Now subsidies enter their insanity phase

We think we’ve got this argument correct here. It has to be only think because the outcome is so absurd as to make us think that we might not be right. But if we are then we seem to have entered the era of insanity over subsidies.

So, the ferry to the Scilly Isles. A new one or three is/are needed. The company that wishes to buy them, which runs the ferry service, applied for a subsidy so as to engage the services of a British shipyard to build them:

First, they spent years trying to unlock the required £50 million in state aid from the Levelling Up fund, which would have necessitated ordering a ship from a British dockyard.

That didn’t turn up so instead they adopted Plan B:

But their application failed, so instead the company took a £33 million loan from NatWest and put out a tender to build one new passenger ferry and two freight vessels. In September, it selected the giant French shipbuilder Piriou to complete the contract.

OK, seems reasonable enough to us. Yes, we are against such subsidies and yet we’re also old enough, long in the tooth enough, to know that they are going to happen in something like shipbuilding. But if the subsidy isn’t offered then obviously Plan B:

In a letter published last week, but sent before Christmas, Shapps expressed his anger to Robert Francis, chairman of the Isles of Scilly council. The defence secretary, who also doubles as the government’s shipbuilding tsar, criticised the ISSG for not picking a UK shipbuilder (he did not name Harland & Wolff directly) to build its new fleet.

The idea that we have a shipbuilding Tsar seems a little Romanov to us (perhaps noting that that didn’t turn out to be a very good governance system) but it’s the insistence that is being made here that really confuses.

You cannot have the subsidy which would necessitate - and also cover the extra costs of - using a British shipyard but you must use a British shipyard anyway?

The ferry company is an independent one, quoted on the London Stock Exchange no less. And a minister thinks it right to bully - even insist - in this manner? There’s something about storming the Winter Palace that sounds like a useful solution there.

But now the lunacy:

He also expressed his concern that the company was planning to increase fares to help cover the costs of the new fleet. A one-way ticket — currently advertised at £83.90 — may hit £100 as a result.

The minister is stating that the more expensive, British, shipyard must - sorry, should - be used and the argument being used in support of this contention is the price rises that would result from using the cheaper, non-British option?

Yes, we know, politics doesn’t have to be logical, usually isn’t. But really, you must use the more expensive supplier to reduce consumer costs? How about we try for a politics that isn’t actively insane?

That this is all about the Scilly Isles (yes, it is pronounced that way) is just icing on that cake.

As an argument this does not, in fact, work

Apparently VAT on school fees will have no effect:

But Sir Keir told LBC Radio: “We have obviously looked at reports on this and all the reports show that it’s unlikely that parents will take their children out of schools.”

He added: “I have looked at this question of will it lead to children leaving private schools and going to state schools and the answer to that, on all the evidence I’ve seen, is no that it won’t. This is the VAT paid by schools, they don’t have to pass this onto the parents, they can do it in other ways.”

So, the claim is that substantially changing the price of private schooling will lead to no change - at all - in the demand for private schooling. Or, as we can also put this, demand for private schooling is inelastic with reference to price.

Except when we say inelastic we don’t actually mean no change, we mean not much change:

A good's price elasticity of demand is a measure of how sensitive the quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good, but it falls more for some than for others.

If your claim fails even Wikipedia’s explanation of the point then it really is possible that your claim is not true.

That second claim is even more silly. VAT is a tax upon consumers. The only way that it can ever fall on anyone else is if demand for the good changes and so shareholders, the capitalists, end up carrying the cost as consumers desert the item and so the business shrinks. Not that private schools have shareholders to dump it on but that’s another matter. The only way that the VAT is not passed on to parents is if price elasticity is large.

What determines how much prices actually rise and, therefore, how much of the tax burden is borne by consumers rather than retailers? It is the sensitivity of demand to prices, a concept that economists formally refer to as the “price elasticity of demand”.

If demand is very sensitive to prices, known as demand being highly “elastic”, then retailers will be very reluctant to increase prices despite the tax, because demand will decrease by a large amount, and their sales will decline dramatically. Under these circumstances, they will prefer to raise prices by a small amount only, bearing the most of the burden of the tax.

….

In contrast, if demand is highly insensitive to prices, or highly “inelastic”, then retailers will readily increase prices because their sales will decline by only a small amount. That means consumers will bear almost all of the burden of VAT.

If elasticity is low - or actually zero, as claimed - then yes, folk won’t take their kids out of private schools. But if elasticity is low - zero as claimed - then the 20% VAT will be passed along to parents. They’re the same statement.

It is not possible to have a Shroedinger’s Elasticity, where it’s high for one part of the argument - non-passing along of VAT - and also low to zero at the same time, no change in demand.

Of course, our pointing this out isn’t going to make an iota of difference given that the idea is really driven by a hatred of any parent not using the state propagandisation service for their children but that’s another matter.

Umm, what competition for green investment?

We do grasp that the incentive to invest determines how much is invested.

Labour’s independent energy advisers have warned the party against watering down its £28bn green spending plans in advance of its promise to create a zero carbon electricity system by 2030.

Experts at the climate thinktank Ember, which provided the independent analysis underpinning Labour’s green targets, said growing international competition for low-carbon investment from the US and EU could leave the UK lagging in the global race for low-carbon energy.

But that strikes us as complete nonsense.

Pretty much by definition low-carbon energy is a domestic economic resource. We can’t - or at least don’t - pack it into ships or shovel it down pipelines and even interconnectors are hugely geographically limited. Renewable energy tends to be produced domestically to be consumed domestically. That’s just the way it is.

So, what global race? Sure, it might be a good idea that China gets more windmills than Britain does, might be a bad idea. But it’s not one of any grand importance in the sense that if they get more then we can’t have more.

It’s actually rather the other way around. We’d be perfectly happy if J Foreigner does all the hard development work, the subsidising of the stuff that doesn’t work quite yet, then we install as and when all the kinks are worked out.

Note that our critique here is very limited. We’re not even commenting upon whether green is the way to go, we should or should not have more renewables and so on. Only on this idea that there’s a race on and one in which Britain should subsidise more in order to win.

What damn race?

Maybe folk could be consistent?

The High Pay Commission - hint, it’s not a commission, it’s a pressure group - tells us that the inequality of reward for going to work is unconscionable.

The bosses of Britain’s biggest companies will have made more money in 2024 by Thursday lunchtime than the average UK worker will earn in the entire year, according to analysis of vast pay gaps amid strike action and the cost of living crisis.

The High Pay Centre, a thinktank that campaigns for fairer pay for workers, said that by 1pm on the third working day of the year, a FTSE 100 chief executive will have been paid more on an hourly basis than a UK worker’s annual salary of £34,963, based on median average remuneration figures for both groups.

This is where we get those pay ratios of 300:1 and so on from. This is bad, apparently.

And, well, hmm. Several of us here have written books. Some on the subject of economics. Thinking of one specific example, the fee was £1,000. OK. Writer and publisher make their agreement, publisher pays what he thinks it’s worth, writer accepts that valuation and does the work. We have a voluntary and free market arrangement.

Shareholders of a FTSE100 company decide what they’d like to pay their CEO, both sides agree, we have a voluntary and free market arrangement.

M. Piketty writes a book on economics which sells a couple of million copies. Given likely royalty rates that brings in perhaps $8 million (it was with a US press). We have an 8,000:1 pay ratio there between M. Piketty and another labourer in the economics mines. This is also a free market and voluntary agreement.

Which leads to a question for that High Pay Commission. Why is M. Piketty’s reward not at least 20 times more vile than that CEO pay ratio? We know why, obviously - free market and voluntary and none of anyone else’s business. But why do they not decry it, complain of it, demand that something be done about it?

It’s not too, too, much to ask that people be consistent, is it?

Well, that depends really, doesn't it?

This could be true, certainly:

The ‘wonder drugs’ that could fix Britain’s sick note economy

With record numbers out of work, weight-loss jabs may hold the answer

Now whether it will actually be true is another matter.

There are indeed many millions signed off sick but whether something that cures a physical illness will bring them back does depend. It’s possible to take a number of views here. Some might say that government, over the decades, has deliberately parked people on sickness benefits to make the unemployment numbers look better. It’s possible that the modern world really does make so many people so sick they cannot work. Even, we’re such a rich country that what an earlier time might call a minor issue that mustn’t be grumbled over is now a ticket to benefits. There’s even that thought that people are entirely rational. If the lowly paid will face a 60 to 90% (which does happen for many) marginal tax rate between benefits and work income then why bother?

We tend to believe all of those in varying quantity.

Which is, we think, where this becomes really interesting. For cures for some to many of those diseases will reveal that truth to us, won’t it? If the cause of the sicknote changes, not the number of them, then it’s not, actually, a health issue at all. Therefore efforts should be aimed at the other issues. If, on the other hand, economic inactivity through illness declines markedly then we’ve no problems with the incentives in our tax and benefit system.

That is, as we say, what’s so interesting here. We get to find out. What fun.

It's not, necessarily, the NHS

Just one of those little things it’s necessary to point out. A point being made that health care got very much better post-war. Indeed it did. As listed, UK diphtheria cases declined from 65,000 to 53 between 1938 and 1956. This is both astonishing and glorious, a massive reduction in both disease and human suffering - given the 5% or so mortality rate that’s many fewer parents having to bury their children.

Good.

It is also true that this same period saw the foundation and growth of the National Health Service. We can all have whatever view we like on that event.

But it’s not - not wholly and accurately - true that diptheria declined because the specific format of the NHS. For the diptheria rate declined pretty much equally in the US - which as many will note does not have the NHS. In fact, the diptheria rate has dropped pretty much everywhere and as, again, people will point out the NHS is that uniquely British institution.

The same goes on to be true of polio, tuberculosis and many another disease and condition. Medical technology reached the point that these were all addressable problems. And addressed they were in every (rich at least) country whatever the structure of their health care system.

It is possible that the NHS is better than any other health care structure. We don’t agree, for myriad reasons. But the proof that the NHS is better does have to come from proof of the outperformance of the NHS compared to other health care systems - not from the general advance of medical technology itself.

We’re back with Thomas Sowell’s ever so useful question: “Compared to what?”

Another planning failure

Mythically, there’s only been the one British public sector procurement project that arrived under time and under budget - Polaris. The myth is around the “one” for historically there may well have been others. But in modern times it probably is true.

The secret in that project was the importance of interfaces. Any part of the system could change their design, build, method, whenever and however they wanted. But changing the interface with any other part of the system was between verboeten and extraordinarily difficult. Everyone could - and did - do what they thought best, the limitation on changes was when such a change would act upon those similar freedoms of another.

The allegory with the free market, the liberal society, is obvious. Do as you wish except when it affects others. Supply goods and services by whatever method, it’s that interface with the wider population, the market, that matters.

But more narrowly, it’s also the thing that British government planning doesn’t do these days:

The UK’s beleaguered public libraries have been let down by years of indecision and delays over how to spend millions of pounds in funding earmarked for a nationwide website.

This was among damning criticisms voiced on Saturday by campaigners who have lost patience with the government, the British Library and Arts Council England (ACE) over their longstanding failure to develop a nationwide scheme. The “Single Digital Presence” (SDP) – renamed LibraryOn – was meant to bring together public libraries in one website to enable the public to access collections across the country.

The problem has been that there are 150 library authorities in England alone, each with their own technology and management systems.

The problem is that everyone’s been arguing about what such a site should do. Which goals are to be achieved? Rather than concentrating upon how to do it, which is a task of the utmost triviality.

All of the libraries are digitised - in their records at least. All have booking systems. All have the ability to create a queue, to allocate a newly freed up book to the next in it and so on. So, all of the hard work is done. All that is required is to enable all the 150 systems to speak to each other - the interface.

Simply define that interface. A library system should be able to output book data in this format here. Every such system should be able to import data in that same format. There, we’re done. This is something that could be knocked up over a weekend by the readership of The Register.

To emphasise the “another” in that headline. Back when there was that £11 billion to spend upon digitising the NHS. That £11 billion that was spent without delivering one single usable line of code. The mistake was to try to design that system. Instead of simply publishing the interface. All medical records systems must be able to out to this format, all must be able to import from it. There, we’re done. Over time and over the normal replacement and capital cycle all machines would then talk to each other across the NHS and we would have, successfully, digitised medical records. There was even such an American standard - a free one - that we could have adopted.

We are, just occasionally, willing to admit that there might be a purpose, a use, for government. Say, in the creation of interfaces which then allow everyone to get on with their own thing. But don’t, as experience keeps insisting, allow government to ever actually try to design or plan anything.

Socialists, having run out of other peoples' money....

….Now have their eyes set on other peoples’ pensions.

Will Hutton tells us that the UK pensions market is just terrible, not enough investment in actually growing British companies and therefore the state must direct matters:

….in 1990 UK pension funds owned more than £1tn worth of UK companies; now they hold less than £100bn. Increasingly, they invest in safety-first government bonds or in destinations overseas…….Absurdly, Britain has tens of thousands of pension funds: they are too small – they must all be consolidated into super pension funds, modelled on the existing Pension Protection Fund (PPF), which can spread risk……..A proportion – say, 5% – of pension fund assets should be organised collectively in a national growth fund to invest in startups, and backstopped by a public wealth fund.

And so on. As we can see, the base idea here is that more of our pension savings should be directed to where people like Will Hutton get to determine. Oh joy, eh?

All of this managing to entirely, wholly and completely, ignore what has actually happened here. The combination of demographic change and Gordon Brown’s varied raids upon defined benefit pensions funds mean that defined pensions benefit funds don’t, really, exist. Exist in the sense that they are still taking in new money, in volume, which they’ll then invest for 50 years to pay out as pensions when the time comes.

Those that do still exist are, pretty much, in run off. That’s why they’re in bonds, not equities. They’re paying out the money saved 30 years ago to the 75 year olds of today. Bonds suit that risk/cashflow profile better than equities.

The pensions that are still accruing current cash for future liabilities are defined contribution funds. Where the investment decision relies upon the individual, not the fund management caste. We do, after all, decide where our pensions savings go these days.

Which means that that problem of under-investment at home is also already solved. That one mention of “invisible hand” in Wealth of Nations is on exactly this point. Individuals tend to invest more at home than is justified by a strict economic appraisal - thus the move from defined benefit to defined contribution pensions funds is going to increase domestic investment.

The problem is already solved.

But of course this doesn’t stop the galactic megabrains from thinking that they should indeed be directing all. Some more Smith:

What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

How prescient of Adam Smith to describe Will Hutton two and a half centuries before the fact.

This isn't AI, this is the minimum wage

Yes, OK, slow time of year, PR attempts to get a company written up will work well right now:

AI sparks revolution in how much supermarkets charge you for food

Digital labelling can pass on price fluctuations more quickly and cut waste

Yes, super and that might even be the effect. But the driver is, we very strongly suspect, this:

electronic shelf labels (ESLs), the first step towards dynamic pricing, had been introduced in a small number of existing shops,……..Retail expert Clare Bailey said the move to digital labelling is the first step towards a “dynamic pricing model” in supermarkets as they look to reduce labour, ….. costs

We’ve all seen this in a shop, an individual clacking out new price labels to stick on a shelf of something or other. That person costs the shop about £10 an hour this year, it’ll soon be about £11 just in wages alone (then add NI, benefits etc) and so the hunt is on to reduce labour costs. One central data entry to change the price on a whole shelf of product, job’s a good ‘un.

We can think of this as just tech reducing labour costs, or labour costs being forced up and thereby inducing the job killing use of technology. Either works.

Far more fun, to us at least, is that this begins to destroy a core tenet of New Keynesian economics. The idea of menu costs is central - it explains price stickiness. Prices do not smoothly change, they move in shuddery jumps. For there’s a cost to changing the price - the cost of reprinting the menu - so it’s only worth doing that when the underlying has changed enough to justify that cost of actually making the price change.

This is true too. It’s also why the New Classical and Real Business Cycle theories seem not to explain the world quite right, but New Keynesian seem to do better. Which is why every central bank and Treasury economic model is, by and large, New Keynesian.

That’s all a recent development, certainly recent decades. Which is where the fun comes in really. For those real world economic models have all zeroed in on a specific explanatory structure just as that structure becomes non-explanatory. If changing prices is now the one single entry in a central database for a shop, possibly for an entire chain, then menus costs are much less of an issue. The world is moving closer to those RBC and New Classical models where prices change swiftly and near costlessly and so the economy as a whole reacts near instantly to change.

Yes, obviously, these are all tendencies, not absolutes. But we really do think that it’s terribly fun that just as the orthodoxy narrows in on something generally agreed that it is also becoming untrue.

As in that old joke about economics exams. Universities still use the same questions they did a century ago - it’s the answers that have changed. Which, actually, they have.

We were told not to do it this way, so therefore we did it.....

The Stern Review was 1200 pages of, firstly, whether we should do anything about climate change and then, secondly, what. It’s remarkable the number of people who accept that whether but refuse, adamantly, to consider the what:

If the 2050 net zero target – the most consequential economic policy decision for generations, made by a piece of secondary legislation without a proper parliamentary debate – wasn’t restrictive enough, the Government is obliged to set binding, five-year carbon budgets which cap the maximum amount of emissions allowed during each period. Ministers face legal action if they fail to do enough to reach them, as judged in part by the apparatchiks on the Climate Change Committee (CCC) quango.

The what we were told to do was use markets and prices. On the grounds that they are more efficient than planning and bureaucracy. Humans have this weird tick, we’ll do more of things that are cheaper, less of those that are more expensive. So, to deal with a problem we want to use the efficient method - because then we’ll do more dealing with the problem.

So, having gained a general political agreement that something must be done about climate change everyone forgot the second part of the lesson on offer.

Which is something of a pity, obviously. But more than that - whatever the terrors of climate change we’re going to have more of them because politics decided to use the wrong tools to deal with it. A cheerful thought for the year end, no?