Let's make fracking easier by increasing bureaucratic delay!

The Telegraph tells us that there will be more consultation on fracking permits:

In a development that will be welcomed by opponents of fracking, the Environment Agency (EA) said the “current level of public interest” meant that the permitting process was likely to be extended to allow for more consultation.

The Purple Scorpion points to the actual document and then comments:

"The high public interest status could mean an extremely lengthy process", says a lawyer, "taking into account a number of rounds of community consultation". "Given the current level of public interest in unconventional gas and oil exploration, it's likely that we will treat such sites as being of high public interest," the Agency said in the document on its website.

But here's what is actually meant. The Government has decided that fracking would be a good idea and wants to make it simpler and faster to gain a permit to do so. This unelected quango has decided to scupper that desire. Instead of it being "You've like a fracking licence? Here you go" they're going to insist upon lengthy public discussion periods for each and every licence. Effectively, every nutter in hte land will be encouraged to shout out the same old stale, and wrong, arguments for each and every licence.

I've said before that I'm not surprised that economic growth has slowed down in recent decades. We're issuing ever more red tape that stops people from actually being able to do anything: why be surprised when less is done?

And it doesn't bode well when a government cannot contain or control its own bureaucracy, does it?

The horrors of zero hour contracts

You'll have noticed the calls for the banning of zero hours contracts. What we used to call temping in fact. My problem with this call for the banning of said contracts can be summed up with this comment from Natalie Bennett (Leader of the Green Party).

Imagine you get a phone call at 6am each morning, to tell you if you’ll get any work – or pay – each day. You’re awake, dressed, waiting, then it’s “stand down”. That can happen five days in a row, and you’ll get to the end of the week without a penny coming in to your pocket.

No, I don't think I would like to get up at 6 am every day. However, let's just change this a tiny bit:

Imagine you get a phone call at 11am each morning, to tell you if you’ll get any work – or pay – each day. You’re awake, dressed, waiting, then it’s “stand down”. That can happen five days in a row, and you’ll get to the end of the week without a penny coming in to your pocket.

There doesn't seem all that much difference there really. But that second type of work offer has people lining around the block, shouting, screaming even that they'd just love to be employed on such terms. For that's how the opinion and comment pages of the national newspapers are written.

You get up at whatever time, look around for the stories that an editor might be interested in. Then phone them up and pitch them in that small gap between their arriving at work (10 am) and the editorial meeting (11 am). Then you wait for your phone call at noonish which will tell you whether you have been chosen as one of the lucky ones to scribble something for the paper's readers. Note that the actual writing is the smallest part of the work routine: finding something to be written about is what takes the time and effort. Yet you'll only ever be paid if you do the easy part, the writing, and never for the research.

It's a job I've done and was happy to do too. As, obviously, everyone else who write freelance comment pieces is.

There are therefore two things that grate about this shouting that zero hours contracts must be abolished. The first being that it does seem odd that everyone else be denied the joys of the sort of contract that we metropolitan media luvvies think quite normal, desirable even. The second is that Natalie Bennett, the Leader of the Green Party, used to employ people in such a manner when she was an Assistant Editor at The Guardian. It just grates, that's all.

Coming around to the Austrian view of investment and recessions

I don't think it's any surprise to anyone that Madsen and Eamonn, here at the ASI, are rather more Austrian in their view of the world than I am. This is partly just because they are but also because I'm not really sure that I believe in any school of macroeconomics at all. I can see that there are useful things pointed out by all of the different schools: quite happy to accept that the New Keynesians have a point about sticky prices and menu costs, the Marxists aren't entirely wrong to think that class can sometimes matter (which Englishman could reject that basic point?) and so on and on. But I'm also extremely doubtful that any of the various schools manages to capture the full complexity of the economy in the way that, say, the microeconomics of prices and incentives captures activity at that level.

However, this story certainly supports one prime contention of the Austrian story:

Spain's €1bn white elephant airport could be yours for just €100m The first private international airport in Spain that turned into one of the country's biggest white elephants is being sold off for just €100m.

A vast airport built where very few live, fewer go and apparently almost none wish to fly to. This is very much he Austrian story about recessions: the boom times allow monstrosties of this type to be financed and built. A misallocation of capital in fact. And once the system gets sufficiently clogged with such misallocations then recession is going to happen. Further, we'll not return to growth until these misallocations are liquidated and we're back to allocating our capital sensibly, not on these white elephants.

What turns people off this Austrian view is that it almost seems to glory in the bankruptcies which are a necessary part of cleaning up the messes of the previous misallocations. Which isn't quite what is being said: rather that this is a sad necessity which we've got to go through so we might as well recognise that. And as I say, this particular case shows that there's at least one solid truth in that Austrian view.

Demand Matters

Markets are about supply and demand. Scarcely a more banal thing could be said in economics, and yet some of the time it seems like free-market economists look only at supply. Glance over policy recommendations from a free-marketeer and you'll often see only tools for freeing up supply—labour market deregulation, planning reform, a bonfire of the quangos, an end to unbalancing subsidies or tax breaks, liberalisation of trade barriers. These are all fantastic things, which we definitely need. And even through the visor of the AS/AD model, even in a slump, these can make things better both by cutting prices and by raising wealth. But either deliberately or unconsciously, these economists are completely avoiding the demand side.

Is this because there are no doctrinaire libertarian things that can be done on the demand side? I've certainly heard many policies like quantitative easing called "socialism" by fellow travellers, but I'd like to think that my libertarian-leaning friends were more thoughtful than instinctively dismissing ideas they see as ideologically impure out of hand.

And further than that, there are things we can do to make the demand side more libertarian, at least if we don't make the perfect the enemy of the good. School voucher systems are not decried for their "socialism" by libertarians despite the fact that under these systems schools are still paid for and run by the state. Monetary policies that are more free market (and more sensible) than our current one should be looked upon in the same way. It's not the case that anything short of abolishing the central bank is "socialism"—unless we want to completely devalue the word. And even if an intermediate policy were a form of "socialism" or "central planning", the realistic alternative is not a free market in money, but an abysmal central plan!

What are these intermediate policies that free-marketeers seem to be ignoring? Firstly there is nominal income targeting, which relies on markets both to stabilise demand and to allocate that demand among competing industries according to consumer preferences; and secondly counter-cyclical taxes, which rise automatically in good times and fall in bad times. Those are both thoroughly libertarian and entirely focused on demand.

In fact, the two most important libertarian economists of the 20th century—Friedrich A. Hayek and Milton Friedman—both endorsed demand-side policy, in the right circumstances. Friedman blamed the US Great Depression on the Federal Reserve, allowing a massive collapse in the money supply and aggregate demand. Hayek said that after the inevitable collapse of a misallocated capital structure there could also be "secondary deflations", where aggregate demand collapses and there is a costly adjustment period. Both would support monetary policy to deal with this issue—stabilising demand, so as to avoid painful adjustments from big inflationary or deflationary shocks. If money is non-neutral in the boom, why would it be neutral in the downturn?

One response libertarians might make is that Say's Law shows there is nothing we can do about demand. But Say's Law clearly doesn't hold in the short-run, and Austrian economists who rightly critique the assumptions economists often make about equilibria should be absolutely clear of this. In the short-run, a dip in aggregate demand—absent any response from the government, central bank, or hypothetical free banks working together—necessitates a period of deflation. But we know that (at least nominal) wages are sticky-downwards, meaning that calling for an adjustment to the new equilibrium means calling for years of the grave evil of unemployment foisted on millions. Say's Law reasserts itself in the medium- to long-run, and by then the misery and destruction of potential wealth has all already happened.

What libertarians are missing is that the relentless focus on supply is leaving them almost completely out of the conversation, and thus leading to worse policy than necessary. If free marketeers were talking about the best things to do on the demand side, as well as on the supply side, then there would be less of the all-eggs-in-one-basket big project spending stimulus, and more diverse market-oriented ways of countering the demand shortfall.

Kick the 'wise men' out of the Bank of England

In today's City AM, newly-minted ASI fellow Lars Christensen (aka The Market Monetarist) writes on the 'Carney rule'. The Carney announcement is a tiny step in the right direction, he says, but as long as the 'wise men' of the Monetary Policy Committee are running monetary policy, policy will be erratic and unpredictable, preventing adequate planning by firms and adding to market panic in economic downturns. Instead, we should have a strict rules-based system of nominal GDP targeting:

A much better rule would have been to commit to stabilising the level of nominal GDP (NGDP), a measure of aggregate demand, keeping market expectations of NGDP growth on a 4 or 5 per cent growth path. This should be combined with an open-ended commitment to expanding the money base to hit this target. This would avoid the nitty-gritty of the Carney Rule and be clearer and easier to communicate to markets.

Monetary policy based on the discretion of “wise men” leads to market uncertainty and panicky jolts as investors react to tiny changes in central bankers’ pronouncements. Replacing the MPC with rules-based policy would bring discipline and predictability to the Bank of England far beyond what was outlined yesterday.

I would prefer to have no Bank of England at all, with money emerging from the market as outlined by Hayek in 1976. Having said that, perfect is not the enemy of good — replacing the discretion of 'experts' with predictable, market-led rules would be a huge step in the right direction. If Carney's new rule fails, it may come on to the agenda sooner than we think.

Could people please stop trying to plan losers for us all?

An oft expressed contention is that if only we allowed those wise people in Whitehall to plan more of our lives then the future would be made so very much better that we won't mind paying the costs of having those wise people in Whitehall. One problem, among many, with this idea is that it does require the people we're paying for to be wise. Not something that I'm really willing to bet on, that. The Very British Dude makes an excellent point here:

.....the biggest change to transport technology on the horizon, the driverless car. Instead, the Lib-Dems are wibbling about High-Speed Rail which will be almost completely obsolete by 2050 as everyone will be snoozing in their own autonomous vehicles. Such vehicles will run door-to-door on a vastly greater network of tracks (let's call them "roads" shall we?) than any train network will ever be able to compete with.

This is exactly right I think. The planning that we're being offered is that we should have more of a 19th century technology in the 21 st century. And it's entirely ignoring the coming impact of a 21 st century technology.

The arguments in favour of HST and other fast trains etc are capacity and speed. We want or desire a rise in the capacity of people to move around the country simultaneously. And we also want to increase the speed at which they do so because time spent travelling is "dead time". That latter isn't really true what with mobiles and notebooks: and it most certainly won't be true when we're all sitting in the back seats of our Wi Fi enabled cars. Such cars will also solve some to all of the capacity problems: the current road networks can carry a great deal more traffic if it isn't all being directed by that all too fallible few pounds of meat called the human brain.

I will admit to being a little unsure about how quickly computer controlled cars are going to be rolled out. But it wouldn't surprise me at all if they were actually commonplace before anyone even starts breaking ground on HST. Which would be an interesting example of spending £40 billion on a project that was outdated before it was even begun, wouldn't it?

Mark Carney bottles it with baby steps

Mark Carney had the leeway to make radical change here but he's bottled it with baby steps.

The 'Carney rule', promising low interest rates and the possibility of more quantitative easing (QE) until unemployment is low or inflation rises, is definitely an improvement on the current regime. It gives firms clearer guidance on the future stance of policy, removing some of the uncertainty in the world economy today. I expect it to deal with some of today's demand shortage, and more importantly tomorrow's expected demand shortage.

But unemployment and inflation come from both aggregate demand (which the bank can control) and aggregate supply (which it has essentially no control over). Since neither of these numbers distinguish between changes in supply or demand, the Bank is still fumbling in the dark with its guesses over whether a change in inflation comes from demand (which means it should react) or supply (which means it shouldn't). This means firms are still left guessing, and it means that uncertainty still reigns.

What we really need is a truly rule-based system that takes discretion away from nine 'wise men' and uses market forecasts to create real stability. That system is nominal income targeting.

Apparently government does all the innovation around here

We have a new contender for silly economic theory of the year here. Marianna Mazzucato's book on how it's really the State, government, that invents everything and that therefore we must, umm, well, I'm not sure actually. Either allow the state to carry on inventing everything or tax everyone more.

Second, government has also increasingly accepted that it funds the risks, while the private sector reaps the rewards. What is emerging, then, is not a truly symbiotic ecosystem of innovation, but a parasitic one, in which the most lossmaking elements are socialised, while the profitmaking ones are largely privatised.

I've already spluttered and sworn about that one elsewhere. When the state takes 50% of all of the entire economic output of the entire country, evertyhing produced in aggregate by every man woman and child in the nation, quite how we can describe any profit at all as being privatised I'm not sure. But there's a larger error at the heart of the argument:

Conventional economics offers abstract models; conventional wisdom insists the answer lies with private entrepreneurship. In this brilliant book, Mariana Mazzucato, a Sussex university professor of economics who specialises in science and technology, argues that the former is useless and the latter incomplete. Yes, innovation depends on bold entrepreneurship. But the entity that takes the boldest risks and achieves the biggest breakthroughs is not the private sector; it is the much-maligned state.

You can prove pretty much whatever you want in any field if you decide to start by ignoring everything everyone else has found out about that field. And the economist who has done the work in this field, about government and private contributions to invention and innovation, is William Baumol.

His finding being that the state, government, and private industry are equally capable of inventing things. Whizzy new machines, whizzy new ways of doing things. He notes that the Soviets managed to make a satellite and a rocket to get it into space and there's pretty much no economic system more state directed than that Soviet one. However, he then goes on to note that innovation is not the same as invention. Innovation is the process by which these whizzy new things disperse through the society (the take up of new technologies if you like) and also the rate at which people find interesting things to do with this whizzy new invention.

The importance of this being that the innovation side is done vastly better by a private sector, a market based one. Technological adoption is faster, more things are found to be done with the invention and so on.

A perhaps even more potent example is the information and communications revolution. The US National Science Foundation funded the algorithm that drove Google’s search engine. Early funding for Apple came from the US government’s Small Business Investment Company. Moreover, “All the technologies which make the iPhone ‘smart’ are also state-funded ... the internet, wireless networks, the global positioning system, microelectronics, touchscreen displays and the latest voice-activated SIRI personal assistant.” Apple put this together, brilliantly. But it was gathering the fruit of seven decades of state-supported innovation.

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. And it is worth noting that absolutely no government anywhere has managed to come up with anything remotely approaching a smartphone. Which is, as I'm sure you'll be fascinated to learn, the technology with the fastest adoption rate globally of any technology ever.

Or, as Baumol didn't quite say, the Soviets did manage to put a satellite up there but 50 years after that they'd still not managed to make a domestic washing machine that worked. And as Ha-Joon Chang rightly observes, the washing machine has done more to reduce the burden of labour, to free women from its shackles, than any other invention. And it did indeed need the private, market based system to do that.

The supermarkets are killing off the independent petrol stations

A complaint from the independent petrol retailers that those dastardly supermarkets are killing off their business. Which I'm sure they are, opening larger stations, selling fuel at cost and so on. Given that this benefits the consumer long may it continue as well. I don't insist that they should not be allowed to complain about this: that's what trade associations are for. To push the interests of their members, just as unions do for their. Only that we don't have to pay all that much attention to such special pleading. However, they make one complaint that is worthy of closer examination. The supermarkets turn over their fuel faster (this being part of why they are more efficient) and this means that there's less stock actually on the forecourts of the country.

Based on the report, the Government concluded that "in the event of a total disruption to petrol and diesel supplies the retail sector holds up to eight days of fuel capacity to meet current demand". But the PRA was already highly critical of the Government's "grossly misleading" conclusions – even before it discovered it had understated the supermarkets' share of the market. Mr Madderson said DECC had misunderstood how the market works: "They are saying we have eight days capacity. In our view it's two to four days, especially if the supermarkets have a bigger market share than we thought."

Is this a problem? I don't know. Certainly I think I'd be slightly worried if I thought that the country had only 30 minutes of fuel on forecourts. What is the right number is I think is a matter of opinion not one of fact. I'd also posit that something that entirely stops the flow of fuel completely for more than two days is probably something that means we've got larger problems than whether we can drive to the shops.

But what interests me here is the other side of this story. So, let us agree, there is only 3 day's supply at the stations, not the 8 everyone thought. What's the implication of that?

Annual road transport usage of fuel seems to be around 40 million tonnes. 5 day's worth of that is some 500k tonnes, or in litres (assuming petrol is equal in density to water, which is close enough) and at a price of £1.35 a litre, that's some £675 million.

That is, in order to support the road transport system, supply it with fuel, this reduction in the stocks has led to that £675 million's worth of fuel not just sitting around in the system. The capital requirements to support the stocks in the system have therefore declined by exactly that £675 million. If you prefer, the amount of capital that has to be allocated to the transport fuel system has declined by that sum, a sum that can now be used to go off and do something more useful or interesting. Say, finding a cure for Simon Cowell (or is that a cure to Simon Cowell?).

And that's what I think is the interesting point here. OK, maybe 3 day's supply of fuel isn't enough, maybe it is. But there's always another side to these things. In this case, to insist that 8 days is available, someone, somewhere, has to find £675 million to finance that stock. I agree that it is possible that, in extremis, not having the fuel there could cause us all damage. But how much should we all be paying to make sure that greater supply is there? What is, if you like, the insurance premium we should be willing to cough up?

Most importantly, is that insurance premium worth the loss of all the other things we can do with that sum of capital?

As I say up top, I don't know what the correct answer is. But I would insist that this is the right way to consider the question. Increasing stocks at petrol stations might indeed be a nice idea: but it's not costless.

Chart of the week: US household savings rate falls after deleveraging of recession

Summary: Latest GDP revisions also boost household savings

What the chart shows: The chart shows US household savings as % of disposable income

Why is the chart important: The US Bureau of Economic Analysis has just published its most recent major GDP revision. These take place every five years, but the 2013 was more through-going than most, in two ways. First, investment in intellectual property (films, books etc) is now counted as capital expenditure. Second, pension savings is now included in the household savings rate. The revision does not change the past, but it provides a better picture of it. In the case of household savings, it helps explain how US households have managed to deleverage in the aftermath of the Great Recession. However, the recent trend is still for the savings rate to fall. Short-term, that is good news for the economy. Somewhat further out, it is a concern.