It's expected return that is the incentive, Dummkopf

The IFS got Nuffield to look at earnings inequality. At which point they note that high earners tend to gain their incomes - more than the general population at least - from business activities. Also, that business activities tend to have lower tax rates than labour incomes. Well, yes, they would:

According to the report, business income – from either self-employment or owning and running a company – accounts for 21% of total incomes for the top 1% of adults and 29% for the top 0.1%, compared with just 9% for the rest of the population at large.

It said business owner-managers could effectively choose to take income out of their company through the form of a salary, dividends, or capital gains – allowing them to benefit from lower rates of tax.

The report pointed to a preferential 10% rate of capital gains tax, called business asset disposal relief, while saying that company owner-managers were able to access tax rates of just 27% on income taken in the form of capital gains.

The reason for this is that incentives are the expected return from an activity, not the actual return. This must be so - the incentive is the driver of the decision to try it, at the point of trying it there is an expectation of what the return will be, not a hard and fast actual return. What gets people to do things is what they think they’ll gain from doing it - again, obviously.

There’s risk involved in going into business. Just to trot out some not wholly accurate but well known statistics - only one in five of new businesses survives to its fifth birthday, VC investors expect 9 of 10 portfolio companies to tank. We’d not want to have to prove this but would at least suggest that the both modal and median experiences of trying to set up a business are money losing - certainly when opportunity costs are included.

Or, an actual number, in Jan 2022 there were 1,560 company insolvencies. A pretty average monthly number and one that only includes those business attempts large enough to bother with such a process.

Imagine we’re trying to design a tax system from scratch. We would want the expected return from innovation to be higher than that from labour. Even if the actual return were lower - we probably could assume a certain over-enthusiasm to carry us over that gap. Given the high risk of not making any money at all therefore the tax rate on money from successful innovation needs to be markedly lower than that on labour incomes.

In fact, given the high risks involved our taxation of innovation income is almost certainly too high. Even if that’s not the point that Nuffield and the IFS are making it is still near certainly true.

Energy Security and Hot Air

The authors of “Energy Security Strategy” seem not to have read the manual provided by a previous Energy Chief Scientific Advisor, Professor Sir David Mackay: Sustainable Energy without the Hot Air. His “sole recommendation is this: Make sure your policies include a plan that adds up!” (p.203) Unfortunately the new Strategy does not. 

The best part is the recognition, at last, of the importance of nuclear to provide the baseload for wind and solar. But Mr Johnson’s arithmetic is dodgy. He claims 95 percent of energy needs will be low carbon by 2030, but Hinkley Point C will be the only nuclear plant planned to be operating by then, contributing seven percent. By 2050, another seven Hinkleys would contribute 49 percent, not counting the unknown number of small nuclear reactors, if demand remained flat. The Strategy expects nuclear to be 25 percent of 2050 demand which implies demand is expected to more than double but the Strategy states “we do know that electricity demand is highly likely to double by 2050”. That has to be nonsense because electricity is only 20 percent of energy now and if energy increases at all, since virtually all energy will be in the form of electricity, electricity demand will have to increase more than fivefold.  

The Strategy confuses demand units, or usage, (which should be expressed as GWh) with capacity units (which should be expressed as GW). It uses the latter to express the former when, obviously enough, we need far more capacity than usage to cater for peaks and troughs, especially of the volatile wind and sun. In 2020, usage is 33 percent of capacity in the UK and 37 percent in the USA. 

Storage can provide some shifting of peaks to troughs and hydrogen will be the main means of that but it is not itself a source. Indeed, it is a wasteful form of storage: of the electricity used to make either form of hydrogen, you only get about half back. The Strategy states “we plan to blend up to 20 percent hydrogen into the natural gas grid” which is not a good idea since hydrogen, per therm, costs more than natural gas. 

Electricity security is not just a matter of generation; power lines have to be secure too. Increasingly volatile weather will knock them out more often and responses will need to be sped up but what about the network as a whole? A proposal has been made but not by the PM’s Strategy paper. 

Amongst the various strange claims in the Strategy are “by 2050 all our buildings will be energy efficient with low carbon heating”, “we expect a five-fold increase in [solar] deployment by 2035”, i.e. 70 GW, and “by 2030 over half our renewable generation capacity will be wind”. It would have been better to suggest the first as a direction and explain why the Treasury will restrain itself from blocking that further. The second implies that solar alone will supply about as much as nuclear and the three together will supply more than 100 percent of demand.                                                                                            

The Strategy launches a few more quangos, such as “the £120 million Future Nuclear Enabling Fund”, “the Great British Nuclear Vehicle” and the “Future Systems Operator”.  One can never have too many of them. 

The paper is full of perfectly good, but itsy bitsy, ideas and cost packages but these are not “strategy”.  We need a proper energy strategy that adds up. 

Two things we thought we'd note from the IPCC report

“The global economic benefit of limiting warming to 2C is reported to exceed the cost of mitigation in most of the assessed literature (medium confidence).”

OK, that’s interesting.

In fact, it’s fascinating, Because they’re using their “medium confidence” in 2C to demand that 1.5C be done. That is, they’re using the costings where they think they’re about right to demand what they’re not certain about at all. Which is an interesting misuse of their own calculations, don’t you think?

Our position has long contained two base insistences. One, that we should only do what makes sense. Any action should add more value - or reduce damages - more than the cost of taking the action. In this we are in accord with the Stern Review and the work that led to the Nordhaus Nobel. In fact, this is in accord with simple basic logic - do those things which add value, don’t those that don’t.

The second is that whatever we do we do it efficiently. For humans tend to do less of more expensive things, more of cheaper. So, by using efficient methods we thus gain more of the thing, whatever it is. Political planning has had Germany opening up the lignite mines again, the UK burning American woodchips in Drax and just everyone growing corn to feed into cars not people. Such planning, we can see by the simple evidence of our own experience, does not in fact work. So, market methods with suitably adjusted prices it has to be - again we are in accord with Stern and Nordhaus and 93% of polled economists.

In short, OK, climate change, fine, but for the Lord’s Sake don’t try dealing with it the way you have been. Oh, and don’t try to accelerate it, not until you’ve proven that it’s worth doing so.

We also found this interesting:

Meanwhile, it adds with medium confidence that “the lifestyle consumption emissions of the middle income and poorest citizens in emerging economies are between 5-50 times below their counterparts in high-income countries”.

Emissions are very closely related to standard of living - obviously so in an emissions powered economy. The true meaning of that being that we in the rich world have no poverty - not when there are people out there living on 20%, or 2%, of what we have. And there’s really no arguing with this non-existence of poverty idea either. For the IPCC is indeed the home, residence, of the accepted science of our age, isn’t it?

Two Ferries, One Shipyard

Two ferries, same shipyard, but Scotland’s government pays twice as much.

Last month, the Scottish government company CMAL, which owns the ports, harbours and ferries in the Clyde and around the Western Isles, signed a contract with a Turkish shipyard to build two new ferries. This week, the private Norwegian operator Torghatten Nord, announced an order for a slightly larger ferry, from the same shipyard, at half the price.

That’s right, as the Mull and Iona ferry users’ committee explains, the Scottish government has blithely agreed to pay for its ferries twice what a private operator is prepared to pay for them.

It’s not that the Norwegians’ ferry will be slower or more polluting. It will have a similar diesel-electric hybrid propulsion system to CMAL’s. It will have more advanced and larger batteries, helping reduce its emissions. And it will travel twice as far each day than the CMAL ferries.

So why, ask the Islanders—who are also Scottish taxpayers, after all—do the CMAL ships cost so much. Well, one reason is that CMAL ships have far larger crews. In fact, thanks to the hard protectionist efforts of the RMT union, they have much larger crews than any ferry operator in Europe. And so CMAL has to have extra cabins for crew members, plus a refectory for them. Oh, and they’ve thrown in a gym as well. While good systems management means the Norwegian ferry will operate round the clock with a crew of just ten, CMAL has to provide for a crew of 31.

So, 200% overstaffing is one reason why the CMAL ferries are so expensive to build—and to run. Then, CMAL starts from scratch and commissions a completely unique ferry, never built before, while the Norwegians start with a common, tested design and simply tweak it as necessary. CMAL also builds in over-complicated engineering and has large passenger spaces with dedicated dining rooms—hardly necessary on the 46-minute journey to Mull. I took a Mediterranean ferry on a four-hour trip from Spain to Morocco, and there was no dedicated restaurants. You just took your food back to your seat.

“Finally,” says the ferry users’ committee, “publishing the price you expect to pay 12 months before putting the tender out doesn’t really help your negotiating position.”

Well, neither it does.

Do we need the Ministry of Defence?

To answer that question, we need to consider what we would do if it suddenly disappeared. Starting at the top, the shrunken numbers of our armed forces must leave the Chief of the Defence Staff (CDS) with rather less to do apart from arguing with the Defence Secretary about resources. If the PM wants to send a battalion to Estonia, he has to ask the Defence Secretary who has to ask the CDS. Much simpler would be for the CDS not to have to wait for his retirement for his life peerage, but to ennoble him on appointment as CDS and Defence Secretary combined. 

The MoD HQ has six three or four star flag officers and nine civil servants of equivalent status. That is not counting the 18 three and four star flag officers outside the HQ. A similar compaction to the military staff plus the Director General Finance and his department should be feasible. In other words, units immediately relevant to conducting warfare (plus the accountants) should fall under the command of the CDS. The other units should either be disbanded, privatised or transferred to more relevant government departments.  

According to its 2020/21 accounts, the Ministry of Defence (MoD) employed 63,393 civilians, i.e. excluding the 160,232 in the armed forces. In 2016, the MoD employed just over 56,000 civilians with 196,590 in the armed forces. Few will be surprised that the former headcount has increased whilst the latter has decreased. The army is about a Corps in size which should require just one Lieutenant General (three stars). In 2015, and the numbers will not have greatly changed since, the payroll included three Lieutenant Generals in the Royal Marines and 11 Lieutenant Generals in the Army. No shortage of top people to cover the necessary staff roles. 

Apart from procurement (16,902 staff) which is a separate blog, three of the other 12 MoD enabling organisations duplicate services provided by other government departments. Police forces are already too splintered around the country without the MoD having its own. Similarly, the Defence Safety Authority (created 2015) provides the same health, safety and environmental protection regulation that the rest of us enjoy through seven Regulators. Its annual report gives no staff numbers, performance indications or costs. Finally, the Defence Science and Technology Laboratory (Porton Down – 4,378 staff) mostly works for other government departments and should be integrated into the government’s mainstream research under UKRI. The Medical Research Council is part of that, not the Department of Health and Social Care; defence research should follow the same logic. 

The above analysis covers all the MoD published units but leaves roughly half of the 56,000 staff unaccounted for, not to mention the military personnel driving desks. It is said that each MoD job needs a military officer who might know something about it during his or her short secondment and a civilian overseer. Whatever the truth, a great deal of the headcount is unexplained. A streamlined armed forces ministry might at least aim to limit each job to just one person. 

The bottom line is that Her Majesty’s realm would most probably be better defended without the MoD but we need an explanation of the missing headcount to be sure.

Just another one of those little teachable moments

That something should be done we agree. We just want to use a suggestion about what should be done to make a deeper point.

Cui bono?

Who benefits from the proiduction of things? Who benefits from imports?

Europe must turn off the Russian gas taps right now

Governments are still sending money to a regime whose troops are arbitrarily killing civilians and leaving their bodies in the streets

Perhaps that’s true, perhaps those taps should be turned off. But think for a moment about who benefits from their being on?

The standard answer is that it’s Russia (or Putin, or the Russian Government, or some such variation). They end up with a pile of euros and that’s the benefit, right?

But think of who would actually suffer if those taps are turned off. Some large portion of Europe would be unable to cook their food, heat their homes, live that civilised and urbane life.

So, who is it that benefits from the production of that natural gas? The consumers, clearly. Equally, who benefits from the imports? Again, consumers.

Production benefits consumers, imports benefit consumers, that’s why we do these things.

Which is that teachable point. We’re never going to grasp the basics of production and trade until we all agree who it is that benefits from such systems. It’s consumers, for they are then able to consume what is produced, imported.

When absolute poverty isn't absolute poverty in the slightest

John Harris treats us to some poverty porn in The Guardian:

A stark metric is the UK’s level of absolute poverty, which is defined as being a household income less than 60% of the median income level of 2010-11, adjusted for inflation – a measure that usually goes up only in times of recession.

That’s actually not true. For this measure of absolute poverty isn’t a measure of absolute poverty at all. It’s still one of relative poverty.

So median household income in 2011 was of the order of £21,000 a year. 60% of that is £12,600 a year. Upgrade for inflation and that’s £15,700. We agree, it’s not a great fortune. It’s also not absolute poverty and nothing like it either. Using what might still be the modal household size of 2 adults and 2 children (and entirely ignoring that the poverty measurement is in fact for equivalised household size) that puts that household in “absolute poverty” in the top 25% of global incomes.

Yes, after we’ve adjusted for the difference in prices across geography. This result also holds, roughly enough at least, before or after housing costs and so on and on. It also doesn’t include the value of free to the user health care, education and so on.

This is not poverty in any absolute sense.

It’s also not true that it only goes up in recession. Yes, we know, what Harris means is that the number of people below that line normally only goes up in recession. But Chart 12 on page 23 here. In 1961 85% of the population was in absolute poverty by this measure. In 2018 perhaps 10%. And we’ve never actually had anyone claiming that 85% of the population is in poverty, not in modern times at least.

So, what’s going on here? The answer is that the “absolute” part is rebased every now and then. That is, as incomes continue to rise - we agree, something not greatly in evidence recently - in general then the number of people in this absolute poverty falls to embarrassingly low levels. Embarassingly low levels for those who wish to screech about the necessity of tax and redistribution that is. So, instead of continuing to use the same, absolute, measure it is rebased to the median income of a later period now and again. So that it will always be possible to insist that there are still hordes in absolute poverty rather than society relishing how much of it - that drop from 85% to 10% say - has been conquered.

Yes, they are lying to you about poverty. Why do you ask?

Who’s Afraid of Self-Driving Cars?

Who gets punished when self-driving cars kill people?

Dr Tomaž Slivnik

"Who goes to jail if a self-driving car kills a pedestrian?" There is no good answer to this question. If it's the car's owner, nobody will buy them. If it's the manufacturer's CEO, nobody will build them. If it's the software writer, nobody will write the software. The inevitable conclusion is: nobody will go to jail. Self-driving car advocates suggest accidents will be purely an insurance (financial) matter.

Unfortunately, this is the worst possible answer to the question. The prospect of going to jail creates an incentive, much greater than financial cost, and which cannot be delegated, to drive carefully. The absence of this incentive creates a moral hazard.

Insurance-based solutions will lead to perverse incentives. Razor-razor blade markets teach us that buyers prefer products which cost less upfront even if later recurring costs are higher. Especially if the upfront cost is high. Initially, regulators won't allow self-driving cars on the road until their safety record exceeds that of human-driven cars. Eventually, human-driven cars will be displaced and only self-driving cars will remain. With human-operated cars and driving skills and non-financial incentives (jail time) gone, market forces will favour cheaper cars over lower insurance premiums (=better safety). Eventually, the safety record of self-driving cars will become terrible. Incentives eventually always win out, even if it takes time. Regulation is no substitute for private actors' incentives.

Self-driving cars are underpinned by AI. AI has had its successes - games, financial markets, search, etc. Its greatest success (and main raison d'etre) is big data analysis and mass surveillance. What do all areas where AI has been successful have in common?

1) they are non-mission-critical: no single wrong decision has catastrophic consequences;

2) in a single iteration, the AI algorithm beats other solutions on average;

3) the outcome is measured by running the algorithm many times.

AI, being a black box solution, is not such a good fit for mission-critical applications.

Will self-driving AI be "tweaked" in the same way search AI was "tweaked" to downgrade or cancel political opponents?

Current self-driving cars are electrical. The average UK household has 2.4 members and consumes 4000kWh of electricity p.a. A typical Tesla consumes 0.24kWh-0.30kWh per mile. The average UK car travels 7500-9000 miles p.a. In 2020, the UK had 32,697,408 licensed cars and 67,886,011 inhabitants. If every car were replaced with a Tesla, electricity consumption would increase by 2000-3000kWh p.a. per household, a 50%-75% increase. The grid is already stretched. Where are the power stations and distribution lines to generate and deliver all this additional electricity?

Tesla started as an electric car company, but, perhaps realising the above problem, diversified into solar energy and switched strategy to "local generation and charging". A fast 400kW electric car charger refuels an electric car in 11 minutes. A 7kW domestic charger (requiring a 70m^2 solar panel installation, fully dedicated to it, on a sunny day) takes 10.5 hours to refuel it. That's longer than overnight - and overnight, there is no sunshine. How's that going to work?

Dr Tomaž Slivnik is a technology entrepreneur and angel investor.

Improving safety without the punishment

Dr Anton Howes

I do not think it would ever be as simple as the CEO of a car manufacturer going to jail, and nor should it be. There are better approaches. 

We have a potential model in the aviation industry, for example, where systems do occasionally fail and cost lives, but where manufacturers or airline CEOs do not end up in jail. Instead, aviation has developed a culture of learning from each previous failure, in which faults and shortcomings are openly reported without fear of punishment. 

A different example is factory safety. Before the 1890s it was widely regarded as a worker's own fault if they got hurt when operating dangerous machinery — and not just by managers and owners, but by workers themselves. If they really thought the injury was due to their employer, they would have to sue them, which few could afford to do. This changed with the creation of workers' compensation: workers received automatic compensation for injuries, according to a fixed schedule of rates, but in exchange they lost the right to sue for further damages. This arrangement meant that both employers and employees avoided costly lawsuits and it re-focused employers from shifting blame towards preventing injuries. The change, and its benefits are documented here.

So I think it is a mistake to assume that only the threat of punishment, jail or financial penalties, provides enough incentive to promote safety in self-driving vehicles. There are other options.

I think Dr Slivnik’s view of a cost-safety trade-off is also mistaken. Airline customers certainly demand a (high) minimum level of safety, or at least of safety regulation. Though airline prices have fallen markedly over the last 70 years, safety has risen markedly too. Nor do I accept that AI will never be safe for "mission critical" applications. Indeed, the whole point of using AI is to go beyond very simple robotic decisions and learn to deal with a growing multitude of less expected events — and it is getting better all the time.

Lastly, on the power needs of electric cars, we need to be aware of price signals. If the grid becomes over-stretched by electric cars, then higher electricity prices, or even the expectation of them, will strongly incentivise the development of a better supply. It sounds like a big job, but we have gone through much more capital-intensive technological changes before. Just think of all those Victorian plumbing, sewerage and gas networks!

Dr Anton Howes is a historian and author of ‘Age of Invention’.

Today in people not understanding markets

We’re not in favour of child labour in cocoa plantations. But we’d also like to point out that paying farmers more isn’t the solution.

Joanna Ewart-James, executive director of Freedom United, an international organisation campaigning against child labour in the cocoa supply chain, said: “Child slavery and child labour have plagued the industry in Côte d’Ivoire and Ghana – which produce 60% of the world’s cocoa – for decades. Cocoa farmers are not earning an income that enables them to recruit the labour they need.”

That doesn’t make sense.

The campaign group says Mondelēz has invested in community initiatives to combat child labour but, along with other leading companies, needs to pay farmers more money for its cocoa.

Nor does that, nor does this:

Martin Short, president of the World Cocoa Foundation, said: “Dealing with child labour abuses as a standalone issue will never work until we deal with the root cause of child labour, which is farmer poverty.”

The farmers find child labour profitable. So, if the price paid to farmers rises they will still employ child labour and increase their profits.

Child labour is, per hour, of course less productive than adult labour. What makes it profitable is that child labour is considerably cheaper, making productivity as measured by the wage bill equal or better than that of adult labour.

Paying the farmers more does not solve this. Making child labour more expensive does. Given that it’s already illegal then more laws about it don’t help. What is necessary is that the place become richer - not the farmers, the place - so that parents won’ t send their children out to work.

As has happened everywhere else, the cure for child labour is an industrial revolution. Which also means the killing off of smallholding peasant farming - because people are making so much more in that industrial society.

As we've been saying, there is no gender pay gap

For some years now, decades even, we’ve been pointing out that there isn’t, in fact, a gender pay gap. It’s most certainly true that there was, there was direct discrimination in employment against women. It’s simply one of those things that isn’t true any more.

What we actually have is a motherhood - or if you prefer, primary child carer - pay gap. The difference is that if employers are not discriminating against women to produce the observed difference in pay then action to stop employers discriminating will not move that observed difference in pay. If it is primary child care producing the gap then it is the perhaps more difficult societal change in who becomes the primary child carer within a child producing human unit - that thing we often call “a family”.

At which point further evidence of that original contention - it’s a child care pay gap:

Women in the United States continue to earn less than men, on average. Among full-time, year-round workers in 2019, women’s median annual earnings were 82% those of men.

The gender wage gap is narrower among younger workers nationally, and the gap varies across geographical areas. In fact, in 22 of 250 U.S. metropolitan areas, women under the age of 30 earn the same amount as or more than their male counterparts, according to a new Pew Research Center analysis of Census Bureau data.

Interesting, especially when added to this:

First-time mothers are older in big cities and on the coasts, and younger in rural areas and in the Great Plains and the South. In New York and San Francisco, their average age is 31 and 32. In Todd County, S.D., and Zapata County, Tex., it’s half a generation earlier, at 20 and 21, according to the analysis, which was of all birth certificates in the United States since 1985 and nearly all for the five years prior.

The mapping of women under 30 outearning men near exactly coincides with that of average primagravidae being at or later than 30.

It’s about children and their care, not women specifically. Now, true, that does most often devolve to women and given the sexual dimorphism in our human species it might be some time before that changes.

However, science is not just about observation, it is to use observation to construct an hypothesis which can then be tested against further and different evidence to see whether it stands up. It’s even considered good practice for those who propose such an hypothesis to point to where evidence might be gathered to prove - as in the meaning of test - their hypothesis.

So, we shall do so. That glorious expansion of liberty which is marriage equality has expanded the number of same sex marriages. Some to many of those are having children by the usual variety of means biology makes available. A study of such families might well be able to identify the primary child carer in such and then look at wage incomes. If the result is that the primary child carer achieves a similar reduction in earning power as that gained by mothers in heterosexual relationships then that would be supportive of the claim that we have a child care, not women’s, pay gap.

It would even be interesting to see whether there is a difference in results across countries - especially between those that have free child care, sorry, taxpayer provided child care, and those that do not. Just to test whether that policy is a solution or not.

It is, of course, up to those who wish to shoot down our hypothesis to go and do that work. We look forward to discussing the results.