Why we don't believe anything said about the wealth distribution

The World Inequality Report is out in a new and fresh edition. In it is the reason why we don’t believe anything anyone says about the wealth distribution. When looking at income the definitions are:

We call this “post-replacement, pre-income tax” income. This definition of income includes most incash redistribution, which occurs through pension and unemployment insurance. Another important income type corresponds to income measured after all income, wealth and consumption taxes are deducted, and after all non-replacement transfers (e.g. healthcare, disability and housing benefits) are added. We call this “post-tax income”. In this report, we alternate between the two concepts, using “post-replacement, preincome tax” as the benchmark

What matters is income after the influences of government on changing income. We might even add a third, after all the consumption available through the government provision of services - education say. But the base concept is clear. Government influences incomes, the correct measure of incomes as they are is after the influences of government upon incomes.

When looking at wealth however:

Household wealth is defined as the sum of financial assets (e.g. deposits, stocks, bonds, equity) and non-financial assets (e.g. housing, business), net of debts, possessed by individuals.

Wealth however is defined as being the pure market value. It does not take any account of what government does to influence. This is clearly an entirely different concept.

If we take a step back into the research by Saez and Zucman (two of the four who produced this World Inequality Report) we find this becomes absurd. Fully funded pension pots are wealth, the state pension is not, nor are unfunded pensions promises like certain public sector ones. When trying to determine how rich people are, the distribution of wealth among people, this is clearly untenable.

That paper even gives us the wealth measurement tool required. We can look at an income stream (and a stream of benefits from a service like health or education can be treated in exactly the same manner, should be in fact) and capitalise it, that capitalised value being the wealth. This is exactly how they treat possible wealth which doesn’t have an obvious market price. So, that’s what we should do to things that are wealth that don’t have an obvious market price.

What the factor used to create that net present value of the income/consumption stream is matters. Say, perhaps, 20x for market instruments, akin to a 5% discount rate. For something significantly reliable and inflation adjusted - government benefits say - 40 might be more appropriate, closer to 2%.

At which point:

Social protection and health together account for more than half of all of central government own expenditure. In 2020-21 spending on social protection increased to £242.7 billion compared to £221.2 billion in the previous year.

£250 billion among friends - £5 to £10 trillion when capitalised. We should add the NHS as well. After all, the selling point is the system’s equity so we really must include it in a calculation of how equal we all are. Add say another £7.5 trillion.

But total household wealth is £15 trillion. Yet, at an extreme valuation government is moving around £17.5 trillion in wealth already. We could even raise that number again by claiming that as all benefit equally from the entire £700 billion government spend then that’s the sum which should be capitalised.

Looking at the pre-government influence number for the wealth distribution is false. Worse than that, it’s not even a useful number.

No, think on it. Say that we instituted a universal basic income at the real living wage. That roughly £20,000 a year claimed. Not that we can, it’s too high but just imagine. That clearly changes the wealth distribution - every adult in the country has a £20k a year income, for a lifetime, that’s a significant chunk of wealth. We know how to value that too, it’s the price of an annuity that would produce that income - a £million or two say.

But by the current measures of wealth and the wealth distribution such a plan would change the wealth distribution by not one single farthing, groat or bawbee.

The entire analysis of and conversation about the wealth distribution is wrong and we don’t believe an iota of it. Simply because it is being measured in the wrong way. It is being measured before the influence of government upon that distribution. Which is not just wrong it’s absurd for it’s a prelude to a discussion of what government should do about that distribution. But if we don’t measure the effect of government then government action will change nothing, will it?

Until they fix this base logical problem the entire wealth distribution literature should be ignored. It won’t be, but should.

Nadhim Zahawi's sound backdrop

Education Secretary of State, Nadhim Zahawi, nailed his colours to the mast in his TV appearance today. There, proudly beside him in his office, is the bust of Adam Smith he was given on Tuesday after his speech at the ASI’s Christmas Party. Very sound.

A price is still a price

Prices are information.

But for now Philips-Davies is concentrating on seeing off Elliott with a comprehensive rebuttal of its demands, claiming that a standalone renewables arm would suffer devastatingly higher borrowing costs.

This is with reference to SSE. The renewables arm and the distribution, the current strategy is to use the profits from the one to fund the other, it being possible to do this at less than market rates by cross-funding internally.

We have no view at all on the company, the raider or even the strategy. What we do want to insist upon though is that a market price is indeed a market price.

Whether or not the renewables are cross funded internally, or externally from the more general market, that price is the same. If it’s done at arms’ length then that price is obvious in the cashflow to financiers. If it’s done internally then it’s not obvious but still exists - in the cash not flowing to the corporate owners, the shareholders.

The price of funding those renewables is whatever it is. Moving around who pays it doesn’t change that in the slightest.

For prices really are information concerning what it costs to do something.

Gosh, planning an economy is hard, isn't it?

It amuses that it’s The Guardian complaining so bitterly about how the vaccination of the poor world is going:

…as wealthy nations have amassed enough surplus vaccines to inoculate their entire populations many times over, in low-income countries just a small percentage have received even a single dose.

Even with the ambitious booster programmes, there are still plenty of unused doses sitting in the warehouses of western nations.

And:

…there will still be close to 1.4bn surplus doses by the end of March 2022. It’s bordering on criminal that these are not being urgently airlifted to countries in need.

Even:

….that the principal factor driving low vaccination rates isn’t one of supply,

And:

….even when they hit the tarmac, dose deliveries too often arrive unexpectedly, or less than three months from expiry.

Plus:

And the White House has already warned that the US’s donation of Pfizer doses requires specialised syringes that are in short supply – which means many could yet expire in warehouses. Between 18 and 25 countries worldwide are now struggling to distribute doses,

This is government working - or not, to taste - in the middle of a pandemic when government is the necessary actor, even when government is the very reason that we have government.

The complaint is that politics and politicians are somewhere between incompetent dolts and just not very good at doing things even when things really need to be done.

At which point think how badly they mess up the things that don’t have to be done by government - health care, education, the morals of the nation - when they apply those same skills and perspicacity to them.

Of course, The Guardian’s not going to note that given that it argues with their entire worldview but the rest of us should pay attention. We have here, in these complaints, a dual lesson. The first is that planning stuff is really, really, difficult. The second is that the political system isn’t very good at it.

So, we should stop using politics to try to plan our world, shouldn’t we?

Conviction Politics vs Arithmetic

Green politicians are well named: they are inexperienced and untested by reality. We were all green once and we had, still have, ideas of how to make the world a better place.  Long may that be so but the more seasoned members of society reckon these ideas should be quantified before they become policy.   

Two camps of Greens, and like-minded parties in Germany and Scotland, oppose nuclear generation of electricity: those with rational concerns that can be addressed and those with only visceral objections with whom reasoning is pointless. When, last month, Nicola Sturgeon ruled out nuclear power as an alternative to fossil fuels in Scotland, she was rejecting the price of nuclear based on Hinkley Point C which is indeed extortionate. The price of electricity from the small, generation IV, Advanced Modular Reactors (AMRs), however, is projected to be about one third of EDF prices. She needs to do the arithmetic. 

When 3,000 Greens were surveyed, 47% were in favour of replacing decommissioned nuclear plants with new ones, 32% were against and 21% did not know. Most of the objections concerned safety (Fukoshima for example) and waste disposal, not nuclear generation of electricity per se. After considering the substance of these two objections, the alternatives for the dunkelflaute days when the sun don’t shine, the wind don’t blow and renewables don’t deliver are reviewed.  The question for the rational Greens is whether the potential problems with generation IV nuclear are more or less than the potential problems with the alternatives. 

“As of October 2021, there are 441 nuclear reactors in operation in some 30 countries around the world. In the United Kingdom, 13 nuclear power reactors.” Getting to net zero carbon energy and nuclear safety are global, not purely national, issues. Little Britain should not be making up its own nuclear safety rules based on minimal, if any, experience of the latest technologies. The US and Canada nuclear regulators , NRC and CNSC,  are co-ordinating their nuclear regulatory systems and have completed their first collaborative project and the UK’s ONR should be part of that. 

The UK government’s (February 2020, p.3) review of new nuclear generation options stated: “In addition to electricity generation, AMRs use cooling systems or fuels that can offer additional benefits, including high temperature heat for hydrogen production, industrial process heat, desalination and the re-use of spent fuel to minimise waste. These applications could play an important role in decarbonising industry, heat and transport.” Advocates of CCS claim burying carbon underground would be easy enough.  If so, that would also be the case for AMR waste. 

Moving on to the alternatives, hydrogen is widely seen as a replacement for fossil fuels, e.g. kerosene, and also as a means of storage. “Long-range jets powered by zero-emission hydrogen used at scale globally are, by some estimates, 30 or 40 years away”.  Some see “sustainable aviation fuel” (SAF) and ‘electrofuel’, made from green hydrogen and captured CO2, as replacements for kerosene. Costs are five times kerosene and they are net zero carbon in the sense that they return captured carbon.  It might be better to use fuels that do not emit CO2 at all. 

We need to see the arithmetic for the more general use of hydrogen but it could not be used as a replacement for natural gas in general domestic use. By 2050, energy supply will be almost all electricity, including the generation of hydrogen and charging batteries. Maintaining the gas network for occasional domestic use on dunkelflaute days would not be economic especially as the natural gas network, much of it antique, would need conversion.

Hydrogen and batteries are the two most quoted candidates for electricity storage. Batteries are good for road transportation and shipping but not suitable for shortfalls in renewables. Ten successive dunkelflaute days would require a storage capacity of 14 TWh at a cost of £4.5trn – more than four times the UK public sector spending for 2020/21- based on the (published) construction and other costs of the 640 MWh storage system planned for the Thames Estuary. Similar arguments apply to fuel cell technology. 

In short, both hydrogen and batteries can make some contribution to storage, i.e. shifting renewable surpluses to deficits, but nowhere near enough. We will need to supplement renewables with constant power (“baseload”) which reduces electricity deficits and increases surpluses. If government statisticians have not yet calculated the optimal baseload percentage of average energy needs, they should have.  And they should have shared the arithmetic with us.  My guess is that 30% feels about right. Furthermore, the constant output required for baseload would probably be best suited by low cost nuclear, given the volatility of fossil fuel prices. 

Renewables plus hydrogen storage plus baseload will still leave a shortfall on dunkelflaute days. The candidates to cope are surplus electricity trading, biomass with CCS (BECCS), and gas or oil with carbon capture. 

Trading surpluses is valuable for filling Grid shortfalls if UK weather patterns complement those of our trading partners, i.e. Norway, the Low Countries and France. If they match, however, importing and exporting will not help, We have enough data to establish the extent of complementarity and the arithmetic should be published. Current practice is not encouraging as in 2019, the UK imported 35% of its energy needs, with Norway being the source of 57% of the imports. Hardly any is exported. 

BECCS requires burning the stuff that removes CO2 from the air (vegetation) in order to put it back and in the process removes the agricultural land the world needs for food production. Full-scale Drax BECCS would be more expensive than Hinkley Point C which is Ms Sturgeon’s objection to nuclear. BECCS is not so much a means of extracting CO2 from the atmosphere as cash from the government.  

With current and known technology, it looks like oil and gas are here to stay with carbon capture either at the time the electricity is generated (CCS) or direct air capture independently (DAC). 

19 pilot DAC plants are currently operating worldwide and 70 CCS projects in Europe, 14 of which are in the UK. This makes Ms Sturgeon’s objection to new offshore oil and gas recovery somewhat surprising. Mapping net zero energy requirements has many uncertainties but lead times are such that choices have to be made now. The enthusiasm for AMRs in the US and Canada indicates we should be taking them more seriously that we seem to be doing.

Despite the rhetoric, Germany is re-considering nuclear because of worries about dependency on Russian gas and the Scottish government remains open-minded: “We are aware of increasing interest in the development of new nuclear technologies such as Small Modular Reactors. We have a duty to assess this and all other new technologies based on safety, value for consumers, and contribution to Scotland’s low-carbon economy and energy future.”

Just do the arithmetic. 

The UK does not have a gender pay gap

The Institute for Fiscal Studies has a report out insisting that the gender pay gap in the UK hasn’t changed at all. Or, rather, once we take out the education factor it hasn’t changed. We on the other hand, and correctly, insist that the UK doesn’t have a gender pay gap at all:

But there has been no similar progress for graduates for whom the gap in hourly wages has not shifted at all.

This means "barely any change" to the gender earnings gap, the IFS said.

In the report itself the more subtle points are:

Gender gaps in pay, paid work and unpaid work have substantial consequences for inequalities in material living standards. Women in single-adult families, especially single mothers, are especially vulnerable to poverty. Women in opposite-gender couple families have been found to consume less than their male partners.

 Inequalities in earnings and its three components increase vastly after parenthood. The opening of gaps around childbirth suggests that unpaid care work is central in shaping inequalities in the labour market.

 The gendered roles that mothers and fathers take on appear to be largely unrelated to their relative earnings potential. Even mothers who earn more than their male partners before childbirth are more likely than their partners to reduce hours of work in the years after childbirth.

What we actually have is a child pay gap, possibly a motherhood pay gap.

As we’ve pointed out many times before mothers - all else being equal - earn less than non-mothers, fathers earn more than non-fathers. That in a sexually dimorphic species the gendered reaction to the arrival of children differs does not surprise us.

This leaves the question of what, if anything, should be done about it?

Norms, preferences and beliefs appear central to the choices of families. Two-fifths of both men and women in the UK agree that ‘a woman should stay at home when she has children under school age’. Internationally, there is huge variation in the proportion of the population who hold traditional gender attitudes. The extent of agreement with such statements is strongly positively correlated with gender gaps in labour market outcomes.

 However, these constructs are not immutable. An accumulation of policies consistently supporting a more equal sharing of responsibilities between parents (or large policy reforms challenging gender roles) may help build up a change in attitudes that leads to permanent change in norms. Given the huge economic costs associated with the status quo, even expensive policies could potentially pay for themselves if they successfully ensure that the talents of both women and men are put to their most productive uses, whether in the labour market or at home.

The clash here is between the two meanings of “liberal”. The modern - and we insist wrong - meaning appears to be equal outcomes at the population level. The correct meaning is that older, classical, one of equal ability to maximise personal utility. You know, this idea of freedom and liberty to live life as one wants?

The claim being made there is that the population must change its ways to meet that desire for equal outcomes.

We agree entirely that if there were an equal number of househusbands to housewives then that disparity of outcome at that population level would disappear and those outcomes would be, at the population level, equal.

The thing is, well, what if the individual folks don’t in fact want to do that? What if sexual dimorphism means that this outcome is not in fact utility maximising?

There’s really only one way to find out, isn’t there? Have that potential equality, as we already largely do, that equality of choices, and see what happens. Our bet is around and about what currently does but we’re willing to be proven wrong. The idea that the population must be forced into some - by revealed preference - undesired manner of living their lives seems most illiberal to us. Even if it is an attempt to meet that modern liberal goal of equality of outcome.

Being ignorant of something doesn't aid in diagnosing that something

Given that we were so involved in that electricity privatisation and the design of the subsequent system, a little comment on something:

The obvious next question is why on earth you would design an energy system this way. The answer is ideological. In the 1980s, the Thatcher government had a problem. It was committed to privatising the power stations and grids that produced and supplied our energy. But its doctrine of efficient markets didn’t work for a system that, like the railways, was a natural monopoly. Its solution was to create a completely new, separate function of “energy supply”, whose sole purpose was to turn this natural monopoly into an artificial market.

The problem here is that if you’re entirely ignorant of even the words being used then you’re not going to be able to diagnose the system nor any problems in it.

A natural monopoly is a specific thing. It’s where a market or system will entirely naturally tend or trend to monopoly. A classified ads section perhaps. People advertise in one specific one because that’s where all the potential buyers look - the buyers look in that because that’s where everyone advertises. Or a social media network, there are 3 billion on the one of those because there are 2.999 etc billion other people on it.

There’s absolutely nothing at all which makes electricity generation a natural monopoly. There is no good reason why the people who own a nuclear plant should be the same as the folks who own windmills. Owning Drax doesn’t make any difference to the likelihood of the same organisation owning solar cells. Nor does owning any part of any one of those four things make owning a chunk of the next more likely, more affordable or even more sensible. Power generation just isn’t a natural monopoly.

Nor is power retailing, something which is largely a function of efficiency at running a billing system.

The grid, ah, now, yes, the grid is a natural monopoly. Wiring up the country twice is just one of those things which isn’t going to happen. Which is why at privatisation it was carved out of the CEGB and remained separate and highly regulated. For what actually happened at privatisation was to identify which exact parts of the whole system were a natural monopoly, therefore not to be left wholly subject to market forces, and which parts were not and which would function best when subject to as much market force as could be brought to bear.

The actual problem the electricity supply market is having now is that government has forgotten what it was doing and why. Introducing that price cap both limits the market forces being brought to bear and also bankrupts legions of the retail suppliers. Exactly what wasn’t to be done, limiting market forces in those parts of the whole system where market forces do and should be left to work.

But then as we say in the headline, if you’re ignorant of something, as The Guardian is here, then that’s not an aid to diagnosing, or even understanding, that something. The pity is that government seems to have made the same error.

Welcome to the Sovietisation of the British Economy

An interesting little commentary on how planned economies turn out:

Dozens of car models — many of them plug-ins — are so scarce that second-hand versions of the same vehicle are retailing for more than those coming off the assembly line, according to the most recent data.

In the latest signs of the upheaval in the car market, figures show that 25 per cent of “nearly new” cars are more expensive than their brand new equivalents.

As it turns out closing down an economy then trying to get it back up again is a difficult task. Which is an interesting commentary on that difficulty of planning an economy - there is no central node of knowledge that can manage the whole thing.

We’ve also seen the same thing elsewhere. In the Soviet Union, where they planned all production, this idea of the nearly new being worth more than the in-production new was commonplace. Not just for cars either - a standard method of making a, admittedly small, living was to do the queuing in the shop to gain access to those new goods then resell for a profit immediately outside said store. With a possible waiting list of a decade for a new car then yes, those nearly new just off the production line examples were worth more than the new and in production ones.

This idea that the used is worth more than the new - with the exception of antiques of course - is that example of the Sovietisation of the British economy.

Sure, right here right now this is an entirely transient phenomenon, a result of the Great Pandemic. The Soviets didn’t have that excuse - which does rather show the dangers of having a properly planned economy, doesn’t it?

The cure for high prices is high prices

What if demand for something rises? Supply then has to either increase or prices do. Those high prices then call into being that grunt work of trying to increase supply. Things that didn’t make sense before now do as methods of said supply, new methods of creating supply are chewed over and so on. The cure for high prices is high prices:

As demand for electric vehicles grows amid a push for a greener economy, carmakers globally are grappling with rising prices of everything from semiconductor chips to copper and aluminium.

Now the expense of lithium, a metal found in every commercial electric battery, is starting to bite as a lack of mining capacity strains supplies. Experts say it is likely to get worse and more investment in production is needed to meet electric vehicle supply chain needs.

Just off the top of our heads, spodumene mines in Australia are opening up again (they closed when the by-product tantalum dropped in price), new spodumene mines are under development all over the place, West Africa and so on and on. The geothermal waters under Cornwall are being filtered, as are those around the Salton Sea, the Kruzny Hory and on and on. The “lithium triangle” in South America and the brines there are being scoured for more opportunities. When Bolivia stops insisting the cars are made up on the altiplano, rather than just allowing the lithium extraction, then perhaps that supply will come online. When Chile issues more extraction licences - the current ones are Pinochet era and it’s the nuclear ministry which may, but does not, issue more* - then that huge supply will be more available. On the subject of brines one group of possibly bright chaps insists they can filter the Red Sea (a little above normal oceanic Li content) and there are beady eyes peering at desalination plants all over the place.

This is before we go and seek out examples of anything, this is just culled from a casual reading of the newspapers recently.

Not that we’re here to make commodity price predictions but there’s a reasonable chance that more than enough of these will come online and that the lithium price will slump at some point off in the middle distance. There is, after all, no shortage of actual lithium around in that lithosphere, it’s only economic concentrations that are scarce.

At which point two observations. That demand for more investment - that’s entirely missing the point. Which is that the investment is not just happening it has already happened. Armies of geologists have been scouring the world for a decade and more already.

Why? The second observation, because the cure for high prices is high prices. Further, given that markets are forward looking the cure for high prices is predictions of high prices. The predictions themselves moving the efforts back through time as people now act to capture those potential profits in the future.

By the time the bureaucracy gets to hear about it everything has already happened. Which might not be as silly as the Chilean licence granting system but it is a fundamental objection to that idea of state planning of such things.

*An isotope of lithium can be used to make hydrogen bombs but this is really just an example of the stupidity of state planning

The very point of carbon permits is that you don't control the price

There are two basic market methods of controlling carbon emissions - carbon permits and carbon taxes. That second allows you to control the price of dealing with emissions but the quantity thereby changed is unknown. The aim of carbon permits - along with market trading of them and so on - is that the quantity allowably emitted is known but the price of the action is both unknown and uncontrolled:

Ministers are considering a dramatic intervention in the carbon market to cut the amount big polluters have to pay for emissions permits.

Prices have soared in the past month, from about £50 per tonne of carbon dioxide to £74. The Department for Business, Energy and Industrial Strategy said in a stock exchange announcement that prices had breached the threshold for the government to step in.

No, that’s not what you then do. Having decided to go the permit route - we disagree, think the settled price but unknown quantity of the tax is better - then that’s the decision that has been made. To control volume not price. You don’t then try to control the price again as you’ve just made the opposite decision.

If we’re honest about it we’re not all that worried by the original problem, climate change, itself. What does keep us awake at nights with attacks of the screaming abdabs is that near no one seems to be paying any attention at all to what has been shown and proven to be true about how to deal with it if it all does exist and does need dealing with.

You wish to control volumes of emissions? Then fine, do so. But don’t then try to control prices as well. You’ve made a choice, stick with it. Quite apart from anything else if you intervene to increase emissions permits if the price begins to bite then no one will bother to worry about reducing emissions, will they? Because there will be intervention as soon as the price begins to bite.

Blimey, we ask you, where do these people get their ideas from?