The amazingly stupid way the government subsidises renewables

We’ve been complaining about this for a number of years now. In fact, we’ve been complaining about it ever since Ed Miliband lit upon this policy. The manner in which the government subsidises renewable energy projects is, quite frankly, insane:

Two offshore and 15 onshore wind farms have won subsidy contracts in the Government’s first competitive green energy auction, significantly undercutting the prices that have been handed to other projects.

The results of the auction suggest consumers may be paying hundreds of millions of pounds a year too much on their energy bills because ministers previously allocated subsidies without competition, providing much higher returns to investors, critics said.

More generous subsidy schemes should now be reined in and excess subsidies clawed back, they added.

In total on Thursday ministers gave the go-ahead to 27 green energy projects, with estimated lifetime subsidy costs totalling £4bn.

Energy companies were forced to bid against each other in “reverse auctions” with the cheapest proposed projects in each category being awarded subsidies.

There’s part of the insanity. For a decade and more they have not been insisting upon competitive bids. Instead, they’ve drawn up standards for certain technologies and then agreed a level of subsidy. That’s madness.

But sadly, it gets worse. They are offering different levels of subsidy for different technologies. As we’ve long said that’s where it tips over into insanity.

Start from where the government actually is: climate change is happening, we’re causing it and we’ve got to do something about it. That something obviously being reducing emissions by having renewable power supplies. So, what’s the best way of doing this? A series of committees deciding who gets to be the lucky recipient of a cheque? Different amounts of subsidy for different ways of achieving the same aim, reducing emissions by x tonnes?

No, of course not. The correct way to do it is to set just the one price (perhaps a subsidy, perhaps a carbon tax) and then see which technology can best achieve that goal, that reduction in emissions. If, for example, solar can meet the target better than wind then wind should have no subsidy and solar all of it. If onshore wind is better than offshore then no subsidy to offshore, all to onshore.

For we don’t in fact want to have just competition among providers of one technology. We want to have competition among all providers of all potential technologies so as to find out which one solves the problem best.

Whatever one thinks about climate change itself the way that the government has been splashing around our money is simply mad. Yes, under both Labour and the Coalition.

Zero hours contracts, mini-jobs, they’re both ways of solving the same problem

Outrage in all the usual quarters as the number of zero hours contracts is reported to have expanded again:

Nearly 700,000 people are on zero-hours contracts in their main job – a rise of more than 100,000 on a year ago – according to new official figures.

The rise is likely to trigger renewed debate over the widespread use of contracts that offer no guarantee of hours and only those benefits guaranteed by law, such as holiday pay.

Part of this increase is simply that ONS is getting better at counting these jobs, part is a genuine expansion. But there’s a terrible confusion in those same quarters about what this all means:

Let’s not be sour. The bounceback in jobs during the current recovery has been staggering – exceeding all predictions. During the depths of the slump too, although things were dreadful, the UK shed far fewer posts than any of the macroeconomic models suggested. Whereas in the past there had been something close to a one-for-one proportional relation between lost jobs and lost output, for every three percentage points of GDP that disappeared after 2008, only 1% of jobs went up in smoke.

But let’s not be blinkered either. If there is reason to be cheerful in the quantity of jobs in a famously flexible labour market, there is reason to be fearful when it comes to the quality. Underemployment, perma-temping and the recasting of low-grade staffers as “self-employed” hires shorn of all rights were striking features of working life in the recession, and all trends that have been stubbornly slow to reverse in the recovery. That much is reaffirmed every month when the official labour market statistics appear. Nothing, however, sums up the pall of insecurity that has befallen so much of the workforce like zero-hours contracts.

What’s missing in there is the word “because”. We did not have the usual rise in unemployment as GDP fell “because” we had more people on these zero hour contracts. The same is true of Germany, where they have “mini-jobs“. And the opposite is true of places like France where they don’t have this sort of labour market flexibility.

It should be obvious that the bottom end of the labour market is going to be pretty insecure and badly paid. That’s why it’s the bottom end of the labour market. And there’s two things we can do about it.

We can ban low pay and job insecurity. Other countries do do that and we could too. The result would be that we have more unemployment, as those places that do ban such things have.

We could simply accept that the bottom end of the labour market is going to be badly paid and insecure and have lower unemployment as a result.

It is, clearly, a choice. But those are the binary options. We cannot insist on better pay and more security and also have those 3 or 4% of the workforce working. That’s just not one of the options available to us. Those jobs that are being done simply aren’t worth very much. Therefore people won’t pay very much to get them done. Whether that cost is in the actual wages or in the overhead of having to provide security. Low paid and insecure employment or unemployment: which will you pick?

And we should note something else as well. When given the choice for themselves hundreds of thousands do choose those zero hours contracts, those mini-jobs, instead of unemployment. Meaning, to the people who are doing them, that they prefer that option. And we really shouldn’t go around banning something that people are, by the choice they themselves make, preferring, should we?

Economic Nonsense: 15. Protection of domestic industries will safeguard jobs

Sometimes when jobs are threatened by cheap imports there are calls for government to step in and safeguard those jobs by subsidies, tariffs or import quotas.  The aim is to make the domestic goods artificially cheaper by subsidy, or to make the imported goods more expensive by taxing them. Some domestic jobs can be retained, at least temporarily, by this tactic.  But the more expensive domestic goods will not be able to compete on world markets outside the country.  They will find their foreign market share diminishes as people opt for the cheaper ones.

Where subsidies are used, domestic taxpayers are made poorer; where tariffs are used domestic customers lose access to cheaper goods.  In both cases they are paying to support the industry concerned.

Some years ago in the UK the Lancashire textile industry was protected in this way.  It might have prolonged its decline, but it did not stop it.  Mass-produced low-cost textiles were being made more cheaply by foreign competitors.  Eventually the UK textile industry moved to high added value luxury and designer products that sold at a premium in both domestic and foreign markets.  Some UK textile products have become world-beaters, without the need for subsidies or tariffs to protect the jobs they sustain.

The advent of the World Trade Organisation (WTO), which succeeded the General Agreement on Tariffs and Trade (GATT), outlaws most of this kind of protection by multilateral agreement.  This means that calls to protect domestic jobs by such means now fall upon deaf ears.  The government has signed pledges not to engage in such practices, in return for the agreement of its trading partners to refrain similarly.

There are still grey areas, though, with Boeing and Airbus each alleging that the other receives indirect government support.  It is generally true that when governments all try to protect domestic jobs at the expense of foreign ones, everybody loses.  The world found this to its cost in the era of the Great Depression.

Why we shouldn’t clamp down on zero-hour contracts

The Office for National Statistics has revealed that 697,000 people (about 2.26% of employees) are on zero-hours contracts in their main job, up more than 100,000 on a year ago. Such contracts make life uncertain for the employees concerned, who may not know from week to week, or even from day to day, whether they have paying work. Some 33% of those on zero-hours contracts say they would like to work more.

So should we be clamping down on zero-hours contracts? No, we should not.

First, it is absolutely correct that zero-hours contracts have become far more common in the last two or three years. They hovered at about 0.5% for most of the period since 2000. They rose in use quite slowly between 2005 and 2012, then shot up to just under 2% in 2013 and to that 2.26% figure in 2014.

However, the unemployment rate has also come down in the last two or three years as well. In 2011 it stood at over 8%. Now it is less than 6%, and seemingly headed steadily down. Even though zero-hours contracts represent only a very small part of the labour force, it seems reasonable to argue that the two trends are related. The economic outlook is brighter, but is still uncertain; businesses remain unsure about the future, unsure about their markets, unsure of how much they should invest, unsure of how many workers they can justify taking on. A bust-up in the eurozone, for example, or a general election that delivers an unfavourable or unworkable government. might change the outlook completely for many UK businesses. So the only way that they can rationally expand their production, and be ready if things really do boom, it so cut their employment risk. Hence zero-hours contracts.

Remember too that even though the ONS talks about people’s ‘main’ job, they might not be the only income earners in a household. The same is true of those on the minimum wage: many of them will be secondary earners. In fact, 34% of those on zero-hours contracts are aged 16-24 and half of those are in full time education. To them, a minimum wage job or a zero-hours contract, while frustrating, is not a disaster, and the extra income, however low or intermittent, is welcome.

Critics – you know who – say that the government has allowed a ‘low-pay culture’ to go ‘unchecked’. So what would be their solution? Ban zero-hours contracts? Raise the minimum wage yet further? The inevitable result would be that employers would no longer be willing to take the risk of employing so many people. And first to go would be young people, with fewer skills and less understanding of workplace culture than more experienced employees, and secondary earners, often women. There would be fewer ‘starter’ jobs through which young and unskilled people could gain experience, more young people trapped in benefits, and a rise in unemployment more generally.

What will do in zero-hours contracts, of course, is continuing economic growth. As unemployment falls, businesses will find it harder to attract employees, and workers and potential workers can become more choosy about the jobs they take. Zero-hours contracts will once again become a very small part of the employment market. Growth, employment, greater security. Job done, and not a politician in sight.

Better to reverse QE than raise interest rates

That is, of course, a chart of the American, rather than UK, money supply. But much the same has happened to our own money supply under the same QE program. And it’s also telling us that it would be better to reverse QE than it would be to raise interest rates. So the idea that that debt could just be cancelled doesn’t fly we’re afraid.

We all know that at some point we’re going to have decent economic growth again, unemployment will fall to a minimum (that frictional unemployment that reflects people changing jobs, not involuntary unemployment) and that then inflation will start to rise again. We all also know, because Milton Friedman told us so, that inflation is always a monetary phenomenon. And, finally, we all also know that base money creation is more inflationary than credit creation: or boosting M1 leads to more inflation than the same boosting of M4 would cause.

It’s putting those all together that tells us that we should reverse QE. Think through the future: so, we get out of this liquidity trap, this zero lower bound. The velocity of money returns to something like normal. At which point we’ve got two choices as to how to reduce the accompanying inflation. One is to raise interest rates, the standard response. But that works on M4, it slows credit creation. We could also reduce that money supply by reducing M1: reversing QE. And as above, we think that shrinking M1 would have more effect on reducing inflation than reducing M4 would.

Another way of saying the same thing is that the amount we’d have to raise interest rates to choke off inflation will be higher if we don’t reverse QE than if we do. And this will be true for decades to come as we gradually get back to the right sort of relationship in size between M1 and M4. Or, not reversing QE means that we have to accept more economic pain to reduce inflation than if we reverse QE. For decades.

Which rather puts the kibosh on that idea so trendy over on hte left. Which is that as one part of the government owns the debt of the government we could just cancel that debt and reduce the debt burden. But doing that permanently increases that base money supply and thus permanently increases the interest rates we’ll need to slay inflation in the future.

So, reverse QE before raising interest rates.