Government hallucinates just as badly as AI does

The current worry de jour over artificial intelligance is that it hallucinates. This is the process whereby an AI (or an LLM to be more accurate) trains on the output of other AIs (or LLMs). Given that there’s no logic or fact check on the output of the earlier models then the input into the later wanders somewhat from reality. Therefore, however clever the workings of the model itself we get GIGO -garbage in and garbage out.

What is less appreciated is that government works the same way. We have, for example, an entire political class that has forgotten its own definition of poverty. Which is living in a household on less than 60% of median household income, adjusted for household size (which can be measured before or after housing costs). This is a measure of inequality, not poverty.

Of course, it’s entirely possible to worry about inequality, not that we here do very much. But it is something different from poverty. The difference between having two pairs of trainers like the lad next door and having no shoes like no one in the country sort of difference.

But because of the insistence on not recalling the definition in use we’ve half the political class insisting we must solve child poverty - something we’ve already solved, many decades back. There is still that child income inequality, if that’s something we want to worry about, but that is a different thing.

Or, today’s example:

But the city that birthed Greggs has now gone to war on unhealthy food, bringing in an ambitious ban on new takeaway and fast food openings in a desperate bid to combat soaring obesity rates.

It follows complaints that fast food chains and takeaways have effectively colonised poorer areas of the city, creating so-called “food swamps” where access to healthy, nutritious meals is nearly impossible, driving generations of children and families into ill-health.

New takeaways have been outlawed in any ward where more than 10pc of children aged 10 to 11 are obese. Starkly, that leaves all but two. It follows a similar move in neighbouring Gateshead, which has banned new takeaways since 2015.

The first problem is the lack of thinking in this iteration of the model. The complaint is that there are lots of fast food shops. OK, so that means that it’s a low margin business - lots of competition does that, destroys profit margins. Now, why would a low margin business cluster in the low rent areas of the city? Anyone? Bueller?

Ah, good, so that’s obvious after 30 seconds of thought. OK, if a local councillor, perhaps 5 minutes thought.

But it’s worse than this. Consider their measure in use there, that counting of child obesity. As Chris Snowdon has been shouting for many a year the numbers are an entire fabrication. The input into this model is an entirely made up - and wrong - output from an earlier incorrect model. This isn’t going to work you know.

As with the worries over AI and LLMs. If the input to this iteration of the model is going to be the incorrect output of the last then government is going to end up hallucinating. We end up being GOSPLAN’d as pointed out elsewhere:

For exactly the same reason too - there’s no looking out the window at reality going on to error check the inputs to the next set of output generation. Which is exactly what happened at GOSPLAN of course. The Five Year Plan said that tractor production would rise 50%. As the Five Year Plan was over-fulfilled - as they always were - then that meant that there were more than 50% more tractors. Therefore Kazakhstan could all be planted with wheat despite everyone in Kazakhstan awaiting a horse let alone a tractor. The Plan then insists that as all Kazakhstan is now planted with wheat there is enough bread for all and so the system collapses - for no one did count the tractors nor even ask the wife about the queue at the bread shop.

Now of course GOSPLAN was extreme and we’re not - aha, aha, aha - doing anything so damn stupid. Except, of course, we are.

At which point the only interesting question is how do we get them to stop doing this? Our own answer tends to simply having less government so that there’s less for them to go mad about.

Tim Worstall

The effect of shipping upon inflation

We do tend to think that this is a really bad idea.

Weber has highlighted the case of shipping companies, which profited from a jump in the demand for goods, including medical supplies, during the pandemic. Can it be true that the only way to overcome a rise in shipping costs when the next crisis hits will be to increase the number of container ships, even though that will take years and no government is going to build them and park them in a port ready for an emergency?

She reckons shipping costs added a full two percentage points to inflation between 2021 and 2022. Surely the solution is for governments to take a large slice of the profits and use it to subsidise prices?

There was indeed a jump in shipping costs. 500%, 600%, that sort of level to get a container across the oceans. As the source itself, an IMF paper, says:

The pandemic spike in shipping costs is more than a year behind us, and our research suggests that we should already have seen most of its inflationary impact by now. Our estimates, moreover, are symmetric, such that declines in shipping costs would tend to bring inflation down in the following year. The implication is for the big moderation in shipping costs in 2022 to contribute to a reversal of inflationary pressures.

Things change, prices change, then things get back to normal as the effect of price changes work through the system. Sounds pretty good to us. In fact that looks like the price system working to us.

At which point the suggestion is to cripple the price system by confiscating righteously earned profits and using them to subsidise. Which is, as we say, something we think is a really bad idea. If we’ve a system that works then why wouldn’t we allow it to, well, umm, work?

Those excess profits being why it does work of course. For the increase in shipping capacity comes not from people launching new ships - takes two to three years from ordering a new one to being able to sail it away. It comes from owners not scrapping old and inefficient ships. Things that are no longer profitable to sail or charter because it’s being outcompeted by newer, larger, more efficient shipping stock. But which can indeed still run for another few years if only the price of shipping rises. Therefore it becomes the scrap yards that are empty as that old stock is run for a little longer thereby increasing shipping capacity and bringing shipping costs right back down again. This is such a well known feature of the market that even the European Union has noted it (last para, page 2).

As ever, the cure for high prices is high prices. Yet the suggestion is that we should short circuit the very process that makes this work? As we say, a very bad idea indeed.

Tim Worstall

Yes, of course mistakes happen

There are, as all of us with ageing body parts know, times when things go wrong. There are those who suggest that if only we got all the clever people into government and had them handle it there would be fewer of those things that go wrong.

They could be right of course:

A ship due to be delivered to Scotland’s state-controlled ferry operator will arrive months late, adding to a capacity crisis that threatens to cut off island communities.

The MV Isle of Islay had been scheduled to arrive with CalMac in mid-October but will now be delivered at the end of the year amid a steel and labour shortage at the Turkish shipyard where it is being built.

Contracting out to the private sector. Tsk, months late, the winter sailing schedule will be disrupted. Obviously, we should have a mission specific plan with strict conditionality in order to remedy matters. In fact everything should be run that way because, clearly, that private sector just cannot cope:

The development comes as a fresh blow to the SNP as two other vessels being produced by a nationalised Scottish shipyard run six years behind schedule and £250m over budget.

Ah, you mean that direct government involvement is worse? Possibly 24 times worse, the difference between 3 months and 6 years late?

Well, we do live in a world of the second best, the task being to find the least bad method, the least bad solution. The least bad apparently not being mission specific government plans with strict conditionality.

Odd that the idea’s currently so popular really.

Tim Worstall

British understatement

Concerning plans to impose censorship upon the internet the claim is made that:

However, critics have said the proposals expose “the sinister and authoritarian side” of Sir Keir’s Labour Party, driving “a coach and horses” through the principle of free speech.

The particular proposal is:

The Telegraph understands that ministers are looking at introducing a duty on social media companies to restrict “legal but harmful” content.

It could mean that firms are required to remove or suppress posts spreading fake news about asylum seekers or other topics such as self-harm, even if they do not meet the threshold for illegality.

It is suppression of free speech. It is censorship. To merely say that it is is an understatement.

A “legal but harmful” clause, requiring firms to take down or restrict the visibility of content deemed to be dangerous but not against the law, was included in the original Bill brought forward by the Tories in 2022.

However, it was removed because of free-speech concerns, with critics warning it could allow a future Labour government to censor controversial material.

Slippery slope arguments are sometimes to often logically invalid. The slope must exist rather than merely be claimed. But if government takes unto itself the power to determine what we may say - other than the usual restrictions upon incitement to immediate violence - then that slope really is there. For we will end up with it being illegal to question the tractor production statistics. The slope being that politics simply will exercise any such powers that it takes unto itself.

It’s entirely true that some exercises of free speech can be harmful. But not having the free speech is greatly more so, viciously more harmful.

No, this is a terrible idea.

Quite apart from anything else how can a government serve a population if the government doesn’t know what the population is saying?

Tim Worstall

No, this is not a good idea

It’s possible that there are good adjustments that can be made to inheritance and capital gains taxes - abolishing them might be a starting point for discussion - and also possible that there are bad ones. This is a bad one:

“There are some reliefs I think there is a very good case for getting rid of,” Adam says.

If someone buys an asset that appreciates significantly during their lifetime, they can for example pass it on to their heirs. The person inheriting it is then only liable for any price gains since they inherited it.

“That is a particularly silly and damaging feature of the system,” Adam says.

“I think there is something to be said for bringing rates of tax on capital gains more into alignment with income,” he says.

To turn to an actual example that one of us knows about. An estate that will be subject to inheritance tax when that dismal day - hopefully long delayed - arrives. Upon which the suggestion is that CGT is at income tax rates and IHT is also payable.

Within that estate is a position in what used to be Vibroplant. Actually a founding shareholder for a couple of hundred quid or so. That’s how the company started in fact, a whip ‘round among Northern professional engineering types a generation or two back.

At valuation date for IHT the value of that stake (whatever it is, no, not known) will be “stepped up” to current market value not original purchase price. Then taxed at 40%. That’s what this “step up basis” is, that death is a crystalising moment for previous capital gains. Having paid 40% then the starting point for any inheritors is the market value that has already been taxed. Which seems fair enough.

The new proposal is that the 40% is taken then on top of that a 45% CGT on the capital gain itself. Which seems more than a little punitive. Note also that no one is suggesting the return of an indexation allowance so that two taxes are charged on 60 years of inflation, not just real rises in value.

We’d suggest that this is, actually, not a good idea. In fact we’d suggest that it’s a very bad one. 80% taxes and more on productive investments in the British economy would have something of a dampening effect upon productive investments in the British economy, no?

You know, the first rule of economics, incentives matter?

Tim Worstall

Yes, yes, whinge away about the whinging on taxes to be paid - then consider the actual point.

The Royal Mint and the problem with recycling

News that the Royal Mint it to process mobile phones for their gold content:

The Royal Mint has unveiled a “pioneering” factory that will recover gold from electronic waste, creating a more sustainable source of the precious metal for the coin manufacturer’s luxury jewellery line.

The factory in south Wales, which has been under construction since March 2022, is designed to extract gold from up to 4,000 tonnes a year of circuit boards sourced in the UK from electronics including phones, laptops and TVs.

This isn’t wholly new of course. One of us worked on such programmes back in the 1990s when there was a lot more gold in them thar hills of electronics. But this is not to sneer or anything (the “new” is what looks like an interestingly useful new process to do it) but to use it as an example to explain the recycling problem:

It is estimated that about 600 mobile phones will have to be processed to create one of the 7.5g gold rings sold in the 886 collection, which are similar to the weight of a £1 coin.

There will also be a little tin from the solder, copper from the circuit boards and so on but the vast, vast, majority of the revenue will come from the gold. And that’s worth, well, maybe £1 per ‘phone? If there are tens of millions of old phones per year (sounds about right) then that’s money to be thought about, obviously.

But the processing of the ‘phone (or other electronics) isn’t the major cost here. It’s the collection of the ‘phones. And this is always true of any recycling process.

It often is true that a pile of 10,000 tonnes of something (or 10 million pieces etc) is worth feeding into a factory to recycle out the minerals and or metals. But also that creating the pile of 10,000 tonnes (or 10 million etc) costs vastly more than the value of those metals.

For example, the Royal Mint will not give you 50p for that old ‘phone at the back of the third drawer down. But might well be prepared to offer 50p each for 10,000 pieces delivered their plant (No, we don’t know but the logic is obvious, yes?).

Which is why recycling schemes always need to concentrate on the major cost to them - the collection into the pile at the factory of the things to be recycled. Not doing so is why EU regulations (gold plated here at home of course) killed the extant lead acid battery recycling scheme. The costs of collection were such that the £5 of lead in each one was only worth 50p at the garage when picked up. Regulation started to insist on a £25 document for the movement of used lead acid batteries. That kills the economics even though the factory to do the processing existed and was, in fact, gasping for stock (the Chief Buyer for that factory was met by one of us at a conference in Russia in fact, so far he had to go to try to replace his feedstock).

As we’ve said many a time we’ve absolutely delighted when people do economic recycling. It makes us all as a society richer. But the economic part of it has to concentrate on the collection costs because that’s where all the major costs are.

Tim Worstall

We’re really not sure why MMT has such difficulty understanding QT

Apologies for the use of Professor Richard J Murphy again but he does provide such useful straight lines:

….I can see no policy reason why quantitative tightening has been done.

Professor Murphy is indeed one of the UK’s leading Modern Monetary Theory advocates and theorists. He was much in evidence when Jeremy Corbyn started touting the Magic Money Tree for example.

OK, we know what that is, monetisation of fiscal policy and it’s in all the textbooks as such - along with the appropriate warnings about it.

MMT does say some true things. A government can just print money and spend it. This is entirely true - monetisation of fiscal policy. As long as there are unused real resources this could be beneficial to the economy too. We would argue, strongly, that it does matter which resources and what the money’s spent upon but leave that as a detail for now. We are, for example, unconvinced that massive such spending will make every dole bludger employed while it might soak up an amount of involuntary unemployment.

MMT also says that this policy faces a limitation. Excess money printing and spending will cause inflation. The arrival of the inflation can even be taken as an indication that the money supply is now excess.

OK.

So, when money supply is excess then that money supply needs to be reduced in order to reduce or get rid of the inflation. It’s usually proposed that higher taxation should be that method. The government taxes more, doesn’t spend the greater revenue but just cancels the money collected and inflation reduces.

A fun point that can be made at this point is that MMT is really very monetarist. The money supply is a major, if not the major, determinant of the inflation rate. Therefore the money supply needs to be managed with the inflation rate in mind. How very different the two ideas are, eh?

So, we had lots of that money printing, Quantitative Easing, during Covid, that money was spent into the economy, we got inflation. Therefore we need to reduce the money supply.

We could, obviously, try taxing that money back and government runs a surplus to destroy that money received. But that’s got a certain political difficulty to it. The BoE intends to QT perhaps £100 billion this year. That’s, umm, quite a lot actually. About the total revenue from Corporation Tax and it’s difficult to imagine anyone sentient deciding to double that for a year. Or, an alternative, putting VAT up to 32% (from the Worstall Caculator, Pencil, 1, Back of Envelope, 1). Or raising national insurance by 50% and so on. No, the rich do not have enough money that only taxing them will solve this problem.

Back to MMT - print the money and if there’s inflation then too much has been printed and some must be called back in. We need to do £100 billion, taxes can’t do that, so Quantitative Tightening is the other way of destroying that excess money. We don’t see this as a difficult explanation. We also don’t see - quite the opposite in fact, we’ve bent over to make it consistent with - the standard MMT description of how the economy works.

We need to destroy the excess money, tax can’t do it, therefore QT. Shrug.

Now all that’s left is to wonder why MMT enthusiasts, even experts, can’t grasp it.

Tim Worstall

What is Stopping Young People from Going Out More?

When we launched our Next Generation Centre back in February, we made clear our intention to address the issues, both major and minor, facing young people in Britain today. Of course, big, existential challenges such as housing supply, family formation, and job opportunities are the main focus of our work - but we also recognise the importance of the smaller lifestyle considerations which influence the lives of young people. One such consideration is the state of the country’s nightlife, and broader hospitality sector. The opportunity to eat, drink, and socialise with friends, colleagues,  and loved ones is an important part of being young. But burdensome taxation, cumbersome regulation, and restrictive licensing rules are stifling the ability of hospitality businesses to provide this much-valued service.  

That’s why, in April, we released our ‘On The Rocks: London’s Nightlife in Crisis’ paper, analysing both the challenges and opportunities of London’s struggling nightlife scene. We highlighted the challenges that the sector is now facing, and proposed a number of policy solutions, including cuts to VAT and Alcohol Duty and enforcement of the ‘agent of change’ principle in planning decisions. 

Following on from this paper, it has been a privilege to strengthen our relationship with the Night-time Industries Association, the country’s leading advocacy body for night-time industries. We were also delighted to support  the NTIA’s Consumer Survey, which was launched back in June, and which aimed to identify the underlying reasons for changing consumer behaviour in this space, namely the relative decline in engagement with nightlife by younger people. Given that one of the core assumptions of our research was that young people are being deterred from enjoying the UK’s nightlife scene both by the general rising cost of living, which has left them with less disposable income, and the increasing cost of a night-out,  we were excited to have access to a quantitative assessment of whether or not this core assumption holds true in reality.

On behalf of NTIA, Obsurvant conducted 2,338 surveys amongst a nationally representative sample, on the 19th and 20th of June 2024. 56% of respondents reported participation in social activities out of the home several times a week, with this figure jumping to 68% amongst those under-25 - proof positive of our assumption that the state of the hospitality sector is having a disproportionate impact on younger people. 51% of respondents stated that they felt an increased desire to go out over the past year, with cost and poor public transport provision highlighted as the two biggest barriers to going out more often.

These trends are only reinforced by the responses to the question of ‘what changes in your personal circumstances have impacted how often you go out?’. 50% of respondents under 30 cited changes in their personal financial circumstances, a factor which cannot be disaggregated from rising costs in the hospitality sector, as the primary factor in shaping how often they go out. Since early 2022, energy prices for hospitality venues have risen by an average of 65 per cent, while rental prices in London for retail prices now sit an average of 3.8% higher than the pre-pandemic peak.  

Almost no respondents reported a change in circumstances as a result of a decision to stop drinking - 22% of respondents cited broad changes in health status, but a minority of these respondents have given up on drinking entirely.

From a qualitative perspective, the same trends abound. Many respondents cited lower tax and improved public transport as two ways in which Government could improve existing nightlife provision - one 18-24 year old in England specifically highlighted ‘lower tax on alcoholic drinks’ as their proposed solution, while one 31-40 year old in England mentioned ‘better and cheaper public transport provision to make it easier to get around.’ These findings mirror the recommendations of our ‘On The Rocks’ paper, which called for an expansion of the Night Tube, provision of late-night National Rail Services, cuts to Beer Duty and VAT, and a freezing of local alcohol levies.

Safety was also a concern for some respondents, who mentioned feeling intimidated when returning from a night out. Once again, this was a concern highlighted in our ‘On The Rocks’ research - we called for an increased police presence around major transport infrastructure at times of increased demand.

By and large, it’s encouraging to see yet more evidence for our prescriptions on London’s nightlife. If it wants to make an immediate impact on the lives of young people, and demonstrate the power of slashing tax and red tape, the Government should make an intervention in this space. In the long term, such a tax cut would result in no long term cost to the Treasury. According to dynamic analysis conducted by UK Hospitality, which studied the impact of VAT reductions over a ten-year period, a reduced rate of 12.5% would deliver a net fiscal gain for the Treasury of £4.6 billion, driven by additional hospitality trade amounting to £7.7 billion in value - if nothing else, this £4.6 billion could serve as a nice stop-gap for Rachel Reeves’ fiscal black hole.

A nightlife intervention would be popular, impactful, and fiscally prudent - what’s not to love? It’s time to cut back the red tape, and allow Britain to party again.

Apparently we need government research to reveal the blindingly obvious

Now that Torsten Bell is just an MP, not the head of the Resolution Foundation, we seem to be getting teaching granny to suck eggs moments:

Government research finds a 1% increase in housing stock drives a 2% fall in house prices or rents

Well, yes, obviously.

This is not a surprise. Further:

The amount of floor space the average private renter has is down 16% since the 90s

Equally obvious. We’ve noted a number of times that British new builds are the smallest in Europe. Chicken hutches are what are put up because we nationalised land development back with the TCPA in 1947. Nationalisation and planning mean shortages after all.

In truth, richer households can always secure a decent home and it’s too often the disadvantaged who lose out on there being too few homes.

Of course, the richer can buy their way out of shortages, the poorer cannot. When food’s expensive it’s not the rich on involuntary diets now, is it?

Yes, those on higher incomes tend to move into new builds initially, but generally everyone enjoys bigger, better homes. And who is the floor space boost biggest for? Those on the lowest incomes. Building is an agenda for the many, not the few.

Again, obviously and as we’ve been saying these decades.

This is all blindingly obvious and has been for those decades we’ve been shouting about it. The reason British housing is as ghastly as it is and ghastlily expensive to boot is because the ability to build new housing was nationalised. Therefore the answer is the privatisation of planning - blow up the Town and Country Planning Act 1947 and successors: Proper blow up, kablooie.

Yes, it’s entirely true that building houses that Britons wish to live in where Britons wish to live is going to annoy an awful lot of bourgeois Britons. But that’s not the point of neoliberalism at all - we hold the keys to how to make life better for the poor. Less government, less planning, more markets and more capitalism red in tooth and claw. Which is exactly how we’re going to get more, larger and better houses for Britain’s poor. Which is, of course, why we need to do that kablooie bit.

77 years of nationalised land use permissions has left Britons living in hovels. We should, you know, change that.

Tim Worstall

Tim Ambler (1937-2024)

We are sad to report the death of our friend and author Tim Ambler. 

With us he published a number of reports and articles on regulation and deregulation, including Deregulation: Road Map to Reform (2005), Deregulation or Déjà vu? (2007), Reforming the Regulators (2008), The Financial Crisis: Is Regulation Cure or Cause (2008), Financial Regulation (2009) and Regulatory Myopia (2009). 

He became Senior Fellow of the Adam Smith Institute and was the author of our major study on reducing the bureaucracy, Shrinking Whitehall (2022). He was a frequent contributor to the Adam Smith blog and gave evidence on our behalf to parliamentary committees.

Tim was in business for thirty years, specialising in finance and marketing. As marketing director of International Distillers, he was the brains behind the success of Bailey’s Irish Cream, and also marketed Smirnoff vodka and Croft sherry. Later he became Senior Fellow in marketing at London Business School, writing important books and articles on marketing effectiveness. Marketing cited him as one of the hundred most effective figures in the marketing sector, and the Chartered Institute of Marketing named him as one of the fifty top marketing experts worldwide.

A larger than life man of many talents, after retirement Tim composed church music, which has been performed at many venues including Westminster Cathedral. At the other end of Victoria Street, he will be remembered for the caustic wit he directed at (most) politicians and bureaucrats. His no-nonsense approach to public policy will be missed.

Tim Ambler, 1937-2024