist knows, the answer is a Pigou Tax. If everyone is charged, within the market price suitably adjusted, the full costs of their actions then we gain the optimal amount of that thing. Optimal in the sense that we are thereby maximising human utility.
At which point something interesting from the IMF. Buried in their report on how fossil fuels are subsidised by $6 trillion, that £11 million a minute number, is what the petrol and diesel prices should be if all those third party costs were to be included in prices. On page 18. The UK charges just about the right price. It’s certainly within pennies per litre. This includes all costs too - not just climate change emissions but local pollution, congestion, accidents, road damage and even the idea that not paying full VAT is a subsidy.
We Brits, even if others elsewhere don’t fully enjoy this privilege, are paying the costs of our desires. We are already at that fully worked out and priced optimal utility maximisation. Yea, including the damages to others a century after us as the ice caps melt into the oceans.
But still we travel too much according to Sir Simon, our mere desires and willingness to carry the costs of meeting them counts as nothing. It might be unfair to characterise his views in this manner but still - the complaint seems to be that us damn peasants just won’t stay put where we’re supposed to be. That’s unfair perhaps but how unfair is that?
Casual hyper-mobility? That the proles are able to visit the other side of the hill without having to walk up it?
It's the how, not the how much, that needs the attention
A certain coordination in demands upon the taxpayer wallet here:
From climate change to health, spending on research pays for itself
So, therefore, government should spend more on research.
To be a science and tech superpower we need to invest more
So, therefore, government should spend more on research.
These calls coming separately from the head of the Royal Society and of the National Centre for Universities and Business. The representatives of those who would get to go spend any more government money allocated to research. Well, as the rumoured not-to-be-a-lady once said, they would, wouldn’t they?
The problem with the call being that they‘re concentrating upon how much money is to be spent. That’s their target, a rise to some specified level of GDP. Which isn’t what we’re interested at all. We want to know what is the output and that’s not something directly linked to that level of input. As they both point out, showing that the UK does put in less than many other countries but also gets more out.
So, any sensible analysis must start from the point that we are more efficient. So, why are we? Our own inclination being to suggest that as we do less of this inefficient government spending in this area therefore our system is overall more efficient. If that is the answer - note we only suggest it - then increasing the government portion of spending simply reduces our overall efficiency.
This is before we get to the logical problem here. The argument in favour of government spending is that such knowledge is a public good. Very difficult to make a profit from therefore the private sector doesn’t do enough of it. But if that’s true then it doesn’t matter which government does it, because it’s the production of a public good anyway. The argument being tried on here, that government must do the spending and also that it must be our government that does, fails in its own logical confusion.
Special interest groups and their begging bowls will be ever with us but that doesn’t mean we’ve got to listen to their pleadings.