One of those George Monbiot questions we can answer

George illustrates one of those basic limitations to government regulatory - heck, any type of - power:

To give one example, it is hard to explain why a large portion of the lucrative waste disposal industry has been ceded to organised crime in the UK while successive governments look the other way. Might they have been, in effect, legally bribed?

No, it’s that government is trying to do too much here.

One of the methods by which government fails is when it tries to do too much. The reason the plans gang agley is that people simply won’t follow them.

Thus we gain, at the milder end of the spectrum, the Laffer Curve - tax people “too much” and they work less. At the stronger end the Soviet Union was an entirely planned economy - and large portions of economic activity were simply illegal and therefore unplanned. Folk just would not obey the rules laid down.

This applies to anything and everything - make those rules, for whatever it is, too strict and the black market will arrive. This is true of cigarette taxation leading to the £14 pack, it is already partially true of vapes and it will be wholly true of the upcoming attempts to ban smoking by age group and so on. Rules that are “too tight” create scofflaws.

This is just one of those things which limit government power. That the humans being governed will only follow said laws, rules, regulations, to a point and no further. Sure, sure, we all really should obey the law, we are a democracy and so should be bound by those in common decisions. Yet we don’t and that is what places those limits upon what can be centrally done.

The reason the illegal waste disposal industry is lucrative is because the laws upon the legal version make said obeying of the law highly expensive. So, some to many simply do not obey them. This isn’t a good idea, obviously and the answer is to have looser laws overall but which gain general acceptance from the population.

Or, to put it more simply. Handing over the writing of waste management laws to the sort of anal retentives who make a duck’s sphincter look relaxed isn’t the optimal solution. Because people just won’t obey such rules.

Onwards to knowledge

We have suggested, already, that the Onward groupuscule might benefit from a little more knowledge before planning the economy for the rest of us. Doing that job of reading their report so that you don’t have to we find this:

Too much speculation has turned housing into a tradable asset, inflating the market and pricing families out of ownership. Britain’s liberal M&A regime enables predatory asset-stripping, and our regulatory and tax regime combined with loose monetary policy have promoted debt financing and leveraged buyouts to the detriment of investment. Weak corporate governance rules have allowed executive pay to rise far above average salaries regardless of performance, and a fashion for share buybacks has sucked capital into inflating share prices rather than business growth.

A fine collection of wibbles as more usually graces The Guardians opinion columns.

A house is an asset - housing is the consumable - and it is possible to buy and or sell a house. A house is therefore a tradeable asset. That the bet has been pretty much one way for some decades now is due to an idiot planning system, not to the nature of the asset nor the ability to trade in it.

Predatory asset stripping is not actually a thing. Moving an asset from a lower to a higher valued use is the very definition of wealth creation. Debt financing is investment, as also is a leveraged buyout. People are paying real money for an asset - this is investment. CEO pay is set in the international market for CEOs, not in relation to pay in this country. We could, of course, always stop foreigners from coming and working here, that would have an effect, but there seems a remakable resistance to that idea at present. And share buybacks are how we move money out of one line of business so that it can be invested in another - more investment in new things being something the groupuscule at least says that it desires.

They’re running with a collection of currently fashionable soundbites, not actual knowledge. And as we’ve suggested before knowledge, then thinking and only then the plan, please.

Sure, to err is human, but to fail at that very first stage isn’t a good start to an economic plan.

Of course slavery, colonialism, did not produce the Industrial Revolution

Nor are slavery and or colonialism the cause(s) of current wealth.

Now, if you want the detailed calculations there’s a source:

Slavery and colonialism did not make Britain rich, and may even have made the nation poorer, a new study has found.

The riches of the slave trade were concentrated in a few families while the nation footed the bill for extra military and administrative spending, according to a book by Kristian Niemietz at the Institute of Economic Affairs.

“Profits earned from overseas engagement were large enough to make some individuals very rich, but they were not large enough to seriously affect macroeconomic aggregates like Britain’s investment rate and capital formation,” he said.

Mr Niemietz argued that that the slave trade had little overall impact on the economy or the country’s ability to industrialise.

The Full Monty is available here.

It’s also possible to approach this with some simple logic. Everywhere had slavery. Many places had colonies. Only some places got rich. There’s therefore - obviously and clearly - something else which caused the getting rich. It’s certainly possible to say that the other thing was that societal change which led to the profits of slavery and or colonialism (to the extent that were those were large enough, if that’s what someone wants to try and argue) being effectively used to produce an Industrial Revolution made the difference. But that then is to insist that it was the societal change, not the slavery nor colonialism, which made the difference.

For example, the Arab slave trade lasted longer than the Atlantic by many centuries, was larger in volume and human misery. The Arab colonisation process covered all of North Africa, large non-Arab areas of the Middle East and reached up into Spain for centuries. Yet near no modern Arab nation is or has become rich in the absence of fossil fuel deposits.

It’s not the slavery or the colonies that produced an industrial revolution nor modern wealth. QED.

Might we suggest that knowledge comes first, then thinking, then plans?

The “Onward” groupuscule has decided to favour us all with their plans for how the economy should be. We would, gently and in a very friendly manner you understand, suggest that knowledge comes first, then thinking about what is known, plans being the final stage in the process?

Around 60% of UK-listed equities are foreign owned, indicating inadequate deployment of Britain’s capital pools, with investment income accruing overseas.

Erm, yes.

As is well known - for we and everyone else write the same article when the pound falls and FTSE rises - some 75% of the revenue of FTSE100 companies comes from outside the UK. Some 50% for the FTSE250. And the two combined, the FTSE350, are by far the majority of the London market capitalisation.

So, yes, true, 60% of the market is owned by foreigners but something around that same 60% - -ish, -ish - is in fact foreign business. We’re not sure we’re worried about foreigners owning foreign business to be honest and we think it’s not a bad idea at all that we get to skim the transaction fees off their doing so.

And, well, if we were to look at that second fact alone we’d probably be suggesting that yes, there is an imbalance there, but it’s that too much of the London market is in fact in foreign. Not foreign hands, actually in foreign.

Now yes, this is partly mere pedantry. But we do think it betrays a certain woolliness of thinking - to be very polite and gentle about it. And we really are very certain that we’re only going to end up with a decent plan - for anything at all - if we start from facts and knowledge then do some real thinking.

The need to finance the current account deficit leaves Britain dependent on selling overseas investors its housing stock, its equities and its debt.

Entirely true, a curret account deficit always is, by definition, offset by a capital account surplus. But how important is this? Last time we looked national wealth had increased by some 50% of GDP over a year (pensions and houses had gone up by a trillion) and as this report says, the trade deficit that must be financed by selling assets to foreigners is 3.1% of GDP or so. At those sorts of rates foreigners pump money into the UK and end up owning an ever smaller fraction of our nation. We can’t see this as a problem.

So, our advice - know stuff first, then think about it, only then make a plan.

Took them 35 years to get there

But more joy in heaven and all that.

The Climate Damages Tax Report claims that we can solve climate change by adding a tax - related to the CO2-e content - to the extraction of fossil fuels:

The Climate Damages Tax report, published on Monday, calculates that an additional tax on fossil fuel majors based in the wealthiest Organisation for Economic Co-operation and Development (OECD) countries could raise $720bn (£580bn) by the end of the decade.

We’ve had to look to an earlier version for the details as they’ve done that naughty thing of issuing the press release before the report, thereby making sure that no independent can analyse. But that earlier version:

A tax on the extraction of fossil fuel: per barrel of oil, tonne of coal, cubic litre of gas, global rate based on CO2e.

Starting at $5 per tonne of CO2e in 2021, increasing $5 each year until 2030 to $50 a tonne, $10 annually after that to $250 a tonne by 2050.

They’ve a few things wrong here. They insist that this would be paid by the fossil fuel companies, which it wouldn't be. Collected by, yes, but the actual burden would be on one of two people. Consumers, if market prices move in lockstep with the tax. Or, more likely at first at least, a reduction in the royalties paid to the governments who currently tax such output.

So, not so much new tax revenue as a diversion of extant.

They say that this should be spent on lovely projects no doubt advised upon, for a fat fee, by the usual suspects. That might not be the way to spend a few hundred billions.

But there’s something we love about this. Which is that this is the Nordhaus proposal for a carbon tax. True, it starts at $5, not that Nobel Prize winning $10, then it grows to $250 not the Nobel $240, but we think it’s fair to say that’s trivia. But it really is that proposal. Solving climate change by a progressive tax upon CO2-e, collected at the well- or mine- head.

Took them 35 years to get there which, given the claimed urgency of the matter seems a long, long, time.

For true piquancy, this is also the proposal supported by Exxon. A progressive carbon tax.

Which does leave us all with something of a question. Given the shrieking that has accompanied the Nordhaus and Exxxon proposals why is it now radical and progressive to suggest exactly the same thing?

If the task is impossible then don't try doing it

People, en masse, can be Hell as that French philosopher chappie once said. This produces a problem on the internet where there’s a mass insisting upon just being people. Moderating their behaviour might be nice if it’s possible. But what if it’s not?

There are really only two ways to deal with it (unless you’re Elon Musk, who has decided not to even try). One is to choke off the supply. But if you do that you undermine your business model – which is to have everyone on your platform – and you will also be accused of “censorship” in the land of the first amendment. The other is to amplify your internal capacity to cope with the torrent – which is what “moderation” is. But the scale of the challenge is such that even if Meta employed half a million human moderators it wouldn’t be up to the task. Still, even then, section 230 would exempt it from the law of the land. Beating Ashby’s law, though, might prove an altogether tougher proposition, even for AI.

So, either people get to say whatever - in all its glorious vileness - or the internet doesn’t work. Which does rather solve the problem for us, doesn’t it? As it’s impossible to have the internet without the classically liberal free speech stuff then we’ll just have to have the internet with the classically liberal free speech stuff.

Glad we’re able to sort that out for everyone. Much effort can now be saved.

If only our rulers understood QE

Sadly, that headline could also be “If only our rulers understood (insert issue of your choice)”.

Here it’s about losses on quantitative easing:

In 2012 Osborne transferred profits from the scheme to the Treasury, lowering the Exchequer’s borrowing requirements – but agreeing, as part of this deal, to also bear the weight of any losses in future.

However, higher interest rates and lower bond values mean the Bank is now losing money on the scheme.

As a result, in the past year the Treasury has transferred £44bn to the Bank to cover the losses. The Office for Budget Responsibility (OBR) expects an overall net cost to the public purse of more than £100bn.

Of course, £100 billion here, £100 billion there, pretty soon you’re talking real money. It is also possible to think that £100 billion as a once off cost for avoiding another Great Depression is a bit of a bargain.

But the specific that is being whined about here. The difference between holding a bond to maturity and selling it off so as to crystallise the loss.

Conservative MPs are demanding that the current chancellor, Jeremy Hunt, reassesses the system and pushes the Bank of England to stop selling bonds at a loss.

Greg Smith, chairman of Conservative Way Forward, said: “It’s not at all clear why the Bank is choosing to sell billions of pounds worth of bonds a year into the market, taking larger losses than would be incurred if they simply held them to maturity.

Selling the bonds doesn’t - barring a slight margin because of uncertainty about the future - change the loss. The loss exists, it is there. For currently the Bank is paying 5.25% on those central bank reserves the banks hold. And is receiving perhaps 0.5% or whatever in interest on the gilts it holds as part of that QE. The difference, that 4.75% a year, is the loss.

It’s possible to take that loss as a cashflow between now and the maturity of the bonds. It’s possible to take that loss as a capital sum right now - and the loss is, by and large, the difference between 0.5 and 5.25% over the remaining years of the life of the bond.

That is, the loss has happened because interest rates have changed. How it’s recognised makes no difference to the fact that it has happened.

We tend to think it would be helpful if those who ruled us grasped this. Money printer go brrr has its costs.

Of course, it is possible to reduce the amount of those central bank reserves held by the banks and thus the amount that the Bank is paying 5.25% upon. Something which is achieved by selling the QE bonds back to the banks…….which crystallises the loss. For the loss exists, it’s real, it has already happened.

Don't worry about intellectual property in poor places

One of our unfashionable ideas is that we shouldn’t worry overmuch about intellectual property in poor places.

Yes, IP like patents and copyrights is vital for some solution is necessary to that public goods problem. If anyone and everyone can just copy then little profit can be made therefore no one invests in the initial creation. When a new drug can cost $2 billion that’s a problem that has to be solved.

But this has also led to an insistence, in some quarters, that everywhere should have to obey those same IP rules. And, well, no.

Truly poor places have, by definition, no money. So, if they have to obey all the IP laws they’ll not buy any of the IP. The impact of IP laws on the revenue of those who developed the IP is zero. If those same poor people then steal the IP instead the impact upon development incentives is also zero. But, clearly, the poor people are made better off. This is a Pareto improvement and therefore we should do that. It makes absolutely no difference to those incentives and people still become better off.

But we then get to that problem of when’s the dividing line between poor and steal and rich and pay?

Chinese authorities have targeted a major online sales platform accused of supplying counterfeit goods, raiding warehouses holding millions of packages destined for overseas buyers.

Earlier this month police raided the Hangzhou office and several warehouses of Pandabuy after reported legal action by 16 brands over copyright infringement. More than 200 public security branch officers, 50 private sector investigators and local police were involved, according to reports.

This is not an exact claim but a general one. This is something that can be left to the market. Everyone has the same nominal rules, obviously. But they require enforcement by those domestic authorities to be effective. When will those domestic authorities enforce?

When that place is creating IP that it would like other countries to also enforce rights to. Which is a useful definition of being richer rather than poorer too - a place that is creating IP is going to be richer than a place which is not.

As we say, not an exact rule but a useful general guide we think. Mutual recognition of intellectual property will come when places are rich enough to be creating IP they want protected. A place that is poorer than that likely doesn’t have any money to buy IP anyway. Yes, obviously grey areas at that interface and dividing line but still, we insist, a useful guide.

Yes, this does mean we’re rather against TRIPS. Oh well, if that’s where logic leads us….

Prices are information - critical minerals edition

Just a little note from the frontlines of the real economy.

We’re oft told that the world is running out of metals and minerals. That’s why we need to recycle everything at whatever the cost. Simply because if we don’t then we’ll run out.

This is not true.

A circular economy is a very fine idea if the resource consumption - that is, the cost - is lower doing it that way. But it’s not necessary for the reason that we’re going to run out if we don’t recycle everything.

Australian miner Lynas posted a slump in third-quarter sales revenue on Wednesday, missing analyst expectations on the back of a plunge in prices for rare earths, ……"There's a general consensus that the current price is below cost for many Chinese producers.” …. The firm's quarterly sales revenue fell to A$101.2 million ($65.64 million) in the three months to March 31, down from A$242.8 million a year earlier.

Rare earths prices are, as above, below production prices. That’s not quite and wholly true, in mining we make the difference between mere operating costs and all in costs. It’s entirely possible to be below those all in costs - covering those capital costs - and still rationally producing if prices are above mere operating costs.

But rare earth prices are as above. Further, the lithium price is below the operating costs of some to many mines, including recently opened ones. The cobalt price is below that all in cost for many producers.

Rare earths, lithium, cobalt, the three we need from that critical minerals list for this electric revolution. There’s so much out there that they’re not worth the cost of digging them out of the ground. Which does rather kill off that idea that they’re in such short supply that we must, at whatever cost, recycle them all.

As we say, if it’s cheap to recycle them then do so by all means. But prices really are information - we’ve not got a shortage of them.

Has the Bank of England Just Landed a Section 166? : Reflections of Bernanke's Review

A letter to the editor of the ASI blog

Dear Sir,

I was interested to read the findings of Mr Benanke’s independent review into the Bank of England’s forecasting and related processes during times of significant uncertainty.
 
It was a detailed analysis with all recommendations accepted by the Bank of England.
 
Within this detail, was a list of shortcomings which focused on the deficiencies of the Bank’s forecasting infrastructure. These included: out-of-date software, insufficient resources to ensure the software and models are adequately maintained, significant shortcomings in COMPASS (the baseline economic model), makeshift fixes, over-complication, and unwieldy systems to highlight a selection of Bernanke’s findings.
 
As I read this list of points, it struck me that the Bank of England via the Prudential Regulatory Authority (PRA), regulates some of our largest financial institutions.  If one of these institutions received similar points of note post a PRA review there would be consequences and certainly remedial action required.
 
This has been a tough period for the MPC and this report will make difficult reading for the Bank of England. The Bank of England is owned and ultimately regulated by the UK Government, and I hope they will take a similarly direct and stringent view as they review the report and action plan to fix. We have been reminded this week, with the Post Office enquiry, that taking “an arm’s length relationship” with wholly owned UK Government entities is not advisable.

Charles White-Thomson
Senior Fellow Adam Smith Institute