Treasury cash cows

Motorists, like smokers and drinkers, have long been cash cows for the UK Treasury. The claim that tax monies raised from them pays for the costs they impose has always been spurious. Treasury receipts from motor insurance and fuel duty are claimed to cover the costs of road-building and highway maintenance, but they have always far exceeded those costs and gone into the general Treasury fund that pays for government spending.

It is sometimes claimed that smokers and drinkers impose costs on the NHS that justify the high taxes on their products, but this completely ignores the fact that earlier deaths from unhealthy lifestyles save the government far more in pension payments than the NHS costs they impose.

The impending switch to electric vehicles, delayed though it is now to be, poses problems for the Treasury, as they search for ways to make up for the looming loss of fuel duty revenues. The idea of a ‘tyre tax’ has been floated, with claims that rubber particles from tyres constitute a bigger hazard than the fumes emitted when fossil fuel are used. The thinking behind this is that electric cars have tyres that can be taxed if fuel duty disappears when the switch away from fossil fuels takes place. It is entirely possible that a Treasury desire to plug revenue losses might have supported the 5-year extension for petrol and diesel cars.

The Treasury mindset with its static model of the economy gives little attention to the basic truth that all taxes change behaviour. Increases in tobacco duty motivate people to seek black market, untaxed cigarettes, which are hard to regulate. Increases in income tax will lead more people to seek tax shelters. Limits to tax-free pension saving will lead some to take early retirement. For most taxes there are unsought consequences not envisaged by those who levy them.

The Treasury, looking only at the in-box, seeks to shore up the public finances by raising revenue wherever it can. Government should be looking instead at the out-box, the money that flows out to maintain its spending.

The government is looking to tax vaping, nominally to ‘protect children.’ The reality is that if the aim of abolishing smoking completely is achieved, the Treasury will be looking elsewhere to plug the loss of tobacco duty.

If they looked at the out-box instead of constantly trying to keep the in-box topped up, they might look at how many people are employed as diversity officers, as awareness officers, or the personnel whose salaries pay for language changes that are ‘inclusive.’ It might look at all the non-productive personnel it employs.

In the unlikely event that a government appeared that was prepared to do this, they would not need to milk their cash cows so aggressively.

This is absurd, truly absurd

What are these people thinking?

Headline air fares could rise by £80 if a law to ban “drip pricing” is introduced.

The government announced a consumers’ bill in the King’s Speech, granting new powers to enable “growing consumer harms” to be tackled.

Drip pricing is the practice in which businesses advertise only part of a product’s price upfront and reveal other charges later in the buying process.

It would ban airlines from charging extra for luggage, seat selection, travel insurance or food and drink vouchers at the point of purchase.

Breaking out the prices of the varied parts enables greater consumer choice. Greater consumer choice is a good thing. Insisting on rebundling the unbundled is therefore a decrease in consumer utility. And why would any government try to do that?

As it happens one of us is making regular short haul trips for family reasons. We are, therefore, intimately acquainted with the routine. Buy the ticket, agree to nothing additional and get to see Dear Old Mum for peanuts. Why would - again - any government want to insist that payment must also be made for a seat reservation, hold bag and even a cup of airline coffee?

This is a nonsense. Perhaps it is time for someone else to have a go if this is the new legislative agenda.

Now we've got to teach people about exports, do we?

The latest complaint about the North Sea:

Up to half of the oil produced in the North Sea will be incompatible with UK refineries by 2035, campaigners have warned.

Britain’s refineries are geared up to handle what is known as light oil, rather than heavy crude.

Around 25pc of domestically produced crude oil is already classed as heavy, with this proportion expected to rise to as much as 50pc in the next decade, according to an analysis by Global Witness.

It means Britain will be forced to ship an ever growing proportion of oil from the North Sea abroad unless new refineries are built.

Alice Harrison, of Global Witness, said: “Rishi Sunak’s obsession with oil is a red herring.

“The UK can’t process the oil we produce, and fresh analysis today shows the situation is only getting worse.”

Taking something produced in Britain and sending it abroad to be consumed by foreigners is known as an “export”. We generally tend to think they’re an interesting idea. With that lovely foreign money we get from these “exports” it is possible to buy things made by foreigners that we ourselves get to consume. These are known as “imports”. The whole process, swapping - intermediated by that money stuff - of swapping exports for imports is known as “trade”.

It’s the way the world gets rich, David Ricardo as well as Adam Smith wrote about it extensively some two and more centuries back. It comes as something of a shock that it’s necessary to educate “Global Witness” on such simplicities. But some are a little more simple about reality than they think they are, obviously.

We’d also add one more little detail. Currently the government gains 75% of those profits from that process of producing oil in the North Sea. True, we think that percentage is a little high but we also insist that resource rents should be taxed until the pips squeak. Still, we’re really not sure why Global Witness is so against money flowing into the Treasury. Are they against it being used to buy nice things for British voters?

AI must be biased or it will be valueless

We’re all seeing those insistences around and about that artificial intelligence must be free from bias. We can only build that glorious new world of equity if this is so. Sadly, the actual truth is entirely the other way around. AI must be biased.

No, really.

We do need to distinguish a little here. As with that division into taste discrimination and rational discrimination. It is rational to rationally discriminate, obviously - someone numerate to do the accounts is an aid to getting the accounts done. But insisting that the numerate person is male or female - or other variation - or not is an irrelevance.

However, with AI the distinction has to be a little different. Not between rational and irrational beliefs at all - but between those held and those not held. We wish to use AI to make real world decisions. Therefore the model AI incorporates must describe the real world.

We don’t have to go far to find claims that Britain is institutionally racist, or grossly sexist, or biased in favour of property owners and many other such insistences. To the extent that any of those claims are true then our AI models have to be as racist, gendered and propertarian as the population and system is itself. Otherwise we’ll not be describing Britain. An AI that did not describe us in all our irrationality would be like the GOSPLAN executive pencilling in ten million pairs of leather shoes when only three cows have been planted to provide the materials for next year.

Say, for example, that the population believed all capitalists were top hatted cigar chompers (not true, some gnaw their cigars) and also that all socialists were wastrels about to run out of other peoples’ money (true, obviously). It’s not the truth or not of either statement which means that the AI must believe the same thing. It’s that Britons believe those things therefore an AI describing or prescribing for Britons must also do so.

The only useful AI is one as biased as the people it is being an AI for. Demands to examine the AI entrails to make sure that it does not incorporate population biases are therefore futile. For that very insistence upon not describing people means that the AI is worthless in making decisions for people.

It is possible to insist that AI not be racist, gender biased, but only if the insistence is equally that society itself is neither of those things. Which isn’t something that those shouting about making sure AI is not racist nor gender biased are going to agree to, are they? For the usual insistence is that we’ve got to make sure that AI does not incorporate these biases of society at large. Exactly the thing which will make AI useless.

We’re sorry about this but it is all true. The only useful AI is one that accurately describes the people it is being applied to - intellectual warts and all. Anything else is just a repeat of designing a system that requires New Soviet Man to turn up to make it work.

Deadwood and Downturns

It’s often said that recessions clear the deadwood out of an economy.

We’re not exactly in recession in the UK (as Germany, unfortunately, is, and as around 20 EU economies were last winter). But things are pretty bad, with high interest rates, a severe monetary squeeze and business being (to put it mildly) less than great all round. So what does that bode for the clear-the-deadwood metaphor? Are all those deadwood companies, still upright thanks only to years of ultra-low interest rates, finally going to perish and give their ground to thrusting green-shoot enterprises?

Unfortunately, I think the opposite may be true.

What really makes unemployment peak in economic downturns is not so much the result of established firms sacking workers. Firms never like laying people off. It looks bad, and in countries like the UK and those of the EU, tightly regulated labour markets make it hard and expensive to sack employees. A much more important factor is that downturns make firms of all sorts more cautious, and more reluctant to take on new workers (especially, again, when employment regulation makes it hard to lay them off again if that proves necessary).

The result of that is that people who do lose their jobs spend longer looking for new ones, and those entering the labour market for the first find themselves competing for fewer openings, so they too join the ranks of the unemployed.

But it is younger, more entrepreneurial firms which are likely to contribute most to the unemployment, because they have not yet built up the confidence, the capital and the other resources needed for them to be sure they can survive a downturn, far less expand while one is in progress. In fact, precisely because they do lack that firm foundation, a greater number of new ventures fail during downturns than do established ones.

Unfortunately, therefore, the mature, deep-rooted deadwood companies are more likely to be standing at the end of a downturn than are the new, green-shoot thrusting ones. It’s the very opposite of what the ‘forest fire’ analogy predicts.

What are the policy implications of that?

First, if we want to speed recovery, we have to encourage newer, smaller entrepreneurial companies and start-ups. That means keeping entry barriers (like regulations) low, but most importantly, keeping taxes on businesses and on capital low. People who are starting or trying to grow businesses always cite taxation as their biggest obstacle: they are taking big risks, probably borrowing money from friends or mortgaging their homes to invest in their new venture, and the government’s tax collectors cutting themselves in for a large slice of any possible future product raises that risk even more. There is even a case for having lower taxes and regulations on small firms and start-ups, just to even up the risks when economic times are hard.

Second, we need a flexible labour market, free of employment regulation that makes firms reluctant to take on workers in the first place. A large part of that is making it easier and less costly for firms to scale back employment when market conditions dictate.

Only such an enterprise-friendly approach, especially a new and growing enterprise-friendly approach, is likely to keep unemployment down, strengthen government and private-sector revenues, capture the innovative capacities of entrepreneurs, and create the new, sometimes revolutionary, businesses that will pull us out of a downturn.

This is entirely logical - so what's the solution?

We are supposed, we think, to gasp in horror at this. Yet it seems entirely logical to us:

Almost twice as many working mothers as fathers have considered leaving their jobs because of the burden of childcare, research reveals.

A survey of 3,000 parents with children under four, commissioned by women’s rights group the Fawcett Society and Totaljobs, shows that new mothers disproportionately feel the strain of juggling childcare and work, and that it affects their finances, work-life balance, careers and aspirations.

One in five (19%) mothers of young children have considered leaving the workforce temporarily or permanently due to the challenges of balancing childcare and their career, the research by Opinium found. For fathers, this figure was one in 10.

As we’ve noted a number of times over the decades someone, somewhere, has to take care of the children. Given the mammalian nature of our species for at least some of the necessary time that will be the female part of the household. We’re also not surprised if - given that mammal thing - there’s some preference in the split of that part of the overall household labour burden in further years too.

Note that we don’t say there should be anything at all. Only that we’re not surprised by a possible divergence in average preferences.

However, since that’s not how the current zeitgeist views it we should move on to possible solutions here. So, what are they?

Well, given that the children do need caring for clearly the only possibility is that some other people work to care for the children while the parent (s) work doing something else. But unless there’s some distinct - and large - economy of scale in child care it’s not obvious that that drives society forward in any grand sense. The same number of labour hours will be spent caring for children, just by different people. That division and specialisation of labour thing does rest upon the assumption of greater labour productivity after all.

The idea of tax subsidy - whether by making childcare a tax relief, or direct subsidy of the costs - doesn’t change this either. We’ll still have a largely female workforce spending their time caring for children whichever way this is done. Parents care for their own or others work their lives caring for the children of others.

We think we’ve got one of those problems that doesn’t, in fact, have a solution. Children need to be cared for so the only argument being had here is who should it be doing that? We don’t reduce the costs, nor increase productivity, either way. So perhaps there just isn’t that solution to be had?

Once more into the breach Dear Friends, once more into the breach

Some 20 years ago we started making fun of the Living Wage people like the JRF. Every time they came out with an insistence that, you know and actually, the minimum wage needed to be higher we did the sums. Having done the sums we then gleefully pointed out that the difference between that living wage and the minimum was the amount that low income people had to pay in income tax and NI.

This was, obviously, nonsense. The minimum wage is, by definition, that amount that society says someone must righteously earn for their labour. That there should be no minimum wage at all, that it’s £0, is also true. But that argument for having a minimum set by statute is “Guys, this is the just and righteous minimum!”

Therefore the government, the Chancellor, doesn’t get any of it - it’s the just and righteous value of that labour.

The reason why those on minimum wage were getting taxed was fiscal drag. Don’t increase the tax free allowance in line with inflation, don’t adjust it for rising real wages. Over a generation the threshold for paying income tax migrates from it being something that only hits the middle class and above to being something that someone working part time on minimum wage has to pay. Which is an absurdity.

Which we kept pointing out. Along with the demand that the personal allowance for both income tax and national insurance be raised to the full year, full time, minimum wage. This also actually worked. The CPS had worked on George Osborne, we (and we know this to be so) convinced Nick Clegg and the LibDems, come the Coalition it became so.

Yes, it took time to be brought in but that’s why the personal allowance is now £12,500 a year. Because that’s what the full time, full year, minimum wage was back when the Coalition signed onto the idea.

At which point:

Should income tax thresholds be raised?

Millions more households will be pushed into higher tax brackets by 2028. We ask two experts if they think this sneaky way of raising tax is fair

We have views on those higher brackets. But we are adamant about that initial threshold. The personal allowance should be, must be, at the minimum wage at minimum. Not to do this is not only sneaky it’s vile.

Consider, for a moment. The current minimum wage is £10.42 an hour. The average (full time) work year is 1,866 hours. The personal allowance is £12,570. Gross annual income is £19,443. Minus the allowance, that’s £6,873. Which is then taxed at 12% NI and 20% income tax. £2,200 a year.

The working poor, those making only that legislated minimum wage, should be taxed £2,200 a year on their incomes? No, monstrous.

So, we’re going to have to do it all over again, aren’t we? The personal allowance for income tax and NI must be the full year, full time, minimum wage. And that needs to be set into stone as policy. Change one change the other, no ifs or buts or this is just a temporary measure for hard times.

Of course, this will produce a revenue problem. Some 30 million working in the UK, if all of them pay £2,000 a year less in tax then that’s £60 billion in revenue foregone. Which is, given the (2021/2) total spend of some £1,180 billion, about 5%.

But we’d remind of O’Rourke’s Principle of Circumcision. You can take 10% off the top of absolutely anything.

People shouldn’t be paying income tax on the minimum wage. So we’re going to have to do this all over again, aren’t we? Gird the loins and once more into the breach - lower taxes for poor people!

Now they're just being ridiculous

It’s becoming just one of those statements:

That free-market capitalism is almost certainly not environmentally sustainable, as well, is a realisation that many rightwingers, including Sunak, are avoiding for as long as they can.

We know that many simply don’t like free market capitalism and wish to see it end. But this idea that it should go because it’s inefficient is simply ludicrous. One obvious reason for that statement is that it is based upon the economic analysis of George Monbiot. Hmm, yes, well…..

There’s nothing at all in either capitalism or free markets that insists upon economic growth. They’re both good ways of getting it, certainly, but the growth is not a necessary precondition for either of the systems or their blend.

However, what each are separately and both are together is efficient. Efficient in the use of resources to gain a certain output that is. For the obvious reasons that inputs are a cost to capitalists therefore capitalists economise upon inputs. This is not complex logic.

We’ve also tested this in that grand experiment we call the 20th century. The capitalist and free market (agreed, many to greater and lesser degrees capitalist and free market) economies gained total factor productivity in a way the planned and socialist economies did not. Paul Krugman’s on record musing that perhaps the Soviet Union managed no increase in economic efficiency at all in 70 years. All growth came from greater resource use, none from better resource use.

We’ve also another test of this in the emissions scenarios that underpin climate change worries. The capitalist and market (ie, A1) outcomes are considerably better than the non-market ones (ie, B2). Yes, in everything.

Economic efficiency means lower resource use for any given standard of living - equally, a higher standard of living for any given resource use. That’s just definitional. Given that free market capitalism is more efficient with resource use than other economic systems therefore - for any given standard of living - free market capitalism is the most environmentally friendly.

But here we’ve got the intelligentsia speaking unto the nation and claiming entirely the opposite.

Of course, some of this is simply delusion and that’s not a rarity on newspaper opinion pages. But we do have a distinct impression that for at least some this is driven not by matters environmental but by that desire to do down free market capitalism. We can definitely think of a few who, if convinced that free markets and capitalism were environmentally optimal, would prefer to damn the environment rather than support liberal economics.

Well, there's your problem then

News from the US:

The world’s biggest offshore wind developer has taken a £4.6 billion hit after scrapping two projects in the United States in a significant setback for America’s renewable energy industry.

The decision led to billions of pounds being wiped off the market value of Orsted, the Danish energy group that also operates much of the North Sea’s wind industry.

It blamed rising costs…

Wind power is grossly more expensive than everyone thought it was and was planning for. As a result, obviously, we both should and will have less wind power.

From the London Stock Market:

Shell has announced a bigger-than-expected $3.5 billion share buyback even as the oil and gas giant’s quarterly profits fell by a third to $6.2 billion on lower prices.

The FTSE 100 energy group’s adjusted earnings were down from the $9.5 billion it made in the same period last year but were in line with analysts’ expectations.

Fossil fuels are vastly profitable and wildly value additive. Therefore we should have more of them.

Except, of course, those pesky externalities of climate change. If only someone had written a report - 1200 pages would be a nice length - explaining how to deal with this dichotomy. Or had been granted the Nobel for explaining it. Or even explained the basic mechanism well over a century back.

Work out what the cost of the externality is - roughly is good enough - and stick that on the whatever it is that causes it. Then it’s included in all the prices everyone uses to make a decision. We then get not just less of the externality but the right amount of it. For only those things that still add value despite that cost still get done, those that don’t, don’t.

Or, given that people did do all of those things if only we had a polity that would enact that solution - or, given the current polity, was capable of understanding it.

The answer to climate change is the carbon tax.

One result of having had it would be that a Danish company wouldn’t lose £4.6 billion trying to build something clearly and obviously economically unviable in the US. For given that all of the costs of the varied technologies would already be in the decision making prices the economic unviability would have been obvious on the first Excel spreadsheet. And so remain in that model rather than become the £4.6 billion reduction in aggregate human wealth it just has become.

The carbon tax is not, in fact, a tax. It’s a decision making guide so that we don’t do blubberingly stupid things. Given what people have been doing about climate change we therefore recommend it as a policy. For we really do think that climate change would be better addressed by not doing blubberingly stupid things.

Maybe that’s just us, but, well, you know…..maybe?

White hydrogen may or may not be a solution

The Daily Telegraph tells us that white hydrogen (geologic H2, that may be archaic or other theories suggest constantly generated) may or may not be the solution to some or all of our climate change woes.

Estimates of the flow of hydrogen from these process are imprecise, varying from very little to all of the current global annual consumption of hydrogen. In addition there might be potentially vast quantities of primordial hydrogen. And the great thing about all this white hydrogen is that we do not need to use large quantities of electricity or fossil fuel to produce it: this is not an energy store like all the other colours of hydrogen, it is a dispatchable primary energy source like nuclear or fossil fuels.

They’re right too - too much is unknown to be able to decide on whether this is some mildly interesting but marginal issue or of some great import.

The bit that amuses us is the sheer serendipity of this other announcement made on the same day:

Significant concentrations of hydrogen and helium have been encountered in sections of the Ramsay 1 well, confirming historic measurement and demonstrating an active hydrogen system in the Ramsay Project area. Testing and laboratory results measured air-corrected hydrogen at 73.3% at 240m below ground level, consistent with the 76% air-corrected concentration of hydrogen reported in the Ramsay Oil Bore 1 in 1931.

This is not investment advice about Gold Hydrogen and it’s most certainly not a recommendation. We just do think that it’s fun.

From that fun we also derive two little lessons. The first is something about mineral resources in general. There never has been a proper survey of the planet and what it holds. The only statistics we’ve got (all those mineral reserves, resources) are listings of what currently active companies claim to have marked out as economic to recover deposits. Anyone claiming that mineral reserves (or that wider definition, resources) is “what we’ve got” is wholly and entirely wrong. Systematically wrong in that they don’t know what they’re talking about, have failed to grasp the basic definition. For example, this find of H2 in Oz - we know it’s there, from that announcement. But it’s not a mineral resource even yet, let alone a reserve. This is also true of all the other places we’ve not gone looking as yet.

The second is that we need some way of working out which of all these possibilities is going to be important and which aren’t. The answer is not to use planning. For obviously planners didn’t know about this white hydrogen find. Nor, really, does anyone’s current plans include any white hydrogen at all. So, what we need is a system that continuously alters course given the new information that flows into it.

You know, markets? Not government plans written into the Climate Change Act 2008 and “legally enforceable” as a result. But prices, markets, the efficient manner of incorporating new knowledge into the body politic. That’s the one way we’ve got of trying everything and so seeing what works.

Sure, perfectly happy to help markets along by incorporating externalities into prices - we’ve been arguing for that for two decades now. We’ve also no complaint at all about the idea of dealing with climate change. It’s the process we use to do this - markets adjusted for externalities rather than the plans of whichever babykisser last got elected - which we insist upon.

Yesterday we didn’t know that white hydrogen existed in Australia. Today we do - great, so, how do we incorporate that into our plans? By not having societal plans other than using prices to inform activity…..