The Laffer Curve really does exist - no, really!

That there’s a tax rate too high to maximise tax revenue seems like a reasonable enough statement. That there’s one that is too low to maximise revenue is an obvious one. The Laffer Curve is merely the insistence that both of those things are true. That there’s an optimal tax rate to maximise revenue collection. That is also all that it says.

However, we do need to be careful here. For the Laffer peak is going to be different in different societies, with different tax rules. Further, it’s going to be different for each different tax in each such different society. The rate for a transactions tax will be very low indeed - that 0.01% on financial market transactions was, even by the calculations of those who proposed it in the EU, above that revenue maximising rate. It’s long been said that stamp duty on share purchases is above the revenue maximising rate. Wealth tax rates might well not be quite the revenue enhancer that many seem to think they will be:

A record number of super-rich Norwegians are abandoning Norway for low-tax countries after the centre-left government increased wealth taxes to 1.1%.

More than 30 Norwegian billionaires and multimillionaires left Norway in 2022, according to research by the newspaper Dagens Naeringsliv. This was more than the total number of super-rich people who left the country during the previous 13 years, it added. Even more super-rich individuals are expected to leave this year because of the increase in wealth tax in November, costing the government tens of millions lost tax receipts.

We’re not about to try and calculate whether that is in fact revenue losing but we would like to just point to it as being one of those interesting questions.

His move to Switzerland follows a relatively small increase in tax aimed at the country’s super-rich, who face wealth taxes at both the local and state level. That includes a municipal tax of 0.7% on assets in excess of NOK 1.7m for individuals, or NOK 3.4m for couples. There is also a state wealth tax rate of 0.3% on assets above NOK 1.7m. In November, the government raised the state rate to 0.4% for assets above NOK 20m for individuals, and NOK 40m couples, taking the maximum wealth tax rate to 1.1%.

A 1.1% tax on billionaires’ wealth isn’t, in fact, going to make much difference to total tax revenue. And we are at least arguably seeing that 1.1% is above the revenue maximising rate for such a tax. Or, another way to put this, wealth taxation isn’t quite the Deus ex Machina of the welfare state that some are claiming it is. The amounts to be raised aren’t worth the behaviour change they engender.

Of course, there is also that new new left idea. That it’s the inequality itself which is the problem and that methods of reducing the inequality, in and of itself, make the world a better place. So, people leaving Norway with their wealth makes Norway a better place. At which point no doubt the new new left will be able to show us some improvements in Norwegian society worth the tax revenue being given up. No doubt - they’ll be queuing up to do so, right? Along with the manner in which Switzerland is getting worse as the rich people go there.

Ourselves we think the inequality is in itself the evil argument is insane. Or, to be milder about it, not backed up by any empirical evidence. But that’s not in fact the hurdle that needs to be crossed here. Rather, is the reduction in inequality worth the loss in tax revenue from the exodus? We look forward to any explanations of why that might be true - not that we’d believe them but we do look forward to people trying to make that case.

One of the many things government need do nothing about

As we’ve pointed out many a time if recycling makes a profit then we should do it - and someone will do it. Whether we maintain that glorious state of being a free market and capitalist society or not if there’s free money just lying around the steets of the city then people will scoop it up. Which is what profitable to recycle materials not being recycled are - free money just lying around. The logic here being very simple indeed, as people can profit from doing what is not being done - recycling - therefore someone will.

Impetus, support, subsidy and legal force are only required when the recycling is not profitable - at which point of course why would we employ any of those four to make it happen?

Which brings us to battery recycling, a part of that electric vehicle revolution:

Recycling could save about 38% of the carbon and 35% of the cost of mining the same materials.

Excellent, so that’s that problem solved then. Manufacturers of batteries will preferentially purchase the recycled material, people recycling will be able to make a profit. Given that battery recycling will be profitable we need use none of the four - impetus, support, subsidy or legal force - to make it happen because it’s going to happen anyway. Indeed, the argument that we need to use any of those four is an admission that it will not be, left alone, profitable and therefore we shouldn't be doing it anyway.

Note that we’ve not even got to bring in the carbon emissions part for this to be true - simple market prices do it all for us.

No, there is no useful argument that “it’s all going to run out if we don’t recycle”. Firstly, that’s all in prices anyway, secondly as Telsa points out (start on page 31 here) it’s not true anyway.

How excellent, we’ve just discovered yet another human problem that government need do absolutely nothing at all about. Which really just leaves us with the only important question - when can we start having less government?

Eliminating emissions from commercial property isn't worth it

Yet another example of the error of allowing the planners to try and deal with a problem. Actually, allowing the planners to do anything at all. The bill for upgrading commercial property to meet climate targets will be substantial:

The high street is facing a £90bn bill for upgrades as net zero rules force businesses to improve more than nine in ten of Britain's shops.

New energy standards will make 91pc of all retail space including high street stores and shopping centres across UK city centres unlettable by 2030 without urgent and costly action, according to Savills estate agent.

The Government intends to ban commercial properties from being rented out unless they are assessed as having a minimum energy performance rating of C by 2027, and B three years later.

Note that that doesn’t eliminate emissions, just reduces them. But let us assume that it would eliminate them just to make our maths a little easier.

Emissions from commercial property seem to be around the 24 million tonnes a year mark. Note, again, that’s all commerial property, not just retail, but we’ll run with that again. Our two broad brush estimates, all commercial not just retail and also eliminate not reduce make the calculation hugely biased in favour of this action.and plan.

We also know, from the Stern Review, that the social cost of carbon (actually, CO2-e, as with those emissions numbers above) is $80 per tonne. So, the saving to Gaia of this mithering about commercial property is 24 million times $80 per year: $1.9 billion or so, call it £2 billion given the level of accuracy we are using here.

The cost is that £90 billion investment. The cost is a once off, the saving is per annum. That equates to a 2.2% interest rate we’re getting on that capital investment. That’s too low to be worth doing.

No, we can’t go off and insist that Stern showed that we must use a really low discount rate about climate change. Because that is already in our $80 per tonne. To then include it again is to double count. By using $80 a tonne CO2-e we are already incorporating it and must therefore be looking fror market interest rate returns on investments.

We really have done this calcultion in a manner hugely in favour of the planners and their decision here. It’s also still a nonsense and will make us poorer. Therefore let’s not do it.

Which does bring us back to that Stern Review and the central lesson he tried to teach us and that central lesson which absolutely everyone is entirely ignoring. In determining what to do we must be guided by what adds value and what subtracts it. The only way to determine this is the use of prices. Finally, don’t use planning as the attempt at a solution because that will inevitably lead to more expensive solutions. Given the way humans are - doing less of whatever is more expensive - using planning will lead to less being done about climate change than the use of markets and prices suitably adjusted.

Demanding that commercial property reduce emissions in this grossly expensive manner is just the wrong thing to be doing for the planet. But that’s planners for you.

It’s not worth doing even before we consider that other plan, where we’re to have an all renewables, all electric, energy production system which itself will be net zero. At which point what emissions are there going to be from property anyway?

Goodhart's Law applies to BMI as well you know

Goodhart’s Law is the cynical but correct observation that: “When a measure becomes a target, it ceases to be a good measure”. Originally an economic observation used to explain why Ministers declaring targets find that things don’t go quite their way - reality is ‘ornery that way.

It does though have wider application:

Fishing industry outraged by plans to ban ‘fat fishermen’

New rules that require a BMI below 35 in order to be passed fit to fish described as ‘ludicrous’ and ‘playing with people’s livelihoods’

Think on it for a moment, this is a declaration that every international prop forward is too unfit to fish. Which will be a surprise to every other international rugby player.

It does, of course, get worse than this. BMI is known to be a flawed measure. We did once have a detailed and exhaustive explanation given to us by an expert in the subject about why a volume measure like this is indeed a squared not a cubic and while it convinced us at the time we’ve thankfully forgotten it. But the point was very strongly indeed made that it’s a useful shorthand as a population measure. It is not to be used - at all - upon individuals simply because there are so many other things which determine that individual relationship between height and weight. Some people really are wider than others and for reasons nothing to do with adipose tissue.

The application of BMI to something like fitness to fish is not just turning a measure into a bad one, it’s using a measure to do what it’s expressly said not to use it for.

Of course, given that this is the British bureaucracy there is a joy to it as well. For apparently our Rolls Royce minds are unaware that fat floats and so do fat people. This being encapsulated in that common - most common in fact - observation about those with certain physiques of strategically placed adipose tissue - well, they’ll never drown, will they?

We seem to have designed our governance system to require those Rolls Royce minds and then staffed it with Trabants, which isn’t we feel quite the right way around to be doing it. We’d prefer something so simple that even a papier mache two-stroke could manage it then stick the bright people into those positions.

Puritanical nonsense of no practical use at all

We’re told that we must stop having nice showers and return to only being allowed miserable ones in order to further our worship of Gaia:

Power showers could be banned from sale under Government plans to save water.

It comes as ministers want to cut individual demand from 144 litres a day to 122 litres a day by 2038 to protect supplies.

The plans include the development of new standards for showers and taps which restrict how much water they can use.

This could mean ending the sale of power showers, which use around 10 to 16 litres of water a minute, meaning a five-minute shower can use 80 litres - compared to around 20 litres in a typical electric shower.

This is about as effective as the old Catholic ideas of not eating meat was in saving lovely bunnies. The Catholics at least getting the idea right - it wasn’t about saving bunnies it was about showing devotion to the religion by deliberately depriving oneself. It’s a shriving of the soul thing, not a resource preservation one.

So too limitations on the domestic use of water. As a Grantham Institute tells us:

Only about 3 to 5% of water use happens at home. About 5% is used by industry to provide products and services (all business essentially falls under this category). And the rest?

The rest is from agriculture.

Shaving a bit off the domestic use of water reduces total consumption by fractions of a percentage point. It’s an irrelevance to anything but that worship of Gaia. The western world has largely given up on belief in God - despite the outward observances this coming weekend - but as Chesterton pointed out once that happens men will believe in anything. Which doesn’t, in the slightest, justify permanent Lenten penances in our ablutions being imposed by government.

At least the Catholics gave up forcing those on everyone some centuries back.

'Wokery' in light of Smith's 300th birthday year

This year being the 300th anniversary of the birth of Adam Smith, I am doing quite a few talks all over the world on the great Scottish Enlightenment thinker. And I have been reflecting on the arguments of those who want to ‘reclaim’ Adam Smith as a sort of woke moderate socialist…

The evidence for this, runs the narrative, is that in The Wealth of Nations he complained about inequality and showed particular sympathy for the poor, “Wherever there is great property, there is great inequality,” he wrote, going on to remark how this led to social insecurity, “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” It is only equitable, he continued that they should enjoy reasonable living standards.

So has Smith been misinterpreted by those who see him as a champion of capitalism (not that the word even existed in Smith’s day)? Not at all! Smith did indeed support free markets, free trade, free commerce, minimal regulation, low taxes, and a modestly sized government precisely because that was the best way to improve the condition of the working poor and promote economic equality.

But the more of the economy that is controlled by politicians — and of course by business people to seek advantage by becoming their cronies and leveraging their power over competitors and the public — the more are the poor oppressed, and the fewer opportunities they have to improve their own condition.

I support trade, free markets and the free society for precisely the same reasons. Left to itself, the ’system of natural liberty’ as Smith called it, will spread prosperity and tolerance through the whole society. Cronyism, centralism and socialism artificially and forcibly stifle those benefits.

A second set of Smith critics see him not as a proto-socialist, but as too confused to be taken seriously. There is an ‘Adam Smith Problem’ in that The Wealth of Nations is all about self-interest, while Smith’s earlier book, The Theory of Moral Sentiments focuses on feelings of empathy and benevolence. So which is it, Adam old chum?

This view underestimates Smith, though, by seeing him only as an economist whose moral ideas undermine his economics (or as an ethicist whose economic ideas undermine his ethics). But remember, in addition to economics and ethics, Smith also wrote and lectured on philosophy of science, logic, politics, and the arts. He was more of a social psychologist, in fact, and his two great books explore different parts of the psychology — different aspects of the human mind.

And even then, there is not such a great divide. Smith sees our moral behaviour as stemming from a deep human desire, as social creatures, to be admired and respected by others. We do things that make other people happy, or at least we avoid things that cause them upset.

Smith calls it ’sympathy’ and rejoices that it enables our species and society to flourish. He sees conscience as a sort of imaginary spectator by which we judge our own actions against this standard. Yes, we have feelings of benevolence towards others, but these feelings are weak. Much stronger is our desire to act in ways that will generate approbation from others.

Just as our economic actions derive from self-interest, therefore, our moral actions derive from a form of self-interest too: not so much our benevolent concern for there, but the fact that we feel better if we do right by others. In both cases, we are acting with ourselves in mind. In other words, there is no ‘Adam Smith Problem’. The only question is how all this self-interest can create a harmonious and functioning society.

Smith saw that it did, and described it as the ‘invisible hand’. F A Hayek, two hundred years later, explained it as ’spontaneous order’, and showed how regular behaviour, even self-interested actions, fit together to produce a beneficial hole. After all, as Smith put it, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”

If only Owen Jones knew a little economic history

The world’s going to pot and Owen Jones is here to tell us why:

The rise of the “free market”, we were promised, would unleash endless prosperity. But while the much-demonised age of strong trade unions, nationalisation and expansive welfare states delivered the greatest improvement in living standards in history, our current economic model is decomposing all around us: the stench is becoming harder to ignore. On both sides of the Atlantic, economic growth has fallen since the frontiers of the state were rolled back, and that more limited growth is more likely to be sucked into the bank accounts of the gilded rich.

It’s certainly exciting rhetoric but how useful is it as an analysis?

Not very is the answer there. Even, entirely wrong. For in that grand sense that Jones means there has been no rolling back of the State. Valiant attempts to move some things out of state control, yes. Preventions of matters getting even more state orientated, yes. But actual rolling back of the state not so much.

The numbers are here. How big that state is is a function of how much of all economic activity - GDP that is - flows through the state. The current amount is higher than the 1950s and 60s, only a fraction less than the peak reached for a year or three in the late 1970s.

So, Owen tells us that the difference between those glorious post-war years and today - the higher growth then and lower now - is a function of the size of the state. OK - given that the state is larger now than then we’d better get on with shrinking it then, no?

No, no, no, this isn't the point of an experiment at all

There’s a horrible feature of modern life which is that on observing something being done people call for us to do it too. That’s not the way that either markets or experiments work. Markets, of course, being one of the ways that we conduct experiments. What is it that works among all the myriad things that can be tried?

Paris has turned its back on e-scooters – so will Britain soon follow?

Electric scooters were meant to be the clean, green commuting machines of the future – now, they’re the scourge of the city

It might be that electric scooters are the scourge of a city. It could be that the value they provide - that there is such value is proven by people using them - is greater than the scourge. Finding out the balance would indeed be interesting, that requires experiment and observation. At which point Paris is doing the experiment - we should therefore observe and see what the outcome is before committing ourselves either way.

Of course, e-scooters are a relatively trivial matter but this principle holds true for everything. That someone else is doing something is not an argument that we therefore should - it’s an argument for us to observe and then decide.

As, you know, happens in that most successful of all economic organisational methods, capitalist free marketry. The capitalists watch what succeeds then copy that, leaving the failures to die in the dust. Thereby we gain much more of the successful things and very much less of the failures. It’s an obviously useful principle.

How dirty do we want the rivers to be?

There’s been a lot of shouting about sewage overflow and so on lately. With the assumption obviously being that there should be no such overflow. All sewage should be completely treated and the rivers left pristine. This is, of course, incorrect.

We live in a second best world, one of scarce resources. Therefore resources we use to build an entirely new storm drain system, separate from the sewage one, must be diverted from some other possibly desirable usage. Therefore the actual question to be answered is how dirty will we allow the rivers to be? So we can have more of those other things? The answer being, well, quite possibly about as dirty as they are right now:

Investment to stop sewage discharges worth more than a £1bn will only stop 3.3 per cent of spills every year by 2030.

Water companies will be allowed to spend £1.1bn on work to improve over 250 storm overflows, reducing the annual average of spills by 10,000.

No, that does not then mean that spending £30 billion will stop all spills - the first part of any problem is the cheapest to solve, it gets progressively more expensive as we eat into the problem.

This is also something not to be solved by just demanding the capitalists do it. The reason the water companies need permission to spend this money is that their returns to capital are regulated. A higher capital base, they get to charge more. So that £1.1 billion will appear on water bills in the fullness of time - plus a return. This is also not something solved by nationalising everything. Whether it’s public capital invested to gain a return or taxpaid subsidy of the water system it all still comes out of our wallets. On the very simple grounds that our wallets are the only ones around. Everything, in the end, gets paid for by the people.

The plan also includes work to improve water quality at Ilkley on the River Wharfe, a designated bathing water site,

At what cost do we just tell the people of Ilkley to go use a swimming pool like civilised people because we’re not willing to pay for making the river any less dirty? We’re sorry to have to say this but that is the only important question here and there is no way out of it either. How clean do you want it - and how much does that change when you’ve got to pay for it?

Synthetic fuels - an environmental game changer

In the Adam Smith Institute we have long argued that government should set the targets rather than mandating the technology to achieve them. In this way we allow competing ideas to be developed that can achieve the goals in different, and often unpredictable, ways.

Governments have decided that petrol and diesel vehicles are to be phased out and then eliminated to remove the pollutants they emit. They are to be replaced by electric, or possibly hydrogen powered vehicles. This misses the point spectacularly. As Tim Worstall of this parish has pointed out, petrol and diesel engines are not the causes of pollution. The fuel they use is the cause, rather than the engines themselves.

If a non-polluting fuel could be devised, the engines could continue in use without the detrimental effects of fossil fuels, and if the new fuels were compatible with existing internal combustion engines, there could be huge savings to be made by going green in a far less costly way.

Step forward the new kid on the block. Two weeks ago Porsche committed itself to the mass production of synthetic fuels at plants in South America. Synthetic fuel – called eFuel by Porsche – is created by splitting water into oxygen and green hydrogen, then combining CO2 with the green hydrogen to produce synthetic methanol, which is then converted into eFuel, which can be used in regular combustion engines. Highly Innovative Fuels (HIF), backed by Porsche, uses a variant of the Fischer–Tropsch process, originally developed in 1926, to make complex hydrocarbons out of air and water.

In a demonstration, the automaker filled up a 911 Carrera and drove it on synthetic fuel for the first time. The potential is huge. Without using fossil fuels it can synthesize fuels for internal combustion engines, and even aviation fuel. The process releases oxygen into the air as it combines the carbon with hydrogen. Even without carbon sequestration being developed for its exhausts, it would be carbon neutral, with fewer particulates emitted than fossil fuels put out.

The European Union has sensibly stepped back from its plan to ban all combustion-engined cars from 2035. A new agreement will see the creation of a class of cars that can only run on carbon-neutral e-fuels.

In the 1950s there was an urban myth that inventors had created a tablet that turned water into automotive fuel, but the wicked oil companies had bought the technology and suppressed it. It won’t be that simple or that cheap, but it does look as though people might well be driving with fuel almost literally plucked from thin air. And it will be much greener than current fuels.