Competition works in markets even without the capitalism bit

A little story from the French railways via The Man In Seat 61:

Competition works, who knew? Trenitalia is now competing with SNCF on Paris-Lyon: Overall bookings (SNCF+Trenitalia) up 20% on Paris-Lyon, up 106% on Paris-Turin-Milan. The average fare paid on Paris-Lyon has fallen by between 23% & 30%.

Note that (1) This replicates the experience in Italy: Competition WORKS for inter-city high-speed, but not necessarily for local/rural/commuter; (2) SNCF is nationalised, but this did not mean low prices. Without competition, SNCF priced to maximise revenue, nationalised or not.

That last sentence misses an important part. SNCF is still pricing to maximise revenue, even with the competition. It’s just that to maximise revenue it has to cut prices and so shift the demand curve.

Still, that is interesting isn’t it? Both SNCF and Trenitalia are state owned organisations. They’re both being forced to compete in markets without also picking up that grubby capitalism bit. The result is that more consumers gain what more consumers desire - that’s what that 106% rise in ridership is.

There’s also that point that such markets don’t necessarily work everywhere for varied technical reasons. Which is fine, not even we, arch neoliberals that we are, insist that all markets, everywhere, are all the time optimal. We do insist they should be used where they are though.

For example, it’s not necessary to sell the NHS to Americans to make it better. We have a sneaking suspicion that wouldn’t work anyway not least because who would in fact buy it? But where markets are possible then let’s have them - they produce that increase in consumer welfare by providing more of what consumers want. Which all sounds very sensible to us to be honest.

It could well be that there are parts of it that won’t work - say, the demand for a valid credit card before getting a jugular stitched up at A&E. OK, that’s fine, let’s not have markets at that specific point then - but let us have them where they are optimal. Say, elective surgery for hip replacements, perhaps that sort of thing.

At the very least let’s do what markets are really, really, good at which is to experiment and allow us to find out what is the optimal arrangement.

Seriously, if markets can improve the Italian train system - with rather less unpleasantness than the last man who managed to make them run on time - then we must be well within the envelope of things that markets can optimise.

Still picking losers we see

Of course, reducing the friction - and thus cost - that the interminable planning system introduces into the economy is worthwhile. Economic growth is the doing of new things, or at the very least old things in new ways. The speed of growth is the speed at which we can do those things - a decrepit planning system therefore slows economic growth.

Yet there’s still a problem with this:

Homeowners who object to new solar panels, wind turbines and nuclear reactors face being ignored by planning officers under a once-in-a-generation overhaul of rules as part of Boris Johnson's energy strategy.

The Prime Minister unveiled a commitment to make it harder to prevent new energy projects from going ahead as part of ambitious plans to slash gas use so the country cannot be "subject to blackmail" by Vladimir Putin.

Part of it is that new housing is just as much a necessity as new energy. It should be the system as a whole reformed, not just for energy. For, if we are now to agree that we cannot delay energy projects through pettifogging detail then why is this not true of all projects?

But even in detail this is still wrong. For by selecting which energy technologies do not have to face the full horrors of the planning system the government is still picking losers. Whatever the new system it should apply not just to the currently favoured technologies, but to all - geothermal, fracking, that new idea of moonlight from cucumbers and so on.

For selecting which technologies are easier to build is again the selection of technologies, isn’t it?

Why do the armed forces let the MoD mess up procurement?

Of the 12 “enabling organisations” that its annual report claims constitute the MoD, procurement is responsible for the largest part of the headcount (30 percent): Defence Equipment and Support (12,136 staff), Submarine Delivery Agency (1,915 staff), Defence Electronics and Components Agency (416 staff), Single Source Regulations Office (Annex F: 38 staff), and Defence Digital (2,400 staff), i.e. 16,902 staff in total.   

Over the years, there have been delays, financial overruns and equipment failures, notably the unusable Ajax tanks discussed in the MoD’s last annual report. The Commons Public Accounts Committee reported in November 2021: “despite numerous reviews of defence procurement over the past 35 years” it “continually fails to learn from its mistakes”. Billions have been wasted. Reforming procurement procedures has proved a waste of time: procurement should be removed from the MoD altogether. In almost any other category, the supplier has to decide what the end user will want, after close discussion, and then provide it at a price the customer is prepared to pay. The intervention of the third party, in this case the MoD, especially one that keeps changing its mind, is guaranteed to create delays and unnecessary costs. 

Some equipment has to be bespoke either because it provides advantage over likely opponents or because purchasing by British armed forces opens the door to international sales or supply. We cannot be held to ransom by a foreign supplier at a critical time. About 40% of MoD purchases are bespoke, i.e. non-competitive, and that is where the problems lie. The 60% open market purchases can be left to the armed forces. 

The British defence industry, which is the world’s second largest arms exporter, should undertake the work and cost of meeting their customer’s needs, just as any other commercial supplier does.  Some fine tuning might be needed: some believe the British defence industry has been feather-bedded by the MoD and could well afford to do their own R&D. Others may think that taking over, in effect, the MoD’s procurement would be too burdensome. Where that proves to be the case, the defence industry can pitch for R&D grants just like anyone else.  

The MoD should also get out of the property business and oil storage businesses. According to its latest annual report, “Defence agreed to contribute land and buildings with housing unit potential for 55,000 homes.” It delivered 11,580 housing units. All land which is not used, and not likely immediately to be used, should be turned over to Homes England. The extensive Defence Infrastructure Organisation, which looks after the MoD estate, and the Oil and Pipelines Agency should be privatised. 

Defence Business Services largely deals with payrolls and pensions and should be part of the Director General Finance’s department which would, if the MoD stepped away, come under the command of the Chief of Defence Staff (CDS). The Hydrographic Office should return to its old home, namely the Royal Navy. In addition to the enabling organisations, Annex F of the annual report shows eight additional arm’s length bodies employing 2,947 staff. Three are museums which should join the others under the Department of Culture, Media and Sport and the remainder should become independent charities.  

Taking these two blogs together, it seems most likely that the armed forces would be better equipped without the MoD as a whole, not just procurement. About half the staffing of the MoD is not explained. The Atomic Weapons Establishments (AWE) are only mentioned in a note to the accounts even though they must be significant employers and have been deemed unsafe for the last seven years without the necessary corrective action taking place. The central HQ is also a significant employer. It is not just procurement that needs to justify its existence and place in the chain of command. The AWE, for example, needs to come under the CDS who might actually sort them out.

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?