Professor Hayek to the white telephone please, Hayek to the white telephone
Steering the UK economy out of the inflationary storm would always require unusual finesse, but the task would be easier if the Bank of England governor had an unemployment number he could trust.
The problem, highlighted by Andrew Bailey in a recent hearing, stems from deeply flawed labour market data from the Office for National Statistics, led by national statistician Sir Ian Diamond.
It’s possible to work merely with management consultancy platitudes - you can only manage what you can measure for example. Which is, in fact, the complaint being made here. The desire is to manage inflation, for that it’s necessary to have the employment numbers and therefore we desire to have those so that we can manage.
We can and should go back a step into theory. Which is that economies are big and complex and therefore we’re simply never going to have those numbers to the level of detail required for that pinpoint management. This is the rock upon which all clever macroeconomic schemes founder. Not only don’t we know, we can’t know.
For example, we really don’t know how many people there are in the country. Observations of, say, sewage volumes (with, admittedly, some heroic assumptions about diet and so on) are rather at odds with any counts of National Insurance numbers or Census counts. Certainly, anyone who tries to insist we know to within better than 5% either way is on very dodgy ground indeed. OK, maybe 3%.
It’s not just this number either. It’s all the numbers we collect have those error bars. Which means that attempting to fine tweak to within those error bars is going to be a nonsense.
Yes, obviously, a 10% fall - or a 5% increase - in recorded GDP is something to take note of, even panic about. Inflation of such sizes and so on. But in that pointillist detail required by the more ambitious macroeconomic management schemes we’re really just out of luck on that information front.
Sad, but there it is. Which does mean that economic management needs to rely upon the things that can be done. Set up the basic systems properly and leave be. Make sure that incentives are good, the rule of law is tolerably enforced, we’ve not a bureaucracy descending upon economic activity like piranhas upon a corpse, taxes are easy and so on. The outcome becomes something not managed, for that’s impossible, but emergent from the correct set up of the system in the first place.
A little bit of news for Mr. Pennycook
We have what might be called a testable proposition here:
When it comes to housing affordability, we really must get away from the over-simplistic notion that ramping up the supply of new housing will fully resolve the affordability crisis affecting many parts of the country.
Harvard University recently had a report out:
Rental markets are rapidly cooling after a period of significant overheating. Rent growth has almost completely stopped, following historically high rent increases in both 2021 and 2022. In the third quarter of 2023, rent growth plummeted for professionally managed apartments to just 0.4 percent, down from 15.3 percent in early 2022, according to RealPage (Figure 1). While rents slowly rose across property classes, the pace of growth was under 1 percent in the third quarter of 2023 for lower- and higher-quality apartments alike.
This abrupt deceleration was geographically widespread, with rents even falling in some markets. In the third quarter of 2023, rents for professionally managed apartments dropped year over year in 32 percent of the 150 markets tracked by RealPage, including many in the West. Just 1 percent of markets posted rent growth of at least 10 percent in the third quarter of 2023, a sharp turnaround from the previous year when rents in half of the markets increased at that rate. While the slowdown is a welcome change for renters, asking rents still remain well above pre-pandemic levels. Some of the deceleration may be explained by the large number of new units that have come online and pushed up vacancy rates. After hitting a pandemic low of 5.6 percent in late 2021, the rental vacancy rate was 6.6 percent in the third quarter of 2023, according to the Housing Vacancy Survey. The rise in vacancies has been even more pronounced in the professionally managed apartment sector. In the third quarter of 2023, 5.5 percent of these units were vacant, above pre-pandemic averages and more than double the all-time low of 2.5 percent set in early 2022. Vacancy rates in this sector rose fastest in the South, reaching 6.3 percent in the first quarter of 2022.
Now that might be over-simplistic, being merely an example of supply and demand (such Econ 101 is just so trite these days) but it seems to work. Build more housing and the price of housing falls. It’s obviously true that some housing is a Veblen Good - we can’t explain Mayfair without that. But housing in general, yes, Econ 101, simplicity, supply and demand, that works.
Build more housing, enough so that the vacancy rate rises, and housing becomes cheaper. Therefore our plan is to do what? Quite, build more housing. Or even, get out of the way so as to allow the people who actually build housing to get on with building more housing.
This appears not to be what some are proposing:
When making a planning decision relating to development arising from an application for planning permission, the making of a development order granting planning permission or an approval pursuant to a development order granting planning permission, a relevant planning authority (as defined in section 85 (interpretation of chapter 1)) must have special regard to the mitigation of, and adaptation to, climate change.
No, that really is from Hansard, something some are seriously trying to put into law. That whether 23B Burnside Drive can be accompanied by the new infill of 23C Burnside Drive must be tested against the climate change impacts. Which, of course, gives every Nimby in the country the opportunity to shriek that a household should remain homeless because Flipper broiling in the fumes of the last ice floe.
This is, to put it mildly, not getting out of the way so that houses can be built and thereby housing be made cheaper. Even if the observation is over-simplistic.
The actual truth about that Econ 101 is that it does work except for the exceptions. Housing, in the general sense, isn’t an exception.
We're glad Polly is finally recognising basic truths
The insistence that rich people won’t move if taxes are increased is, of course, wrong. The question is never whether any, it’s how many taking how much money? However, this is an outbreak of good sense. Finally:
It’s a done deal – just about. Down at the bookies, you can get 14/1 on a Tory majority at the next general election, while betting on Labour to win, the odds are a measly 1/6. If you need any more confirmation that Labour will form the next government, just listen to the clamour of the wealth advisers telling their high net-worth clients that it’s time to pack their Louis Vuittons.
Well, there we have it. People spending their own money (or for the tax types, not spending it) on their own interests according to their own views of the world is proof perfect. Which is, we agree, rather our view of the world.
Most people most of the time do at least attempt to maximise their own utility. They also pay more attention to doing so when it’s their cash - and their benefit - at risk than any other decision making method. Which is why markets work. Also, why - as Polly now finally admits - the market outcome is the correct one. For it is the one that encapsulates the most human thought about what has, is and will happen.
Cool. So, now all we’ve got to do is get more of life subject to those market - own money - decisions and the world will be a better place, right?
Even Polly now agrees.
No, no, you really cannot point to betting markets as being proof of the contention without accepting that more generally about markets.
Market competition for the win then
More people producing things leads to lower prices for consumers - all else being equal of course.
Morrisons has begun matching its prices to Aldi and Lidl as new chief executive Rami Baitiéh mounts a fightback against the German discounters.
The supermarket has pledged to match the price offered by Aldi or Lidl on more than 200 products, offering customers whichever price is lowest. The offer will cover everything from corn flakes and mince to canned tomatoes and baby wipes. Prices will be updated twice a week.
One of the advantages of advancing age is that we’ve seen things happen before. Back a quarter century the big worry about British supermarkets was the uncompetitive nature of the industry. Net margins were up at 6% and the like of turnover - vastly high by international standards. Reports were written identifying triangular areas that one or t’other of the chains dominated and so on. Not much happened.
Then Aldi and Lidl arrived. A different method of retailing, a smaller number of stock lines, different positioning, lower prices. At which point that competition started to eat the market - net margins for the industry are now in the 2 to 3% range. For everyone has had to do, these recent decades, what Morrisons is now doing. Cut prices to consumers to combat said competition.
Those German and Austrian billionaire families which own those two insurgent chains have not done this for our interest. They’ve done it to amass those billionaire fortunes. But the effect has been to lower food prices for all of us. The capitalists competing for our custom is what produces that benefit to us.
Sure, there are alternative ways of attempting to gain this result of an increase in consumer living standards. Venezuela famously decided that the President knew what things should cost and therefore everything should cost what the President said. The result was not an increase in living standards, rather the vanishing of everything from the marketplace.
The standard example in the economic literature of this effect is indeed about the butcher and the baker, it’s not their benevolence that feeds us, it’s their regard for their own self-interest. The particular issue here being that free part of free markets. Which means that people are free to enter the market if they wish - which they have done and to our collective benefit.
Free market competition for the win then.
Markets are forward looking, d'ye see?
No, we are not about to make a claim about the revenue from any changes in the non-dom taxation system. We are though going to insist on how the effects of any changes should be measured:
Labour’s plans for a £2bn tax raid on non-doms are already putting off wealthy foreigners from coming to Britain, international lawyers have warned.
Tax lawyers working with billionaires and multi-millionaires have already noticed a “substantial” drop in interest from overseas clients in coming to the UK, according to Withers.
Labour has long warned that it plans to change the scheme, which allows foreigners to live in the UK without paying tax on their overseas income for up to 15 years.
The party, which is 20 points ahead in the polls, initially said it would abolish the non-dom tax status. However, shadow business secretary Jonathan Reynolds earlier this week suggested Labour would instead “modernise” it and make it less generous.
As we say, we’re not about to insist on any particular fiscal outcome from these changes. We have our suspicions of course - expectations even - about lower overall revenue but those aren’t proofs.
What we do want to insist upon though is how any effects need to be measured once the deed is done. For, as we can see, markets are forward looking. People are making decisions now on what they expect to happen in the future. Thus those expectations of future changes move the reaction back in time to now. So, when measuring the effects of the changes we do not - both should and cannot - start from the time of the actual changes themselves. Rather, we must start from when those changes became likely and therefore affected behaviour.
That is, any calculations of the yield from changes in non-dom taxation need to start a year or two back from today, not from when those changes are actually enacted, nor the tax year in which they first apply. Not because of anything that’s either good or bad about changes in non-dom taxation. But because that’s the only way we’ll be able to measure the effects of those changes upon revenue.
So, stop having government targets then
Some issues really are Simples:
Family meals have become far more fattening since the Government set targets to reduce their calorie content.
The Government has been urging restaurants, supermarkets and manufacturers to cut calories from their foods, either by reformulating them or cutting portion size.
But an official report by the Office for Health Improvement and Disparities shows Britons are consuming more calories than ever in meals and snacks.
The data show family meals now contain 10 per cent more calories per 100g than they did when the programme began recording measurements in 2017.
The volume of calorific food being consumed also rose significantly, partly fuelled by the rise of snacking and takeaways during the pandemic.
The figures show shoppers consumed 25.3 per cent more calories from crisps and snacks in 2021 than in 2017.
If government targets for lowering calorie counts in fact lead to higher calorie counts then the answer is to stop having government targets for calorie counts.
Simples.
This is not just a gotcha, nor an arf arf. It’s a serious point. We have had other examples of the contrariness of us humans out here. Calorie counts on menus have led to at least some people deciding to get more bang for their buck. If this meal is 800 calories, this one is 1,100, they’re both the same price, why not have the one with more calories? Food energy is, after all, one of the things that we eat in order to gain access to. So, thanks very much for the calorie counts on menus, I can now see which is the best bargain on that menu. I’ll have the Fatburger with large fries, thanks.
Micromanagement of us, the people, at this sort of level simply isn’t ever going to work. So, don’t do it.
The Dr Seuss problem in public spending plans
If we had some eggs we could have ham and eggs for breakfast, if we had some ham.
Or, the fallacy of the unwarranted assumption:
In a report setting out the case for a vast expansion of GB Energy in the early years of a Labour government, Common Wealth said state-led investment in clean energy would be substantially cheaper than the private sector equivalent – helping to save households money on their bills.
It said renewable investment financed out of Labour’s initial £8.3bn capitalisation would save between £125m and £208m a year on debt interest costs each year – saving up to £1bn in total compared with private-sector borrowing, which is typically more expensive.
Business Green, the media outlet of choice for the subsidy suckers, agrees. Obviously.
It is true that the interest rate on public debt is lower than that on private. For the obvious reason that if the project is mismanaged, or goes over budget, or goes kablooie, or just generally doesn’t work out well then the taxpayers are on the hook for repayment, not the cashflows of the project that has been mismanaged, gone over budget, banged kablooie or just generally doesn’t work out well.
We’ve a transfer of risk that is - for nothing is actually free in financial markets.
OK. But what’s the assumption there that leads to the claimed lower bills? That the public management of the project will lead to the same risk, compared to private sector management, of the project being mismanaged, going over budget, exploding kablooie or just generally not working out.
This from the people who have given us the Scottish ferries - where they managed to bankrupt their own shipyard building the things - and HS2 and Sizewell and, well, you get the picture*. We might even think that similarity of outcome, of risk, might be an unwarranted assumption.
Building things with public money would be cheaper if building things with public money were cheaper. Well, yes, but Dr. Seuss was right you know.
*We particularly relish the national planning system for housing land which produces a shortage of land for housing despite 98% of the country not being used as land for housing.
Why would we want to win this climate change competition?
This looks like good news:
All those stories foretelling a shortage of critical minerals seemed to assume that miners sit on their hands and that technology is static. The greater likelihood is a glut.
There are already as many solar panel factories as could possibly be needed this decade. Hence the drastic deflation in solar prices. Panels are today being flogged in the Global South at $120 per kWp, tantamount to free power. Try selling them a new coal plant without a bribe.
Well, yes, we’ve been known to push that likelihood of a minerals glut ourselves. Lithium mines are already on care and maintenance basis as prices are so low (Core Lithium for example) and cobalt mines aren’t opening on that same price basis (Jervois).
We’ve also been known to mutter over the decades that if solar gets cheap enough then the problem becomes solved. Yes, intermittency is still a problem but if electricity is cheap enough - with a lot of emphasis on enough - then all those dreams of batteries, of hydrogen from electrolysis to fuel cells, or Fisher Tropsch up to petrol and so on, become economically possible. Now, which might win out, even whether any will, we don’t pretend to want to plan. We’re of the market school, recall? Let people try everything and we’ll all do more of what works once it has been shown to work.
However, there’s also this:
The West has woken up to the technology threat from China, pulling slightly ahead last year with combined capex spending of $718bn on clean tech and the mineral supply chain. Clean capex rose 38pc in Europe, reaching $341bn in the EU and to $74bn in the UK – more than France ($56bn), or Italy ($30bn), which might surprise some.
“It is simply a technology battle at this point. There are three key races in clean tech and China is winning all of them,” said Kingsmill Bond from the Rocky Mountain Institute.
“The US and Europe are massively behind but last year was the year they got back into the game. There is an exponential growth story taking place across the leading regions and sectors of the world,” he said.
We’re not understanding this “technology threat”.
Those folks who have invested massively in solar factories are having to slash their prices because so many people entered that race. So, they’re all losing money on those slashed prices. Why would this be a race we’d want to enter? The competition to see who can lose the most money through industrial overcapacity?
We also can’t see it as a threat. Someone is now willing to sell us stuff below the cost of production? Sounds good to us, will they sell us two d’ye think?
What is this technological race and why do we want to lose money entering it?
We're going to see many more pictures of starving polar bears
The latest news from the Great White North:
Polar bears in Canada’s Hudson Bay risk starvation as the climate crisis lengthens periods without Arctic Sea ice, despite the creatures’ willingness to expand their diets.
Polar bears use the ice that stretches across the ocean surface in the Arctic during colder months to help them access their main source of prey – fatty ringed and bearded seals.
In the warmer months when the sea ice recedes, they would be expected to conserve their energy and even enter a hibernation-like state.
But human-caused climate change is extending this ice-free period in parts of the Arctic – which is heating between two and four times faster than the rest of the world – and forcing the polar bears to spend more and more time on land.
New research looking at 20 polar bears in Hudson Bay suggests that without sea ice they still try to find food.
OK, this could be true. We’re certainly not saying that it isn’t. However, we just want to put a little warning down.
Pictures of starving polar bears won’t be proof that it is happening.
Which might seem a little odd but bear (sorry) with us.
End of life for an apex predator is not a happy time. After a life eating everything else there’s nothing that does come eat you once you’ve lost a pace. End of life for an apex predator is, likely enough, therefore starvation when the ability to hunt goes.
We also know that polar bear populations have expanded massively in recent decades.
We would therefore expect to be seeing more starving polar bears - that end of life fate of so many apex predators.
There’s also that larger point. The population of apex predators is kept in check by the plenitude of the prey species. Once that predator species reaches full exploitation of the food source then it is indeed starvation which keeps it in check.
Seeing, pictures of, or finding starving polar bears will not, therefore, be proof of this contention that climate change ice loss is causing polar bears to starve. Sure, such evidence might well be consistent with that contention, isn’t proof against it, but it’s not proof of it.
As with more whales washing up on beaches being consistent with ships, or seabed development noise from windfarms, or whatever, killing whales. It’s also consistent with, something we should expect to see in fact, from the truly massive expansion - and a righteous expansion too - in whale populations in recent decades.
Evidence is indeed evidence but the big question is always, well, evidence of what?
We would suggest, ever so gently, that some who might try to mislead us will use pictures of starving polar bears to insist upon the verity of that contention - that climate change induced ice loss is starving them. As we say, this could be true. But we need rather more proof than pictures of starving polar bears to prove it.
We'll admit to being terrible cynics about the fashion business
At least one of us was once accused of dressing like a 1970s DJ - which, upon consideration, we felt to be a step up from the usual description. So, it could well be said that fashion isn’t really and quite our thing.
Coach’s Stuart Vevers on sustainability in fashion: ’The change has to come from designers’
British designer credits a decade in New York with firing a ‘genuine passion’ for sustainability
This newfound insistence upon sustainability in fashion amuses us. For, of course, the entire point and purpose of fashion is to show who is in this season with the latest things and who is some regrettable oik still wearing something at least three weeks out of date. At the highest possible, most favourable, description the entire industry produces Veblen Goods.
Which is, of course, a problem when actual clothing - and designs - are now cheap as chips and getting cheaper by the week. Temu, Shein, Boohoo and the rest means that said oiks can be dressed in whatever at the same time as the cognoscenti. Which would never do, of course. Violating the main point of the game.
What is the point of catwalk shows, now that social media serves up fresh trends to everyone’s phone every day of the year? “[It] has to be about sustainability”, says Stuart Vevers, the British designer who has spent the last decade bringing fashion credibility and a new point of view to the once-staid American handbag brand Coach.
Fashion weeks hand the microphone of the cultural conversation to designers, and Vevers wants to use his airtime “to look at where sustainability can be scaled. Where we can scale is where we can have an impact.”
Thus the rules of the game must be changed. For if the base idea is the production of Veblen Goods then Veblen Goods there must be. So, now sustainability is in - a method of creating expensive things which people will buy because they are expensive and therefore “Look at Me!” as opposed to nice cotton t-shirts which just anyone can now have in abundance.
As someone once said about methods of eating asparagus (perhaps a Mitford?). Which one is used doesn’t matter, even firing it from miniature cannons into fellow diners’ mouths. But that there is a fashionable method which you don’t know about is vital. For that’s how the distinction between you and non-U is made.
Given the paucity of wildly wealthy economists out there it’s not true that a command of economic theory is a surefire way to make cash. But it is nice to see that The Theory of the Leisure Class is still relevant as a description of human behaviour 125 years later.