The EU's method of dealing with climate change always was insane

There have always been multiple layers of insanity to the way that the European Union and various layers of bureaucracy have tried to deal with the problem of climate change. Assuming, for the sake of argument, that there is a problem that needs solving. It is still true that the actual system of attempting to deal with it is, well, doolally. As this little example from Drax shows:

Drax's hopes of securing lucrative subsidies for its biomass conservion have suffered a setback after the European Commission launched a full state aid investigation over concerns the payments may be too generous. The Yorkshire-based power plant is in the process of switching from burning coal to biomass, and was awarded a £1.7bn Government subsidy contract in April 2014 for the third of its six units - subject to state aid approval. The contract would see Drax paid a fixed price of £105 for every megawatt-hour (MWh) of biomass-fired power the unit generated until 2027 – well over double the current market price. Drax shares fell 5pc on Tuesday after the European Commission said it was concerned that the rate of return from the subsidies "could be higher than the parties estimate and could lead to overcompensation".

The first level of nonsense is that they've decided to pick and choose between different technologies. Some, those favoured, will gain subsidy. And that subsidy will be different for each technology. No, bureaucracies are not good at choosing between technologies. Further, if there is to be subsidy it should be one flat rate subsidy for all technologies. Those that can make that standard succeed: those that cannot do not. Without people being able to lobby for just a little bit more subsidy if they can catch the ear of the bureaucracy (as the absurd Swansea Barrage has).

The second level of loopiness is in the actual technologies that have been chosen. Outside those who consume or grant subsidies there's no one at all who thinks that shipping 2.4 million tonnes of low energy wood pellets across the Atlantic is going to do anything at all to reduce either emissions or climate change.

The third level of madness is that having designed such a system the bureaucracy is taking archaeological ages to manage to make any decisions. Market economies, heck, successful economies, do not allow 20 months for the papershufflers to even start hemming and hawing about what is going on. That it's an entirely ridiculous project is true: but that there's simple paperwork delays of this length will strangle any and every activity in the economy. It's better, by far, for there to be the wrong decision, the wrong investment or activity even, than the entire economy grind to a halt while waiting for permission.

This is why we here at the ASI have always been in favour of a carbon tax. We know very well that, whatever the reality of climate change, some fool somewhere is going to do something. So, let's make sure that what is done is minimally damaging and might even have some useful side effects. If emissions have externalities then tax the emissions and let the market sort out the rest of it.

As, actually, Lord Stern recommended. It's just that having taken the argument that something must be done from that Stern Review everyone has rushed off to do exactly the thing that the Stern Review said don't do. Do not use this as an excuse to plan the economy. Rather, use this as a reason to adjust market prices and then use that most efficient human discovery, that market, to make all subsequent changes.

Whether or not something must be done is an entirely different argument from what should be done if something must be. We should not, for the sake of our own future wealth, and that of our children, confuse the two. Yet we've ended up doing what the argument that says something must be done proves should not be what we're doing.

This is simply insane.

Can National Health Sense Be Dawning?

A trio of former health ministers has called, on 6^th January, for a cross-party commission to be set up to review the future of the NHS and social care in England. An epiphany indeed. Alan Milburn (Labour), Stephen Dorrell (Conservative), and Norman Lamb (Lib Dem) should be congratulated.  The NHS has never been a strong card for the Tories and they should be particularly delighted to take this opportunity to remove the rod from their back. This call could be the first step to taking politics out of the NHS and should be welcomed.  Once again we have the prospect of a junior doctor strike brought about by ministerial meddling.  Yes the BMA is intransigent but the lesson of history is that there are no bad soldiers, only bad generals.  Politicians, who know nothing about management, should get out of trying to micro-manage the biggest employer in Europe.

This has nothing to do with privatization: as discussed before, the public corporation should resource internally its core functions and whatever it can do efficiently and economically and outsource the rest.  It should not run blast furnaces to make steel for its own surgical instruments.

Three more strategic changes need to be made and the cross-party review should consider which should take priority: the links with social care, removing bureaucracy and dividing the NHS into right-sized units.  Taking the last first, it is absurd that the NHS Scotland and NHS Wales should both be considered “right-sized” in terms of taxpayer value when one is 60% larger than the other.  Either one is too big or the other is too small.  And Northern Ireland?

And it is still more absurd that NHS England, covering a population 10 times the size of Scotland’s as to be a uniform, standardized organization providing the same uniform standardized service everywhere.  In this logic, Truro is identical with Newcastle but Newcastle is totally different from Edinburgh.

The NHS is too big and needs to be divided into managerially feasible units achieving their own goals in their own ways.

Much of the NHS bureaucracy has been created over the last 70 years in response to ministerial meddling.  Remove the latter and we could have the first ever purge of the time wasters.  A neighbour provided a neat vignette the other day.  “Have you ever wondered,” he said “why it is impossible to find a parking space in the King’s Lynn hospital car park during the week but the car park is empty at weekends?  The number of patients and their visitors are much the same and medical staff not that much reduced.  The bureaucrats have all gone home.”  We should send most of them home permanently.

Finally, as also discussed before, the NHS should focus on “cure” and with “care” managed separately.  They have quite different objectives and need different skills albeit the transition between the two should be seamless.  Keeping those who should be in care in far more expensive NHS hospital beds is bad for everyone.  We need a National Cure Service working closely with a National Care Service.

Well, that didn’t take long did it?  Let’s hope the cross-party review can report and its recommendations implemented before this bright new year concludes.

It's all about power

Many people seek to impose their will upon others. They want others to live as they think they should live, rather than as they might choose to. Many religious wars of past and present have been fought to make others follow beliefs and practices they do not share. Wars of conquest have been fought to bring other peoples under the will and power of the conquerors. It's all about power. Strip away the ideology and verbiage used to justify totalitarian regimes, and look at the practice. It's about forcing everyone to succumb to the orders of the ruling elite, and to lead the lifestyle they insist upon. It is about preventing others from being free agents making their own decisions, and forcing them to surrender to the decisions of those in power. The sanction is force, not persuasion. It can be the physical violence of imprisonment, torture and death, or the forcible seizure of property and the imposition of lifestyle conformity through a monopoly of legal power.

Dictatorships use thugs to beat up, terrorize and murder their opponents. From Russian Cheka to Nazi Brownshirts and Iranian Revolutionary Guards, they bully people into following the leaders' will, and execute or imprison those who do not comply. It's not about persuading and convincing people, it's about forcing them into submission. Even in a modern democracy when street thugs abuse and intimidate opponents, they are bullying, not arguing.

Bolshevism, Trotskyism, and their modern day successors are not about giving power to the people. They are about taking power from the people, making them live out someone else's vision of how they ought to live rather than their own. Unequal people interact to produce an unequal society; since this contradicts the vision of those who favour equality, coercion is necessary to produce the preferred outcome instead. It's all about power, the power to make other people conform to the vision of the enlightened elite.

Censorship of contrary views is the exercise of power, whether done in parliaments or universities. It is not about making society or campuses "safe spaces," but about preventing people from expressing views that others disagree with. It's all about power, the power to silence opponents.

Democracy makes it difficult for minorities to impose their will, but easier for majorities to do so, especially if they claim to represent the moral voice of society. The answer, and it is only a partial answer, is for there to be constitutions and institutions that restrain those who would impose their vision upon us. "We tolerate monomaniacs," said Michael Oakeshott, "it is our habit to do so; but why should we be ruled by them?"

People have falsely supposed that morality checks power. But only power checks power. Power can be restrained by constitutions and institutions only if they are backed up by power to impose sanctions on those who transgress their limits.

It is only a partial solution because the real answer requires a widespread recognition that the price of not having another person's vision imposed upon you is that you do not attempt to impose yours upon them. Your right to withstand power is reinforced if you don't yourself attempt to impose it. It's all about liberty, yours and theirs.

The government finally decides to do something about housebuilding

Not that the government has decided to do the right thing about housebuilding of course, that would be far too much to hope for. But they are doing something:

Ministers want to break the stranglehold on the country’s building industry, with eight developers responsible for more than half of the homes built every year. Under the plan, the Government will arrange for planning permission to be granted at five areas in England and then offer the sites to developers. The sites, which comprise 13,000 homes, will be offered in parcels of 500 homes each to smaller house builders.

We do not believe the idea that the housebuilders are trying to maximise profits by dribbling housing out onto the market at all. We think they're being entirely rational in keeping a stock of perhaps 6 years of housing plots simply because it takes 6 years to move currently unplanned land along to something that has been built upon. Just as we rather expect a coffee shop that gets weekly deliveries of beans to hold a week's stock of beans, one enjoying daily deliveries to keep only a day or so's stock. To us therefore the answer has always been blow up the planning system so as to allow more building.

But let's say that you do believe the landbanking story (although your believing it will put you in company with Polly Toynbee, not somewhere an economic rationalist ever wants to be intellectually). So, if you think there's a cartel monstrously and outrageously hoarding building sites, your response would be to create more building sites of course. Which is what is being done. But instead of creating enough for 10% or so of current new build you would instead, well, you'd blow up the planning system and make absolutely sure that there were many potential building sites, wouldn't you?

You would so expand supply that there could be absolutely no chance of cartel, monopolistic or oligopolistic behaviour. We would return to the planning system of the 1930s. Which was, actually, the last time the private building industry produced the sort of volume of new build we think the country needs and or desires. And which also, as matter of simple historical fact, dragged the country up out of those Depression doldrums.

Hmm, more housing, cheaper housing, an economic boom from the building of it all and we get to kill off a pernicious bureaucracy to boot. All sounds most wonderful: and all we have to do to achieve it is carry out that most enjoyable task of killing off that pernicious bureaucracy. As we've said around here before often enough, repeal the Town and Country Planning Act and she'll be right. And as we also like to emphasise around here, the solution to troubles that government is trying to deal with is often to stop government doing the damn fool things it is already doing, nothing else.

And to complete the trifecta, as we also like to note, it's surprising how often stopping government from doing something is the correct solution to our woes.

Seven reasons not to care about high pay

1. Executives can be worth a lot to firms. When bad CEOs are sacked or new CEOs who are expected to be good are hired, the firm they work for can become a lot more valuable. Apple lost 5% of its value after Steve Jobs died, about $17.5bn. Microsoft became 8% more valuable after Steve Balmer resigned in 2013 – he represented more than $20bn worth of losses to Microsoft. Angela Ahrendts's departure from Burberry in 2013 wiped £536m off the firm’s value; Tesco became £220m more valuable when its CEO merely announced that he would take an active role in managing the firm. Why? Because CEOs make really important decisions that can make or break the firm.
2. Critics of high pay can’t say how much they think CEOs should be paid. The High Pay Centre says it thinks CEOs are paid too much, but how much would be the right amount? They don’t say, and don’t suggest any real way of knowing. They emphasise multiples of employee pay on their website, but there’s no reason at all to think that would be a good way of judging how much a CEO is worth to the firm, and doesn’t even make sense across firms – is the CEO of a giant firm with a low average wage, like McDonald’s or Tesco, less important than the CEO of a relatively small firm with a high average wage, like QinetiQ?
3. CEOs might be much more important now than they were in the 1960s. The most interesting question about executive pay is: why has it risen so much since the 1960s compared to median worker pay? There are a couple of different reasons this might be. One, as Scott Sumner suggests, is that CEOs actually are much more important now than they were (so being a good one is more valuable to a firm). Executives’ decisions probably mattered less when the world was less globalized and markets were less diverse – you knew what sorts of appliances and groceries consumers wanted, and your job was to manage capital competently to produce them. Now, even big firms face rapid destruction if they make the wrong call about what sort of products are going to popular in a few year’s time. As Sumner says, “Think how much Sony would have benefited in the past 10 years if it had had the Samsung management team”.
4. …But tax and regulation probably plays a role too. Economist Kevin Murphy argues that history of executive pay (particularly in the United States) is only understandable in the context of tax and regulatory changes, like penalties on golden parachutes, a rise in stock option grants caused by changes to tax and accounting rules, and “changes to holding and listing requirements that favored stock options over other forms of incentive compensation”. (NB: This doesn’t mean that these rules are bad or undesireable, but they may help us to understand why executive pay is higher now than it once was.)
5. Performance related pay causes executive pay packets to rise on average. Critics of high executive pay often call for pay to be more closely linked with performance – in the form of stock rewards, for example. But as Murphy shows, this actually makes the ‘problem’ of CEO pay even worse, because pay has to rise on average to reflect greater risk. “The payoffs from stock options, for example, are inherently more risky than are payoffs from restricted stock, which in turn are more risky than base salaries.” So the more we try to make CEO’s pay reflect performance, the higher CEO pay will be!
6. Employee representation can be bad for firms. The High Pay Centre’s policy prescriptions are quite modest – today they’re calling for firms to include a worker representative on remuneration committees, which doesn’t sound like a big deal. And it probably isn’t. But employee representation on boards can be a very bad thing: according to a Financial Times report on Volkswagen last year, worker representation on the car company’s board turned the board atmosphere toxic, and led to very bad decisions being made. Reform of bad practices was blocked by the employee-supported Chairman, who worked against shareholders and his own Chief Executive to stop jobs from being cut and working time limits from being raised, ultimately harming the firm. Strangely, the High Pay Centre cites Volkswagen as a success story.
7. It’s shareholder money on the line. Ultimately, it’s hard to see the public interest argument here. If shareholders are really missing a trick and overpaying their chief executives, who loses out? Well, shareholders, in the form of lower profits. And they’re the ones who stand to gain if they can fix that problem. Unless the High Pay Centre can show that the market is completely broken (and pointing to high pay as evidence for this is circular reasoning) there must be an opportunity for a firm to realize that CEOs are being overpaid, to buck the trend, and presumably to prosper. Why hasn’t that happened yet?

On this idea of stranded fossil fuel assets

We were really very surprised indeed to see this assertion being made:

Fourth, in a fast-changing, post-Paris world, we need a real focus on assets. Oil companies are valued on their reserves: but as clean energy technologies such as solar and wind become cheaper and better, how many of these will ever be extracted? To hit climate change targets, an estimated 80pc of the world’s fossil fuel reserves have to stay underground.

That's from Nigel Wilson, who runs L&G, the UK's largest equity investor. And what surprises us is that it's self-evidently wrong. And yet it's also a very popular view: Mark Carney at the Bank of England has been known to sign on to it. The implication being that if the world won't use fossil fuels off into the distant future, the oil companies have reserves that won't be used in that distant future, therefore the oil companies are worth much less than the market currently says. So, of course, sell now!

But it is, as we say, self-evidently wrong. Shell's reserves look like some 6 billion barrels, BP's some 17 billion. Shell is currently valued at $130 billion odd, BP at $64 billion. We're just not seeing the connection there. With oil at $40 a barrel those valuations should be more like $250 billion and $680 billion.

And it's not even true in theory that the oil companies should be valued at the current oil price times their reserves. That is, even if we do try to value them by their reserves. Rather, they're to be valued at the value of those reserves discounted to net present value using the market interest rate.

A reasonable guess at the market interest rate is the yield on stocks, some 4-5% or so at present perhaps. So, discount something of value in 30 years time to the net present value at a 5% interest rate and......it's worth absolutely nothing today, isn't it, to any reasonable level of accuracy?

This does of course speak to the whole point of Lord Stern's Review. We humans are subject to hyperbolic discounting: we discount things in the far future too much. This is why we must use special, lower than market, interest rates to think about said far future. But if we are going to do that with one part of said future, the damages from climate change, then we really do need to use the same technique when thinking about other parts of that future, the values of reserves. Or, alternatively, we could acknowledge that that discounting at market interest rates has made the future value of those reserves spit in terms of today's corporate valuations and thus the worries over stranded reserves is simply because no one is understanding the settled economic science about climate change.

We are strongly persuaded that it's that latter. For we know that it's terribly unfashionable to do so in either political or agitating circles but we are prepared to take those economic arguments seriously in all their implications. Not to assert that they are correct you understand, but to think through what they are telling us if they are correct.

And if Lord Stern is correct about discount rates, which he is in theory as all economists agree even if there's all sorts of arguments from Nordhaus, Tol, Dasgupta, Weizman and the rest about the details of exactly what the rate should be, then there simply cannot be a problem with the value of far future reserves being incorporated into current fossil fuel company valuations. The assertion that we suffer from hyperbolic discounting means that the net present value of the far future is near nothing: and if the assumption of hyperbolic discounting is not true then climate change is something we should do absolutely nothing about at present.

It is, of course, entirely possible to believe in both: both that we must expend great effort today to deal with climate change and also that the oil companies are grossly over valued for the same reason. It's obviously possible because large numbers of otherwise sensible people do believe it. It is not however logical or reasonable to believe in both at the same time.

Minimum wage debate: still not over

The new round of NBER papers is, as ever, interesting. One of particular interest comes from Jeffrey Clemens at the University of California San Diego. He refreshes the minimum wage debate by dialling in on the effect of hikes (a) during the great recession and (b) on lower-skilled individual aged 16-30, finding a fairly substantial effect on that group.

I analyze recent federal minimum wage increases using the Current Population Survey. The relevant minimum wage increases were differentially binding across states, generating natural comparison groups.

My baseline estimate is that this period's full set of minimum wage increases reduced employment among individuals ages 16 to 30 with less than a high school education by 5.6 percentage points. This estimate accounts for 43 percent of the sustained, 13 percentage point decline in this skill group's employment rate and a 0.49 percentage point decline in employment across the full population ages 16 to 64.

The debate is not over, but this does look like a reminder that there's 'no such thing as a free minimum wage hike'.

The coming reversal of inequality

We're consistently told that the current level of economic inequality is unsupportable and that therefore something must be done. You know, that death of capitalism thing and why don't we just all sing Kumbaya together? However, it is rather necessary to work out why inequality has been increasing and even what sort of inequality has been increasing. As it happens global inequality has been falling: the poor are getting richer faster than everyone else so the gap between the top and the bottom is closing. So, that's good from any angle: absolute poverty is being beaten, the sort of thing we worry about, and inequality is reducing, the sort of thing others worry about and we don't. However, inequality within rich countries has been increasing: as before, not something we worry about very much if at all although obviously others do.

But why? And the real underlying reason is that in he past few decades we've added a few billion people to the global labour market. That's really what globalisation has done: and it's why poverty and overall inequality are receding. but that has meant something of a change in relation to capital and labour. Roughly the same amount of capital (and this is true of human of financial capital, true of highly skilled labour or pure capital) is being added to vastly more labour. Relative scarcity thus tells us that the returns to capital (again, both human and financial) will rise as against the returns to labour. Given that capital is very much more concentrated in ownership than labour thus inequality rises.

And that's usually the point at which the analysis stops. Something must be done and usually it's tax capital much more so as to give to labour. But the actual point we want an answer to is, well is this going to continue?

No, actually, it's not:

Based on UN population estimates, the number of people in the developed world aged between 16 and 64 peaked in 2010, while the number of people aged 60 and over will exceed the number of children for the first time in 2047, and more than double from 841m in 2013 to two billion by 2050. In the UK, the average age is expected to rise from 40 years in 2014 to 42.9 by mid-2039, when one in 12 people is projected to be aged 80 or over, according to the Office for National Statistics (ONS).

This is not just a rich world phenomenon. It's almost certainly true that we've reached, or are just about to, Peak Labour. From here on in demographic changes mean that labour is going to become more scarce relative to capital, not as in recent decades in glut. Thus we would expect the relative prices to snap back and thus that globalisation induced increase in inequality to go away again.

Meaning, of course, that we don't need to tax the rich into penury at all.

The re-emergence of the hard left

“Always after a defeat and a respite, the shadow takes another shape and grows again." "I wish it need not have happened in my time," said Frodo.

"So do I," said Gandalf, "and so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given us.”

Some Conservatives short-sightedly welcomed the rise of Jeremy Corbyn to the Labour leadership because they hoped it would make Labour unelectable. It might, but accidents happen in politics. What it has done is to put lunatic policies into mainstream discussion. Because of his official status his pronouncements have to be covered by the media as if they were serious viable policy. We now have to listen daily to ideas that were discredited decades ago. Back from oblivion have come the nostrums of state-run businesses and punitive tax rates on those disapproved of. His appointment of like-minded colleagues has dispelled any notion that he might be a coalition builder and someone who can create the compromises that real-world government is built upon. The fanatical zealotry of some of his supporters, and the hatred they exude towards opponents, gives us some idea of the sort of politics that could be inflicted upon the country.

The danger has to be confronted. The ideas and arguments put out in support of extremist proposals have to be shown to be dangerous, impractical nonsense. These have been tried many times and have failed many times. The arguments for free choice, competition and enterprise, have to be made again and won again. We will play a part in that. Some of what we say will be well-known to some of our loyal readers, but it is worth saying it to a new audience who might otherwise be fooled into thinking that the state can run businesses efficiently, or that government can run people's lives better than they can do so themselves.

We will publish a series of posts which remind people of the core principles of why liberty and markets are usually better than governments and state officials at improving people's lives.  We will look forward, as we always do, and innovate ideas that can address problems and shortcomings with practical solutions.  But we will occasionally look back to the reasons why Socialism failed before, and why it would fail again, were it to be given the chance.

This is what will happen to solar tariffs everywhere, eventually

Interesting news from Nevada: the state now has solar feed in tariffs on a rational economic structure. It's still not all the way there but the structure is now sensible: and this is the way that all such tariffs will end up to. Simply because it's the only rational way, economically, to do it. Instead of getting the retail price for whatever electricity they feed into the grid, panel owners now get:

This summer, NV Energy, Nevada's largest utility and a subsidiary of Berkshire Hathaway , had asked for a rate structure that included a monthly service charge, a demand charge (based on a home's peak demand), and an electricity charge. For homes with solar, it proposed paying 5.5 cents per kWh for the electricity they send to the grid, well below the 11.6 cents per kWh that customers are paying for electricity.

This is simply the way that it has to be, in the end at least. Leave aside any concerns about whether it should be yet or not and consider the underlying economics of this. The grid needs to exist if we're to share power at all. And thus it needs to be paid for: a standing charge doesn't seem like a bad idea as a method of paying for such infrastructure. And the size of that charge needs to be determined by peak drawdown (or perhaps feed in to it) as that is what determines how the grid is built.

And then, yes, everyone should be paid the current value of what they are feeding into said grid. And with solar that's only ever going to go down. As there's more solar on the grid then of course there's more of the grid that is all producing at the same time: that's how sunshine works across geographic areas. In the end, instead of being paid the wholesale price for power people are going to be paid the marginal price for power at that time. Something that the more the technology becomes as a percentage of total supply is only ever going to go down.

This isn't just a "Har, Har, Hippies!" argument: the only economically rational manner, in the long run, of paying for a grid that contains solar, or indeed any other local and or intermittent source, is going to be this one. A charge for the grid, scaled to the size of the connection, with production gaining moment by moment marginal value, consumption possibly based again on that marginal value. It's really going to change how things are done: and if we don't move to something like this then the system is going to go bankrupt instead.

Thus, obviously, it is going to happen: the only question is when.