Stasis isn't a good look for an economy - nor a civilisation
The Public Accounts Committee tells us that losses on lending to Greensill could have been avoided:
Taxpayer losses linked to the collapse of Greensill Capital could have been avoided if the state-owned British Business Bank had not conducted "woefully inadequate" due diligence and the Treasury had shared more information, a damning report has found.
The Public Accounts Committee, which scrutinises public sector spending, has said the bank was "insufficiently curious" about where the money it lent was going and accepted too much information provided by Greensill in its application for Covid support scheme cash at face value.
It’s entirely possible to avoid direct losses by the simple expedient of never doing anything. That does then raise the risk of suffering significant losses from not having done anything. The balance between an economy, or civilisation, in complete stasis and one where everything done is an entire and whole mistake and waste being one that has to be struck. For that stasis isn’t a good place to be.
So, we’re willing to cut a certain amount of slack here. The entire point of those covid loans schemes was that they were being done in an emergency. So, doing it right now was more important than making sure that every pound was being sent to entirely and wholly the right place. As with, say, sending out food in a famine. We’d all far prefer that some greedy guts got two portions of beans, everyone got one, than a more careful approach where most got one and some none. Sometimes just flooding the zone is the right answer.
At which point, to return to our more general view of governance. The British civil service, the British government, has proven itself incompetent at the task of handing out free money. We’d better, therefore, stop asking them to do the difficult things like planning how to save the planet, planning how the economy should work, planning the type of cars we should use, planning, in short, how to bring peace and light to the Earth. Because if they can’t get the first line of the cheque right, the bit just after the “Pay to the order of” then why would we trust them with anything else? Or even ask them to do anything else?
Unkind, perhaps, but drivel's not a good starting point for a policy decision
We must, apparently, do much more recycling:
The UK must scale up recycling of materials for low carbon industries or risk facing a critical shortage of key metals, a new report warns.
The projected use of lithium, cobalt, silver and rare earth elements by the UK’s low carbon industries over the coming decades is set to soar. China controls 60% of global mine production and 40% of rare earth metal reserves, raising fears of a significant threat to the supply chain for businesses.
But the thinktank Green Alliance said the UK could limit the threat by building up domestic recycling of valuable materials and reducing energy use.
Why, yes, by “reducing energy use” they do mean that you’ll have to walk and if you can’t get there by walking then you’ll not get there. Why do you ask if they do?
The problem with this, as with all other such claims about how we’re all about to run out of everything, is that it’s based upon drivel. The purest, most wholesome, drivel. As detailed in this free and usefully short book of ours.
The story is that if we go green then:
UK demand for certain critical raw materials is set to soar as a result of the move to a net zero carbon economy. Under its current transition strategy, it is likely to use up double its fair global share of known reserves of some critical raw materials by 2035, and this could increase to as much as five times its fair share by 2050. We have assessed ‘fair share’ based on the amount of known reserves available, divided per head of population.
Those who pay attention will know that reserves aren’t a useful measure of anything other than reserves. In their background paper - yes, we checked - they define their counting as:
UK critical raw material demand is calculated cumulatively from 2021 and compared to known global reserves (the amount estimated to be economically and technically recoverable), based on United States Geological Survey data.
Yes, drivel.
Mineral reserves are not what there is out there to use. There’s no even connection between those two things, what can be used and reserves. Reserves are what has been proven to be there, to a high legal standard, and can be extracted using current technology, at current prices, and a profit made from doing so. It costs a lot of money to prove all of this so people only do it for deposits they are, or about to, mining. The useful definition of reserves is therefore the stock at mines.
This bears no relationship at all to how many other mines we might be able to have, other minerals we might extract from, what happens when prices change or how much is actually out there. There’s just no connection at all.
So, the claim here is that the UK must start doing lots of very expensive recycling - for if it were cheaper than digging holes we’d already be doing that, as we do with many other metals - because, well, apparently because the Green Alliance know jack about the subject under discussion.
Ignorance and drivel not being the way to decide upon public policy to our mind. But then perhaps we’re just picky on that point.
The GA say to us that:
We conducted the analysis based on known global reserves and understood the definition we were using, including discussing it with our Circular Economy Task Force member Colin Church who is CEO of IoM3. Nowhere in the report do we claim that it is not possible to find further reserves. Rather, we are using this analysis to indicate that by failing to limit rises in future demand, the UK will either use more than its share or drive up new mining. Both scenarios lead to us causing detriment to other countries, including lower-income mineral exporting countries, in terms of environment & social impacts as well as potentially making it harder for other countries to scale up green techs.
We tend to think that’s been cobbled together. At least we hope it has been. For look what is actually being said there. If we buy something from foreigners then that’s bad for foreigners.
Just to twist the knife a little, from their report:
Some processes also exacerbate water scarcity. Brine‑based lithium extraction in South America requires 500,000 gallons of water per tonne of lithium, in a region already suffering water stress.
Brine is salty water, those South American brines are much saltier than seawater. They cannot be and are not used for other things - largely because they kill any plants or animals they are applied to. One of the salts in that salty water is a lithium salt (salt can be the stuff we put on our food, but also a large number of chemical compounds). The way that 500,000 gallons of water is used to process the lithium is that we take the lithium out of the salt water.
That is, we don’t use 500,000 gallons of water to get a tonne of lithium, we clean 500,000 gallons of water to get a tonne of lithium.
Basing public policy on this sort of drivel just isn’t going to make us a richer and happier nation. Who knows, perhaps we could start basing what we do on some knowledge of reality? Or is that too much to ask?
Never, ever, forget the tax wedge
The famed Laffer Curve is an observation about reactions to changes in the income that can be acquired through offering labour out into the market. It’s only a subsidiary use of that observation that some strive toward a target income, others more affected by marginal gains, which concerns taxation rates. The tax is a trigger for those income changes, but the observations would be true if there were some other factor changing income due from that labour.
That we use it to talk about the tax wedge - the difference between pre-tax and post-tax prices and reactions to them - just shows how important the tax wedge is when considering reactions to prices.
At which point something which we don’t think is true:
Currently at $150 per kilowatt hour, once battery storage falls to $100 per kilowatt hour, petrol and diesel cars will become uneconomic.
The untruth here is ignoring that tax wedge. As we’ve pointed out before the IMF claims that petrol and diesel are correctly - to within pennies a litre - taxed in the UK currently. Electric cars are, using the same calculation, distinctly undertaxed. For the correct taxation is not just about CO2 but congestion, VAT, accidents and so on.
This before we get to the political reality that government currently loves that £35 billion -ish a year from fuel duty and is going to replace it with another tax on the same activity if and when all is electric.
That is, the $100 claim is for untaxed electric as opposed to heavily - even if by one calculation correctly - taxed ICE. The correct comparison should be between electric as it will be taxed and ICE as it is taxed. Our estimation here - admittedly, using the ASI calculator of a wettened thumb held up into a following wind - is that it’s unlikely that electric vehicles ever will be cost competitive with internal combustion engines. Not when we include the tax wedge, which is the only way to properly evaluate such things in the real world.
Batteries plus £35 billion a year in tax are not going to be cost competitive with ICEs plus £35 billion, nor batteries without tax against ICEs without tax.
Given the estimation method here we do welcome more accurate calculations and if the facts do change we’re entirely willing to change our minds on this. We think it unlikely we’ll have to.
The difficulty of governing a society in any detail
Three little stories from just one issue of one newspaper:
Shell is planning to finally scrap the complicated Anglo-Dutch structure that critics say has been a drag anchor for years.
It would shift the firm’s centre of gravity decisively from The Hague to London, completing a process started in 2005.
The second:
The Church of England is facing questions over its role in converting hundreds of asylum seekers, including the Liverpool suicide bomber, to Christianity in an attempt to help them avoid deportation.
The third:
Female prisoners should not be forced to live with “big, brute rapists who have decided to identify as women”, a former minister has said.
Dutch law places significant barriers to stock repurchases through the dividend tax imposed in that country. Folks can - and do, obviously - get around that simply by leaving.
Apostasy is a crime carrying the death penalty in certain Muslim countries and the end result can be informally applied in some other majority Muslim places. Apostasy as a method of not being sent back to such places can have its attractions.
Rules about gender and prison places can be gamed - so, they are.
Our point is not that any of these rules are incorrect. Nor that there don’t have to be rules in such areas. If there’s corporate taxation then there must be rules about what corporate taxes are. If a distinction is to be made between an asylum seeker and an economic migrant then rules about which is which have to exist. If the prison estate is split along gender (or sex, use whichever word you prefer) lines then rules there have to be over the definition of gender (or sex) suitable for each part of that prison estate.
Our point is that any such rules will be gamed or avoided over time. Simply because that’s what we humans out here do. We look at the rules constricting us and plot our slides through the thickets. This means that any attempt to rule a society in any detail fails.
For once that path that may be slid along is identified, here comes another rule to block it, then another iteration of exploration, another set of rules, avoidance, rule and so on until:
However, it was during his travels that Mr Koenig realised “just what a source of distress it was to our country.”
“These are not just anecdotal tales of paperwork but something much deeper about the way the state is structured. France remains highly Jacobin - very centralised, interventionist and dirigiste,” he said.
“It belies a lack of trust in the individual whose every move is micromanaged. That creates a huge sense of mistrust among citizens against the powers that be and has seen France descend slowly into a sweet anarchy where nobody respects the rules as they are no longer intelligible.”
Yes, of course it’s possible to make cheap jibes about how none of us actually want to become French. But this is the end result of such stultifying rule making - everyone ignores them. One of us spent considerable time in the late Soviet Union and its aftermath and life was lived in the interstices of those all encompassing rules. Just everything was approached from the aspect of well, here are the rules, so we obviously don’t do any of that and how do we slide by them?
The detailed governance of tens of millions of people just isn’t possible because people are, well, they’re people. They’ll game any such system and the greater the clampdowns the more they’ll - we’ll - ignore the rules as a whole.
That is, the old British system of having few specific rules, a few general principles and enforcement only of the important stuff actually does work. To the annoyance of would be rule makers, papershufflers and clipboard wielders everywhere.
That that’s also a description of a free and liberal society is a useful coincidence but it is that, a coincidence. It’s the system that actually works is the point we want to get across here.
Governments need to rule lightly to rule successfully.
Once more into the breach dear friends - time to sort out low pay again
Polly Toynbee alerts us to one of the unfairnesses in modern life. For once we actually agree with her as well:
On Monday, the “real living wage” – a voluntary scheme – is rose to £9.90 an hour outside London, which equates to £1,930 more a year than the government’s so-called national living wage (NLW).
As we’ve pointed out before there’s nothing wrong with that real living wage calculation, it uses the same underlying logic as Adam Smith and the linen shirt. If the people in a society think that not being able to do - or own - these things makes you poor then in that society, if you can’t, then you’re regarded as being poor.
As we’ve also pointed out, in common with the New York Times back when it knew things, the actual minimum wage is £0. We’re thus not in favour of the idea of a legislated minimum wage any higher than that. It is though true that one exists and that’s the world we currently live in.
At which point to complain about something we’ve shouted about before. Shouted, complained, about to the extent that policy changed.
Back in 2004, 2005, however far back in the mists of time it was, when the Joseph Rowntree folks first started calculating this living wage, we pointed out that the difference between that and the legal minimum wage of the time was near entirely the amount of tax charged to those on low incomes. Every year, as both changed, we made the same calculation and indulged ourselves in making the same point. If we were to lower the taxation of the poor by increasing the personal allowance to that full year, full time, minimum wage then we would have solved the problem being complained about. The post-tax take from the minimum wage, untaxed, would be the same as the living, now real living, wage as taxed.
We wish to increase the incomes of the working poor? Then stop taxing them so damned much.
This became one of those things that took off as a political meme. One of us had significant input into the tax part of a fringe party political manifesto where the idea appeared. Our advocacy here convinced various Lib Dems including a certain Mr. Clegg - aha, aha, to the extent that they’re not or weren’t a fringe political party. The good folks at the Centre for Policy Studies worked on George Osborne and so when the Coalition came together it became policy.
Those decades of fiscal drag that led to part timers on minimum wage paying income tax were reversed. The personal allowance was raised from the £4,000 or so level up to the current £12,570. It took half a decade to get the idea established, a decade following that to get the change fully implemented. That the number is £12,500 plus a little inflation is because that’s what the full year, full time, minimum wage was when the ambition was announced.
And now we’ve all got to do it all over again. For look at Polly’s number there. £1,930 a year. As the minimum wage is currently £8.91 an hour that means the work year is being calculated as 1,950 hours (1930/99p is 1949 an’a’bit) Which looks a little high for the average but isn’t far off that average for full time workers.
OK. So, 1950 hours times that £9.90 is £19,305 for that real living wage. Given that that’s well into the top 10% of global incomes we do think that’s pretty high for a minimum wage but still. The personal allowance for income tax is £12,570. So, 20% income tax is paid on £6,735 a year - £1,347. “Employees’” national insurance starts at £9,568 so the 12% charge is on £9,737 and is £1,168.44. Everything gets worse if we include “employers’” NI which is, as we know, incident upon wages.
So we have this situation where we’re charging £2,515 in tax to those we also insist are only just making it out of poverty for a full year’s work? Further, where we could solve this simply by insisting that the full year, full time, minimum wage is what the personal allowance should be - for both NI and income tax of course.
For look at what happens. The current minimum wage is, for those working hours, £17,374 a year. The current real living wage as currently taxed is £16,790.
We do not, in fact, have wage poverty here, we have tax poverty. The problem is not the wages being paid, it’s the exactions upon them.
Or, as we said all those years ago and won in part - because we were right - and as we’ve got to shout about all over again. If we want the poor to be richer then stop taxing them so damn much.
The only even possibly logically valid argument in favour of a minimum wage - one that, as above, we don’t in fact agree with - is that it’s a moral issue. Society has decided that that’s the minimum, irreducible, value of an hour’s work and that’s that. OK then, that’s the minimum, irreducible, value of an hour’s work then and society doesn’t get dibs on a slice of that in the form of tax.
Both these numbers, the personal allowance (even, three numbers, taking NI and income tax as having different allowances) and the minimum wage are under the control of the Chancellor of the time. One day we’ll have one who does the right thing and makes it clear that they’ve all got to be the same number. The tax allowances are the full year, full time minimum wage, the full year, full time, minimum wage is the tax allowance.
Anything else is building the society on the backs of those we’ve already declared are too poor to fund it and why the hell would we do that?
Conglomerates and the financialisation of everything
General Electric is to split itself up into three companies in a continuation of a process that has been going on for decades more generally - that death of the conglomerate. In a description of why they used to exist we have this:
What’s more, the cash generated by one division could be used to fund research and development in another.
We would not say that what is about to follow is the entire explanation but we would insist that it’s part of it.
Raising money used to be an expensive operation. Stock and other capital markets were not that liquid. Spreads were wide. The pool of capital was not that deep.
As those people complaining about the financialisation of everything have been saying, the financial markets are much larger now. They’re distinctly more efficient. Spreads are vastly lower - we’ve seen one estimate that stock spreads in New York have declined by two orders of magnitude in the last few decades. This is, of course, at least partially a result of High Frequency Trading.
The influence upon conglomerates is that it used to be sensible enough to keep money within a company and reinvest it within the corporate envelope. Thus disparate lines of business with the cash flow of one financing the next. This has obvious costs in that a structure, management, workforce, optimised for one task didn’t necessarily have the skills - possibly the gumption, or even a clue - to run that entirely different line of business. But that cost of running finance across the corporate boundary made up for that.
Now that cost of raising finance is much lower. So too is the cost of paying out past profits to shareholders. So the cost of specialisation has come down - and so we see more specialisation.
This is exactly the flip side of all those complaints that companies are paying out profits as dividends, performing stock buybacks and so on, rather than investing internally. We have more efficient financial markets now so paying out the gains from one line of business to leave individual investors with the capital allocation decision now makes more sense than it did.
As we say, we’d not die in a ditch to insist that this is the only thing that has been going on. But we’d certainly deploy those logical shovels to dig in on the point that this is partially to largely true.
The increased efficiency of financial markets has meant that we no longer have to put up with the inherent inefficiencies of conglomerates. Or at least less so that we used to. We take this to be a good thing as we generally do about increased economic efficiency.
Oh what a tangled web we weave
Some people want to be MPs, MPs want to be ministers and ministers want to be financially comfortable in their later years. According to Monday’s Guardian, half of all Tory ex-ministers take jobs in companies relevant to their former departments. Business is driven by value for money and directors would not be offering employment for the pleasure of ex-ministers’ company at their lunch tables. The Patterson affair was trivial: the line between advising on lobbying and helping out with doing it is a fine one, remembering that the companies will make no secret of where their advice came from. The civil servants who actually make the decisions are well used to ignoring the lobbying by their own ministers, never mind other MPs.
One wonders for example what motivated the Government to put millions into Rolls Royce generation II small nuclear reactors intended for submarines, 20 years or more ago, and disregard the modern generation IV advanced nuclear reactors (costing about the same but producing more electricity) now being progressed by other leading countries. It would be absurd to believe that future employment had anything to do with it.
Parliament should not waste its time on trivia, like the Patterson affair, or whether the Prime Minister had the authority to have his official living quarters redecorated, but on the far more insidious forms of corruption, namely ministers and senior civil servants making decisions in their own long term interest and trespassing on the coattails of quangos and regulators that should be independent but are not.
My streamlining quangos paper last October showed how they could all be abolished: either they are necessary but should not be independent, in which case they should be integrated within their departments, or they are necessary and should be truly independent, in which case they should report to Parliament, not government, or they are unnecessary and should be abolished. Setting up a new quango to address an awkward issue is bad government and expensive for taxpayers.
The NHS is a classic case in point: it should either be an Executive Agency (part of government) or a Public Corporation (independent of government and reporting to Parliament). The previous Health Secretary considered these options and decided it was more fun to tell the NHS what to do when he felt like it and disclaim all responsibility when he didn’t. As a “non-departmental public body”, It remains simultaneously independent, and not independent, of government.
The fact is that neither this, nor any other, UK government will stop meddling in legislative matters that belong to Parliament or using the tangled web of governance to further its own interests. And the personal interests of ministers do not necessarily coincide with what the country most needs.
The country is lucky to have many high quality ex-ministers still serving on the back benches. They should confer with the leaders of opposition parties to discuss what kind of parliamentary commission should review the streamlining of governance and its relationship with Parliament. Government would obviously whip against any such motion and we would then see which MPs prefer their own personal ambitions to the best interests of the country.
Decision making on steel - kick that can
Much muttering is going on over what should be done about steel in the UK. The correct answer being nothing. At least, nothing yet.
The tasks of decarbonising the economy and securing supply chains do not come bigger than for the sprawling steel plant in Port Talbot in Wales.
For more than a century it has dominated the town as one of its largest and best-paying employers.
But the plant, one of the UK’s top carbon polluters, will need to find ways to make steel with less carbon dioxide output - eventually cutting it entirely in the race for net zero.
The challenge for loss-making parent Tata Steel UK is who will pay for improvements to achieve this. An inability to find the funds could put local jobs at risk.
It is possible that the UK really does need to be able to make its own virgin steel. So, scrap recycling with electric arc furnaces is fine but not exclusively. It is possible that it doesn’t so arc furnaces only would be fine.
That though isn’t the only question. There is a method - direct reduction - which is low to no carbon. It depends upon green hydrogen to work usefully. If we do get solar to electrolysis cheaply enough then DRI is the solution. If we don’t it ain’t.
So, what do we do now? We wait.
Which is where we really do insist that doing everything now is not cheaper than just waiting and seeing. Even, this is at the heart of why so many dislike the Nordhaus (you know, the Nobel winning manner of dealing with the problem) approach to climate change. This seeming detail:
Within the next 10 years, one of its two blast furnaces will need replacing, offering the opportunity to simultaneously implement a new system - giving time for new skills to be learned.
The Nordhaus approach is to work with the capital cycle. Don’t scrap perfectly usable stuff we’ve already got built. Wait until we need to replace it anyway then make sure that the replacement is the best - in this case least emittive perhaps - available option at that time.
Don’t tear down usable blast furnaces, tear down ones that need replacing anyway. At which point the begging letters for tax funding are easier to deal with because even if subsidy is still required it’ll only be the marginal cost of the new tech, not the total replacement cost. And, of course, we’ll know a great deal more about whether than green H2 is going to work properly or not in just a few years. If it really does - a reasonable guess being yes it will - then no subsidy will be required as it will the technology of choice anyway.
The general screaming and shouting at present is that we’ve got to do everything right now, today, by lunchtime even. The actual answer is that waiting for the capital cycle is correct. Don’t rip down stuff that works, just make sure the replacement, in its time, meets the new standards. Oh, and make that decision when that time comes, when we know which techs actually work at that point.
Some assertions end up being ludicrous
It’s a standard claim from the intellectually fashionable these days that “excessive wealth” is the major problem our society, our world, faces. Which leads to statements like this:
We need to redefine what the good life is, instead of never-ending expansion, the latest iPhone, jetsetting. The planet can’t take another Jeff Bezos.
Mr. Bezos has that $190 billion or whatever it is this morning as the stock markets gyrate. But that he has that much is the least important part of the story. How did he get it?
According to the bank, Amazon and its peers have pushed down inflation by about 0.1 to 0.2 percent.
That’s per year for a couple of decades. Certainly, we shouldn’t apply all of that to Amazon, or Bezos, but just for kicks let’s try it. That’s a 4% (without compounding) reduction in the price level. That’s something we consumers gain each and every year. Limit ourselves just to the US economy of $20 trillion - and yes, this is the inflation level for the whole economy, it’s not just on whatever tchotchke Amazon sells - and that’s $800 billion a year. We get $800 a year collectively, he gets $190 just the once. If we capitalise our benefit as that Bezos pile is capitalised then we’re getting $16 to $24 trillion (roughly, you understand) over time.
We’re on the right end of the greatest bargain in all history that is. More formal proof is in this from William Nordhaus.
That things can be provided more cheaply means that we’ve had an increase in efficiency. Which is that we’re using fewer resources to reach a particular standard of living - that’s what an increase in efficiency is. Quite why the planet won’t survive increasing efficiency is something that intellectual fashion doesn’t seem to address. The idea that Gaia will suffer from our using fewer resources seems more than a little odd.
Actually, it’s ludicrous. But then that’s the thing with fashion, the results of the usual groupthink often are ludicrous as catwalks and Guardian columns so often show.
The capitalist and free market gloriousness of Johnson Matthey's failure
Johnson Matthey has decided to pull out of that so very important battery design business:
Johnson Matthey is to abandon years of research and development and hundreds of millions of pounds spent trying to find the key that will unlock the full potential of electric cars: being able to travel hundreds of miles on a single battery charge, without the weight and cost of batteries that make the vehicle undriveable or commercially unviable.
What joy. For our task is to have a system which explores the technologically available space for manners of sating consumer demands. To sort through what can be done and match that up with what people want to be done. That being what capitalist free marketry does better than any other system we’ve tried as yet.
That this isn’t working out in this instance is a pain for those who funded it, certainly. But the reason for the abandonment?
With the demand for electric car batteries escalating, MacLeod had to admit that Johnson Matthey had lost the technological battery race with producers in low-cost economies such as LG Chem, of South Korea, and CATL, of China.
“While the testing of our eLNO battery materials with customers is going well, the marketplace is rapidly evolving, with increasing commoditisation and lower returns,” he said. “We have concluded that we will not achieve the returns necessary to justify further investment.”
Someone else got there faster, better, cheaper. So, in order not to run out of their money - or their investors’ money - Johnson Matthey stopped. That’s the grand joy, the manner in which the system stops mistakes. It is not just that the envelope is explored, but that when the corners are found it stops.
Just think it through for a moment. The only alternative to folks risking their own money is that government does it for us all. Which is where the big problem arises - government never does stop such things until they run out of other peoples’ money.