Subsidising green tech could be self-defeating

One of the only arguably beneficial impacts of taxing petrol as heavily as the government does is, theoretically, to encourage the production of ‘fuel-efficient’ vehicles. A tax on fuel increases its price and consumers will seek fuel-efficient alternatives to current vehicles. This increased demand has encouraged car manufacturers to develop vehicles that are more fuel-efficient. Since subsidies are the inverse of taxation, the effect of subsidising green technology on innovation is inverted.

Subsidising green technology means that producers have less incentive to continue innovating and producing even more efficient technology since the government basically favours the status quo or a particular benchmark. If we must have subsidies, this benchmark (as in, a certain level of efficiency) must be constantly revised upwards so that: 1. We don’t subsidise as many firms’ products, 2. Cash transfers to firms require constant innovation and improvement. Cutting back subsidies for fuel-efficiency and green technology in conjunction with these high fuel taxes (let’s face it, they’re not coming down anytime soon) should encourage innovation whilst tackling the budget deficit.

A similar logic applies to subsidising solar panels, wind farms etc. because the government has essentially signalled to the producers that, although their inventions are not cost-effective, the remaining burden will be imposed upon the taxpayer. This means that these alternative energy sources will not be developed to their full potential as quickly as they would otherwise be.
Why delay innovation on the basis that we are happy with what we have compared to what we used to have? Surely, we should encourage the production of new, more efficient ‘green’ energy technologies sooner rather than later; this can be achieved by cutting subsidies for existing green technologies and thereby preventing such firms from being comfortable with inefficiency.

Minimum wages encourage hostility towards migrants

Having a minimum wage is what makes ‘illegal immigration’ feasible. Most illegal immigrants are unskilled, poorly paid workers; Epstein & Hezler (2013) say that “Minimum wages play an essential role since they put a limit on local workers’ and legal migrants’ wages. Thus, under certain circumstances, the probability of employing illegal workers is increased.” Incidentally, the authors also suggested that one way to reduce illegal immigration would be to increase legal immigration (assuming a constant minimum wage). According to a survey commissioned by the Migration Observatory at the University of Oxford, “Among respondents who want immigration reduced overall, 54% said that they would like reductions either “only” (28%) or “mostly” (26%) among illegal immigrants”.

Illegal immigrants fill a gap for employers who cannot survive by hiring people at or above the minimum wage and who also cannot attract legal residents that are willing to break the law and work for less than minimum wage. Firstly, if there were no minimum wage, then employers would have less incentive to employ illegal immigrants and would, instead, turn to legal residents to offer their labour for these rates. This would simultaneously empower the unemployed with more opportunities to offer their labour, make entrepreneurship increasingly feasible (especially that of the labour-intensive variety) and significantly reduce illegal immigration.

Whether the contempt toward illegal immigrants is from allegations of criminal activity, taking jobs, etc., this has a spill over effect on the perceptions of immigrants in general. There is an oft-documented tendency for people to stereotype and make sweeping generalisations (even if we are subsequently ashamed of doing so). Hence, any negative perceptions of illegal immigrants contribute to the general degradation of legal immigrants’ status in society.

Furthermore, and perhaps most importantly (depending on who you are), via a combination of both the inflexibility of the labour markets that it contributes toward (and, therefore, of price levels in various other markets) and the controversial illegal immigration that it makes feasible, the minimum wage is one of the greatest barriers to the possibility of free immigration and, therefore, of a world where greater understanding and co-operation between people flourishes.

Mazzucato versus Worstall and Westlake

Marianna Mazzucato’s 2013 The Entrepreneurial State is the most influential book on innovation. Although Mazzucato’s arguments in the book and beyond are many and varied – for example, I’m particularly sympathetic to her scepticism of the uncritical financial support for small businesses – the arguments gaining the most traction are the least convincing and potentially most damaging.

In short, Mazzucato’s thesis is that the state has been the key driver of “innovation” and should therefore take a more active role than they currently do. Central to this, is the policy suggestion that government agencies that fund this innovation should take a cut of the profits from the inventions. Two writers have convincingly unpicked this – the Adam Smith Institute’s Tim Worstall and Nesta’s Stian Westlake.

First, on the point about states driving innovation, Worstall cites William Baumol, who makes the crucial distinction between innovation and inventions. In reference to Mazzucato’s observation that the key technologies that went into making the iPhone were state funded Worstall explains: “Baumol’s point is that the private sector could have come up with these technologies, even though it was the state that did. But only the private, or market, sector could have come up with the iPhone.”

To put it another way, the iPhone is more than the sum of its parts. In an excellent article (worth reading in full), Westlake cites the work of Jonathan Haskel, which “suggests that for every £1 that British businesses spend on R&D, they spend £8 on other intangible investments of the sort that Apple used to make the iPod a success: design, new business models, marketing and software development.”

But perhaps Mazzucato’s biggest mistake is one of policy. As Westlake explains elsewhere, in The Entrepreneurial State Mazzucato suggests that “the state should find ways to share directly in the profits of companies that benefit from government innovation spending. A repayment system needs to ‘reward [the government for] the wins when they happen so that the returns can cover the losses from the inevitable failures.’”

Westlake outline three convincing reasons why this wouldn’t work: “it would be nightmarish to administer; it imposes costs on exactly the wrong businesses, creating both a presentational and a practical problem; and it’s worse than an already existing option – funding innovation from general taxation.” Westlake’s last point cuts to heart of the problem. As Worstall has pointed out in a response to Mazzucato’s response to his criticism of her work:

That governments sometimes produce public goods should not be a surprise. That’s what governments are for in fact. To provide collectively those things that cannot be provided through voluntary cooperation. To then complain that government doesn’t get extra rewards for doing the very thing we institute it for seems most odd. That’s why we pay our taxes in the first place: in order to get those public goods. Why should there then be some extra appropriation when all government is doing is what we asked it to and paid for it to do in the first place?

Philip Salter is director of The Entrepreneurs Network.

Five myths about ISIS

For my money, the very best foreign policy blogger on the internet is anonmugwump. One thing he is particularly good at is skewering popular myths. His latest post is one of the best I’ve read on his blog—an extremely well-sourced and detailed look at five popular myths about ISIS. He shows, in detail, that:

  1. Military intervention probably won’t make things worse
  2. The issue isn’t predominantly political
  3. ISIS is likely a threat to the West
  4. Intervening isn’t a trap
  5. Cutting off ISIS’s funding from gulf states isn’t the best way to deal with it.

To some extent, the following myths are all interlinked. The typical anti-war activist believes that the current crisis is mainly political and financial and so military means are not addressing the primary cause of the rise of ISIS. The idea that we’re going to make it worse through military intervention isn’t just because its failing to address the key causes but because it reinforces what went wrong: Maliki alienated Sunnis and bombs will alienate Sunnis. And somewhat linked but not entirely, they think because ISIS is a response to local conditions, ISIS is not concerned with attacking the West. This post is addressed to these people – their premises are false and so their conclusions and prescriptions are also flawed.

Read the whole thing, as they say.

A very clever way of proving Lord Stern wrong

The particularly controversial part, from an economic point of view, of the Stern Review into climate change was the use of a very low (near zero) discount rate. The discount rate you use of course being vitally important as you try to translate possible future damages into current numbers so that you can compare them with hte current costs of trying to avoid those damages.

The argument was and is that we know that humans are subject to hyperbolic discounting. Given our lifespans we tend not to think about the far future as much as we perhaps should. Thus market interest rates are fine as a guide to events in coming decades but not to things in centuries.

There’s now been a very clever piece of new research which measures how we do actually discount for events in that far future. English property law allows for both freehold land and leasehold: and those leases can be from a century to near a millennium long. Looking at the price difference between the two it is possible to work out that discount rate that we actually do apply:

We use these estimated price discounts to back out the implied discount rate that households use to value cash flows to housing that arise more than 100 years from now. We find the discount rate for very long-run housing cash flows to be about 2.6% per year. Interestingly, we find similar implied discount rates in both the UK and in Singapore – two countries with very different institutional settings.

This discount rate is rather higher than the one Stern used in his report. And the implication of that is that if we use this new and improved discount rate then our proposed carbon tax should be lower, we should be expending less effort in attempting to avert future climate change.

We could, of course, stamp our pretty little feet and insist that humans should not value the future in this manner. That all of us should value things as Stern says we should. But the fact is that we do not: and it’s rather better to try to run the world taking account of the way we all are rather than as certain dreamers would have us be. And the simple truth seems to be that we value damages to people in a century or two rather less than the costs of averting them. So, we should do less to avert them.