It worries that people get their economics from The Guardian

Perhaps not as much as the idea that The Guardian employs economic journalists who manage this:

What’s behind the record FTSE 100 high?

Hopes of a UK interest rate cut and easing geopolitical tensions are not the only reasons for the intraday peak reached this morning

Indeed, not the only reasons at all.

We did read through the ideas offered and were most surprised (well, this is The Guardian so perhaps the “most” is not wholly true) to find that the most obvious reason was not mentioned.

The FTSE100 index is not inflation adjusted. Therefore as money becomes worth less - because people insist on producing more supply than there is demand, obviously - therefore that index rises.

The FT had the good grace to point this out even if only as an afterthought.

There is also this:

Paul Marshall, the boss of the £40m ($55bn) hedge fund Marshall Wace

If that was the current exchange rate then that would produce a record high in the FTSE100, yes. But then those glory days when the subeditors knew more than the journalists are long, long, gone.

What austerity?

Polly Toynbee has made a career out of shouting that we must be more like Sweden.

UK public spending grew from 38pc of gross domestic product (GDP) in 2019 to almost 50pc at the height of the 2020 pandemic after Rishi Sunak as chancellor announced huge taxpayer subsidies to pay people’s wages during lockdown.

Spending has since come down to 44pc of GDP but remains far higher than its pre-pandemic level.

And:

Sweden has one of the largest public sectors among OECD countries. Government spending was 49.2% of GDP in 2019, the fifth highest in the OECD

We have, in these recent years, become very much more like Sweden. It doesn’t seem to have made us - or anyone actually - any happier. So, having tried the experiment we find that it doesn’t work.

At which point that science thing comes into play. Theories are all very well but they must withstand experimental evidence - if they don’t then they’re failed theories. We have tested this, will being more like Sweden make Britain happier and the answer is no.

Ho Hum.

It’s also possible to wonder about something else. If government spending has risen by 6% of GDP - which is a lot, even a lorra lots - then what is this story about austerity? Seriously, what austerity?

Renewables aren't so cheap then

Useful information today:

The switch to net zero risks driving up household energy bills by £400 a year after a jump in interest rates, a leading think tank has warned.

Higher borrowing costs will massively inflate the cost of the green transition, the Resolution Foundation said, with families set to spend an extra £29bn annually on energy by 2050 if rates do not return to 2019 levels.

This shouldn’t be a surprise. As with nuclear, the vast proportion of the costs is the financing expenses. Fuel costs are pretty much zero for either, there are some operating costs but it’s the capital costs that make up the vast bulk of the total, those capital costs must be financed. Therefore returning to positive real interest rates - as we have just done, even though only marginally so - means a change in the costs of renewables.

Shrug, obvious, innit?

At which point we can leave it - but we shouldn’t. The entire concept of net zero - or even dealing with climate change at all - is based upon the idea that not dealing with climate change is more expensive than dealing with it. Now we’ve just got evidence that dealing with it through renewables - those oh so cheap forms of energy collection - is more expensive than we’d thought. 25 million households, £400 per, that’s £10 billion a year. That’s also £10 billion a year forever.

So, dealing with climate change is now more expensive than we’d thought it was. The benefit of dealing with it is exactly the same as before. That changes the balance of how much dealing - rather than suffering from - climate change we should be doing. We should leave be more and do less to head it off that is.

No, there is no way out of this logic. For the logic is that preventing climate change is cheaper than suffering it. But the costs have changed, so the amount of preventing/suffering also changes.

A useful guide to who is being realistic - scientific even - on the subject is who makes this point. Those who ignore it aren’t.

Well, yes, obviously, quite so

In the energetic pursuit of net zero, billions of pounds could be squandered needlessly. That’s the lesson from countries as diverse as Italy, the US and UK, where the rush to subsidise green projects suggests vast sums are at risk. Worse, they could be lining the pockets of multinational businesses and City financiers.

Stamping feet, demanding that everything be done right now, squealing that we’re going to Violet Elizabeth Bott ourselves blue in the face unless net zero happens yesterday is going to be a very expensive way of trying to deal with the problem.

This will, as Phillip Inman then goes on to point out, lead to a possible rejection of even dealing with climate change at all - facing the vast cost of doing it all right, right, now people might well prefer to do nothing about it.

This is - as we’ve pointed out a number of times - something warned about in the Stern Review of 2006. Humans do more of less expensive things, less of more. So, our method of dealing with any problem - and for the purposes of this argument, right now, we’ll assume climate change is one of those - has to be the most efficient one possible. For it’s that very efficiency which means that we’ll do more solving of the problem given the resources available to be devoted to such a solution.

As Stern, again, points out pure and nothing but free markets don’t deal with externalities - they’re external to market processes, see? But the most efficient method is to crowbar the externalities into market prices - markets are more efficient than planning and bureaucracy.

Therefore the correct method of dealing with climate change - again assuming the existence of the problem - is to internalise the externalities into prices through a carbon tax. Because that way more dealing with climate change will be done.

None of this is any mystery, it’s all in the Ur documentation on the subject, IPCC reports, that Stern Review, the Nobel winning work by Nordhaus. The only possible mystery about it is why the political process doesn’t adopt it.

But then it’s always possible that people go into politics in order to be able to boss people about rather than actually solve problems.

Another thing that's failed the market test

Unilever has abandoned efforts to “save the world” after a backlash from investors over “virtue-signalling” that included giving Hellmann’s mayonnaise a social purpose.

The consumer goods giant, which owns Marmite, Dove, Magnum and Ben & Jerry’s, has watered down green targets and scrapped some diversity pledges after investors told it to focus more on profits and less on social and environmental issues.

The initial contention was one of those things that could - have been - be true. The young today, or people today, are so invested in these wonderfully aware and connected ways of looking at the world that a company which accorded to the usual dictates would make a greater profit.

It’s obviously possible for us to look into our own souls and decide that no, actually, fair trade cocoa really isn’t something we’re willing to pay a premium for. Nor a guarantee that packaging requiring recycling will be kept to a minimum, the wilder shores of gender equity promotion or whatever else current politics decides is a fashionable concern. But we are - whether we mean the collective us who read this, or we as individuals - obviously far, far, from the majority of the society. Maybe those others out there will direct their spending to support those issues? Therefore a company according to those dictates will make a larger profit?

If it does then fine, obviously. We are, after all, the people who insist that it is those actions of consumers in markets which dictate how capitalism does work, after all.

But what if it doesn’t? After all, there are many more claims of truth than there are truths.

Which is, we insist, one of the - many - benefits of a market based system. That we’ve a system that tests these truths.

Sure, maybe the world will be a better place if every woke and fashionable bee in bonnet is accord to. But it will only be true that all those things should be paid for if people are willing to pay for them. The claim was they would - Unilever would be more profitable because of doing those things. Apparently not. So, the claim has been tested, found to fail and that’s that. Don’t do it then.

Do note this isn’t exclusive to the sort of things we regard as silly - that market test applies to everything. It’s just one of the joys of the system, claims get tested, we find out which are true. A function which we are insistent is a vital part of feedback in any system.

Perhaps price controls aren't all that good an idea then?

Patients have described the effect on their health and wellbeing of the “new normal” of drug shortages in the UK, which has led to three-month delays and 80-mile round trips to acquire medication.

Simon Bell, a 43-year-old data analyst from Tyne and Wear, has cystic fibrosis and requires medication that allows him to digest food. “For people with cystic fibrosis, the part of our pancreas which releases enzymes and allows us to digest food doesn’t work, so we have to take these tablets, which does the job of what’s missing from our pancreas,” he says.

Since the outbreak of the coronavirus pandemic, Bell says he has been experiencing shortages of Creon 25000, the drug he takes, and once was unable to get his medication for more than three months.

If it’s being described as “the new normal” then this is something not specific to the one drug nor problem. And it isn’t either - the US has grand problems with Adderall, the UK has reported such with HRT.

The problems here are not from patents and single supply. The worst area is in fact in generics.

So, why?

We would suggest a path to investigate. No, we’re not insisting, not yet, but just suggesting.

You know that supply and demand curve stuff? Prices decline and fewer people desire to supply? That.

For what is the grand boast of the NHS and many other such health care systems? That as major, if not monopoly, (monopsonist that is) buyers they are able to push down the price paid for drugs. Further down than a free market would have such prices.

This is such a boast of such systems that the Americans - at least some Americans - insist that Medicaid should be able to do the same and they have, for a select handful of drugs, just started doing so.

And, umm, well, what is there we know about pushing the price of something down below the market clearing price? There will be a shortage of supply.

We have price fixing, we have a shortage of supply. Does Occam’s Shaving Kit require any other explanation here?

As we say, we’re not wholly wedded to an absolute insistence upon this as the only cause. But we really are very sure that price fixing has costs. As we seem to be seeing the predicted costs perhaps we should be thinking about the inadvisability of the price fixing?

The bureaucratic costs of recycling

Christopher Booker used to note this about lead acid battery recycling here in Britain. But today’s example comes from India:

India has 11 similarly vast solar parks, and plans to install another 39 across 12 states by 2026, a commitment to a greener future.

Yet this solar boom has a downside: the waste it generates from the panels, made of glass, aluminium, silicon, rare-earth elements; as well as power inverters and wiring.

One minor piece of pedantry, solar panels do not contain rare earths. But, you know, sigh. Solar panels are made of things though, when the solar panels are end of life, those panels then need to be dealt with. Perhaps reusing, or recycling, those things in those panels is a good idea?

Protocol dictates that solar waste from the plants must be transferred to e-waste contractors, authorised by the Central Pollution Control Board (CPCB), within a specified timeframe, typically 90 or 180 days.

Oh what a good idea. Lots of lovely bureaucracy.

Because authorised e-waste contractors are often unwilling to handle the waste in accordance with the CPCB protocol, a network of informal operators – who dismantle, aggregate, transport and recycle panels – have stepped in to fill the gap.

What a lot of really lovely rules and bureaucracy.

Tayyab* and his family work at the tail end of this waste-management chain. In a dimly lit and poorly ventilated room in Bengaluru, the 20-year-old and his younger siblings spend their days dismantling broken panels for their valuable metals and other materials.

“I take apart the metal frame, separate the glass and sort out different metals that can be sold separately,” says Tayyab.

Some work outside the rules and the bureaucracy.

Tayyab’s story is just one among many in the informal solar-waste sector, where workers find ways to extract value from the under-regulated but booming renewable-energy sector.

Ah. So the things that are valuable are extracted and reused or recycled. That’s good. But it can only be done by those not obeying the rules and the bureaucracy - for the costs of the rules and the bureaucracy are greater than the value of what can be extracted.

Which does lead to a thought. Say there’s something you wish to have done, something you wish to encourage being done - say, the recycling of the valuable bits of solar panels. The way to do it would appear to be having few rules and no bureaucracy, so as to lower the cost of recycling solar panels. Humans do more of cheaper things, less of more expensive - so, lowering the costs of recycling solar panels will increase the recycling rate of solar panels.

Anything we’ve missed there?

Kill bureaucracy to save the planet. Sounds good to us.

The groceries market seems alarmingly competitive to us

There are those trying to insist that significant parts of the American economy are uncompetitive. This allows the exercise of market power and thus excess or economic profits. True, this is the sort of analysis that comes from Senators Warren and Sanders so best not taken entirely seriously but there are also those we have to worry about like FTC chair Lina Khan.

Is there in fact some way we can test this?

Could be - back around the turn of the millennium there was considerable muttering that perhaps the UK groceries market was more than a little uncompetitive. Tesco was making net margins on sales of around 6% we seem to recall - around the highest in the world at that time for a supermarket chain. They’re now down around 3% and what’s changed is the irruption of the discounters, Aldi and Lidl, into the UK market.

There used to be very decent margins, price competition increases, margins are now lower. Yes, OK, it’s reasonable to think the earlier high margins were possibly a product of the absence of the price competition. Note that this is a market problem solved by the market, even if it’s still a problem.

But we can also use much the same logic the other way around:

Jeff Bezos had a golden rule for deciding whether Amazon should take the great leap from the internet to the high street. “We would love to [open physical stores], but only if we can have a truly differentiated idea,” he told an interviewer in 2012. “We want to do something that is uniquely Amazon.”

In the years since, the company has repeatedly tried to reinvent the supermarket. In 2016, it opened a till-free convenience store on the ground floor of its Seattle headquarters, using cameras and artificial intelligence to monitor what customers picked off shelves.

The following year, it paid $13.7bn (£11bn) for the upmarket grocer Whole Foods. And in 2020, it opened its own range of high-tech Amazon Fresh supermarkets in the US, before later expanding to Britain.

But despite the company becoming the world’s dominant internet retailer, Amazon’s near-decade of trying to reinvent the supermarket has stubbornly remained an ambition rather than a reality.

Amazon is not exactly a constrained competitor in the American groceries market, by either ambition or capital availability at least. Yet there seems to be no room in that marketplace for the extra competitor - or no room at some usefully profitable set of prices. From which a useful conclusion is that if it’s not possible to enter through greater efficiency or lower prices then the market as it is is efficient without excess or economic profits.

Which is an interesting finding, no? That there’s no room left for a competitor does rather mean that the current competition is sufficiently cutthroat. Not that we expect actual evidence to convince Senators but it’s nice to know all the same.

Pensions - net matters, not gross

We’ve all seen those claims around that pensions savings don’t, in fact, invest in new assets, new companies. That, instead, the money just goes into buying up second hand pieces of paper which funds the rip off of the City houses (cont. pg 94).

There’s a reason for this:

This has meant that UK-listed companies are receiving just £500m in net investment from pension funds each year.

Goldman Sachs said defined benefit (DB) schemes – which pay a fixed income but are largely closed to new savers – are selling £2.5bn of shares per quarter to pay out pensions to retirees.

At the same time, defined contribution (DC) pensions – which do not guarantee a specific income but depend on the performance of financial markets – are buying £3bn of equities over the same period.

People eat their capital to finance their retirements. This might be done inside a pension fund, a tax wrapper or simply directly and individually. But it is not true that a pension is simply the income made from some pot of money. It’s eating into that pot itself, that stock, over time.

Therefore it is necessary that those assets - whatever they are, shares, bonds, direct assets like buildings, windmills, anything - be bought from the retiring generation by those now beginning to save themselves.

Which is why much of the financial markets is indeed trading second hand pieces of paper. Because this generation of retirees needs to sell the things they invested in 30 and 50 years ago.

Any plan based upon an estimation of the gross number is therefore going to be wrong. It is the net which matters. What is left over of the new investment after the old has been purchased? Also, any complaint that The City just trades old paper is entirely missing the point. For, obviously, people need to be able to sell what they’ve invested in, so there must be a market in old investments, right?

Let's explain again why rent controls are a bad idea

In many ways, the frequent calls from politicians to implement rent controls are remarkable; insofar as, despite their repeated failure to solve the rental crisis, they are still being consistently proposed as the solution. In Scotland, where temporary rent controls have predictably driven down the availability of private properties by 20% and raised rents on new tenancies by 14%, the SNP have doubled down on their failure and is seeking to ban rent increases for up to five years. 

When rent controls have been tried elsewhere the results have been identical. Take Berlin, where the 2020 rent caps which fixed rents at below market rates were accompanied by decreases in supply five times as large as reductions in prices. Equally in Stockholm rent controls have resulted in a shortfall of 27,000 apartments. As a result the average queue for a rental apartment in the capital is 11.3 years. 

Unfortunately Sadiq Khan's most recent proposal for solving the housing crisis is likely to be just as much a failure in London as it has been everywhere else. His plan is to deliver 6,000 new homes in which rents would be capped at a third of local salaries. He has also urged the government to delegate him the power to freeze rents across the capital. If granted this would cause serious issues for an already troubled housing market. 

Considering that policymakers are continuing to tout rent controls as the answer to our housing crisis, it’s worth once again explaining why they inevitably hurt the very tenants that they are meant to support.

The answer  lies with one of the key insights of economics, incentives matter. Changing the incentives presented to the seller of a good will have an impact on the buyer and vise-versa. Rent controls have significant negative impacts on the incentives of landlords to operate in the rental market, and therefore generate adverse consequences for tenants

The impacts on sellers in the housing market are two-fold. Firstly, capping prices will weaken the incentive to rent out, encouraging landlords to sell properties and invest in other more profitable asset classes such as stocks or bonds. YouGov polling has shown 37 per cent of landlords would reduce the number of properties they let if an external agency like a council was given authority to set rents both during and between tenancies. Properties from this sell off tend to be sold to new those intending to live in the properties as unlike landlords they are unaffected by the rent caps. This will inevitably create shortages in the rental market, as demonstrated by decline in rental properties available following the rent cap policy in Scotland. 

Secondly, it reduces the incentive to invest into the production of new housing. Developers and landlords know that their properties will be struck by rent controls, which will prevent them from generating adequate revenue to justify investment in new development. This will limit growth in the supply of housing, in the long run worsening the housing shortage. 

There have been various examples of this effect, in 2023 Get Living paused its £200 million plan to build 1500 new homes due to the Scottish Government's rent control policy. As the Scottish LandLords association stated, “The rent control proposals, as has been seen in places like Ireland which has similar measures, will see reduced investment and more landlords leaving the sector, leading to higher costs for tenants.”

These combined effects mean that rent controls, aimed at keeping rents low for tenants will only result in a reduction in the supply of housing, creating housing shortages and preventing development. 

The Greater London Authority's target for affordable housing starts by 2026 is between 23,900 and 27,100 per year, but by February only 4% have been started - just 874 new houses. As for the £4.8 billion "Building Council Homes for Londoners" program, council house building starts since last May has been precisely zero. 

Without allowing for greater development significant increases in rents are inevitable, rent controls do not offer a genuine solution to this challenge. Unsurprisingly the solution to the London housing crisis is less- not more government- regulation. Deregulating planning leading to greater investment into property development would expand the supply of housing, reducing rent prices without creating property shortages.