The Donald, Elon and efficient government

These ideas are always fun and they also near always run into the usual bureaucratic quicksands:

Donald Trump has said he will hire Elon Musk to save the US money by cutting government costs if he wins the November election.

Obviously, we wish them luck if circumstances make the experiment possible and all that. But the lesson of what Musk has done at Twitter needs to be kept in mind. An 80% fall in staff headcount with an - at worst - mild decline in performance seems acceptable.

But simply to think of firing 80% of the government isn’t quite the point. For the thing that Twitter did was identify what didn’t need to be done any more. Like, armies reading every tweet to see if they should be allowed.

Now, yes, it’s possible to say that people shouldn’t say hurty things online. Our view being that if free speech doesn’t include being able to say hurty things then speech isn’t free enough. JS Mill was right about fists and noses that is. The shift was that if hurty things may be said then the army of hurty checkers was no longer needed.

The same is true of government. It isn’t just that the entire edifice is grotesquely overstaffed with people doing nothing - which, obviously, it is. It’s that government is doing many things which, even under the most favourable analysis, only very marginally need to be done. Not doing those things might - maybe - at that margin very slightly degrade the lived experience. But not having to pay for them to be done will so improve life through fructification in the pockets that overall life will improve.

That is, it’s not that we merely want more efficient government. It’s that we need less government.

The trick to reforming government is not, as so many businessmen drafted into it so often mistakenly think, to do it better. It’s to do it less.

Tim Worstall

Is ‘An Englishman’s home is his castle’

Do English people have a cultural aversion to flats? Is it deep-rooted in our DNA to envision a home to be specifically a house? Or is it just that England's planning history means houses are the majority? Is the market really responding to demand, both presumed and real?

Flats and apartments saw the largest increase (in gross terms) for any type of accommodation between 2011 and 2021 in England/Wales, with 21.7% of households being of this type, up from 21% in 2011.

However, these percentages are still very small compared to the EU, where the average percentage of people living in flats was 47.5%. And it isn’t the Soviet-style Eastern European apartment blocks that are responsible for this large percentage. It is Spain with 65.6% of its population living in flats, and Germany with 62.7%, that are the EU countries with the biggest proportion of people living in flats.

The history of housing in England and Wales gives us part of the answer for our dominance of houses over flats. The UK has the oldest housing stock in Europe, largely due to the Industrial Revolution and a housing boom post second world war, which means our housing stock has expanded outwards and not up. 

The increase in the proportion of flats being built as new housing has several advantages. For example, they are the most energy-efficient property type in both England and Wales. They are quicker to build than houses, and speed will be necessary to meet the Labour government's goal of 1.5 million new homes in the next five years. They also take less land space to build than houses; the average total floor space of a house in England and Wales is 102.75m², compared to 61.5² for the average flat. This makes flats a good solution to the government's anxiety that housing development will infringe upon the Green Belt area (although 90% of land in England is undeveloped!).

Despite housing build trends favouring flats, this doesn’t mean that English people like them. The Department for Communities and Local Government found that 72% of respondents desired the building of more houses, whereas only 14% desired more flats.

Clearly ‘the dream’ isn’t to live in a flat or an apartment, and I wonder why this is. It might be because English flats are typically smaller than houses, which is less desirable considering English houses are already some of the smallest in Europe. Even the British term ‘flat’, as opposed to the more American ‘apartment’, has more negative associations and perhaps contributes to our cultural aversion. 

But does this tell us more about the English psyche than it does about the state of our flats? 

The saying ‘An Englishman’s home is his castle’ emphasises that our homes need to be private. They must be self-contained and shouldn’t be overly shared with other people. Is the thought of living in an apartment block with other people too communal for English people? There’s the horror of meeting neighbours in the corridor when taking the bins out, or hearing the conversations in other flats through multiple shared walls and above the ceiling. 

An Englishman’s castle must also offer freedom, something that a house provides more readily.  For example, in a house you have the ability to relax as you please in a private garden, which flats can’t provide. The pride in buying a first home is a crucial part of the typical ‘English dream’, and the vision it evokes is of a front lawn leading towards the front door, not of a shared corridor. 

There is also something inherently more family-orientated about a house; perhaps it is only a house that can truly be considered a home in the English imagination.

Simply put, an apartment ≠ a castle. 

Ah, there it is, economic casuistry again

Even, what could be described as an attempt to mislead people:

Ed Miliband has been urged to cut household energy bills by £200 with a cap on “pylon levy” charges imposed by electricity distribution companies.

The Energy Secretary is being encouraged to launch a review of the profits made by power distribution networks, which manage the cables that connect homes to the grid. In contrast to heavily regulated suppliers, their operating profit margins can be as high as 42pc.

Dale Vince, the Labour donor and founder of energy business Ecotricity, suggested that trimming the companies’ profits to a lower level could cut £6bn from standing charges – saving customers an average £200.

The trick in there is that word “operating”.

As we’ve noted before - spitting with rage as we did so - this has been tried on the margins of children’s homes operators. The trick is to look at the gross margin before all the capital costs of the infrastructure necessary. The higher the capital costs of the activity - like, say, having a home to put children in - then the higher that gross margin that can be shrieked about. Exactly the same trick is being used here. For the regional electricity distribution companies absolutely none of the costs of having a regional electricity distribution network are included when calculating that 42pc. But, you know, having the wires and the pylons and there substations and all that is a pretty important part of being a ‘leccie distributor.

Once we do account for all that properly:

He argued that because the industry was highly capital-intensive, a better measure would be return on capital – which averaged around 5pc.

Imagine that - no, go on, just imagine - the government ran these. Borrowed at those famously low rates that government can borrow at. Base rate is 5.25% at present, so the cost of the borrowing would be about, -ish, 5%. That’s now much net margin government would have to make to pay the capital costs of having the network. That is, a good guess would be that these companies are making their cost of capital, there are no economic profits, economic rents here at all.

But that claim of up to 42% - that’s simple casuistry, no? That insistence upon measuring profits by operating profits, by the closely akin EBITDA, rather than actually including the capital costs of the existence of the business at all.

Why are they trying to so mislead, gaslight, us all?

Tim Worstall

Clearly, the only sensible answer is to privatise Scottish Water

From The Guardian:

Sewage pollution of Scotland’s rivers and beaches is far more widespread than realised because ministers have failed to take the problem seriously, an environment watchdog has found.

Environmental Standards Scotland (ESS) said there were thousands of sewage overflow incidents last year, and that nearly half of the country’s storm overflows released sewage more than 50 times.

Of those, a third released sewage at least 100 times, and four sites more than 500 times. Few of these incidents were publicly disclosed; most failed to be justified as exceptional.

“It is clear that some sites spill much more frequently than should be expected”,” the agency said, with human health and the environment put at risk. Unlike in England, where nearly all outflows are monitored, only 8% of Scotland’s are checked.

As is well known it is only possible to manage what is measured. The English water companies do measure those sewage overflows. They’ve a lower level of such overflows than Scotland - according to the incomplete information currently available - and also a better record of reducing them in recent decades.

Therefore, obviously, the correct solution is to privatise Scottish water.

Glad we could help here.

Tim Worstall

Are we being gaslit* by the Secretary of State?

The results of the latest renewables subsidy auction are out and the Secretary of State for this sort of stuff, Ed Miliband, says it’s a wondrous example of how he and his newly installed in government confreres have been able to change things. Well, yes, sort of. The change in strike prices was actually announced in November last year. But that’s probably allowable politics - claiming that all good things that happen are your good things is par for the occupation.

There is something that worries rather more.

That’s all in 2012 prices. Because that’s how those prices always are reported. All of those prices are also uprated by CPI from 2012 to whichever year the money is actually handed over. The BoE’s inflation calculator seems to think that inflation this dozen years has been about 40%. Therefore all those prices are, in fact, in actual money paid, upped by 40%.

That is also before a number of variations possible. Page 5 here.

Costs not included in DECC’s standard levelised costs: CfD top-up payments will be paid on the basis of generation after taking account of the generator’s share of transmission losses, known as the Transmission Loss Multiplier so the strike prices need to be increased to account for this.

 PPAs: The revenue received by the generator is a combination of the wholesale price and the CfD top-up, which is the difference between the strike price and the reference price. If the generator cannot achieve the reference price because it sells its power through a PPA at a discount to the market price, the strike price must be increased to compensate for this. PPA discounts reflect route to market costs including the costs of trading and imbalance costs.

 Contract length: The levelised cost is defined over the operating life of a project. If the CfD contract length is shorter than the operating life and wholesale prices and capacity market revenue post-contract are lower than the levelised cost then, all other things being equal, the strike price must be increased above the levelised cost to compensate for this.

We’re not wholly sure about that last but we think it says that if a wind farm falls apart before its scheduled end of life then we’ve got to pay them more for the electricity they’ve produced? We agree that could be wrong, clarification encouraged.

But the thing that confuses us. The Sec of State, Mr Miliband, keeps telling us that renewables are much cheaper than fossil derived electricity. It would, obviously, be great if this were true for that would mean we’ve solved climate change. At those 2012 prices it’s also, just about, possible to make that claim - sure, there are a couple of experimental technologies but the big volumes there etc.

Except that the actual prices to be paid are that 2012 price plus 40% inflation plus those other costs and any future inflation to boot. Which is - at least as far as we understand it - significantly above the current gas derived electricity price.

Which is the bit we don’t understand. Why are prices so deliberately reported in this manner? Why are all the announcements of prices 33% below** the actual price being paid and so not comparable with current market prices? We’re sure there must be a reason for this other than trying to gaslight*** us all. We just can’t think of any that is other than that attempt to gaslight****.

Answers on a postcard to the Rt Hon***** Ed Miliband, 3-8 Whitehall Place, London, SW1A 2EG.

*Aha, aha, aha

**Yes, that’s how percentages work, roughly

*** Aha, aha

****Aha

*****Possibly

They identify the cause of homelessness then ignore it to solve it

As we’ve pointed out a number of times before homelessness - in the sense of rough sleeping - is not, in fact, a problem of not enough housing. Which is something made clear here:

As the light fades in Christchurch Gardens, a man, hooded with a soiled blanket hanging across his shoulders, rummages through a bin. Another is having a violent argument with an invisible enemy under a streetlamp. A drunk retches loudly into a flowerbed.

Welcome to Westminster, the gilded backdrop for a crisis that mixes mental health, drug and alcohol abuse, migration and homelessness into a horror show for tourists.

Yes, obviously, these people are homeless. But it’s not all caused by the lack of homes.

Between April and June this year, there were 752 rough sleepers in Westminster, up 39pc compared to a year earlier, according to the Combined Homelessness and Information Network (Chain).

And?

Between April and June, there were 624 people in Greater London who were classed as living on the streets, according to the Chain. Nearly one in four of them, a total of 143, were in Westminster.

There are a number who pass through such rough sleeping, there are those who remain in it. Those passing through obviously have had a problem but there is also some system that aids them in coming out the other side. Which is good, obviously.

A quarter of rough sleepers in Westminster have problems with alcohol and 29pc have drug problems. More than half (51pc) have mental health issues while 29pc have previously been in prison and 13pc have been in the care system.

Note that we’ve more than 100% there. There are those with more than one problem. But the problem of those rough sleepers is those problems, not housing itself. From other reports we know that at least some of them have already been placed in sheltered accommodation and then left it again. It’s the inability to cope that is the problem, not housing itself.

OK, so what might we do about it?

It is a problem that Labour is desperate to fix, with a promise to boost social housebuilding,

That’s the wrong answer, isn’t it?

“I haven’t seen the Government actually making the commitment to social rent that is really needed,” says Lord Best, chairman of the Affordable Housing Commission.

Not addressing the cause of the problem in the slightest.

Housebuilders have warned Labour’s target of 1.5m homes over five years will be impossible to achieve and the housing associations who build the vast bulk of social rent homes have warned they do not have the money to ramp up development.

Without a cash injection, local authorities will be unable to fulfil their existing homelessness duties, adds Jasmine Basran, head of policy and campaigns at Crisis.

We had rough sleepers before we had a shortage of housing, we’ll have rough sleepers after we don’t have a shortage of housing. For housing itself isn’t the problem being suffered.

What the actual and correct solution is is another matter - perhaps devolving mental health and addiction care to the community of the fresh night air wasn’t the right decision - but as ever we can only solve a problem if we divine and define it correctly in the first place. That hard core of hundreds of rough sleepers is not caused by a lack of housing. Therefore more housing won’t cure it.

Tim Worstall

Behavioural Economics in Public Choice

I have been writing on the different schools of economic thought through the ages. One interesting take-away from the last half-century is how much economists’ attention has been drawn away from mechanical, macroeconomic explanations and towards how people actually make their economic decisions. There is, for example, a revival of the Austrian School, which stresses the subjective nature of values and economic choices; the Public Choice School, which looks at how collective decisions are made, and the consequences of that for economics; and Behavioural Economics, which attempts to bring human psychology into the study of personal choices.

At the heart of the Public Choice School approach is the idea that every stage of the democratic decision process — from elections, through the legislature, to the bureaucracy that implements the laws and the judiciary that interprets them — is riddled with self-interest, leading to decisions that are irrational and often factional. And for its part, Behavioural Economics hinges around the idea that natural biases in the way human beings see and respond to events also creates some shocking irrationalities.

Behavioural Economics has applied this psychological approach largely to the ways that individuals make choices. But I wondered what might be revealed if we took it into the making of collective decisions. Is there more than mere self-interest at work? Is the democratic process not riddled with other psychological biases too.

To start with, one of the strongest natural biases identified by Behavioural Economic is risk aversion. It is why bad news sells newspapers; we are much more alert to and concerned about bad things than good ones, partly because bad things can be fatal to us. But this shows up in the public choice environment too. I saw an example of this in the Thatcher era, when a UK-wide private hospital company decided to bid to build and run a new NHS hospital. Department of Health bureaucrats were so keen to cover their own backs that the tender documents with all their provisos formed a metre-high stack, requiring the company’s response to be even higher. And how did the bureaucrats respond to this bid to run NHS provision in a completely new way? After two months of silence, the first question they asked was what kind of cutlery would be used in the staff canteen. 

Can’t be too careful, they say. But yes, that was too careful, and indeed the political system abounds in being too careful. We pass laws and regulations that attempt to keep people completely safe from harm. It is irrational, because the extra cost of guaranteeing that extra featherbedding is huge; and overprescriptive regulations thwart people from trying new ways of doing things that might just prove more productive, and even safer.

As we make our way through the other cognitive biases identified by Behavioural Economics, we see the democratic — i.e. political — system falling for every one of them. Bounded rationality, for example: rather than consider very possible implication of every possible option, we tend to follow ‘rules of thumb’. And if those work reasonably well, we tend to stick with them (what these economists call ‘satisficing’) even though other rules of thumb might actually work better. In Public Choice terms, Bryan Caplan showed the bounded rationality of electors: they tend to favour government solutions, for instance, over market solutions. As do politicians, of course. And for their part, bureaucrats, especially regulators, tend to assume the superiority of regulation over competition.

How decisions are presented. the choice architecture, also affects personal choices. That is the whole theory behind ‘nudge’ — tell people the downsides of smoking, for instance, and they will probably do less of it. But it works in political decision-making too. Should we have more free trade, which could deliver better choice and lower costs? Well, international competition might also create job losses too, and you can be sure that the media focus will be on the unemployment (risk aversion). No wonder that electors and politicians opt for protectionist policies.

Confirmation bias is another human quirk, where we see and judge things in terms of our own beliefs, rather than against any objective standard. Politicians are particularly prone to this error. Rent controls, for example, make it less worthwhile for property owners to rent out rooms and homes; so they evict their tenants and quit the market. That leads to calls for more tenant security. And if owners can’t evict people anyone but can’t make any money out of them because of the rent controls, they just let their properties fall into disrepair. Which is taken to be proof of how greedy ‘landlords’ are and leads to yet further controls… and so on, until the whole rented sector dries up. Rationally, we should scrap the controls and let the market allocate things. But rationalism is little use in politics.

Politics abounds with another bias, the sunk costs fallacy. The high speed rail link (HS2) between London and Birmingham is costing hundreds of billions of pounds for very little difference in journey time, but so much construction has been done that politicians are embarrassed to pull the plug on the project. The same happened with Edinburgh’s (three times over budget and five years late) new tram system and Scotland’s (also three times over budget and five years late) replacement ferries.

Politicians also make decisions on the basis of salience. What is playing in the media today — prison escapes, dangerous dogs, school truancy — is likely to shape policy far more (and more urgently) than longer term issues — like disincentives in the tax and welfare systems — that might be far more significant in their effects.

The Behavioural Economics bias list goes on. Optimism bias — plenty of evidence for that in public procurement, and projects like the postwar replacement of ‘slums’ with ‘modern’ blocks that people hated even more. Or mental accounting — sticking with 1001 budgets for separate projects, rather than re-thinking spending as a whole (as Canada did in the 1990s). Or the endowment effect of over-valuing what we already have (like ‘our’ ‘precious’ NHS). I have decided to explore all this psychology of public choice in more detail. If we know exactly what foibles are producing such daft public policy, after all, we might be able to do something about it.

What if it’s actually the international bureaucracy to blame?

So, Monkeypox has broken out again and this time around the solution is not just to ask the promiscuous to be less so for a bit. OK. There is a vaccine, why isn’t it available to these who need it?

African nations hit by mpox still waiting for vaccines – despite promises by the west

Last week’s planned rollout of doses faces further delays as campaigners complain of greed and inequality

Ah, yes, we know that one, don’t we? We must overturn capitalism in order to make the world a better place.

“The continuously unfolding injustice of mpox owes to long indifference and inequity, stigma, slowness, anaemic use of public power and yes, greed,” said Peter Maybarduk, access-to-medicines director at US-based campaign group Public Citizen, which signed the letter.

Quite so, quite so.

But we actually have a system to deal with this problem. Sure, maybe capitalism does need to be overthrown but what is going wrong with the system we’ve already got to ameliorate this particular and specific problem?

Unfortunately, a new Mpox variant is now spreading in the Democratic Republic of the Congo and nearby countries. Here’s the crazy part: despite declaring Mpox a public health emergency on August 14, the WHO has not approved any Mpox vaccines. You might think, “Who cares what the WHO authorizes?” After all, the FDA, EMA, and the UK have all granted emergency approval. But here’s the catch: the WHO’s approval is crucial for GAVI, the vaccine alliance that donates vaccines to developing countries. Without WHO approval, GAVI is reluctant to provide vaccines to the Congo. To add insult to injury, the Congo itself has approved the Jynneos and LC16 vaccines. Yet, the WHO refuses to authorize and GAVI to donate these vaccines, citing vague concerns about safety and efficacy.

Oh. The problem is in the international bureaucracy we’ve put in place to ameliorate the problems caused by capitalism. So, obviously, the solution is to abolish capitalism and have more of life determined by international bureaucracies.

Right?

No, come on, it’s obvious. Can’t be any other solution at all. Clearly the world is made better by giving more power to the incompetent, how can anyone think otherwise?

Tim Worstall

Observation of reality is always useful

Yea, even in economics that reference to the actual universe has its merits. Which brings us to the latest idea from Danny Blanchflower and Richard Murphy. Calling themselves the Mile End Economists they are to:

We are not. We believe that what is being done by Rachel Reeves since she became Chancellor in July is deeply dangerous for the people of this country.

It looks as if she is heading to deliver Austerity 2.0, the first version having been delivered 2010. That will be her prescription when she goes to the dispatch box in October to deliver her first budget. And we think she's making a fundamental mistake.

There is this little difficulty. A difficultette perhaps. As one wag has put it about current politics:

It’s bleakly entertaining watching people who’ve spent the last 15 years complaining about austerity now in government and having to face up to the fact that there actually wasn’t any.

Or as one of us put it elsewhere:

Yet the current meaning that has real value among the electorate is that the Tories, the b*stards, just stopped spending government money. Those are the ‘cuts’ they are expecting a new government to simply reverse and let the milk and honey flow again.

Yet the Conservative Party didn’t, in fact, spend the last 14 years reducing government spending: quite the opposite. Large parts of the Labour electorate have however convinced themselves – egged on by a large part of the press – that government spending has fallen and that it will be easy to reverse. But they have been taken in. There is no switch on spending waiting to be flipped.

Or as we’ve said here:

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?

The Mile End Economists are to campaign against an austerity that never happened. Ho Hum. Still we suppose it beats their usual shouting at clouds.

Don’t forget, it’s actually a Labour Party advertisement currently claiming that the Tories overspent. What austerity?

Tim Worstall

The war over so-called Price Gouging

Readers will excuse me for prompting them to delve into their pandemic memory hole, but isn’t it glad to be able to enjoy big events again? Taylor Swift bringing in £1bn to London’s nightlife economy is no surprise, with so much pent-up demand following almost two years (even if some time ago) of being locked indoors. Today, we saw the outcome of a similar flurry of interest - Oasis tickets go on sale. Brace for the coming debate over price gouging, laying in the background of previous Parliamentary debates and in the US with Kamala Harris’ proposed reforms.

Oasis’ return will see a new era in BritPop, a mix of nostalgia paired with new innovations in the performing arts. Safe to say, social media has been going wild in excitement - but something piqued my interest. The jokes about ‘who is going to remortgage their house’ to afford tickets are a meme shared by die-hard fans who have learned the hard way that resales are common.

For those unfamiliar with the reselling market - high-intensity ticket buying (often automated) is common amongst the most popular artists’ fan bases. Within the first few minutes, lines of code and hyper-organised punters will have purchased all of the available tickets, only to turn to a secondary market worth up to $2.82bn a year according to Statis Research. Tickets would return to organic fans at multiples of the price. However, this should be welcomed, rather than banned.

‘Price gouging’ is a necessity - it reflects the true price (and thus, demand) for a very limited product. 90,000 seats at Wembley may sound like a lot, but for a band like Oasis who have sold 75 million records worldwide, it is not nearly enough to facilitate equitable demand. In order to correct for this, selling (or re-selling) at higher prices will ensure that future concert holders will be able correct pricing and maintain the financial viability of their performances, and incentivise even more shows. It also discourages hoarding by some punters, who may seek to get early, cheaper tickets in order to fork them out at lower rates to friends and family - they are free to do so, but it’s fairer if everyone has a good shot.

There will be calls for price controls and regulations on ticket pricing after Saturday. Kamala Harris’ government has already touted price controls to counter “corporate greed”, and given the political osmosis between the UK and US, we can expect such battles to be touted here. But, as my colleague Dr Eamonn Butler has pointed out, evidence from 40 centuries of history shows that price controls never work. They limit supply further, create dangerous black markets, and significantly harm consumers just looking to spend their money as they please. From rent controls to energy price caps to tickets, the Invisible Hand of the market is immutable.

Policy makers have a duty towards consumers to act in a free market, where, yes prices may be uncomfortable, but at least they are right. They should avoid imposing additional regulations and controls on prices, and deafen themselves to grumpy concert-goers about parting with their money to enjoy a concert they wish to pay exorbitantly for. Price controls are straight from the economics black-book. Pure Blunderwall.