This could be true Mr. Tugendhat, could be true

Too much of our pensions are invested in dead money - bonds - where they sit waiting for interest.

We need to see more invested in live money - equities - where they can support ideas and create jobs.

Not that corporate bonds are dead money of course, they finance companies just as much as equities do. A different layer of the stack possibly but still financing economic activity.

What is meant is that mountain of Gilts, that Treasury debt, which sits in British pensions funds.

And, well, OK. So, why do pensions funds carry those gilts? Why aren’t they in those equities - or corporate bonds. Equities and corporate bonds do carry higher returns, so we’d expect pensions maximising money managers to be in them. Why aren’t they?

Gordon Brown, basically.

He abolished the tax exemption on dividends. He - and the Major admin as well to some extent - also insisted that direct benefit pension funds must hold many more gilts. The two effects together meant that pensions funds did flow out of equities and into gilts. So, if we wish to reverse that process then we should reverse those two actions.

Great, that’s dealt with then.

We might also suggest this as a more general principle for government policy as well. It’s often useful to solve problems by unpicking the mistakes of past administrations. Actually, we think that could well be the most useful thing to be done. Not another layering on of a new and better set of mistakes, instead a removal of the errors of the last lot. Which there must have been, obviously, otherwise there wouldn’t have been that change of power at the last election, would there?

Someone's going to have to explain the word "populist" to us

The idea that someone standing for election should promise things that the populace might like to vote for seems to us to be rather the point of the system. And, as Mencken said, democracy means they then get it good and hard.

Milei, in Argentina, diagnosed that the entire Argentinian state, its economics, its management - in both senses, what is done and who is doing it - is rotten and needs to be swept away. He got elected. Of course, for all those others who are part of the management of other states this poses something of a risk. What if it works and then their own restive managees decide to do the same? We’d thus expect the establishments of everywhere else to not just denigrate but actively block anything Milei tries to do. As, of course, the domestic managerial class will also be trying to do the same.

We do indeed think that it’s possible for a place to be so badly run that only truly radical action will restore matters. We are not conservatives, we are classical liberals after all - neoliberals even.

But perhaps someone could explain this to us:

“Fiery right-wing populist Javier Milei wins Argentina’s presidency and promises ‘drastic’ changes”

Why is he being described as a populist? Other than in that manner of proposing things that the electorate might find popular that is?

For we’ve also had this in this same election:

Argentina will exempt millions of workers from paying income taxes, a dramatic attempt by Economy Minister Sergio Massa to improve his standings in next month’s presidential election at the risk of deepening the country’s fiscal hole.

Workers earning less than 1.7 million pesos ($4,857) per month won’t have to pay income taxes as of October, up from the previous threshold of about 700,000 pesos, Massa said Monday in Buenos Aires. The measure means only 90,000 top executives and high-ranking managers across the country will have to pay the tax, he said. That’s less than 1% of total registered workers.

The incumbent finance minister essentially abolishes income tax (not a bad idea!) and still loses. But it’s his opponent, the other guy, who is described as the populist?

Other than “populist” merely meaning someone the managerial class doesn’t like what does it actually mean?

The Invisible Hand and Social Order

In this 300th year after the birth of Adam Smith, much of the focus has been on Smith’s economics, as recorded in The Wealth of Nations (1776). But Smith’s ethical thinking was no less profound. Indeed, it was The Theory of Moral Sentiments (1759) that made him famous.

Like The Wealth of Nations, The Theory of Moral Sentiments (TMS) was a complete break from the thinking of the time. Ethics had until then been widely assumed to be based on God’s will, or the clerics’ interpretation of it; or something that could be deduced through abstract reason; or even something that could be felt through some ‘moral sense’ like touch or vision. Smith, by contrast, argued that morality stemmed from our human nature as social beings, and our natural empathy for others. 

This replaced speculative thinking by scientific method. Smith maintained that by observing ourselves and others, we could discern the principles of ethical behaviour. It was a matter of psychology: how we form judgements about ourselves and others, and the influence of customs, norms and culture upon those judgements. 

This scientific approach was very much in line with the Scottish Enlightenment, which stemmed in part from the exchange of ideas between Scotland and England following the 1707 Act of Union, and sought to apply observation and scientific method to the study of humankind. Old hierarchies were breaking down, with industrialisation replacing Scotland’s old feudal lifestyles, and with religious pluralism, leading to a more active debate on morals and virtues. New thinkers, like Francis Hutcheson and David Hume, were role models for Smith’s intellectual radicalism.

TMS argues that morality is rooted deeply in human psychology, especially the empathy we have for our fellow humans. By nature we understand, and even share the feelings of others. We want others to like us, and we strive to act so that they do. Even if there is no one else around to see our actions, we are still impelled to act honestly, as if an ‘impartial spectator’ is judging us at all time, setting the standard by which we judge ourselves and others. Every choice we have to make helps us see that standard more clearly and act according to it more consistently. All of which leads us, as if drawn by an invisible hand, to create a harmonious social order.

TMS is primarily a descriptive account of human moral action. It examines how people actually make moral choices, and the pressures on them to do so. But it also provides a guide on how we can cultivate our morality, emphasising the importance of self-reflection and self-improvement.

It is no exaggeration to say that TMS laid the foundations for the subsequent development of psychology, sociology and economics, helping establish them as distinct subjects of scientific enquiry. His idea that self-interested actions—wanting to be liked by others, or exchanging things we value less for others’ things we value more—had a profound effect on the rise of liberal thought. 

Smith’s approach is just as relevant today as it was in 1759. Through self-reflection, we can make better moral choices. By sharing the feelings of others, we can foster understanding between individuals and groups and create a more peaceful humanity. By understanding our shared interests we can live and work and collaborate together for the mutual benefit of us all, both in economics and in life in general.

We'd just like to point out a certain economic detail

Given that this is from Willy Hutton of course it’s somewhere between misleading and wrong. But why is it?

Britain is suffering from an intensifying four-decade-long investment drought in the public and private sectors – the root cause of the crisis in stagnating productivity and living standards that shapes our politics and daily lives.

Whether or not the gross amount of investment is too high, low, about right, is not our point. Rather, where it’s going is. For where whelpingly massive amounts of what investment that does happen are going does, by definition, reduce recorded productivity.

We would also argue, quite a lot, about living standards and even GDP. Living standards are determined by GDP plus the consumer surplus, not by GDP alone. Much of the technological development of the past few decades has vastly increased that consumer surplus which also either not being fully included in GDP or sometimes even reducing it.

There are those estimates that Google and free email are worth $18,000 a year per head of population, that Facebook is valued at $800. As Hal Varian has been known to point out, GDP doesn’t deal well with free. The consumer surplus is there in such things but not the GDP (which is actually just the advertising on those things, not the value of the things themselves). We’d also use the example of WhatsApp. This has no revenue associated with it at all, no ads, no subscription. There is therefore no output measure at all in GDP. Yet there are costs of course - a couple of hundred engineers in Facebook last time we asked them. That means - labour costs, no associated measured output - that WhatsApp is in economic statistics as a reduction in productivity. Despite 1 billion people gaining some or all of their telecoms from it - for free.

But we can and should go further than that. We all know there’s a vast amount of investment happening in this going green stuff. Maybe that’s a good idea, maybe not, that’s for another day. But the point of what is being done is to address an externality - those environmental damages, costs of emissions, which do not show up in prices and therefore are, again, not in GDP. So, we solve those externalities - and maybe we should! - and we create green jobs while doing so.

Cool. So, now we have the same output - say a GW of ‘leccie, even a GWhr - with the same value as before but we’ve used more human labour to produce it - those green jobs that the energy transition creates. By definition productivity has declined. Again, by definition productivity has declined.

Investing in not boiling the planet seems fine to us. An increase in the consumer surplus pleases us, not worries. But one thing you simply do not get to do is insist that we solve externalities then worry that GDP is not moving as a result. That’s just a fact of solving externalities, things that are not measured in the price system. Further, if we create lots of jobs to do things in non-polluting ways - again, not something that we’re necessarily against - then you don’t get to complain about falling productivity. Because that’s the outcome of the very thing you’re demanding we do. Creating jobs is reducing productivity, they mean exactly the same thing.

Yes, we know, here’s no excuse for Willy Hutton. But we do still wish for even a little intellectual clarity on these simple economic points. Going green reduces labour productivity. The country’s been investing vast amounts on going green. Yet people then wonder why labour productivity’s not rising?

Sheesh guys, try reading a book.

Could we hope for sentience?

No, this isn’t about AI, this is about the housing debate. Where we should hope for something better than we’re getting. Perhaps not sensibility, or good sense, but how about we start by hoping for sentience?

To start with, this defines the crisis, wrongly, as being exclusively about the quantity of homes available. But (and leaving aside the fact we have 1.5 million more dwellings than households: ONS/census data), the crisis is actually about the cripplingly high cost of buying or renting a home and the short supply of social housing – very different to ‘not enough homes’.

Dig a little deeper and you get the ‘supply and demand’ argument: ‘increasing housing supply will bring prices down’. But this logic doesn’t work if demand stays high.

Yes, there’s much else wrong with that piece from the Campaign for the Protection of Rural England.

But our hope - not even a demand, merely a hope - that we might be able to observe a little economic sentience when matters economic are being discussed?

Leave aside that ignorance of the really basic stuff about supply and demand and focus on that last - “if demand remains high”. But if demand remains high then that’s the reason itself to build more houses. People want there to be more houses - that’s high demand. Therefore there should be more houses because that’s what people want. They’re actually insisting that because people want more houses therefore they shouldn’t be allowed.

As we say, sentience in the debate would be useful. But what really worries us is that CPRE has an input into housing policy. How did we end up with the economic understanding of this level being an input into public policy formation on matters economic?

Governments - politics - are simply bad at maintenance

That’s the lesson to take from this:

An increasing number of England’s pothole-plagued roads will be completely resurfaced, ministers have said as councils are handed £8.3 billion for repairs.

Councils will be urged to use the money to fund long-term improvements, including full-scale resurfacing, rather than quick fix repairs as part of a new decade-long funding settlement.

To ensure this, for the first time, the cash will come with a condition that local authorities publish resurfacing plans every quarter, so motorists can hold them to account.

The revenue raised from charging people to use the roads is vastly greater than the costs of building and or repairing roads. So there’s our first clue - actually private roads would cost less and also be better maintained because there wouldn’t be that leakage of some 60% (our guess) of the revenue into other things that usefully buy votes. Government’s an inefficient method of providing roads that is.

Secondly, government is simply a lousy way of maintaining anything. For maintenance never does gain political presence or visibility. Routine patching of holes doesn’t make political careers - perhaps it ought to but it doesn’t. Big plans to splash the cash do make careers - as here. So, doing the plodding boringness that needs to be done isn’t done by politics. A corollary here is that we’ve already got methods for voters to hold local authorities to account. Called elections. And if we’re suggesting that these don’t work in doing so then we’ve got to call our basic manner of democracy into question, don’t we?

The third issue here - that unseen that the economist should look for - is that if we’ve just proven that governments are grossly inefficient providers of roads themselves, let alone maintenance, then what else is currently run by government and politics that badly? What else should we be privatising so that we can have the same at a lesser cost, or more for the same cash?

It really is true that fuel duty (alone, before VAT and other such taxes) is £25 billion a year, spending on roads is about £12 billion. Private roads would be cheaper that is, as even the most vibrant capitalism won’t soak that much in profit off the revenues. So, what else also meets this standard of currently being done grossly inefficiently - so that we can make ourselves richer by not doing it through the medium of government and politics?

Leasehold Reform- a Vote Winner?

There are over four million leasehold properties within England and Wales according to the Government. This represents a sizeable number of voters. First a little bit of background.

In December 2017 Sajid Javid, as Secretary of State, commissioned the Law Commission to find ways to make it ‘easier, faster and cheaper’ for leaseholders to extend their lease and buy the freehold (the Labour Government under Tony Blair tried to do this in 1997). The King’s Speech on 7th November unveiled the Government’s proposal.

A number of the proposals are pragmatic. The introduction of 990 year leases with a ground rent of a peppercorn is a sensible way forward, as is allowing purchasers to immediately pursue a lease extension/enfranchisement rather than wait the current two years of being registered at the Land Registry. It is also pragmatic to allow the 25% commercial element to be increased to 50% for collective enfranchisement. However, there is a fly in the ointment. 

This ‘fly’ is the Government needs an easy win ahead of a General Election and by threatening to fix the rates in calculating the premium to extend the lease and abolishing marriage value to make it cheaper for leaseholders there will be a costly and lengthy legal challenge. Freeholders have already stated they will mount a fierce legal challenge if marriage value is abolished and they are not paid ‘fair’ value representing current market evidence. The Law Commission was so worried about this they took leading counsel’s opinion on this matter, who warned there was a high risk of freeholders being successful, which would cost taxpayers tens of billions of pounds. 

The reality is the introduction of new 990 year lease means marriage value (only payable under 80 years) and ground rent will naturally fall away. Consequently, the Government pursuing this policy seems reckless in the extreme, especially when taxpayers might have to pick up the bill.

Is there a workable solution?

Our team of academics offered the Government a real time working calculator, which uses market evidence and is updated daily and it keeps marriage value (much reduced due to proper peer reviewed research) and can reduce the amount payable by up to 62%. 

Millions of leaseholders need reform and Government needs a success and taxpayers should not be made to pick up the bill to the tune of tens of billions of pounds when there is a workable solution. All political parties are in favour of reform, but it must be done fairly and without cost to taxpayers.

No plan, never mind a decent one

When it comes to announcing its targets without the slightest idea of how to achieve them, the Department for Energy Security and Net Zero (DESNZ) is world beating. Wisely or otherwise, DESNZ set its key target for net zero carbon emissions by 2050. Initially, emissions fell, largely because the UK exported carbon-emitting industries. In March 2022, the Public Accounts Committee report concluded: “The government has unveiled a plan without answers to the key questions of how it will fund the transition to net zero, including how it will deliver policy on and replace income from taxes such as fuel duty, or even a general direction of travel on levies and taxation. The government has no reliable estimate of what the process of implementing the net zero policy is actually likely to cost British consumers, households, businesses and government itself.” In other words, it had no plan.

 In July 2022, Mr Justice Holgate ruled, in effect, that DESNZ had no plan to achieve its objective and they should prepare and publish one by 31st March 2023. In the event, no plan emerged and on 15th November 2023, the Public Accounts Committee reported on how DESNZ was managing innovation and its contribution to achieving net zero carbon 2050. It found it to be short-termist, muddled and had no central management.

DESNZ has published numerous aspirational papers on what might be achieved but none bring the whole picture together or explain what the overall energy/electricity needs will be or how they will be generated without carbon emissions. On low wind and sun days, renewables and nuclear will be inadequate and so fossil fuels, with carbon capture, usage and storage (CCUS) will be needed into the foreseeable future.  For example this month, wind  generation reached a low of 0.4GW (1.7% of demand). Nominal installed wind capacity is over 27GW. As of now, CCUS is commercially unproven in the power sector, so it is all a bit speculative. 

At the 8th November Oral Evidence session with the ESNZ Select Committee, the Secretary of State claimed “we’re now spending £20 billion on carbon capture and storage”. Clearly net zero carbon will be impossible without CCUS. DESNZ claims the UK will be the world leaders in that and has set up a council to achieve it: “Commissioning of the first CCUS facility from the mid-2020s would help the UK to meet our ambition of having the option to deploy CCUS at scale during the 2030s, subject to costs coming down sufficiently.”  The £20bn is possible in the future, but not currently and needs clarifying. It is not clear whether this should be government funding.  Surely the responsibility for, and costs of, decarbonising fossil fuel emissions should lie with the fossil fuel generators.

The creation of the UK’s CCUS market lies with its Council, inaugurated in 2018. Its last meeting was on 27th June. Some 45 or so members, including the Director, CCUS, DESNZ and his five deputies, discussed bureaucratic matters, like reporting lines, with little evidence of practical haste. The idea of having “a timeline to understand industry progress” was introduced.  Fancy that! Things would move a lot faster if they were left to the fossil fuel companies.

The overall picture is that DESNZ in inadequate. What do its 8,498 staff actually do? Probably around 44% work from home.  The ESNZ Select Committee held a brief Inquiry into what DESNZ actually does. The new Secretary of State was not asked how the 2050 targets might be achieved, so it might be described as a soft ride but other ESNZ Committee inquiries are addressing those issues and will be reporting next year. The bottom line is that we have this vast number of people in DESNZ, their main target is achieving net zero carbon emissions by 2050 and, after years of prodding, have still not produced a plan, never mind a decent one, to achieve it.

UK industry is back-peddling on CCUS as they wait to see how tough the post-election Government will be on CO2 emitters. The current Government seems to be supporting this by allowing the Emissions Trading Scheme to decline in effectiveness as evidenced by the UK’s falling carbon price, in sharp contrast to the rising carbon prices in other countries. The Sunak Government seems to have thrown in the towel on tackling climate change and will, I imagine, keep a low profile at the upcoming COP. 

Expressive Choices

Why do we have a bigger welfare state than is good for us?

But then, before I tell you why, I’d better justify that assertion. So just take the case of my own country, the UK. Here, the government spends nearly half of everything its citizens earn—and then it borrows. And the biggest chunk of its spending goes on the three big-ticket welfare-state items: health, education and welfare (including housing). 

That makes the welfare state a significant cost on taxpayers. And of course high taxation is very damaging for individuals and businesses, particularly small and new businesses, while the interest payments on the government’s debt raises those costs even further and reduces its scope to spend on something useful.

There are also the dependency and incentive issues. With state welfare focused on the poorest, many find themselves trapped in dependency. If they try to improve their own condition, they find their benefits being reduced, often very quickly. That tapering, combined with the high taxes needed to sustain the welfare system, discourages individuals from seeking work, or moving to better-paid jobs. The result is a lower national income, and reduced labour market flexibility, leading to a fall in the productivity of the economy.

State welfare is also poorly targeted and wasteful. The amount of money we spend on it could make our poorest citizens relatively rich; but much of it lingers in the pockets of those who administer the system, while much more goes to people who do not genuinely need it. Nor does it really help people out of poverty: it simply pays them cash, rather than looking at what they need in order to prosper.

Moreover, state welfare crowds out more targeted and effective interventions such as private charity and philanthropy. And it suggests to taxpayers that their obligations to their fellow citizens have been dealt with for them, making them less willing to take on responsibility themselves. 

I could go on, but you get the picture. We all know the system is inefficient, badly targeted, bureaucratic, wasteful and often counter-productive. So why do we keep voting for it?

I think the answer may lie in what economists call ‘expressive choice’ — as opposed to the phenomenon of ‘instrumental choice’. An instrumental choice is one such as you would make in a marketplace. Perhaps you want a new coat. You go into the shops and choose one from the variety of different coats on offer. You pay your money, and your choice turns into reality—you have the new coat you wanted.

Expressive choices are those such as you make in elections. The chance of your vote making an actual difference—being the single vote that decides if one candidate defeats another, or whether a referendum succeeds or fails—is miniscule. Usually, it is millions to one. So, unlike your coat transaction, you do not always get what you choose. You vote for one candidate, but another succeeds. You vote for one policy, but another is put into effect.

How, then, do people respond to that? One answer is that they vote for things that make them feel good. You can vote for anything you like, because your choice is not actually going to make a difference. So, people vote for high-spending pro-welfare candidates because they see it as a way of ‘helping the poor’—and indeed a way of ‘helping the poor’ that is absolutely costless to them (unlike the coat transaction). So why not?

The trouble is that it isn’t absolutely costless. The costs of all those welfare state programmes mount up, and voter-taxpayers feel the burden of it. And the inefficiencies and disincentives mount up too, which burdens them and everyone else too. 

I don’t see any way out of this welfare ratchet in a democratic system. Perhaps we need to lay down limits on what that system is there to do, and can do and can spend. But I can’t see politicians voting for that.

Wrong decision Prime Minister, wrong decision

No, this is wrong:

Offshore wind projects to receive subsidies boost after auction flop

Claire Coutinho to announce 70pc increase to guaranteed price offered to developers

There are detailed complaints being made about it. For example, one claim (which we do not endorse, nor claim is either true or wrong, merely present it):

Remember its not £73. That's in 2012 money.

The new cap is more like £96 in current money.

The European spot price for gas is around €60 per MWh currently.

But whether that’s true or not the decision is still wrong. It violates the basic logic about climate change, that sort of wrong.

To start with the very basics. The claim is that emissions cause costs. We’ve certainly no problem with the idea that there are externalities - markets are great things but many things are not included in markets and are therefore not great. The answer is to include those things in markets so that markets can work their greatness upon them.

So, how much should we do about something? Our aim is the maximisation of human utility over time. The universe - sadly, the cow - imposes limitations and constraints upon us in that task. Resources are, after all, scarce. We also know that doing anything has costs - at very minimum there are opportunity costs, near always there will also be direct costs. So, whatever the thing, problem, constraint or externality we should do the amount that maximises that utility. This means balancing the costs of doing the thing - no, costs here do not mean mere money, they mean those other things we cannot do because we devote our scarce resources to do this thing - against the benefits of doing that thing to so maximise utility.

So, the price of wind power changes. Why doesn’t matter. A bait and switch by developers, a change in real world prices, makes no difference. Therefore the optimal amount of wind power to maximise utility changes.

That is, wind power changes in price therefore we should have a different amount of wind power - not change wind power prices via subsidy so that we get the same amount of wind power.

This is true of every decision about climate change. Whether to do adaptation or mitigation, which specific energy technology to use - solar, wind, fossil, geothermal, whatever - which transport, what foods to eat and everything. When prices change we should be changing the quantity demanded of each of them - that’s in fact what prices are for, to tell us about quantity.

It’s not economic to stick towers of steel in the North Sea environment? Well, then it’s not economic is it, we should do less of that. We’re even willing to agree - for the sake of this argument - that it’s no one’s fault, this change in offshore wind power prices. It is still true that the change itself, the rise, means we should have less of it. Instead, more whatever - fossil, carbon capture, solar, tidal, geological hydrogen, geothermal and on and on.

Prices have changed, as is obvious. Therefore the correct answer is that both supply and demand should.

We therefore present how that meeting with Ms. Coutinho should have gone:

Offshore Wind Developers (for it is they): “Minister, we can’t build at these prices, just can’t.”

Ms Coutinho: “Well, thanks for trying, Guys. Goodbye.”